Twilio Inc.

Q3 2021 Earnings Conference Call

10/27/2021

spk01: Good day and thank you for standing by. Welcome to the Twilio Q3 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. And if you would like to ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is also being recorded. And if you require any further assistance, you may press star zero. Without a further ado, I would like to welcome one of your speakers for today, Mr. Andrew Zili, Vice President of Investor Relations and Treasury. Mr. Zili, the floor is yours.
spk11: Thanks, Carl. Good afternoon, everyone, and thank you for joining us for Trilio's third quarter 2021 earnings conference call. Our prepared remarks, earnings press release, investor presentations, SEC filings, and a replay of today's call can be found on our IR website at investors.quilio.com. Joining me today for Q&A are Jeff Lawson, co-founder and CEO, George Hu, our outgoing COO, Mark Boroditsky, CRO, and Josema Chipchandler, COO. As a reminder, some of our commentary today may be in non-GAAP terms. reconciliation between our GAAP and non-GAAP results, and further information related to 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 expected business benefits and financial impacts from our acquisitions, particularly segments and zip lists, and our partnerships and investments, including the associated transactions, the impact of recent and future privacy changes on certain third-party platforms on us and our customers, our outlook for the quarter ending December 31st, 2021, our ability to achieve our targets for non-GAAP growth margin over time and annual growth rates over the next three years, and our ability to manage changes in network service provider fees that we pay in connection with the delivery of our communications on our platform and the impact of those fees on our growth margin are 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 cases. 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 Jeff for a brief statement, and then we'll open the call for Q&A. Thanks, Billy. Before we begin Q&A today, I wanted to take a moment to thank our COO, George Hughes. for the amazing contributions he's made to Solio over the past five years. With George's leadership, we really figured out a developer-first go-to-market, which is an incredibly challenging feat, given nearly no other company has a go-to-market that's as unique or as efficient as ours. George has set us up on a new trajectory and built a tremendous team, starting with his direct reports and all the way down to go-to-market organizations. And I can't wait to see what you build next, George. I'm also incredibly excited for Mark Ordisky to be taking the torch and continue driving our forward progress. Mark has built a tutorial sales team from nearly zero to the powerhouse of talent it is today. He's got the admiration and respect of his teams and a vision for how to continually evolve and grow our go-to-market with developers, enterprises, partners, and digital leaders. I'm excited for the next chapter, Mark. Now, on to the questions.
spk01: Thank you, sir. Again, as a reminder, if you have questions, please press star 1. Our first question comes from the line of Meta Marshall from Morgan Stanley. Please ask your question.
spk00: Great. Appreciate the question and congratulations on the quarter. You know, understanding you had a couple hundred basis point headwind from political traffic that contributed to the deceleration and organic revenue growth we saw in Q3, but what do you think is kind of the biggest contributor to the slowdown in organic growth and what kind of gives you that continued confidence that you can grow 30% the next three years, a number we kind of understood to be an organic number? Thanks.
spk11: Yeah, hey, Matt. This is Kazama. I would say, first of all, we have 38% organic. We feel great about our overall growth performance in the quarter. Obviously, we're at about 65% on an inorganic basis. And if you just look at the breadth of the growth across industries, across use cases, across geographies, and across customers, I mean, we have a lot of confidence in the go-forward capabilities of the business. I would also add that We had a really strong quarter performance from segment. And so when we put all those different pieces together, we definitely see our ability to continue growing at elevated levels for the foreseeable future. And we feel really confident in our ability to deliver the 30% plus organic growth that we talked about last year over the next three years.
spk00: Great. Thank you.
spk01: Our next question comes from the line of Fred Heidmayer from Macquarie. You may ask your question.
spk06: Hey, thank you very much. Could you talk about your overall M&A philosophy? How do you approach that build versus buy versus partner debate at Trilio? And then generally, when you're looking across the landscape, the market landscape, how do you think M&A appetites are progressing in the CPaaS market and in the customer engagement markets?
spk11: I think this is Jeff. I'll take the question. So first, your question on the M&A philosophy, which has really remained unchanged in the history of the company, which is, you know, look, we've got our insights about the market, where it's going, and what our customers need from us. And as a result, we have a roadmap of the things that we want to accomplish for our customers to unlock this vision of being the leading customer engagement platform, which I see as the greatest enterprise software opportunity of our time. And when we look at the things that we're going to go build, whether it's the teams we have to go hire or technology we have to build, If we see a team out there that's amazing or we see a product out there that's really exactly what we might go to ourselves, then we might say, hey, well, we can achieve this vision faster by bringing that team or that product on board and accelerating our ability to unlock this vision. And that's really how we've always looked at it, which is does it accelerate our ability to achieve our vision of becoming a leading customer engagement platform?
spk01: And I think I had a second question.
spk06: Yeah, the second question there was just generally how do you see the overall M&A appetite for Twilio in this market and generally across the entire CPaaS market? Certainly there's been quite a bit of M&A from other CPaaS vendors out there.
spk11: Hey, Fred, this is Kazama. I would say that, I mean, we obviously have a really strong balance sheet and a lot of cash on it. I think the way that we look at it is, exactly the way that Jeff described, but we will be opportunistic if an opportunity presents itself. I think we obviously have been inquisitive over the last several years. We did segments, of course, last year, kind of around this time, and then we've done, you know, some assets in more of the messaging space since then. But it's not like we see something in front of us that we necessarily have to do. We want to be selective about the opportunities. We obviously certainly see where valuations are today as well, but I think more than anything, we just feel great about the technology stack that we've already got and feel really, really confident, especially coming off of a really strong signal conference.
spk01: Great.
spk06: Thank you.
spk01: Your next question comes from the line of Rishi Halaruya from RBC Capital Markets. Your line is open.
spk09: Hey, guys. This is Richard Deloria from RBC. Thanks so much for taking my questions. It's always been great to work with you and all the best with the next chapter. And, Karzema, congrats on the promotion and new responsibilities. Just wanted to ask one question, which is, You know, from a macro perspective, you know, look, seems like a really strong demand environment. But how should we think about the puts and takes of maybe some of the benefits that we saw from, you know, lockdowns last year potentially fading and maybe the return of travel and specifically business travel, especially given that most industries seem to still be having that put on hold. Just how are you thinking about stuff like that coming back? Thank you.
spk11: This is Jeff. I'll answer. First of all, I agree with you. This is a strong environment for companies who are undergoing digital transformation. And those transformations have been accelerated by the pandemic. And something that I think is really important to understand here is that this is not like a left turn or the digital interactions that got put in over the course of the past you know, a year or two was not a deviation from, like, the future of the role of cutting board. It was just an acceleration. We were bringing forward a lot of the innovations that were happening. Like, think about telemedicine. Like, you know, you saw telemedicine probably take a decade's lead in its adoption. And that is going to continue, I believe, to be the trend. When I look at Do you want to drive across town for every doctor's visit? No. If you can see a doctor in 15 minutes on a video call and then go back to work, that's a better experience. Same thing with experiences like curbside pickup or online ordering and all these sort of things. This has been an acceleration of the natural digital transformation of the world. It's just going faster. When you see that environment exist, businesses are going to continue to drive those roadmaps. because the competitive environment demands it, and customers get accustomed to these efficiencies and these good experiences, and that creates even more demand for digital. And so I think it's a flywheel for how customers are now differentiating themselves digitally in this market, and our customer engagement platform now enables this. And you think about it, like I talked last week at Signal, our big customer conference, about how while the pandemic has accelerated, like so many companies, every company we talked to, 250,000 customers, the digital acceleration of the topic has accelerated their digital presence, like these digital roadmaps. But guess what else is also accelerating? The digital giants, you know, Amazon, Netflix, Facebook, Google, et cetera. And so while those companies saw their futures accelerated, so did the giant digital companies, and that has increasingly raised the stakes for every company to execute at a first-class level individually. And the platform that we're building, the Plurio Customer Engagement Platform, is designed to give all those other companies the ability to listen to their customers, understand their customers' first-party data, and use that data to build a great understanding of the customer, personalize the journey, and make it relevant, and therefore win their customers' hearts, minds, and woes. And you can think about it when I talk to customers. Everybody out there says, you know what I want to do? I want to acquire a customer once. I want to delight them with an amazing product experience and make them a loyal repeat customer for life. That's what Twilio enables companies to do. And that has been, I think, accelerated because of the pandemic, which is all part of this digital acceleration that we're experiencing. So, yeah, there's a strong environment out there, and I think that that is going to continue. I don't think this is an aberration. I think it's an acceleration.
spk09: All right, got it. Thank you.
spk01: Your next question is from the line of Samad Samana of Jefferies. Please ask your question.
spk08: Good evening. Thanks for taking my questions. Jeff, maybe one to kick off for you. As you mentioned, the Signal Conference, the company rolled out Engage, and you rolled out Frontline long before that. I'm just wondering if you're starting to see, as you've rolled out more of these solutions on top of the core platform, if you're seeing any difference in the adoption on day one from customers or if you're seeing a more bundling of the solutions up front and how that's actually driving volume inside of the business as well.
spk11: That's a great question for Mark, our Chief Revenue Officer today. Thank you, Jeff, and thank you so much for the question. definitely affecting the adoption that we have seen in the recent quarter. As an example, Flex has inspired our partners to consider building the next generation of their offering for contact center on the Flex solution. Likewise, with the announcement of Engage last week at Signal, I had a number of conversations with ISD that are looking at, again, changing their offering overall. Probably the one that aligns the most to the questions to model is the success that we've seen with our partner, Waterfield, who has built a plug-in for Flex and made it possible for us to sell into more of the market. And this past quarter, we saw small companies that needed a full solution on day one adopting Plex as their first solution from Twilio, which gives us great confidence about the potential that Plex represents from SMB all the way to TCK.
spk08: Great. I don't want to put you on the spot with a math question, but I appreciated the additional disclosures, but I still had a follow-up. So if I adjust for political revenue in 3Q, it really implies closer to low 40s organic growth. One, I just wanted to see if that's correct. And then the guide implies, again, kind of low 30s if you take out political revenue. How should we maybe contextualize that with that go-forward 30% plus growth as well as you look forward?
spk01: Yeah, thank you for the question.
spk11: Believe it or not, I actually can do a little bit of math on the fly. I think the setup that you gave is about right. I mean, I think we continue to see elevated growth across the business, as we talked about earlier. You know, the reality is that we gave a 65% in organic, 38% organic. I think if you do the math that you just implied, you're at about the ballpark that you just described. The guidance that we put out for Q4, I mean, we feel really, really good about. We see a nice setup, certainly, for Q4, and as we look out based on a lot of things that Mark just referenced a moment ago, as well as some of the things that Jeff talked about relative to Signal, I mean, we see a tremendous amount of opportunity in front of us and have, you know, a really, really strong conviction that we can deliver 30% plus over the next three years. So I think we just feel really, really good about broad-based strength across the business.
spk08: Great. I appreciate y'all taking my questions. Thank you.
spk11: Sure.
spk08: Thanks, Mark.
spk01: The next question is coming from the line of Derek Wood of Collin. You may now ask your question.
spk11: Thanks for taking my question, George. Good luck in your next endeavor. Kazem, I know it's probably early, but anything you want to share in terms of what your early priorities will be as you move into the CLO role? And then I'd You've had a new CRO for a year, Mark. I know you're on the call. Should we assume from a direct sales, go-to-market standpoint, we shouldn't anticipate too much change, or should we be thinking about taking the time to make bigger tweaks to the model? Maybe I'll go first, Derek, and then Kazima, and then I'll turn it over to Mark. I think from my standpoint, you know, in large part, the role is an expansion of additional responsibilities that I already had. And so I see it more as a continuation of things that we've already been doing. I think in general, you know, we want to or I want to in the role really help the operating team win as much as possible, as efficiently as possible. as fast as possible and to create the infrastructure and support systems inside the company so that, you know, all of our great teams inside the good market and engineering teams can, you know, innovate and then obviously distribute all the great products and services that we've got. So I don't think there's, like, really a sea change in the context of my role. I'm, you know, obviously super excited to take it on. Even more so, I'm humbled and feel really privileged to be a part of the team and, you know, want to continue to help Jeff and the management team win. Mark? Thanks, Susana. And thank you, Derek, for the question. A little background. I've been at Twilio now for seven years, since the acquisition of my last company, Auti.
spk08: And as Jeff referenced in his preamble, it was just a handful of sales reps at the time here at Twilio.
spk11: And when George joined five years ago, I had the great privilege to build out the go-to-market strategy that he's been executing on since. As you identified, Derek, we're expecting to continue forward with the strategy that we have today. We've got a fantastic team in place. We're well positioned to continue to execute against the already successful execution that we have as developers. We're continuing to progress our success in the enterprise, and we're expanding our overall international footprint. As I mentioned earlier as well, in the examples I gave, we're making great progress about partner community, engaging them to build out the business together.
spk12: That's helpful. If I could follow up on a financial question back to you, Kazima.
spk11: You know, gross margins have certainly been topical with investors.
spk12: Interesting slide you gave on the bridge to the A to P fees, but
spk11: If you could just take a second to kind of really unpack that and kind of what's been causing the pressure, you know, how we should be thinking about gross margin, you know, in the next few quarters and kind of what it's going to take to get to that 60% long-term target. Thanks. Yeah, thanks for the question, Derek. I mean, I think the bridge with respect to the A to P fee dynamic, at least, is self-explanatory, right? You can see that it's almost 100 bps relative to what we would otherwise have reported were it not for those fees. I think more broadly, you know, what we've seen is honestly a fantastic problem, which is that our messaging business has been growing at really accelerated rates. And, you know, we gave you some information last year, for example, during our investor day that basically illustrated the relative gross margins of our different products and services. And so as the messaging business grows at those accelerated rates, it makes the margin rate down a little bit, which honestly is a trade that we're more than willing to take given the fact that we are focused on first profit dollar expansion so that we continue investing in the business. In terms of the latter part of your question and 60% plus, I mean, we still have a lot of conviction in that 60% plus longer-term framework. And I think where that's going to come from is the accelerated growth that we're seeing in our application services category. And I think Segment is obviously the most recent example of that. I think certainly the promise of Engage and what we described at the Signal Conference last week, as well as the fact that Segment had a fantastic quarter sequentially coming off of Q2 into Q3, gives us a lot of confidence that that business is going to perform well and continue to underpin a lot of different things that we want to do with the rest of the business. And obviously, we're very excited about the progress of Flex2. And so I think it's a combination of those things that lead us to continue to believe in that 50% plus long-term target.
spk01: Your next question comes from the line of Michael Turin of Wells Fargo Securities. Your line is open.
spk07: Hey there. Thanks. Good afternoon. Appreciate you taking the questions. George, certainly wish you the best. Know from just a number of these calls, you've been instrumental in things like instrumenting the go-to-market and the partner initiatives there. Can you just maybe broadly as a team talk more about continuity just on the go-to-market side? Given we're heading into the year end, we can appreciate that Mark has been with you for some time, but maybe just adding additional context for investors and that evolution and just the confidence in sustaining the tremendous pace that the business has been able to perform at for a number of years now.
spk11: Thank you, Michael. This is George. Thank you for the kind words. Certainly, it is a difficult decision to make. I'm so incredibly excited about Twilio and its future, I think especially coming off of an amazing signal where I talk to so many customers that are just excited about this customer-gating software vision and segments But what gives me confidence is the tremendous leadership team we have here. I've been working with Mark now for a number of years, four years, and Mark has done an amazing job. He's really built this entire sales machine and delivered the numbers quarter after quarter. He's an incredible leader. He's hired all of the great talent we have in the sales team. And I know that you can do an amazing job going forward. I think there's gonna be a ton of continuity. And I think that Mark is also going to evolve the organization and bring it to the next level also. I also, before I let Mark chime in, I also want to really congratulate and acknowledge Kazema, who's going to be an amazing COO for Trulio. He's been an amazing partner in me. He's one of the smartest people I've ever worked with, a great leader, and he's going to do phenomenal, phenomenal things for the next chapter of Trulio. Thank you, George. And, Michael, thank you for your question. Right now, the expectations are very solid around the team and how we're going to be progressing with the plan that we have in place. This plan has been developed over the last five years with George and I in lockstep. When George joined, he brought expertise that was very familiar to me from my previous enterprise experience, and he supported us in building out a plan that allowed us to reach to the enterprise from the model that principally developed itself through it. and helps us to build out the overall global footprint and ultimately our partner initiative. These are all things that are in flight at great stages of success. I am very confident for the team that's in place that we will continue their trajectory.
spk07: That's all very helpful. If I could just ask a follow-on. Gross margins were actually – I know you've gotten a couple questions here, Cosima. They're actually slightly up. I think many investors are expecting that we might see discontinued headwinds given the international business is now a third of overall. Are we at a point where things like Segment and Zipwhip are starting to provide the counterbalance or anything else you'd call out? You also added a slide on just gross profit growth. So is that a metric maybe just to highlight in terms of just the conversations around these dynamics?
spk11: Yeah, I would say the inclusion of a gross profit slide isn't necessarily an indication of anything new. We've been saying for a while now, Michael, that we've been focused on gross profit dollar expansion. Obviously, that gives us a lot of fuel to be able to reinvest back into the business. We just thought it would be helpful in terms of providing some additional color. Same thing kind of with the gross margin slide, which is, you know, I'm not sure if it's really kind of a story behind the story, other than obviously the APPs have clipped us a little bit, and you can see that in the bridge that we provided. I think generally speaking, you know, as I said earlier, like we feel great about the quote-unquote problem that we have in that, you know, we have this incredibly fast growth messaging business, which has mixed the overall gross margin of the company down. But to your point, whether it's some of the newer acquisitions or flex or segment, we do have a number of things that can provide fuel for a gross margin uplift over time. We're not necessarily getting to that today per se, but we do have a lot of confidence in our long-term framework of 60% plus over time. Thank you. Thanks, Michael.
spk01: The next question comes from the line of Itai Kidron from Oppenheimer and Company. Please ask your question.
spk05: Thanks, Jeff. I'd like to start with you on Twilio Engage. Super excited for that announcement. I guess, help me think about the ramp here. I know when Flex came out, you know, very conservative, but it clearly did very good out of the gate. You have already an established customer base here with Segment. Is there an opportunity for this business to ramp faster than one would think? And do you need to make any adjustments on the go-to-market approach in pushing this product?
spk11: Thank you, Ty and Jess. So let me give you some forward-looking projections about this. Just kidding. You asked about the ramp up. Obviously, I can't tell you anything specific about the product. I know what the ramp is going to be, but what I can say is that there are two things. Number one, I think there's a lot of demand in the market for this product. Digital growth and digital personalization for how businesses are building their businesses is a tremendous opportunity. And that opportunity is actually accelerated by the privacy changes going on in the world with IDFA tags and third-party cookies and all those things getting changed because companies can't rely on what's honestly shenanigans. And the changes that will be going on, whether it's cookies or IDFA tags, these privacy changes are on the right side of history. And so what Tobio is providing is the antidote to all those changes, which is a personalization and marketing uh, system that starts with first party data, that starts with a company understanding, making sense of all the first party signals they get from their customer and the data on approach. So then use that signal, use that first party data to then go personalize and build great relationships with their customer across all these touch points, whether it's marketing, content centers, sales, you name it, or whether it is across all these different channels, you know, messaging, voice, email, uh, in an app, on the web, et cetera. That's the heart of how companies are going to weigh the hearts, minds, and bullets of their customers. And the changes in privacy provide a really nice tailwind, I think, in the macro sense of what companies need to do in order to continue growing the relationships with their customers and continue growing their customers. So that's the first thing. And the second thing I want to point out is I think there's a very natural synergy with not one, but two go-to markets that Gilead has, right? It's a natural upsell from our messaging product because it makes our messaging even more powerful. And it's a natural upsell from segment, which allows you to do something new and interesting with your data, which is actually access. And so I'm really looking forward to, as that product goes out in GA in 2022, I'm really looking forward to how we can bring that to our customers. And I'm really excited about the product.
spk05: Very good. Maybe a follow-up for you, Kazima, on the net expansion. Maybe you can kind of walk us through a little bit, perhaps, of the puts and takes of that metric going forward. I know you still have the political activity, which I guess would weigh on that number next quarter. But I think you also are going to celebrate the anniversary of Segment, which we'll include in. And I don't remember if Segment was above or below average on that standpoint. Can you help us think about what would be the right way to think about how net expansion rate is going to change over the next, call it, three, four quarters?
spk11: Yeah, so a couple things there, Rikai. Thanks for the question. So, first of all, I mean, we feel great about 131%. growing at really elevated levels and just given the size that we are at our own rate. We feel great about it. And, you know, 131 is kind of in the range of where we've been over the last several quarters. So really good broad-based things across the business. I mean, we don't guide on expansion rate, as you know. And so I think it'd be a little bit premature for me to kind of talk about where I anticipate that ending up being in Q4 and beyond. What I will say is that We do intend to be disclosed in our remarks earlier that segment we will include as part of Q1 being the first full quarter kind of post the anniversary of the acquisition. And, you know, we'll publish those results and include segment at that time. But, you know, we'll have to kind of wait and see for that quarter.
spk05: Very good. Good luck.
spk11: Thank you, Zach.
spk01: Our next question. Sorry. Our next question comes from the line of Parker Lane of Steepo. Please ask your question.
spk12: Thanks for taking my question. Jeff, I was wondering if you could talk a little bit about the stickiness of the incumbent platforms in the CRM markets. And when you look at the B2C component there, how much appetite do you think there is for disruption of those legacy platforms, particularly as some of your competitors out there in the newer markets are launching their own CDP offerings? Thanks.
spk11: Yeah, thanks, Parker. This is Jeff. So, you know, we're really excited about Segment, which is obviously the number one CTP in the market. We're really excited about Soil Engage, which is built on top of it. And, you know, it's interesting. When I look at the market, I just see a huge hole in the market for a platform that is helping B2C companies really understand their customers and then execute on that understanding by personalizing every part of the journey and empowering their employees with great engagement apps. And the CRM market is a great one, but that's really about B2B. It's not configured to do this. B2B CRM really starts with salespeople entering notes, which is just a completely different starting point than what B2C companies need. And so the opportunity that we're going after and what our customers are looking for, is how do B2C customers with volumes of data, how do they take that data, understand it, and act on it across all the different applications and all the touch points that they have? And that's a fundamentally different market that nobody has really practiced. And that's the opportunity for Twilio's customer engagement platform, and that's the opportunity that customers are pulling us towards because no one has solved it. And so that's what we see as the market is going down today.
spk01: The next question comes from the line of Mark Murphy from J.P. Morgan. You may now ask your question.
spk10: Yes, thank you very much, Jeff. Question on Twilio Engage. What do you see as the differentiation or the line of demarcation there? If we compare it to some of your partners who provide cross-channel experiences where they're using push and in-app and SMS and email and then I believe some of them then send their messaging traffic to you. If you could just help us maybe with a little compare and contrast.
spk11: Yeah, it is, Mark. You know, MarTech is a really rich landscape. And we have, you know, many companies out there doing all sorts of interesting things. And what we're seeing is that customers are really asking for a data approach to their growth automations. an approach that starts with data and then move out from that data into understanding customer, building profiles, and then building actions from the data. And that's where Segment has always played, and that's where Segment's strength is. So ultimately, we're serving an unmet need when customers come to us saying, hey, can Segment be used to build these journeys and then ultimately run these campaigns? And that's the really neat thing about Segment, is that not only do we allow marketers to create these rich segmentations, and you heard at Signal about how Intuit, when they went from like 30, or sorry, they went from three segments, their whole customer base was cut to three segments, to now like 450, and that increased the engagement in their customer base from 20% to 50%. I mean, that was the story that Mariana told at Signal last week, which is amazing. And so Segment also allows the marketers to use all the data points to see the measure of the effectiveness of their campaigns, which I think is another interesting point of Engage. So instead of measuring a bunch of emails on just where they delivered, where they opened, where they clicked on, segment a lot of marketers to optimize for what actually drives revenue. Did it result in people buying things, which of course is the ultimate goal. So what we're hearing from our customers is that the data-first approach which starts with having great data by your customers. That unlocks all sorts of new ways for smart growth marketers to do their job and ultimately one that the market hasn't yet solved for them.
spk10: Okay, I think I understand. Yeah, so the CDP is the basis there. I had a quick follow-up, maybe for Cosima or Jeff. I think the sequential organic growth in revenue was a bit less than some of the prior quarters, although interestingly, I think the same thing happened a couple quarters after you acquired SendGrid. I guess we've seen that. Can you just touch on that? Is that voice or video or something else? You're reaffirming this 30% plus growth for three years. Can we presume that you have visibility into some better sequential build into Q4 and early next year?
spk11: Yeah, Mark, I'll take the question. I mean, I wouldn't read too much into, like, product mix dynamics. I think we feel really good, honestly, about the sequential growth and just kind of the overall growth of the company at our scale and based off of our product set. And I think, you know, as we talked about, I think, earlier in this call, you know, you look at some of the things that we announced, the signal and the tools that's going to provide us going forward, we feel fantastic about, you know, the overall growth prospects of the business. So in terms of, you know, the setup on the 30% plus, I mean, you know, we provided guidance, obviously, for Q4, and we feel really good about that. And we see continued strong growth into the future. And, you know, that 30% plus that we provided last year, we certainly see that on an organic basis over the next three years as well.
spk01: The next question comes from the line of Matt Stottler of William Blair. You may now ask your question.
spk02: Hey, guys. Thank you for taking the questions here. I guess one, just looking at the revenue growth performance in the quarter. So if you look at the relationship between the obvious expansion, which to your point has been incredibly consistent in this kind of range on a multi-year stack, when you look at the difference between that and the organic growth that you guys reported, the relationship between those two essentially gives you some sense of the incremental revenue that you're generating from new customers in any given quarter. This quarter, that contribution seemed to be the primary source of the step down in organic growth sequentially. They're going from 50 to 38. Can you just talk about anything that you're seeing in terms of What might be driving that lower contribution from revenue from new customers on an organic basis this quarter or anything that you're seeing in the market that could help us to make some sense of that?
spk11: Yeah, this is Kazem and Matt. I can talk about it from a financial perspective, and then maybe Mark can talk about it from a customer adoption perspective. I'd say there's nothing specifically that I would necessarily unpack in terms of new customer growth. As you saw in the quarter, we had very strong ads in terms of new customers. We had a great expansion rate in the quarter. We had strong overall revenue growth both on an inorganic and inorganic basis. I think the math that you're trying to do is kind of directionally accurate, but There is a certain amount to unpack there, which we can essentially do offline. But I think in general, I would say we feel great about the overall prospects of the business. We feel great about the setup for Q4 and have a lot of conviction in our 30% plus organic revenue growth over the next three years. Mark, do you want to add to that, maybe from a customer adoption perspective? Certainly. Matt, thank you for your question. From an adoption standpoint, we had a terrific Q3 across all aspects of the business. As you know, we have a very diversified business that is relevant in a variety of economic conditions, which allows us to continue to deliver strong results. What's even more encouraging, especially on the heels of Signal, is the kind of reaction that we're getting to the messages that we shared here today and that Jeff elaborated on around the customer engagement platform, the value of a solution like Quilio Engage, and the progress we're experiencing with Flex and, candidly, the excitement around a data-first model. Everybody's looking for ways to deal with the new challenges that they're facing in the market around first-party data.
spk08: And as a result, we've heard really solid excitement that gives us confidence around the business as it is.
spk02: Got it. That's helpful. And then maybe just one more on just a quick one on the gross margin front. So the bridge you gave is very helpful, right? Kind of taking out the A to P fees and understanding that was very helpful. You also signed a A new commercial agreement with Cineverse earlier this year, which seemed like it would provide maybe a little bit of a tail end to gross margin. Is that something that was embedded in the results this quarter, or is that something you can talk about in terms of how we'll learn going forward? Thank you.
spk11: Yeah, with Cineverse, there's nothing really to talk about yet. We do expect that investment to take place before the conclusion of the year, but it's not exactly our initial results yet.
spk02: Got it. Thanks again.
spk01: The next question comes from the line of Catherine Trebnick of Collier Securities. Your line is open.
spk04: Oh, hi. Thank you for taking my question. Can you break down who you think your biggest competitors are at this point with the newly announced Twilio Engage? Thanks.
spk11: Hey, Catherine. This is Jeff. I'll take the question. So really, our competitive set has always been very diverse. There's typically not one competitor that we see in a whole lot of different situations. And a lot of that is because of our unique developer-first approach. Developers bring Twilio into such a wide variety of companies to solve such a wide variety of things that they're building. And that leads us into a company in a way that's not like a traditional, like, you know, to an RP, like, thing. So many of our deals are like that. And so that's the historical of Twilio. And, you know, going forward, I'm looking at the new products or customer engagement platform, which is, you know, it's really a new category. There are products that are needing to meet the market, and that's why we're building them. So when I look at what we're building, whether it's Toyo Engage or whether it's, you know, segment CDP, like, you know, the number one CDP in the market on top of it, building a product that customers have been asking for, which is, you know, a data-first approach to marketing. And so, you know, I just don't see it as a direct head-to-head. I think we're building something new, both in terms of each of the individual products. You know, I think Flex is different than what's out there in the market. We're solving a problem that customers say they have, and that's why we built Flex. Same thing with Engage. Same thing with Frontline. And these are the pillars, really, of our customer engagement platform, which as a whole is certainly solving a really unsolved problem for B2C companies, which is how do I understand my customers and engage with them? And there's nobody who's solved that problem at a platform level.
spk04: All right. Thanks, Bill. Ask more on the next call. Appreciate it.
spk01: The next person to ask the question is Pat Will Ravens of JMP. You may now ask your question.
spk08: Oh, great. Thank you.
spk11: Hey, Jeff, so, you know, as we're looking into 2022, and hopefully it's pretty different than 2021 was, I'm curious what you think your top two or three strategic imperatives are. Thanks, Pat. So, you know, obviously we've been really progressing the Toyo engagement platform, a customer engagement platform. And so, you know, one of my first priorities this year was making sure that we, you know, brought to market Toyo Engage and did it with a great team. It's a great introduction, which we did last week at Signal. I've also been really prioritizing the company, our teams, because we're obviously in the second year of a pandemic. These are difficult times for every team out there. So really prioritizing the well-being and the productivity and the growth of our team. And our team has grown tremendously to push the pandemic. And then, of course, customers. Customers' needs are evolving during this time. And really sending many new customer challenges, sending those customers in our direction helps solve those challenges. Whether it's the pandemic, whether it's privacy, and the IDFA changes, the cookie changes, and just the many things that companies are having to deal with as the world is rapidly evolving. And those companies have to become builders and have to build those relationships with their customers and keep up with the evolving landscape. Those are things that are pushing customers towards us and giving us a lot of insights about how we can further serve them. And I've been very focused on that as well. So, you know, those are probably the three big areas, which is, you know, our products, our teams, and our customers, which is, you know, I think the right things for CEOs to focus on. Great. Thank you.
spk01: Our last question comes from the line of Taylor McGinnis of UBS. Please ask your question.
spk03: Hi. Thanks for taking my question. With gross margins flat this quarter relative to last, and given all the ADPPs you guys have this quarter, How much of that was potentially driven by a mixed shift from slowdown in messaging versus maybe more durable factors and efficiencies that you guys might be seeing? So was that just all mixed shift related, or is there something else driving that?
spk11: Yeah, hey, Kayla. This is Kazama. I'll take the question. I wouldn't say there was necessarily any one factor. I mean, I think what we're seeing is continued strength in the messaging business, and so There's not really like an underlying story relative to that product set. We continue to feel great about the growth prospects there as they've been over the first half of the year and certainly in Q3 as well. I think equally, we feel very excited about the performance of segment and we continue to see higher growth in our application services category. In a given quarter, I mean, any one of the kind of product mix dynamics or international or even customers to some degree, are going to influence what the gross margin rate is in a particular quarter. So for now, we're really concentrated on gross profit dollar expansion. And obviously, over time, we do intend to work that gross margin number up. We think that will come from a mixed shift in those application services and certainly stand by our longer-term target of 60% plus gross margins.
spk03: Great. Thanks.
spk08: Thanks, Taylor.
spk11: Great. Well, thanks, everybody, for joining today. That will end the call for us. I look forward to chatting with you throughout the rest of the quarter.
spk01: Thank you again for participating. This concludes today's conference call. You may now disconnect.
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