Twilio Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Twilio Inc. Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode.

Operator

After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Veeneman, SVP of Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining us for Twilio's fourth quarter twenty twenty four earnings conference call. Joining me today are Kazemah Shypchandler, Chief Executive Officer and Aidan Vigiano, Chief Financial Officer. As a reminder, we will disclose non GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward looking statements on this call, including statements about our future outlook and goals.

Speaker 1

Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10 Q and our forthcoming Form 10 K. Forward looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward looking statements except as required by law. And with that, I'll hand it over to Kazemain Aden, who will discuss our Q4 and 2024 results, and will then open the call for Q and A.

Speaker 2

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. Twilio had a terrific Q4, reaching $1,195,000,000 in revenue, an 11% increase year over year and our second consecutive quarter of double digit growth. Q4 also marked an important milestone for Twilio, as it's the first time we've delivered quarterly GAAP operating profitability in the company's history, well ahead of our initial target. For the full year, we generated 4,458,000,000 in revenue, representing 9% organic growth year over year.

Speaker 2

Over the past two years, we've dedicated ourselves to transforming Twilio's business from one primarily focused on growth to one that balances innovation, growth and profitability. Our results demonstrate the success of those efforts. Not only have we recently accelerated revenue growth, but we've also significantly boosted our non GAAP profitability, while meaningfully accelerating our path to GAAP profitability, plus reducing our net burn rate and outstanding share count. And we've increased annual free cash flow by nearly $1,000,000,000 since 2022. All of this illustrates our commitment to operating the company with more discipline, rigor and focus.

Speaker 2

And while there's more work to be done, the results speak for themselves. At our Investor Day a few weeks ago, you got a chance to hear about the new Twilio, including our product strategy, growth levers and financial framework that we have in place to win a much larger addressable market. As marketing, sales and customer support converge into customer experience as a service, we strongly believe that Twilio's leading communications platform plus contextual data powered by Segment and our innovations with AI position us to win in this massive market and reinforce our vision that every digital interaction we power between brands and consumers is nothing short of amazing. While we provided a lot of details during our Investor Day, today I wanted to take the opportunity to reinforce a few of the key takeaways, while also sharing some of the highlights from Q4. On the innovation front, in 2024, we launched two fifty one products, enhancements and services.

Speaker 2

These innovations align to our strategy of building a trusted, simple and smart platform that enables brands to drive more secure, relevant and personalized interactions with their customers. Throughout the quarter, we continued to invest in our core capabilities to drive even greater customer value. During Cyber Week, Twilio powered more than 5,000,000,000 messages, delivered more than 65,000,000,000 emails and supported six seventy eight million calls, all while delivering 100% uptime. The confidence our customers have in Twilio is stronger than ever and critical periods like Cyber Week prove to our customers that Twilio has the trusted, simple and smart platform that they need. During the fourth quarter, we expanded our trusted channels to meet our customers' evolving needs by adding new capabilities to support existing channels, including RCS and WhatsApp.

Speaker 2

For RCS, we also recently announced that rich content cards, media and rich card carousels are now available and supported by our content template builder that helps streamline development. RCS is proving a valuable expansion vehicle for existing messaging customers. Customers like MarketBeat are able to benefit from Twilio's streamlined approach to development on a single messaging API and our universal template management system. It's also clear that Twilio continues to be at the center of the AI value chain as we already have 90 of the Forbes fifty AI startups building on Twilio. We continued to drive ROI with our AI enabled products, benefited from emerging AI companies that chose Twilio as an essential component for their customer engagement layer and partnered with key AI players in the ecosystem like AWS, Databricks, Google Cloud, OpenAI and Snowflake.

Speaker 2

In Q4, Conversation Relay, which helps simplify the process of building robust AI voice agents went into public beta. While it's still early, we believe that AI will drive a renaissance in voice and everyone from enterprises to startups will begin orchestrating new voice experiences that are two way and personalized. On the segment front, the AI innovations that went live throughout 2024 are beginning to generate tangible results for our customers. As an example, with Predicted Audiences, one company realized a 70% improvement in audience accuracy and in Q4 found an average of four weeks of data science time saved by giving marketers the ability to predict behavior. Emerging AI startups are continuing to build on Twilio.

Speaker 2

In fact, more than 9,000 companies building in the AI space utilize Twilio services in 2024. Paradox dot ai, '1 of Twilio's AI Searchlight winners, is using conversational AI for recruiting and leverages their AI assistant, Olivia, to help with frontline recruitment. Starting as a self serve customer in 2017, they reached unicorn status in under five years. And today, Twilio powers over 150,000,000 messages a month on their behalf. But more importantly, with Twilio messaging, they've been able to help companies like McDonald's, Workday and SAP get interviews scheduled in minutes versus the manual process that used to take anywhere from five to seven days.

Speaker 2

And finally, we're continuing to partner with established AI companies like OpenAI. During the quarter, we helped OpenAI launch calls and WhatsApp messaging through their Twilio powered number, CHATGPT, which has seen incredible volume since launch. Our innovation strategy and execution continues to pay off as we were named a leader in multiple analyst reports. During the quarter, IDC named Twilio a leader in its market scape, worldwide customer data platforms focused on B2C users. And, Omnia also named Twilio a leader in two of its reports, the Omdia Universe Customer Engagement Platforms and the Omdia Universe Customer Data Platforms.

Speaker 2

With respect to distribution, we continued to focus on our key growth levers, self serve, cross sell, international expansion and our partner ecosystem, while also optimizing for scale and efficiency. In Q4, our go to market team continued to deliver improved execution, as evidenced by strong large deal activity during the quarter. On the communications side, we closed 78 deals worth $500,000 or more, up 47% year over year. And in Q4, we closed our largest segment deal ever with one of the world's largest financial services companies. Within self serve, we saw a continued acceleration in sign ups, upgrades and revenue growth, a testament to the improvements we've delivered in our self serve experience over the course of 2024.

Speaker 2

Cross sell and up sell continues to be a massive growth opportunity. During the quarter, we had terrific wins, including one with a long standing Twilio voice customer, that's a top health system in The U. S, which operates 33 hospitals. The customer adopted Twilio's RCS messaging, branded calling and engagement suite in order to increase call adoption, establish a stronger brand presence and increase messaging deliverability and engagement. Additionally, we also signed a deal with a leading web hosting provider.

Speaker 2

The company has been a long time Twilio messaging customer and expanded their use to include Twilio's conversations API to power two way SMS and voice channels. With Twilio, the company has integrated the product into their own proprietary unified inbox, giving customers the ability to manage their business communications needs on their smartphone and simplify the communication with their own customers. International expansion and partner distribution continue to help us unlock an underpenetrated addressable market. As an example, during the quarter, Twilio expanded its relationship with Klaviyo with several SMS deals in European markets. Finally, we are driving our go to market strategy more efficiently by leveraging AI and automation, which is built upon Twilio's own technology.

Speaker 2

In presales, we're using data to lead the identification process, which has shortened sales cycles. Additionally, today 80% of our new inbound leads are being handled by AI, which has led to a faster sign up and upgrade process for prospects due to faster responses, multilingual support and depth of knowledge. Post sales, our help center assistants have garnered a 75% ticket deflection rate when AI is engaged. I'm proud of how our discipline, rigor and focus has helped position the company well for the years ahead as we drive strategic customer centric growth with innovation at the core. In many respects, 2024 was about rebuilding the foundation.

Speaker 2

2025 is the year we'll stay focused on executing against our ambitious innovation roadmap to unlock the power of communications, contextual data and AI. And as we unlock it, every consumer that interacts with the 325,000 plus active customer accounts that we power will benefit. Our strategy is clear, our execution is focused and our impact is real. I'm incredibly proud to see the hard work paying off as we enter this next phase of growth and create more value for our shareholders in the years ahead. And with that, I'll turn it over to Aidan.

Speaker 3

Thank you, Khozema, and good afternoon, everyone. Twilio finished the year with a strong Q4, delivering our second consecutive quarter of double digit revenue growth and our first ever quarter of GAAP operating profitability. For Q4, we generated record revenue of $1,195,000,000 which represented 11% year over year growth. We also generated record non GAAP income from operations of $197,000,000 and $93,000,000 in free cash flow. We came into 2024 committed to driving durable growth, continued margin expansion and increased free cash flow generation.

Speaker 3

And I'm pleased with our execution throughout the year. For the full year, we generated revenue of $4,458,000,000 representing 9% organic growth, non GAAP income from operations of $714,000,000 and free cash flow of $657,000,000 We also completed our prior $3,000,000,000 share repurchase authorizations, returning over 2,300,000,000 to shareholders in 2024 alone and reducing our outstanding share count by 16% since the start of the year. Revenue in our communications business for the quarter was $1,121,000,000 up 12% year over year. Messaging revenue growth accelerated for a second consecutive quarter, while e mail performance remained strong, driven in part by strong volumes during Cyber Week and the holiday season. Political revenue contributed roughly 60 basis points to our reported revenue growth rate.

Speaker 3

This was partially offset by a 40 basis point headwind associated with sunsetting the software component of our Zipwhip business, which we have now fully lapped. Segment revenue for the quarter was $74,000,000 down 1% year over year. We were encouraged by the go to market execution in the quarter with bookings slightly accelerating year over year along with over half of new bookings coming from multi year deals. Our Q4 dollar based net expansion rate was 106%, representing our best performance since Q1 of twenty twenty three and reflecting the improving growth trends we've seen in our communications business over the last several quarters. Our dollar based net expansion rate for communications was 108% and the dollar based net expansion rate per segment was 93%.

Speaker 3

We delivered record non GAAP gross profit of $621,000,000 up 10% year over year. This represented a non GAAP gross margin of 52% down 40 basis points year over year and 100 basis points quarter over quarter. The decline in gross margins was driven by expected higher hosting costs during Cyber Week, as we referenced during our Q3 earnings call, along with an increase in revenue mix from messaging. Non GAAP gross margin for our Communications business unit was 50.6%, down 10 basis points year over year and 110 basis points quarter over quarter. As we referenced on our Q3 earnings call, the sequential decline was driven primarily by higher hosting costs associated with the holiday shopping season, as well as higher messaging revenue mix.

Speaker 3

Non GAAP gross margin for our segment business unit was 72.3%, down two ten basis points year over year and up two forty basis points quarter over quarter. The sequential improvement was primarily driven by benefits from our segment infrastructure migration project as well as hosting credits in the quarter. We largely completed this project during the fourth quarter, which we expect will help support segment gross margins as we move into 2025. Q4 non GAAP income from operations came in modestly ahead of expectations at a record $197,000,000 up 14% year over year driven by strong revenue growth and ongoing cost discipline. Our non GAAP operating margin of 16.5% was up 40 basis points year over year and sequentially.

Speaker 3

In addition, we generated $14,000,000 in GAAP income from operations, representing Twilio's first ever quarter of GAAP operating profitability. As I referenced at Investor Day last month, in Q4, we incurred $17,000,000 in bad debt expenses related to our customer, Oi, a Brazilian telecom company, as a result of a slowdown in their ongoing payment activity. We fully reserved our exposure to Oi's existing accounts receivables, which reduced operating margin by 140 basis points in the quarter. For the full year 2024, we generated non GAAP income from operations of $714,000,000 up 34% year over year and our non GAAP operating margin of 16% was up three twenty basis points year over year. Non GAAP income from operations for our Communications business was $275,000,000 in the fourth quarter.

Speaker 3

For the full year 2024, our Communications business generated over $1,000,000,000 in non GAAP income from operations. Non GAAP loss from operations for our segment business was $10,000,000 in the fourth quarter. Segment operating losses improved sequentially as a result of the gross margin improvement in the quarter and ongoing cost discipline. Our segment business remains on track to achieve breakeven non GAAP income from operations by Q2 of this year. Stock based compensation as a percentage of revenue was 13%, down 60 basis points quarter over quarter and two forty basis points year over year as we continue our efforts to reduce equity compensation.

Speaker 3

Full year 2024 net burn rate was 3.3%, down 160 basis points year over year. As a reminder, this does not include the impact of share repurchases conducted over the course of the year. We continue to manage dilution on a net burn basis, which we define as the number of employee stock units granted in a year, net of forfeitures and divided by the prior year ending share count. We generated free cash flow of $93,000,000 in the quarter, down sequentially as we anticipated, driven by incremental vendor prepayments totaling roughly $130,000,000 As a reminder, we periodically pay certain vendors early to secure favorable terms and pricing. For the full year 2024, we generated $657,000,000 in free cash flow, up 81% year over year and representing a margin of 14.7%, which was up 600 basis points year over year.

Speaker 3

Before I turn to Q1 and fiscal year twenty twenty five guidance, I wanted to recap the financial framework we announced at our Investor Day in January. In 2027, we're targeting non GAAP operating margins in the range of 21% to 22%, up 500 to 600 basis points compared with our full year 2024 results. From 2025 to 2027, we expect to generate $3,000,000,000 plus in cumulative free cash flow. We're targeting GAAP operating profitability in fiscal year twenty twenty five and each year thereafter. We continue to focus on managing stock based compensation and dilution responsibly, and we're targeting stock based compensation at about 10% of revenue and net burn at less than 3% in fiscal year twenty twenty seven.

Speaker 3

As a reminder, we continue to orient the business to deliver double digit growth over time. So our framework assumes annual revenue growth through 2027 that is similar to our 2025 guidance of 7% to 8%. Finally, our Board recently authorized a $2,000,000,000 share repurchase program expiring at the end of twenty twenty seven. And we're targeting an average of 50% of our annual free cash flow and capital returns to shareholders from 2025 through 2027. Moving to Q1 guidance, we're encouraged by the growth acceleration we saw in the second half of twenty twenty four, but we're continuing to plan prudently given our usage based revenue model.

Speaker 3

For Q1, we're initiating a revenue target of 1,130,000,000 to $1,140,000,000 representing year over year growth of 8% to 9%. The quarter over quarter decline in revenue reflects both the Q4 seasonality dynamic that we've seen in the last couple of years, as well as a modest impact from Q4 political revenue. I would also note that there are two fewer days in Q1 versus Q4 and one fewer day in Q1 versus the year ago quarter. That being said, we continue to feel good about our guidance for the year and we're maintaining our full year 2025 organic revenue growth guidance range of 7% to 8%. Turning to our profit outlook for Q1, we expect non GAAP income from operations of $180,000,000 to $190,000,000 and for the full year, we expect non GAAP income from operations in the range of $825,000,000 to $850,000,000 As anticipated, free cash flow in Q1 will be impacted by a roughly $120,000,000 payment related to our company wide cash bonus program that we implemented in 2024 as part of our efforts to reduce stock based compensation.

Speaker 3

This will limit free cash flow generation in the first quarter. That said, we continue to expect to generate strong quarterly free cash flow over the balance of the year and for the full year we expect free cash flow in the range of $825,000,000 to $850,000,000 I'm very pleased with the accelerated revenue growth we delivered in the fourth quarter as well as our ongoing cost discipline that is driving strong profitability and free cash flow. I'm also encouraged by the innovation we are delivering and the impact new products and features are having both for our customers and on our revenue growth. We are confident in our plans to drive durable revenue growth, continued margin expansion and strong free cash flow generation in 2025. And with that, we'll now open it up to questions.

Operator

Thank you. Our first question is going to come from the line of Jim Fish with Piper Sandler. Your line is open. Please go ahead.

Speaker 4

Hey guys. Thanks for the additional color here following the Analyst Day. Well done again at the Analyst Day. Trying to understand given some of the macro stuff that's going on, how much of the strength you guys are seeing in messaging and email is due to somewhat this return of the crypto world?

Speaker 3

Hey, Jim. This is Adrienne. I'll take that question. So I'd say from a crypto perspective, we do see those customers exhibiting stronger volume, though it's I would say nowhere near returning to the levels that we saw in 2020 to 2022. So it's a bit better, but it's relatively immaterial to the grand scheme of things.

Speaker 3

So not a big driver for the business messaging or email.

Speaker 4

Got it. And then just it was nice to see segment here in terms of like while revenue was a little bit down year on year. If I look at that deferred revenue build, it seems that implied billings was up north of 20%, if I get most of that over to that side. Is the segment business seeing a bottom or how much is the sort of billing strength attributable to that big deal you referenced?

Speaker 3

Yes, maybe I'll comment on the back or the RPO and if Khozabim wants to say anything on the business, he can do so. But yes, both the RPO balance you're looking at, CRPO balance as well, they're really driven by segment. And so the growth really is driven by a combination of bookings growth as well as the percentage of new bookings that are tied to multi year deals. And what we saw in the quarter was bookings were up a bit, but also that over 50% of

Operator

the deals that we booked in

Speaker 3

the quarter were multi year. And so that's been a point that the team has been working on and focused on and we're starting to see that kind of show up in the bookings metrics. So that's part of what is driving it. And then I would say, I would note that any of these metrics that you're kind of looking at, any of these deals that they're twelve months or less in initial duration when you look at the actual metric that you're looking at on the balance sheet. So they're not fully representative of segments book of business.

Operator

So that's a little bit

Speaker 3

on the metric. I don't know if you want anything on the business, Kazama?

Speaker 2

Yes. Jim, all I would say is, is that I think this has been sort of a steady as she goes story, right? Like I think that there have been a number of operational improvements that we made in the business. I think going back to the operating review that we announced, last year, there were a number of things that we wanted to do to improve performance, both on the technology and innovation side, but also in terms of the way that we are running the business. And I think you're starting to see a lot of that show up in the balance sheet item that you referenced.

Speaker 2

And I think ultimately that will turn into revenue. I think it's going to take a little bit of time. Revenue does lag. But I think sitting here today, we feel pretty good about the standalone business. And I think we feel even better about the way that the segment asset actually contributes to the overall growth story that we laid out during the Investor Day.

Speaker 4

Helpful. Thanks guys.

Speaker 5

Thanks.

Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Michael Turrin with Wells Fargo Securities. Your line is open. Please go ahead.

Speaker 5

Hey, great. Thanks very much. Appreciate you taking the question and congrats on the return to double digit growth. I was hoping you could maybe just spend some time speaking to ways you aim to ensure the growth improvements you're seeing proved durable. What are you using to build those initial 2025 assumptions?

Speaker 5

And then what are some of the swing factors we should contemplate that could keep you at the more aspirational double digit growth level?

Speaker 3

Yes, maybe I'll start by kind of what we saw in the quarter. And I think what's important when we look at the growth in both Q3 and Q4, first of all, it really wasn't driven by political. In Q4, we talked about it being 60 basis points. That was largely offset by the end of life of our software business in Zipwhip. So it's true 11% operational growth.

Speaker 3

And importantly, it wasn't one thing driving it, right? When you look at it by product, we saw strength again in accelerated growth in messaging. Email has been strong all year, continued to be strong. We had a record breaking Cyber Week, with strength in messaging, email and voice because Amit kind of gave you some of those stats in his prepared remarks. ISVs were strong, self-service strong.

Speaker 3

When you look at it by industry, we disclosed the top five at our Investor Day, but we saw strength in tech, financial services, healthcare, retail, e commerce, advertising, they all exhibited healthy growth. And then geographically, it was similar. So I I think that's important for us, right? It's not one thing that's kind of driving the strength, but it's pretty broad overall. From a planning perspective and as we think about what we're guiding to, which is 7% to 8% for the year, we feel pretty good about that.

Speaker 3

We know that we're running ahead of that, obviously, in the second half of twenty twenty four, but just given the usage based nature of our business, we think that it's prudent to continue to plan or smart to continue to plan prudently. In terms of what swing factors could be to drive double digit growth, as we talked about in Investor Day, that's how we're orienting the business today. We are running the place internally that way. We're planning a bit more prudently, but we will continue to drive those actions internally.

Speaker 2

Yes. There is nothing Michael that I would really add. I mean, I think I would certainly echo all of what Aidan said. I think when you break it down by some of the channels, like we feel pretty good about the activity there. I think we referenced during the Investor Day as well as during today's conversation the fact that we are seeing a number of AI green shoots.

Speaker 2

I think that's pretty positive. I think the most important part of the story frankly is, A, that the way that we're kind of tuning and running the place is towards that double digit number. And so guidance aside, like that's the way that we are running the place. And then I think on the other side, there's just a lot of momentum in terms of the number of things that we have underway that's ultimately going to spring from innovation and technology. But we feel pretty good about the way that things are shaping up.

Speaker 2

And look, we just did our Investor Day a couple of weeks ago, so we're just a few weeks on from there. And in the context of the framework, we feel really good going forward.

Speaker 5

That's great. Just as a quick follow on, on gross margin, know that line can move around a bit. If we're looking at 4Q relative to rest of year, is that more seasonal traffic driven? And are you confident in ability to continue to deliver some level of gross margin expansion as you progress towards those 27 targets? Thank you.

Speaker 3

Yes. So what I would say, I'll answer that in two pieces. So in terms of Q4, it's and we kind of signal this a little bit coming into the quarter. We always have higher hosting costs in Q4, just given how much traffic is going over the platform. And so we provision for that because it's important to us that we maintain trust with our customers and are resilient in terms of being able to deliver important traffic during things like Cyber Week.

Speaker 3

So hosting costs were a factor. You'll see if you look from Q3 to Q4 in 2023, that was a similar dynamic. The other thing that happened in the quarter was there was a greater mix of messaging product revenue as a percentage of total. So we talked about the fact that that business was strong. It accelerated from a growth perspective in Q4.

Speaker 3

And so that had a mix effect as well as you know that business carries lower gross margins. Now as we think about the plan for the framework that we provided at Investor Day and the 21% to 22% operating margin target by 2027, What we said is that assumes basically constant gross margins. We aren't assuming an uplift in gross margins to achieve those that framework. Now is there opportunity over time? I think so.

Speaker 3

When you look at the mix of our products and how many of them carry software like gross margins. But I think the reality is in the near term messaging mix both from a product perspective as well as where traffic is terminating geographically will have an impact. So we're planning to roughly flat gross margins over the next several years.

Speaker 5

Thanks very much.

Operator

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Nick Altman with Scotiabank. Your line is open. Please go ahead.

Speaker 6

Awesome. Thank you. You guys alluded to large deal strength in Q4 and at the Investor Day you highlighted how that $1,000,000 plus customer cohort was I believe the fastest growing. So, Kazeemeth, can you just maybe talk about the high end and what's driving the strength there? Is that more volume driven?

Speaker 6

Is it more cross sell driven? And then my follow-up is, when you look at the improvements in the communications expansion rate, how much of that is being driven by those larger deals or the high end customers? Thank you.

Speaker 2

Yes. So, let me just step back for a second. I think that, as we look at a lot of these larger deals, it's always going to be a combination of new land and then, of course, expand via cross sell. But I think what's really important and interesting for our business as you kind of think back to the Investor Day is that a lot more of our customers are seeing value from using multiple of our products on the one hand. And then I think even more importantly by using the combination of products, especially as it relates to the way in which communications and data interact and then as we start to use AI.

Speaker 2

So, I'd say increasingly, the larger, more sophisticated use cases that we're seeing deployed, sophisticated use cases that we're seeing deployed enterprise customers, they're all kind of heading down that path. But it's always going to be a combination of expansion through cross sell, but there are more than a handful of new deals in there as well. So it's kind of a combination, but I think it's customers increasingly moving towards our vision. Remind me, Nick, what was the second part of your question related to expansion?

Speaker 6

Yes. Just on the communications DB NRR, that looked pretty good.

Speaker 2

How much of it's driven by larger deals?

Speaker 6

Yes.

Speaker 2

Yes. I think it's again a little bit more broad than that. Like I think the fortunate dynamic that we're seeing in the business right now is, as Aidan alluded to, the trends that we're seeing aren't concentrated in any particular area that instead they are broad based. And so I wouldn't per se point to large deals as being the driver. I would instead say we're seeing it kind of across the board and that's certainly very encouraging for us.

Speaker 6

Great. Thank you.

Operator

Thank you. One moment for our next question. Our next question is going to come from the line of Mark Murphy with JPMorgan. Your line is open. Please go ahead.

Speaker 7

Thank you very much. The number of AI customers that you've racked up is pretty amazing. You had mentioned it at the Analyst Day. Wondering if you could shed light on how much of that is tied to authentication or something that ties into an app download at the front end

Speaker 2

of the

Speaker 7

cycle versus something that might align with an ongoing AI usage pattern? And then is that AI business driving any tangible tailwind to revenue growth? For instance, is that greater than where the political contribution tailwind was?

Speaker 2

Say the last part again, Mark?

Speaker 3

I would say I'll add to the last and then maybe Cosana can take the it's not contributing meaningfully. Like I'd say it's a mix of different types of customers. Some are really small and just getting started on our platform. Others are larger enterprise customers that are now building different AI use cases. But in terms of the growth rate, it's a mix obviously across the different group, but I wouldn't say it's a huge tailwind to our revenue right now.

Speaker 2

Yes. And I think similar dynamic in terms of use cases. I mean, it really it spans the spectrum there, Mark. I think you certainly do have folks that are doing 2FA as a part of it. I think one like really good example vis a vis usage, one-eight hundred CHAT GPT, obviously, that was a pretty cool use case to launch, saw a lot of volume.

Speaker 2

I think as well, like you're seeing a lot of vertical AI startups like in a number of different industries that are really trying to ramp up quickly. We see a lot of those companies riding on our infrastructure rails that would be non authentication, if you will. And so it really kind of runs the gamut. Like I wouldn't say there's like a materially different mix necessarily than the business at large, but I think what's most encouraging about it is, is again the fact that we have as many as we do, the way that we'll be able to grow with these folks over time. I think the folks that are in the vertical spaces in particular, the ability to use data as well will enrich those use cases down the road.

Speaker 2

And again, having broad based strength here is a good thing.

Speaker 7

And thank you for that, Ko. And a quick follow-up for Aden. Just curious how commonly do you think we're going to see that this kind of a huge prepayment? You mentioned the $130,000,000 1 recently. Is it should we think of it as being an annual possibility in Q4 if you're going to be benefiting from some great terms and conditions?

Speaker 7

Or do you think it's going to be more episodic than that?

Speaker 3

I think it will be more episodic than that, Mark. I mean, we happen to have a large prepayment, you said $130,000,000 in Q4. I just think that the way we think about it is just given the strength of our balance sheet, this is something we want to continue to do with different strategic vendors from time to time. It really allows us to secure better unit economics and pricing and better terms for the business. And so, it won't necessarily be every Q4 to answer your question directly, but from time to time in different quarters, you will see these different prepayments.

Speaker 3

There's always kind of a run rate level in the business every quarter. But like I said, some quarters may be bigger than other. I just wanted to assume it's going to be every Q4. It doesn't necessarily play out that way.

Speaker 7

Very clear. Thank you. Appreciate it.

Operator

Thank you. One moment as we move on to the next question. Our next question is going to come from the line of Ryan Coons with Needham and Co. Your line is open. Please go ahead.

Speaker 4

Great. Nice to hear some of your progress in the RCS market, some early wins there. As we look at this, how would you characterize where the market is today? Can it scale? What are the keys to success here from the industry?

Speaker 4

Is there multi operator interconnect working today? Does it work internationally? Can you walk us through just a minute on where we are? Thank you.

Speaker 2

Yes. Ryan, this is Kazem. I'll take that. So, I think in terms of where we are, it's incredibly early. I think, again, you know the story pretty well, like RCS has actually been around for a long time.

Speaker 2

I think we're encouraged by some of the early deployments, but I still think that there are a variety of challenges that still exist in the ecosystem. I think interoperability being one of those. That all that said, I think that we're ready. I mean, we want to support customers. I think the part of it that we're actually the most excited about is the branded nature of it, the notion that when you interact with the brand, that you know exactly who it is on the other side.

Speaker 2

And beyond that, I mean, the engagements themselves are very rich, right, in terms of not having to go to an app or a website or what have you. I think, we've talked in the past, I think the utility of it has a limited set of use cases depending on how the RCS works. And so I think where we are on it is very much ready. We'd be excited if it really took off. I think we're kind of cautiously optimistic about the way that it plays out.

Speaker 2

I think we view it as being sort of neutral to modestly accretive to the way that we kind of think about things. And in some very, very early days, I think the volumes that we're seeing, I mean, they're certainly taking off relative to where they were, but it's off a pretty low base.

Speaker 4

I assume the Android ecosystem is kind of far ahead of the Apple ecosystem right

Speaker 3

now? Android.

Speaker 2

Yes, much further ahead.

Speaker 4

Yes, got it. Yes, Android, right. Thanks so much.

Operator

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Meta Marshall with Morgan Stanley. Your line is open. Please go ahead.

Speaker 8

Great. Thanks. Maybe you could just give us a sense, I know obviously you have a lot of existing customers and you'll get idea of their business performance by usage, but just kind of what you're seeing kind of on the business environment as we start the year, just kind of as you go through sales cycles? And then maybe as a second question, on the segment piece, the net expansion rate still kind of being below 100%. Just kind of when do you expect some of the new wins and traction that you're seeing can kind of help improve that metric?

Speaker 8

Thanks.

Speaker 2

Yes. Hey, Meta, I think we feel pretty positive about the business environment. I mean, I think I don't want to get ahead of Q1 beyond the guidance that we provided, but I think just generally based on the trend line that we saw in Q4 that customers are ready to engage, they are excited about the products and services that we have got. I think they are very excited about the vision that we have laid out in terms of the communications plus data plus AI. I think the fact that there are a number of fielded use cases now and products that go with that that they can avail themselves of, I'd say pretty positive on balance.

Speaker 2

I mean, again, I don't want to get too far ahead of it, but we feel pretty good about the business environment. I think just one thing I'll note is, we always kind of plan around a neutral macro. So nothing that we've kind of said or and certainly nothing in the business really, I wouldn't take from that that we're planning for like a rebounding macro or anything like that. We're planning for neutral. We'll certainly be a beneficiary of a higher macro.

Speaker 2

And if it gets worse, we could see us get a clip from that a little bit, but we're planning for neutral.

Operator

In

Speaker 2

terms of net expansion, like we're not it's not like a metric that we per se run the business to. What I would say about it is, is that when we look at some of the key inputs into the way that we think about the standalone segment business, I'd say number one, we're seeing a lot more stickiness in terms of the deals because they are more multi year. Number two, we've done some work on the technology side to get customers activated much more quickly so that they're getting ROI. I think that certainly helps. And then I think three, the way in which it now interoperates with some of the data warehouses, which was sort of long a request from customers, like all of that is in place.

Speaker 2

And I think that, that all ends up being good for the business. I'm sure you heard the question earlier about the balance sheet dynamics with the business. We feel better about where it is. I think it's work in progress. We want to make it even better, of course.

Speaker 2

And revenue and the expansion characteristics will kind of follow all that.

Speaker 8

Great. Thanks.

Operator

Thank you. One moment as we move on to our next question. Our next question comes from the line of Arun Bhatia with William Blair. Your line is open. Please go ahead.

Speaker 9

Perfect. Thank you guys.

Speaker 10

Maybe the first one I'll focus on NRR on the other side of the business, the comp side, the 108 is pretty impressive here. I'd be curious to hear how much of that is improvements in gross retention versus certainly there's been a focus in the business and investing in innovation product cross sell. So the split between that would

Speaker 11

be interesting to hear.

Speaker 10

And then how do you expect this to evolve? Is this a sustainable level going forward as some of those initiatives play out? Or is Q4 maybe so there's some seasonality in there that we should consider going forward?

Speaker 3

Yes, I'll take that Arjun. This is Aidan. So the comms DB and E accelerated to 108% in Q4. I'd say it generally tracks revenue growth, right, if you look at it over time. But when you break it down, obviously, like I said, we had accelerated growth in messaging.

Speaker 3

We saw strong performance in email. So I'd say from a product perspective, largely coming from there. When you break it down between the different, churn contraction, expansion elements of BB and E, churn was low. It has historically been low, continued to be low. We really saw the improvement, by through increased expansion.

Speaker 3

I'd say a modest reduction in contraction, like that's how I'd characterize it. When you look at DB and E by our different sales segments, I'd say the two that I would say performed, really well were ISVs as well as self serve. And we talked about them at our Investor Day. Those are key go to market segments for us. They continue to perform well in the fourth quarter as well.

Speaker 3

And then by industry, it was a number of different industries, but that gives you a sense of how to think about it a couple of different ways. In terms of how to think about it going forward, I'd just say like it attracts revenue. We don't guide to this metric, so I'm not going to provide a specific number, but it will track largely kind of the revenue trends of the company.

Speaker 11

Okay. Got it.

Speaker 10

Thanks, I think that's helpful. And then maybe zooming out a little bit, at Investor Day, we talked a lot about kind of cross sell as a big driver of growth. And I think you had mentioned I think 63% of customers are single product. When you think about the cross sell opportunity, like how do you bucket it in terms of maybe like here's kind of the layup products that you can sell and like are there others that are home runs that are maybe longer sales cycles, but where customers could significantly increase in size? Like how are you approaching that from a product and go to market perspective?

Speaker 2

Yes. Hey, Arjun, that's a good question. I think a couple of answers. So one is, we have concentrated incentives as part of the sales incentive plan to make sure that our teams are focused on it. And I think they're excited about that alignment there.

Speaker 2

I think second thing, kind of to the real heart of your question, like are there I think the word you used was layups. I mean, it's never a layup, but I think on some of the easier side, if you will, you would imagine that customers, their ability to use SMS and email in combination or SMS and voice in combination, like some of the kind of classic channels or if it ever if it really took off like with RCS, like being able to kind of reinforce some of that activity with a voice workload afterwards. So I'd say any one of those combinations, I wouldn't limit it to those necessarily, but those are pretty attractive. They're going to end up being shorter sales cycles because they're already plugged into one of our communications APIs. We can get customers up and running pretty quickly.

Speaker 2

We have a number of actually deployed use cases in which customers get more value by using two channels at the same time or complementary versus just one. So we can point to a lot of evidence there too where customers are getting a lot of value. So I'd say, the first part of your question there, like that's probably on the easier side. I think that said, it's a little bit longer of a sales cycle, but again, we're incentivizing our teams to make sure that they're focused on this too. That combination of data with communications, like there's a lot of work that's going on in our R and D team to make sure that in the same way that I described like on ramping a channel, the same way it is as easy to on ramp data, also through kind of a singular or simple set of APIs if it can't be done through one.

Speaker 2

And I do think we're seeing a lot of interest there. I think it'll take a little bit more time. But the easier that we make it, if we can make it completely self servable, like that's really where we're headed with it. And I think that will start to take off, but that will take some time because of the R and D investment cycle.

Speaker 11

All right. Perfect. Very helpful. Thank you.

Operator

Thank you. One moment as we move on to our next question. Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open. Please go ahead.

Speaker 5

Hey guys. I wanted to ask, just maybe again, we're still early into this whole kind of consistent guidance framework and coming out of the Analyst Day, where you did a great job. Maybe just talk about how much conservatism, how you've thought about conservatism baked into both Q1 and as we get through the year? And then just a quick question about bad debt expense, the operating income seemed one time that impact in Q4. If you could just dive a little bit deeper into that, those would be the two.

Speaker 3

Yes. Hey, Alex, this is Aidan. So, I think again, we're really pleased with the performance in the second half of the year. We saw strength across a number of different areas. As it relates to the guide for the year, we're guiding to 7% to 8%.

Speaker 3

As you said in Investor Day, we're orienting the business for double digits. That's just kind of how we're running the place. But again, the nature of our business matters, right? We are usage based, we're not subscription based. And so with that, there's a little bit more volatility, a little bit less visibility in terms of forecasting.

Speaker 3

As it relates to Q1, we're guiding to 8% to 9% year over year growth. That's a point higher than we guided in Q4. So you are seeing that these trends that we're seeing in the second half or that we saw in the second half of twenty twenty four are positively impacting our forecast. But again, just given the nature of the business, given that it's a fairly dynamic market, we'll kind of continue to plan prudently. As it relates to the bad debt expense that I mentioned, maybe just a little bit more color.

Speaker 3

So it was a $17,000,000 charge in Q4 related to a Brazilian telecom customer. We really saw a slowdown in their ongoing payment activity. This is a customer by the way that we called out in our 10 Q for several quarters. I think what was different is historically, they had been making ongoing payments, which limited our, I'd say, bad debt exposure to partial reserves this quarter. Their behavior changed a bit and resulted in a bit more risk.

Speaker 3

And so we fully reserved their receivables in the fourth quarter. So it was a bit of an unusual for us. It was about 140 basis point impact on our margins in the quarter. But like I said, we're fully reserved on that customer at this point. We don't expect additional charges related to, Oi, which is the name of the customer, in the future.

Speaker 5

Perfect. And then just anything on the competitive environment and the competitive front as you go forward, particularly as you continue to kind of combine or level up some of these conversations around a broader platform based offering?

Speaker 2

Yes. I mean, we feel great competitively, right? I mean, I think we're the market leader in two really important categories. I think you're seeing some of the recent success that we've had, especially in what I think is going to be really a secular trend around AI, like that's very encouraging. We're growing at a faster clip than any of the other guys.

Speaker 2

And I think we want to take that strength and not rest on our laurels, but instead convert that energy into new R and D investments, which kind of lead to a double digit mentality over time. And I think that's going to be a really good setup for the business. And I think some of the R and D investments that we're making are really exciting and they're going to unlock a lot of value for customers. Thank you guys.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Patrick Walravens with Citizens JMP. Your line is open. Please go ahead.

Speaker 9

Oh, great. And let me add my congratulations. Adrian, can you remind me how to think about the operating margin ramp from like 17% to 18% in 25% to the 21% to 22% in 27%? I mean, I have 26% pretty flat currently with 25%. Is that the right way to think about it?

Speaker 3

What I would say, so we committed to 21% to 22%. Do you know that given the guide that we gave for 2025, that implies roughly 17.5% in 2025. So you should assume accretion each year. We didn't give specifically how to think about twenty six percent and twenty seven, but you should assume that each year we get a bit of accretion on margin rates. So if we're going from 17.5 to '21 to 22, that gives you a sense of how to model kind of twenty six and twenty seven.

Speaker 11

Okay. I'll go in the middle.

Speaker 9

And then Khozema, where are you can you maybe give us some examples of where you're using agents internally? You reeled off a number of areas during the Analyst Day, but where is it where are you finding it's really working for your own internal operations?

Speaker 2

Yes. Good question, Pat. So, I think there's two areas where we've seen really a market difference in the way that we're operating. I think the first would be in customer support where we're seeing a significant amount of deflection

Speaker 5

as

Speaker 2

a result of employing AI agents. That's made the workforce a lot more productive on the one hand, but on the other hand, it's also gotten customers to an answer much, much faster in effectively a self serve fashion. So, that's been very exciting for us and obviously continue going deeper there. The other side of it though is with respect to SDRs. So, instead of necessarily attaching a person to every incoming inquiry, we're able to vet a lot of those now through, again, AI agents.

Speaker 2

And the reason that one, I think, is even more impactful in some respects is, obviously, there's a cost savings. But more importantly, when the rep attaches themselves to the vetted account, it's just that, it's been vetted, right? So it's a much more high quality lead so that the rep ends up pursuing business that's probably going to materialize versus just chasing something that happened to come in.

Speaker 5

Great. Thank you both.

Operator

Thank you. One moment as we move on to the next question. Our next question comes from the line of Ryan MacWilliams with Barclays. Your line is open. Please go ahead.

Speaker 11

Hey guys, thanks for taking the question. Love to hear about how you're seeing any changes in the macro through the end of the fourth quarter or to start this year? And if you notice any changes from a usage perspective, from a geographic standpoint, in North America versus the rest of the world?

Speaker 3

I'd say, hey, Brian, I'll start. So I'd say nothing I'd call out specifically from the end of Q4 through kind of early Q1. What I will say is for us, you always see a drop off in volume because you're coming off of a very high holiday season. That's not atypical this year. That's just kind of the seasonality of our business.

Speaker 3

So I don't think there's anything I'd call out specifically U. S. Versus rest of world, as it relates to the volumes I'm looking at kind of daily.

Speaker 2

Yes. No, I agree with Hayden. I mean, there's obviously a lot going on. It's dynamic, but I don't think that we've seen necessarily anything that would really impact our business thus far.

Speaker 11

Perfect. And then, Khozema, voice AI, we're still really early days and I'm sure this is going to change like ten different times over the next few years. But as we think about like the potential voice AI use cases that would make sense for Twilio versus might make sense more like over the top via like Siri or Alexa or something, like what use cases do you think or have you seen early days that people want to to use Twilio for and that you guys are the rails for your customers? Thanks.

Speaker 2

Yes. I'll give you maybe like an anonymized example. I mean, I think that we have customers who are actively in beta and piloting different use cases right now. So basically, I mean, think of it this way, right? You have a customer who previously may have been using an an IVR as the mechanism to handle an incoming workload.

Speaker 2

And in many instances, at some point that IVR has got to then flip to a human agent who's got to be able to handle like whatever that transactional load is. And when that happens, the only measure really of what's going on there is cycle time. And not only is it just cycle time because of the fact that that's the case, there's no real opportunity to drive a more interesting, intimate, upsell type experience. And so, the customer that I'm specifically referencing in this case, what they're doing is, is that they're using the voice product that they were, but layering on top of that our voice intelligence capability. So all of the traits from that call are getting stored.

Speaker 2

They're using AI on top of it so that instead of even going into an IVR, the AI agent is handling it from start to finish. In addition to that, because it's an AI agent, you're not paying a person to handle that volume. And so there's no constraint on cycle time and so you can create that much more interesting and intimate experience. And then finally, what's especially interesting in this particular case is that, it allows time for upsell, right? And so using some of the data that can be referenced from prior transactions and data history with that particular customer, you can use that data to go forward and say, by the way, you ordered XYZ last time, here's an opportunity to do it the next time.

Speaker 2

And it drives more volume, ideally higher margin volume for those customers. And on the back end of that, we can actually add a channel to thanking them for their business on the other side. So that is a kind of real life one that is in motion right now. It's not a singular example. We're starting to have that conversation with a number of our other customers as well.

Speaker 2

And I think that is right at the heart of this idea of communications plus data plus AI, which is why we're so excited about it is that we are actually starting to see the green shoots.

Speaker 11

That sounds much better than being stuck in IVR hell. Thanks, Ghislaine. Appreciate the

Speaker 9

color. Sure.

Operator

Thank you. And that was going to be our last question. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating and you may now disconnect. Everyone, have a great day.

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Earnings Conference Call
Twilio Q4 2024
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