Twilio Inc.

Good afternoon and welcome to Twilio's third quarter 2020 earnings conference call. My name is Rob and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. I will now turn the call over to Andrew Zilli, Vice President of Investor Relations and Treasury. Mr. Zilli, you may begin. Thanks. Good afternoon, everyone, and thank you for joining us for Twilio's third quarter 2020 earnings conference call. Our earnings results press release, SEC filings, and a replay of today's call can be found on our IR website at investors.twilio.com. Joining me virtually today are Jeff Lawson, co-founder and CEO, George Hu, COO, and Kozema Ship Chandler, CFO. As a reminder, some of our commentary today will be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. Additionally, some of our discussion and responses may contain forward-looking statements, which are subject to risks, uncertainties, and assumptions. In particular, our plans and timing to close the segment acquisition, including the expected business benefits and financial impacts from the acquisition, and our expectations around the impact of the COVID-19 pandemic on our business, results of operations and financial condition, and that of our customers and partners is subject to change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements or ability to close the segment acquisition in a timely fashion. A description of these risks uncertainties and assumptions, and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-Q, and our remarks during today's discussion should be considered to incorporate this information by reference. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today, or to reflect new information or the occurrence of unanticipated events, except as required by law. With that, I'll hand it over to you, Jeff. Thanks, Zilli, and welcome, everyone, to this quarter's earnings call. Before turning to earnings, I want to encourage all who are listening, especially here in the United States, to please vote. Have a plan. Find a way. Make your voice heard. At the top of our earnings calls from time to time, I may briefly discuss some element of social justice, policy, or societal issues in the hope that it has some impact and to show that we at Twilio take these issues seriously. On our last call, I referenced the fact that black lives matter. And I want to say it because it needs to be said, black lives still matter. And Twilio will continue to advance the dialogue on this and other issues that we care about. Now, on to earnings. We delivered another quarter of outstanding results. I cannot be prouder of what we've accomplished during these trying times. Our success is a testament to the value proposition that Twilio's platform offers businesses. Digital engagement, software agility, and cloud scale. Our goal is to build the world's leading customer engagement platform. we're going to achieve this vision by investing in our products our platform and our people the demand and excitement for digital customer engagement was evident during a recent customer and developer conference signal where we had tens of thousands of people register for our first ever virtual conference embracing our builder mentality civil was run on twilio's platform which our internal team developed in a matter of months to great success Throughout Signal, we heard from leading enterprises like Nike, Delta Airlines, and Ernst & Young about how they are using Twilio's platform to create new ways to engage with their customers over digital channels. And to ensure we continue to meet the needs of our customers, we announced several new products and innovations to help the developers of the world continue to build solutions to solve today's challenges as they execute on their digital transformation initiatives. We know our customers are looking to Twilio Flex to take down the largest and most complex contact center workloads out there. But they want to do that while continuing to use the best of breed solutions they've grown to love, such as their workforce management, their CRM. We announced the Twilio Flex ecosystem, enabling customers to access more than 30 validated solutions from partners, including Google, Salesforce, Zendesk, and Collabrio, all built to accelerate contact center projects. Usage of Twilio Video has skyrocketed. And we want to get video in the hands of as many developers as possible. So we announced a free version of Twilio Video for peer-to-peer use cases called Twilio Video WebRTC Go. Twilio Frontline is a mobile app that provides a direct messaging-based connection between customer-facing employees and consumers in a way that's safe, secure, private, and compliant. As non-desk workers far outnumber desk workers, Frontline can help drive greater sales, higher customer satisfaction, and lower costs through more efficient operations. And we announced Twilio Microvisor, a complete device connectivity platform that eliminates the complexity of building for IoT. Microvisor runs on the connected device and creates a secure, managed runtime with the intelligence to connect to different types of networks, including Wi-Fi and, of course, cellular via the Twilio SuperSIM. We also recently announced our intent to acquire Segment, the leading customer data platform. Segment enables developers and companies to unify customer data from every customer touchpoint and every system of record, empowering marketing, sales, and service leaders with the insights they need to design and build relevant data-driven customer engagement. The combination of Segment and Twilio means that we will be able to help any business make their customer engagement across every channel more personalized, timely, and impactful. This is an important step towards our vision of building the world's leading customer engagement platform. We also wouldn't be able to execute on this vision without the strong culture and inclusive workforce our employees embrace every day, which is why I'm excited to welcome Libra Clemens, Twilio's first Chief Diversity, Inclusion, and Belonging Officer. Libra is responsible for guiding and scaling Twilio's inclusion strategy and diversity initiatives across the company's global workforce. There has never been a more important time to bring in a head of diversity to the C-suite of the company, and I'm excited for where she will lead us. I again want to thank our employees for their continued dedication to our customers and for delivering these great results. And a special thanks to the Signal team for delivering such an outstanding virtual event. I also want to thank all of those who are on the front lines, those who are fighting the fires in California, those who continue to fight this pandemic, and those who will be working in the election poll stations in just over a week. Thank you for everything you're doing for the rest of us. And please remember to get out and vote. With that, I'll hand it over to George. Thanks, Jeff. The team delivered another quarter of great results in Q3. Our focus on growing our enterprise presence, expanding internationally, and growing our partner ecosystem continues to drive great outcomes as companies turn to Twilio's customer engagement platform, and our opportunity is expanding as a result. I'm extremely impressed with our marketing and events team, who created an amazing virtual experience for Signal. In addition to all of the great individual sessions, We hosted our Creator Summit, where we brought together more than 200 executives from customers and prospects to network, hear from inspirational speakers, and learn about Twilio. We also had more than 800 developer attendees at our superclass and delivered 40 hours of content on Signal TV. And our brand experience team built our conference experience from the ground up, incorporating more than 10 Twilio products, including Flex, Video, and SMS. During the quarter, we also announced that Deloitte Digital would be joining the Twilio Build Partner Program as our first premier global systems integrator. Deloitte Digital's Twilio practice will offer the entire Twilio product suite, including Flex for contact centers, as well as the full set of Twilio communications APIs and platform services to help clients reinvent their marketing, sales, and service, and radically transform the customer engagement experience. This is a great step forward in our partner programs, as it significantly expands our reach and ability to leverage Deloitte's expertise in our top industries, such as healthcare and financial services, where Twilio has helped institutions of all sizes dramatically transform the customer journey to adapt to these new circumstances. In healthcare, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy, and magnitude of that need. The team has been hard at work to make many of Twilio's most critical products HIPAA eligible, such as Twilio SMS, chat, conversations, video, voice, and SIP and runtime tools. As of today, Verify and Lookup are also HIPAA eligible for healthcare customers. And this focus on healthcare is paying off, as you can see with a couple of deals we signed this quarter. We expanded our relationship with Philips, a leading health technology company focused on improving people's lives and enabling better outcomes across the health continuum. In response to COVID, Phil's built a virtual waiting room using Trilio SMS to replace the physical waiting space in just six weeks. Health systems like Yale New Haven Health and Boston Medical Center use solutions that curb viruses like COVID-19 and the flu. With this new solution, the patient texts the hospital when they arrive and the hospital texts them back when a room is available so they can go straight to an exam room. We entered into a new relationship with Banner Health, one of the largest not-for-profit healthcare systems in the country. After investigating several vendors, Banner Health selected Twilio to power patient notifications across multiple channels, beginning with our voice API. They view Twilio as the leading engagement platform that can power a consistent digital patient experience across Banner Health. In financial services, another highly regulated industry and a key focus area for Twilio Institutions have long had apps, chatbots, and other customer service tools to help them connect with customers. But COVID was the first time that these capabilities were put to the test as the primary way for people to interact with their service providers. When the pandemic hit, consumer banks, wealth managers, and insurance companies were flooded with inbound calls from customers while being tasked with developing a richer set of capabilities and tools to enable their employees to safely and effectively work from home. Now as providers look to the future, they are implementing a range of new digital solutions that create a better user experience for customers at any time and on any channel. We saw this in the third quarter as we expanded our relationship with a Fortune 50 bank that was forced to close many branches in response to COVID. They were looking for a better way to engage with customers via digital channels. They selected Flux, integrating it with programmable messaging and Salesforce to power their new omnichannel digital customer engagement strategy. to improve lead conversion and provide better customer service on demand. We also signed a new Flex deal with Robinhood, a pioneer of commission-free trading. As the demand for their platform has accelerated as a result of COVID, Robinhood is continuing to adapt, scale, and power elements of its customer support with Flex. As we've discussed, we have a very broad customer base, and our platform is used by companies across more than just healthcare or financial services. Some other great deals from the quarter include an expanded relationship with Alaska Airlines, the fifth largest US airline based on passenger traffic. In an effort to reduce direct interaction between employees and guests in response to COVID, Alaska is using our programmable SMS connected to their reservation system to allow agents to send a customer's boarding pass via SMS. We entered a new relationship with Prometric, a global leader in technology-enabled testing and assessment solutions. With the acceleration of digital technology driving new consumer behaviors, As well as an increasing need for remote test proctoring as a result of COVID, Prometric selected Twilio as the video management service for their application, with Flex as the user interface between the proctors, security agents, readiness agents, and test takers. Overall, our team continues to execute on our strategy as our investments in enterprise go to market, international expansion, and our partner ecosystem are paying off. We are extremely well positioned as we look to close out the year, and we're excited about the massive opportunity ahead of us in the next several years. And with that, I'll hand it over to Kozema. Thank you, George, and good afternoon, everyone. Total revenue for Q3 grew 52% year-over-year to $448 million, and dollar-based net expansion was 137% as we continued to see broad-based strength across the business. As we get closer to the election, political traffic is likely to pick up. And we saw that in the third quarter as political traffic contributed approximately $10 million or 2% to revenue. Excluding political traffic in Q3 2020, revenue grew 48%. Revenue from our top 10 active customer accounts represented 14% of revenue compared to 15% last quarter and 13% last year. International revenue was 27% of total revenue in Q3 compared to 27% last quarter and 28% in Q3 2019. WhatsApp contributed approximately 6% of revenue, down from 7% last quarter. Starting in 2021, we will no longer break out WhatsApp as a percentage of revenue. We continue to have a great relationship with WhatsApp. However, as our business has scaled, coupled with the strong revenue diversification we discussed at our investor day, disclosing the contribution from a single customer is less meaningful. Verizon's A2P fees contributed approximately $10 million to revenue. As a reminder, this fee is a direct pass-through to customers and does not impact gross profit dollars. I did want to note that we expect to stop breaking this out in 2021 as we lap the implementation of the Verizon fees. If and when we experience fees from other carriers, we do expect to provide that information if relevant. Third quarter non-GAAP gross margin was approximately 55% and was negatively impacted by 130 basis points from A to P fees. As you'll recall from our recent analyst day, we discussed that gross margins would be negatively impacted in the short term as the growth of our messaging product has been re-accelerating, a trend that continued in Q3. To reiterate, this is a trade-off that we will gladly take as it adds gross profit dollars, which we can continue to reinvest, delivering elevated levels of growth. Gross margin was also negatively impacted by about 100 basis points from foreign exchange, primarily from the euro, appreciating relative to the U.S. dollar. Non-GAAP operating profit came in at approximately $7 million, stronger than originally forecasted, driven by higher than forecasted revenue and the timing of hiring within the quarter. While we were able to catch up on our hiring plans in the third quarter, the timing of some of the hires meant that we didn't fully recognize the expenses we had forecasted. Moving to guidance. Please note that our guidance today does not include the impact of our announced acquisition of segment. We expect the acquisition to close during the quarter, and we do expect a modest top and bottom line impact in the fourth quarter. As such, on a standalone basis, we expect Q4 revenue of $450 to $455 million, including A to P fees, for year-over-year growth of 36% to 37%, and we expect a fourth quarter operating loss in the range of $10 to $15 million. While on the topic of guidance, I'd like to update you on our guidance philosophy. Going forward, we plan on only providing quarterly guidance. At our recent investor day, we provided medium-term guidance that we expect 30% organic annual revenue growth for the next four years. Also, our medium-term guidance does not incorporate the pending acquisition of segment. This guidance was provided based on our forecast for Twilio's existing business. We are managing the business for the long-term, making decisions that benefit all stakeholders, and our medium-term revenue guidance reflects this. As we discussed at our analyst day, some of the investments we planned on making this year did not materialize as we had originally forecast due to COVID. While still finalizing our 2021 plan, we intend to continue with our investment plans into 2021, which we anticipate will drive operating losses into next year. Also, with our recent announcement to acquire Segment, there will be certain integration costs will incur to further enhance Twilio's customer engagement platform. Once the deal closes, we expect to provide more information on our Q4 call. Lastly, I encourage those of you that may have missed our investor day held on October 1st, as well as our announcement acquiring segment, to visit Twilio's investor relations website at investors.twilio.com to view the presentations and webcasts. I wish everyone well and hope you are healthy and safe. Thank you for joining. Operator, please open the line for questions.

In order to ask a question, you will need to press star 1 in your telephone. To withdraw your question, press the pound key. And your first question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Great. Thanks. Maybe first question, just on Signal, could you give some color commentary as to what were the most attended sessions or where you kind of saw most customer questions around? And was any of that surprising? And then maybe just Kazima, any bounce back worth noting in key verticals like travel and hospitality? That's it for me. Thanks.