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spk00: Good evening. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio fourth quarter and full year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. Andrew Zulia, Vice President of Investor Relations. You may begin your conference.
spk08: Thanks, Angela. Good afternoon, everyone, and thank you for joining us for Twilio's fourth quarter and full year 2021 earnings conference call. Our prepared remarks, earnings press release, investor presentation, SEC filing, and a replay of today's call can be found on our IR website at investors.twilio.com. Joining me today for Q&A are Jeff Lawson, co-founder and CEO, Mark Boroditsky, CRO, and Kozema Shipchamber, 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, David D'Auxilio's outlook for the quarter ending March 31, 2022 Julio's goals regarding delivering non-GAAP operating profitability beginning in 2023, and meeting annual growth rates and long-term non-GAAP growth margin targets. Julio's expectations regarding our products and solutions. Julio's expectations regarding business benefits and financial impact. From our acquisitions and our partnerships and investments, including the associated transactions. Our expectations regarding the impact of recent and future privacy changes on certain third-party platforms on Twilio and our customers, and Twilio's ability to manage changes in network service provider fees that we say in connection with the delivery of communications on our platform, and the impact of those fees on our growth margins, 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 statements. A description of these risks, uncertainties and assumptions, and other factors that could affect our financial results are included in our SBC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-Q. And our remarks today 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 all that out of the way, I'll hand it over to Jeff for some opening remarks, and we'll open the call for Q&A. Thank you, Billy. I am very happy with our 2021 results. Built on some great outcomes for customers that continue to generate the best and best growth for investors that you see today. I've never been more excited about the future of the company than I am sitting here right now. We have an awesome leadership team, a combination of our leading cloud communications platform with Twilio's segment's number one customer data platform, gives Twilio an unparalleled view into the customer journey, setting us up as the company that can truly deliver from the customer engagement platform vision. We intend to become the software layer that digitally connects every business to their customers to introduce true, personalized engagement and relationships in the next chapter of the cloud. We're builders, so our work is never done, and I'm incredibly eager to continue building the company in 2022 and beyond. With that, let's open the call for your questions.
spk00: At this time, I would like to remind everyone, in order to ask a question, press star then number one on your telephone keypad. Our first question comes from Samad Samana with Jeffries. Your line is open.
spk01: Hi, good afternoon. Congrats on the strong finish to the year. It's great to see the organic growth. Maybe, Jeff, first for you, in reading over the prepared remarks, I think the company really did a good job of expressing moving from just the infrastructure side to more of the solutions layer. I'm curious if you could maybe help us understand how the adoption is going for the more solution-based products that the company is rolling out, and how we should think about maybe the traction changing. I know you guys call that IDFA in particular as a driver. Are we at an inflection where that's accelerating, or how should we think about the shape of that adoption?
spk08: Yeah, thank you, Samad. So, you know, I think there's two parts to that question, which is, essentially, you know, first of all, really pleased with how the introduction of our software layer is going. You know, if you think about it, look at some of the customers that we're talking about in our earnings calls. Not just this time, but really every quarter, right? We've got great companies for adopting Flex and Segment. Like, I love the VirtuMotors example we were talking about today, them bringing Flex and Segment together to make the contact center better. You can look at Stripe adopting Flex for their contact center needs. and Flex expanding in global 2000 financial services companies, and a global 2000 automaker, and NewBank, many others. Invisalign putting in Flex for their process. You know, we can come up with so many customer stories, but really the answers that are approached in an up strategy is a great one. Because Torio is used by so many companies around the world. Every industry, every shape and size, every continent. I mean, this really is the need for things like email and messaging is so ubiquitous. And developers bring this in with so little friction. we're able to use those initial wins and that initial traction that we get to move up the value chain, move up the world chart, and move up the software staff to then go address the things that our customers are trying to solve, whether it's in their contact center, whether it's in their sales process, their marketing, inside their product. And that is really what the In-N-Out strategy that we're talking about is all about, leveraging the ubiquity of Twilio across all these different kinds of companies into building this customer engagement platform that from our conversations with customers They all need because they all have to go build great relationships with their customers. The way you do that is by understanding the customer and then engaging with them. That's why Twilio having the leading CDP to understand customers and then the leading communications platform to go engage with them. That's such a powerful combination. The second part of your question about IDSA and the tailwind provided by privacy. Look, I think society is on the right track. right, investing in privacy, passing regulation and laws and things like deprecating tracking tokens that if most consumers knew what had happened on the internet, they'd be pretty horrified, actually. So we are on the right track, and what this is doing is forcing customers, our customers, businesses, to focus on the fundamental of business. The fundamental of business. I think about my grandfather who sold paint to hardware stores in Detroit. And what do you have to do? You have to know your customer and then talk, you know, musically to them about their business and about how you're going to help them. That's the fundamentals of business. Understand your customer and talk to them. And so by investing in privacy, the companies have to actually use the first-party data they have to help people use their product, help people use their website, their mobile app, what they buy, what they return, et cetera, and use all that as a signal for how they can digitally engage their customers and make that experience more personalized and compelling. And so I believe that is a challenge. You know, that is a big trend coupled with the whole direct-to-consumer market that's going on. Which, again, is like two sides of the same coin, if you will. That means that companies have to build their customer base and then engage them and turn them into repeat happy loyal buyers instead of just turning to customers and going and acquiring more by buying more ads. And I think that's a big change that's going on in the ecosystem that we in segment with the CPP and then with the rest of our products are helping to power that.
spk01: Great. That's very helpful. Maybe just a quick follow-up for Kazama. First, appreciate the additional disclosures and the numbers around organic growth. That was very helpful by you and the IR team. Maybe if I just – the outlook for getting to profitability in 2023, I know we're still a ways out from that, but – Can you maybe help us understand what the assumptions are around? Is that going to come on the gross margin line, or is that mainly because of OpEx leverage or revenue mix? How should we think about what allows the company to get to that profitability and what you're assuming in that?
spk08: Yeah, thanks a lot. Thanks for the question. I appreciate you asking. So I think it's actually a combination of things, some that will play out in the shorter term and then others that will kind of play out in the medium to long term. The way to think about it, I think at least for the short term, is that the improvement is largely going to come from operating expenses. One of the things that I mentioned in my prepared remarks and that we've talked about in the past is that we haven't been investing in a number of areas in the last several years. In particular, what we've been calling out historically has been flex, enterprise go-to-market, international go-to-market, and then core infrastructure. We expect that our rate of cost growth in those areas just starts to moderate, basically, in the second half of the year. And I think a good example of that is our ERP project, which goes live in the middle of the year. And it's not to say that we're not going to invest in the other areas. We will, but I think the lower, the rate of growth in those investments will be a little bit lower than what we've seen historically. And I would add to that, you know, up to this point, we've really prioritized growth and scaling the company. And I think growth certainly remains a priority for the company, and we, you know, actively make that tradeoff historically. But I think we're at the point now where we've got enough scale that we can actually start reaping the benefits of that scale and just become more efficient in our operations. So we see a real efficiency opportunity as we look out, and we're really confident in our ability for non-GAAP profitability in 2023. I think over time, in the medium to long term, we do expect improvements in our gross margin line as well. Obviously, that number does bounce around from period to period in the short term. That's a trade-off that we also actively make because we like the fact that we're onboarding customers and have an opportunity to grow with them. But, you know, very consistent with what Jeff said a moment ago, as we onboard those customers and really leverage this in-and-out strategy and bring them into higher levels of the software stack, I think we have a real opportunity to provide value to customers, and I think that will provide a margin improvement for us as a company, and that's why we stand by our 60% loss over time in the gross margin line.
spk01: Great. Very helpful. Thanks for taking my questions. Thanks a lot.
spk00: Your next question comes from Derek Wood with Code. Your line is open.
spk07: Great, thanks, and nice to see a strong quarter. Congrats. Jeff or Mark, I mean, you guys have been on this journey to build out this kind of CRM suite of applications. You referenced this In-N-Up motion, and the product portfolio has certainly matured quite a bit. From a go to market perspective, looking in 2022, how are you planning to be more aggressive in this up stack, the up part of the motion? And what would you like to see kick into a new gear in 2022?
spk08: Eric, thanks. Great question. This is Mark Rodizzi answering. It is front and center in the way that we are going to market in 2022. As a matter of fact, we're in the final days of our sales kickoff this week, and the primary objective that we're enabling the team on are the in-and-out strategies. So, leveraging our install base and access to customers efficiently through email and messaging to sell them more broadly on the vision of the customer engagement platform. You may remember we announced the customer engagement platform at Signal this past quarter. It's resonating with customers of all sizes, driven by their desire to take more control over their digital engagement with customers. And we're hearing interest across the entire arc. their end consumer engagement from top of funnel all the way through long-term loyalty. So the training we're doing now as we're looking out for 2022 is supporting our sales team to ensure that they're ready and able to approach the opportunity that we see as significant in the market today.
spk07: Great, great to hear. One for Kazem. Could you double-click on the change in your guidance philosophy? How has your approach changed versus what it was before? And I guess what kinds of new insights have you gained or are more comfortable with in order to better predict consumption behavior?
spk08: Yeah, great question, Derek. So, as you know, we run a usage-based business model. For the most part, we do have a little bit of data. in there as well. And I'd say with each passing year, we just had a lot more insight as to the way that customers end up using our platform. And we're just able to better predict usage patterns over time. And so what we end up doing with our FP&A team is basically fine-tuning that forecasting model every year. And as we can collect additional information, we're able to be more granular about the ways in which we can do that. So for Q1, we are refining our guidance philosophy, basically to provide guidance that is ultimately more consistent, not just with actuals, but also to give investors a better approximation of our expected performance. And as you saw in our Q1 guide, we're showing continued growth of 45% to 47% underreported, and then also 32% to 34% organically. I think it was important for us to call that out. That obviously does include segment now, and, you know, we have a lot of confidence that we'll be able to deliver on our 30% plus worth target over the next several years. And just lastly, I would say, Derek, that, you know, we obviously do get a lot of good feedback from our investors and from our analysts, and we take that into account, too, and I think this just provides for a more consistent setup over time.
spk07: Great. Well done, and great job on the disclosures. Thanks.
spk08: Thanks, Derek.
spk00: Our next question comes from Michael Turin with Wells Fargo Security. Your line is open.
spk04: Hey there. Thanks. Good afternoon. I appreciate you taking the questions. Maybe my least favorite question to ask on the call but feels worth asking is on gross margin. Clearly the growth is outstanding. The gross margins are stepping back here. It's clear international messaging strength is carrying forward, but How should we think about the tradeoffs and when app services can help flatten that trajectory? And maybe secondarily, we saw the Cineverse transaction ended this morning. Is there still a chance you can partner there or comment to improve the core gross margins, or is that no longer the right way to think about that relationship?
spk08: Yeah, those are great questions, Michael. Let me take the second one first, and then I'll answer the gross margin question more fully in a moment. Sure. First of all, with respect to Cineverse, I know there is some press out there suggesting that we might buy Cineverse, and you're definitively not doing that. What you probably did see in some of the press announcements this morning is that the merger agreement between M3 and Cineverse has come to a termination as a result of a mutual agreement between those parties, and that largely reflects market conditions as they stand today. The way that that agreement worked was it did also provide for an alternative path, which is a minority investment in Cineverse. And so that's now the path that we're going to be pursuing. The commercial wholesale agreement that we also referenced historically, you know, that's very much in place. We have a great relationship with Cineverse. It's been very long-standing, and we intend to continue that. And frankly, that partnership gives us a great product, you know, for us to be able to leverage in the United States. So I don't really see a significant impact in the near or medium term as a result of any of that. I just wanted to provide you a little bit more clarity on some of what's been reported or speculated in that up. With respect to gross margins, you know, more broadly, you know, for us, and we've had conversations, you know, with you and a number of others in the past, obviously, we have this really, really high growth messaging business. And, you know, we feel great about the way in which that business is performing. And, you know, the way that it played out in Q4 was that our international volumes really took off. And, I mean, you're right. Like, that part of the business carries a sort of lower gross margin structurally, certainly relative to some of the other products that Mark and Jack kind of alluded to. But that messaging business also cranks out really significant gross profits that we like and that we want to reinvest. And I think most importantly, as Mark alluded to, it creates that install base, which is sort of that critical foot in the door for us to execute our in-and-out strategy. As you saw on the last page of the presentation disclosures, while all of that is going on, our application services are actually growing at a faster rate. you know, kind of a good problem that we have is that, you know, our messaging business organically also grew 52% last year. And so that's just kind of a trade-off that we want to make. As long as we continue to generate high-worth profits, as long as we can generate great growth off of application services and segments, we feel confident that over time we will be able to grow into that 60% plus range that I talked about earlier. And we have a lot of confidence in that. But in the short term, you will see it bounce around a little bit up and down. And, again, in our disclosures, we try to give you some sense of how the APCs and stuff like that impact as well.
spk04: That's a very comprehensive answer. Appreciate it. Thank you. Thanks, Michael.
spk00: Our next question comes from Mark Murphy with JPMorgan. Your line is open.
spk06: Yes, thank you very much, and I'll add my congratulations. Kazima, I'm wondering if you can shed any light on any specific products that are growing materially above or materially below this organic growth level of about 39%. I would imagine Flex Video Segment or Outpacing. I'm less certain about Voice, Email, Authy, some of those products. Just curious if you're able to comment on any of the major outliers there.
spk08: Yeah, Mark, appreciate you asking the question. I mean, I'm not going to go through every single product and give the breakdown here, but here's what I will say in answer to your question. Again, just referencing the last page of our disclosures, if you look at our growth rate over the course of the prior year, we grew our messaging business at incredibly high rates, 52% organically, which on any basis is a really super performance. And In spite of the fact that that part of the business is growing really fast, our application services category, which includes a number of those products that you just referenced a moment ago, basically pre-segment, pre-SendGrid, non-telephony-based cost products, you know, that's growing at a faster rate. The good problem that we have is that that messaging business, as you again can see on that pays in terms of its revenue contribution, it's just really big. And so it's going to take some time for this in and off to play out in our financial statements, even though it is playing out very much in real life with our customer base. Beyond that, you also saw in the prior quarter, in the second quarter, a really fantastic quarter, really significant growth sequentially. Year over year, obviously, we don't break that out because it was inorganic in the prior period, but you can see the sequential was really, really strong. And Now that it's in our numbers, you know, we still have a tremendous amount of confidence in that 30% plus over the next three years, which, quite frankly, is on a much higher base. We've beaten that since the time that we announced that we could do that.
spk06: Thank you. That's very helpful. And as a quick follow up for you, you had mentioned the in and up strategy. I'm just wondering how rapidly perhaps your R&D investment is shifting toward products that might be sold more to a marketer rather than a developer. For instance, the customer journey insights, the engaged products, kind of the orchestration of messages rather than the delivery of messages.
spk08: Yeah, thanks, Mark. I mean, you can see we've got investments in, obviously, our core communications products in segment, the core customer data platform, as well as the products we're building above those two layers. And the way I think about it, which is developers are assisting the sale, and for the communications API products, like, you know, developers can take us a long way, maybe even, you know, all the way there. But for a product aimed at a marketer or aimed at a contact center buyer, you're going to have a line of business owners who's going to make private decisions. But with Twilio, they get the support of their internal technical teams on the purchase, meaning the developers, the technical people are there at the table telling the business decision maker, like, yeah, that thing that we want to do, we believe we can do it with Twilio. In fact, we've already built the prototype half the time. And that supports the sale. It delists it. It adds momentum to the sale. As opposed to the world where, like, you know, I talk to a lot of our sales leaders, and, like, in their, you know, yesteryear careers at, like, prior companies, they would be selling to a live business owner, and the live business owner would say, oh, this is great. Can we do this? They turn to their IT team. The IT team, you know, with their arms folded, is like, no, no, it'll never work. Can't do it. And so you've got detractors on the technical team. And I think the magical thing about Twilio is that we can have proponents of Twilio both on the technical side and now with more investment in the sort of application area, also in the line of business owners. I think it's a powerful combination. And that's why we focus so much on winning the hearts and minds of developers, coming to bring this into the company, and then making them some of our biggest champions as we make our way through and up the org chart and pulling up the value stack of software. And so we are investing obviously in both. And I also think of the application products that we're building are also very developer-centric in terms of customizability, flexibility, using code to really build what companies need is for to those products. We're not trying to provide just a turnkey and like you can't customize a type solution. We are trying to build products that while they do the things you want them to do out of the box, give you ample footprint to go in and turn them into the solution that the company needs for a long period of time. You don't get boxed in and you're stuck with something that's not serving your needs as markets evolve, as customers demand new things, et cetera. And I think our approach is as proven by the adoption by a wide variety of customers, whether they're the young digital disruptors or whether they're the global 2,000, Fortune 500 companies, I think we see across the spectrum this approach is working.
spk06: Very helpful. Thank you.
spk00: Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.
spk02: Great. Congrats. A couple of questions. One, you noted disclosure of having about 36% of the global 2000 and just wanted to get a sense of is some of your confidence about the 30% growth rate for the next couple of years? driven by room that there is within kind of this core customer set, or is it by the opportunity to win some of the more of the global 2000? Just trying to get a sense of, you know, how much of it you feel like you've already landed that gives you confidence of that 30% growth rate. The second question, maybe building on what you just said, Jeff, you've made a compelling argument at Signal about why Twilio is best enabled to help customers on their customer journey versus some of the competitors out there. Are you finding with customers that you're even having to do some of this evangelism about why you versus others? It's still kind of in its infancy where they're just happy to have a solution that you can provide and give them. Thanks.
spk08: Yeah. So, hey, thanks for the question. Let me take the first part of the 30% spot dynamic, and then I'll have Mark add to that, and then we'll turn it over to Jeff. So in terms of 30% loss, I mean, the reason we have such confidence in our ability to do that over multiple years, it's not just because we have relatively low concentration in GDK, but at the same time, I mean, we're able to do a ton of business that's really creative and innovative with digital disruptors as well. And if you look at the way that the company has evolved over, you know, basically since the IPO, like a couple dynamics have played out, which I think are really interesting and and give us the level of confidence that we have in that number. The first is that if you look at the distribution and concentration of our customers, you know, it used to be relatively high, and since then we've taken on more business in our top ten while that overall number has consistently shrunk over a number of different years. And so certainly you have some large companies in that bucket. You also have digital disruptors in that bucket who are really taking off. But the real point is that that breadth of customer that we serve is massively wide, which means that we're not overly concentrated in any one customer. We're not overly concentrated in any one industry. And that breadth allows us to grow at scale now. I think the second thing is that we've talked a lot about in the call already, like our messaging business, but in addition to our messaging business, like we've said a lot about other products that we're able to sell into these customers. And so our ability to now kind of go up staff with our application services, with segments, with email, I think allows for another interesting kind of upsell, cross-sell opportunity that we're able to do as well. And then I would say the third thing, and we've called this out in the past, is that we obviously have been making an investment in our international go-to-market efforts. We're starting to see that really pay off. We obviously saw a lot of takeoff velocity in the most recent quarter with respect to that investment. And so I would expect to see that continue over time. And obviously, you know, there are a lot of customers out there in the world that we are really eager to serve. Mark, do you want to add anything to that? Yeah, absolutely. Great question, Metta. Picking up where Kozima left off, the opportunity for us is, still very massive beyond our existing footprint. So primarily landing new logos remains an important part of our CMS execution. So landing with SMS or email and then being able to build a trustworthy relationship with the customer, as we've referenced a couple of times, that's a true situation across all of the market segments. And as you pointed out, we still have a majority, of the G2K out there where we have opportunities to build that initial relationship. The second dimension is expanding our footprint for reaching out to the full white space of the account. And across our entire base, we have that opportunity to go back to those customers and continue to build our relationship and expand the commercial results that we're generating. And then lastly, we're recognizing that There are many enablers that are making a difference for us in the market. As an example, we power quite a few ISVs. They're selling package solutions against fraud requirements. As partners, we're helping them to get into more debate. Like we are also pursuing with FIs and resellers that are projecting this into other types of opportunities, like what we shared in our disclosures in our pre-written statements. We are seeing traction with organizations like BPO. We shared with you on the last earnings announcement this relationship with HGS. We recently announced a relationship with Health Performance. And HGS has had significant progress with over 20 of their customers moving over to Flex. Now, these are accounts that are relying on a channel strategy, if you will, for us. to become adopters of our platform. So we're going to be pursuing growth in all those dimensions, and I think largely the opportunity is still in front of us. Hi, Amita. This is Jeff. I'll answer the last part of your question about to what extent are we evangelizing to our customers. way i look at it is you know customers have what they need to accomplish right like they've got their challenges they've got their market dynamics their competitive pressures and what that is leading most companies to is realizing that they need to have these direct relationships with their customers when i talk to you know executives that every kind of company you can imagine understanding their customer, building that complete picture of their customer, and then asking them to improve the outcome of their business, to spend less on marketing, to spend less on advertising in particular, to increase their retention rates, to decrease their customer acquisition costs, and increase the lifetime value. I mean, these are the metrics that drive executives at pretty much every kind of company. And I think oftentimes what happens is the people, the bottom-up motion that we all have, are the people on the front lines who are tasked with solving these big problems. And they're the ones that recognize that Twilio can solve these problems. They bring Twilio in. And then we follow up with some more top-down education around the market, a new approach. And I think that's working very well. We have both a bottom-up and a top-down approach to our customers. I'll share a quick story with you, which I felt was sort of illustrative of this. I was talking to the CEO of one of our customers, a pretty large company in the education space. And, you know, they've been using our products, and I was telling them about our engagement platform. And I was telling them about Flex, and Frontline, and Engage, and all these new products we've been bringing to market in the last several years. And the CEO stopped me by track. Whoa, whoa, whoa, hold on, hold on. And shared the screen, shared the screen on Zoom, saying, you know, I just got the report here. It says the old way of doing it was monolithic apps, and the new way is composable APIs. Jeff, you're not getting rid of APIs, are you? Which I was like, no, no, no, of course not. We're building all this with our own APIs. We're making it so that you can actually go build on top of these platforms and unlock the things that you're trying to unlock by integrating these experiences together and hiring developers to go building for your customers. And he was like, okay, okay, phew, I'm glad to hear that. And it was so interesting to me to hear the CEO of an education company say, evangelizing to me the value of APIs, the value of composability that was moment right there. A lot of these ideas are now widespread, right? Think about the fastest growing companies in the software and technology space. You know, companies like AWS, like Twilio, like Stripe. I mean, these are APIs. These are the building blocks that allow companies to go build their future and innovate for their customers, increase the agility of their company. That is what customers want. and we are able to provide it to them. There's always some degree of evangelizing when you are kind of moving the technology ball forward. It's not like we're just, you know, selling guacamole and everyone knows what that is. It's just a question of whether you want us to launch it or not. Really, this is technology and how technology is enabling them to build their business, which does take more time and education than just selling guacamole, but I like the business that we're in. Perfect.
spk02: Thank you so much.
spk00: Our next question comes from Alex Zukin with Wolf Research. Your line is open.
spk06: Hey, guys. Thanks as much, Jeff, as I'd love to buy some guacamole because I'm sure it would be delicious. I want to ask you maybe two questions. First one on – I don't know if maybe somebody has already asked this, but I'll try it a different way –
spk08: When you think about the major differences in the demand drivers between Q3 and Q4, obviously it was just two very different quarters. And Kazama, you mentioned it's a consumption-based business and inherent in that is some volatility. But just help us understand, if you can or if you would, what were kind of the biggest differences? Like what made Q4 just such a great quarter relative to Q3? And then The follow-up is just how to think about now, particularly with segment going into the organic bucket, what's the right way for us to think about and model dollar-based net expansion going forward? I know you're not – that's not a metric you guide to, but any help there would, I think, you know, at least help set the right model framework going forward to better understand the various components. Hey, Alex. Those are good questions. Appreciate you asking. I would say in the demand driver space, I mean, there's nothing materially that really changed from one period to the next. I mean, you know, we talk a lot about the fact that this is a usage-based business. And, you know, in being that kind of a business, you're always going to see like a little bit of an up and down period to period. You're going to see, you know, certain customers take off in certain periods. You're going to see a little bit of domestic versus international next. Um, I'd say in the most recent period international and really took off. And so, you know, that was something that, that we feel really good about, obviously, because, um, that's an investment that we've made over, over a number of different years, but you know, it's not like we're trying to necessarily like tune the business. So that international takes off one period and, you know, domestic goes a different way or, or that one product that goes over the other. I would just really kind of point to broad-based strength across the totality of the business. And, you know, we feel like the business was really good in Q3. We felt it was really good in Q4, and we really liked the setup, you know, coming into 2022 and multiple years beyond. So it's hard for me to really point to, like, that one thing, which I think is really the basis of your question. There really isn't one other than we have broad-based strength across the business and feel good about the performance. I think with respect to, you know, the way that you should think about segment getting layered in, I mean, we obviously have provided separate disclosures on segment on a year-over-year basis. We haven't, you know, kind of broken out that CBD or the CBD. I don't think I'm going to guide to that here today. What I will tell you is that we feel really good about the growth prospects of that business. You can probably intuit from the fact that it was up 10% sequentially that we really like the growth trajectory of where it's headed. I think you probably can take from Mark's and Jeff's comments that we're seeing tremendous traction with customers there, not just in terms of what we can do in combining it with messaging, but also with respect to combining it with flights, which is really, really exciting. And we think that business has really, really strong growth prospects going forward. I'll just point out, Alex, one additional thing is that Guacamole is a consumption-based business. Indeed. Indeed. Well, thank you, guys. Congratulations.
spk05: Thanks, Alex.
spk00: Our next question comes from Will Power with Braid. Your line is open. Thank you.
spk05: Okay, great, thanks. Yeah, a couple of questions. First one, perhaps for Kazima. You pointed this out, but international growth clearly accelerated, it looks like, quite a bit. And it sounds like messaging was a big piece of that. You know, I'd love it if there was just any other color as to what the drivers behind that kind of surge in international messaging might have been and what else you might have seen internationally that drove some of that acceleration.
spk08: Yeah, thanks for the question, Bill. I'd say there's two dynamics. I think the first is that, you know, you've been a long-time follower of ours, obviously, and we've talked a lot about our international good market investments, and Mark's built a really great team internationally, and I think we're really starting to see the fruits of that investment. And you've seen that, I think, over multiple quarters now with our ability to grow in international markets. I think the second dynamic is that there was one customer in particular whose volume really, really took off in Q4, which, you know, we felt pretty good about as well. That happened from time to time, too. And, you know, obviously there's the gross margin dynamic and all that as well. But I feel great about the way the international lens and we think there's continued strength over a long period of time.
spk05: Okay, great. And then maybe for Jeff, you know, just building on some of the other commentary, just looking at your, you know, your growing strategic position around first party data, you know, the end and up strategy that you've referenced, you know, what are the pieces that you think could bolster that further? I mean, it doesn't necessarily need anything, but they're natural tangential areas that, you know, further solidify that. And I guess more broadly, maybe how do we think about, you know, kind of the M&A pipeline and appetite here?
spk08: Yeah, thanks, Will. Appreciate the question. First of all, just sort of like what are the pieces to bolster it? And I think it's, you know, continued execution. We've got products that at great revenue scale continue to expand very nicely. So when I think about, you know, how are we continuing to make sure our messaging product is best in class or, you know, product is best in class segment, I think it's fantastic for bringing customers in the store. So we've got a lot of best in class products. We've got a lot of pieces, and we're in the process of bringing them together. When I think about what is ahead, it's like we're bringing these pieces together. We've got three pillars of our engagement platform. We've got Engage for the marketer, which is still very early in its cycle. We just announced it in Q4. We've got Frontline, which can be used by frontline workers and sales teams and things like that. Then you've got Flex for the contact center. Clearly, there's a lot of buyers there. There's a lot of cam there already. And we're continuing to bring those together, bring those products to more and more and more customers. As far as M&A pipeline, I'm going to give you the answer that I always give, because it's true, which is that we always have an active game board. Because obviously, if there are acquisitions out there that are accelerating our roadmap, um we should be willing to do them but we also of course maintain a high bar great companies great cultures great products and those are things that we're interested in but we don't have any particular strategic goal or anything that we're going after but you know of course like any company of our size and with our balance sheet you know we're aware of what's out there okay well i'll just add one comment to what justin at the end there which is um obviously in the current market there may be some attractive opportunities and we'll be on the lookout but the reality is we're very very focused on our organic growth rates right now and want to continue growing the business that we've got we don't see a burning need to necessarily do anything and i must reiterate uh for anyone that missed earlier like there was a speculation that we might purpose center verse and we're certainly not going to do that yeah i appreciate that thanks our next question comes from ryan mcwilliams with barclays your line is open Next segment question. Looks like Twilio's presence in global 2,000 customers doubled since the end of 2020. So congrats. Jeff, I know it's still early, but love to hear about the strategy and expectations behind Engage and how customers so far are starting to come around to the idea of using Twilio as their unified customer engagement platform. Absolutely. I'll start with Engage. I mean, the way we see the market is that, you know, historically, marketing automation products really focus on running a campaign, right? So you get this trade in there, you hit the send button, and you get to see how many people opened it, how many people opened the, you know, the campaign. And, like, that's the way they were designed, you know, 15, 20 years ago. And that's still the product that most companies use today. But actually, the more modern marketing stack is one that is driven not by campaigns but by data. It's actually driven by a rich set of data about every customer and who they are and what message is going to actually resonate most with them. And by the way, the outcome you're looking for isn't just, did they open an email? It's like, did they make a purchase? Did they increase their lifetime value? Are they actually a more valuable customer? And these end up being complex set of campaigns, multivariate analysis. Great marketers today are using data in incredibly interesting ways that the legacy marketing software just really isn't set up to accommodate. And that's the opportunity that we're going after. We're going after a very data-centric approach to marketing in the belief that many marketers are already there, and the ones who aren't are going to get there very And I think this is already proven out by the traction that the segment CDP has in the market, because the CDP is actually how you raise the money, I think, into actionable insights to the marketer. The last step is just kind of, you know, is actually in your campaign, and that's what we're adding on with Engage. But the hard part about that whole equation It's the data part. And we already do that. We're already leading the market in that. And so adding actually the marketing execution side onto it is actually a relatively light list in terms. We're very excited by the feedback we're getting from our early customers. We think that we've got a really novel and attractive approach. And ultimately, at the end of the day, look, it is the same budget we're going after that the legacy pods enjoy today because that's the marketer's budget. But I think that it's where the market is going, and I think we're going to have a leading product as the market is getting there. And you already see traction in the market going up. The second question you had, can you repeat that one? No, that was a great caller. I appreciate it. My second one for Kazima, just pleased to hear about non-GAAP operating profitability for fiscal 23. Just getting some questions here on gross margin. Like, I completely understand how it can vary from quarter to quarter, but as we think about the path forward from here, can we think about gross margin being higher on a yearly basis going forward, given the elevated growth in the higher margin application services business? Yeah, hey, Ryan. I think it's a totally fair question. We're not going to guide on a year-to-year basis, per se, on gross margins. What I will say, though, is that we feel very, very good about the progress that we're making on application services. That's kind of the non-to-lot-money-based cost product that we have at segments and grid. As you saw in our disclosure in the prior years, that grew at a much faster rate than even our very fast-growing messaging business. And so... As that trajectory continues, we feel very good about the prospects to get to our 60% plus target, to which I would add we feel really, really good about the way the segment is going. We feel very, very optimistic about how Engage has already started. And so the combination of those factors, I think, gives us very high confidence in 60% plus over time. In the meantime, as long as the messaging business that we put on generates high gross profits, we are comfortable from period to period with that gross margin number, you know, bouncing a little bit up and down. But over time, you know, we still feel very good about 60% plus. And I think we have a great track record with investors of, you know, delivering what we say we'll do. And I think over time we will get to that 60% plus. Thanks, Doug. That's right.
spk00: Our next question comes from Fred Havmeyer with Macquarie. Your line is open.
spk08: Hey, thank you. You know, Jeff, Twilio's products and platform has certainly expanded a lot since, you know, I think its heritage as a platform and, you know, channel to be able to rickroll people back in 2008. And I wanted to ask, you know, from your perspective as founder, whenever you put on your coding gloves and you're thinking about, you know, what's exciting on Twilio's platform and what are the products that are disruptive or interesting or that you would use to build the next iteration of startups and growth businesses, what gets you most excited about what is happening with Twilio? Well, that's a fantastic question. You know, when I think about it, it really goes back to the, The mission of our company. If you notice, we updated our mission last year. We talked about it a little bit last year. We'll talk about it more in some upcoming venues. But we updated our mission to really reflect the reason why I and so many at Twilio get out of Edmond Lane. It's to unlock the imagination of the global builders. And what's so exciting about that mission is that people are, you know, humanity's been, you know, the world that we see today is created by people who build. And they're built for thousands and thousands of years. And what you see now happening in the world of software and the internet is people building at a scale that was previously unimaginable. You know, a developer or a startup or a company can build a product and If they build the right thing, millions or billions of people can become their customers practically overnight. And that is a scale of execution and an idea that I think is underappreciated in the world. That with software and the internet and the distribution mechanisms that the internet provides, anybody can be a builder. Anybody can unlock a new idea. And that goes for developers. That goes for a wide variety of builders inside of companies. It also goes to the companies themselves. And I love seeing, you know, when a startup enters the market and comes out with some great new big idea. And then the incumbent follows suit. And actually, they start coming up with the big new great ideas. Like, I've been loving watching what's going on in the EV market, for example, with, like, you know, Ford's doing a great job bringing out cool new EV products. And, like, I'm from Detroit, so I can't mention these things. But it's really cool to see how the markets evolve and software ultimately becomes this vehicle, no pun intended, for companies and people to change the world. And so it gets me tremendously excited about the products that Twilio builds. is that we get to unlock the imagination of the builders who are our customers. And for so long, companies have been told, because they bought a bunch of apps to power their business, they bought an app for this, an app for that, and then they had this idea, they're like, oh, we want to go, like, our customers want this, let's go do that. And one of you told you, like, oh, no, it doesn't do that. You told them, no, we can't do it. And what I love is giving our customers the path to yes. This idea that we have for how we're going to better serve our customers, or we're going to out-innovate our competition, The answer is with Twilio, it's yes. And that's our API. That's our platform approach. That's Slack. That's Frontline. That's Engage. That is Segment. This is unlocking the imagination of the world's developers. And, like, you know, aside from the various cams of, like, you know, marketing and contact centers and messaging and all that stuff, if you take a step back and you think about the addressable market of people who build, like, that's the story of humanity. And that's my favorite part about building Twilio. Okay, thank you. You know, when Twilio Intelligence for Voice is available to me, I'll spend a weekend hacking together projects to order guacamole. So thank you.
spk00: Our next question comes from Matt Van Fleet with BTIG. Your line is open.
spk03: Yeah, thanks for taking the question, guys, and showing up on the quarter. You kind of touched on parts of this, but wanted to maybe bring it together in one cohesive question. When you look at segment and the rate of adoption across the enterprise, it seems like the idea maybe at the very high end, Jeff, to your point of talking to a CEO, it's a great idea. Everyone realizes that they need more data to be smarter and more individualistic in terms of their outreach, but In reality, how many of these companies that you're talking to are ready to implement Segment? how much of sort of a customer education and maturity level is broadly out in the market? And maybe the follow-up to that is, is there potential that you could see this pretty dramatically accelerate over the next couple years as companies get a little smarter, maybe our technology a little more up-to-date across other parts of the organization to really leverage segments?
spk08: Great question. And it's an added lens to the earlier question regarding the opportunity just in front of us. The opportunity is across the entire market. We see the interest that comes from small customers all the way to the largest customers. And you were talking about are they ready to adopt? We see requirements that start at the use case where literally you need to be able to connect a couple of real-time data sources to be able to have an understanding of the customer and then provide whatever interaction that's going to take place to progress the customer relationship. So imagine, if you will, connecting to a CRM, connecting to a point-of-sale system, connecting to whatever the app is that the company runs their business on, to be able to get to that understanding and then be able to respond in the channels of the customer's choice in order to have that interaction. And that, by the way, can be across the entire arc of the customer relationship. What we see happen is that we can move from that use case orientation to strategically more and more of their customer requirements. and be able to address a greater set of commercial requirements that position CBT as a strategic part of the way that they think about building and expanding the relationship. So, like, as an example, you know, we share today the Virtu Motors example. where they have implemented segments in order to understand the caller that's calling in to be able to look up and see that they're in fact a customer that bought from them in the past. What car they bought, to know what the residual value is, to then prepare the agent to be able to have the right conversation with that customer and be able to more than likely sell them another car. We're seeing that kind of opportunity from use case to expanded, strategic, full customer lifecycle department.
spk03: Great. And then I guess on the flex side of the business, are you still traditionally going in and replacing or sort of augmenting and building on top of legacy on-prem solutions that have just, you know, maybe run their course of functionality and Or are you increasingly seeing opportunities where customers rush to get anything that was supposedly cloud or hosted at the beginning of the pandemic, but now realize that they can't configure it, they can't do actually what they wanted or what they thought it could, and are now looking at what Flex and Twilio more holistically can mean as a 5-, 10-, 15-year partner from a technology perspective?
spk08: In smaller customers, So think of this as like digital disruptors up to like a mid-market price account. We do have a fairly healthy portion of the business that is their first real implementation of a contact center type solution. They may not call it a contact center, by the way. They may call it their support solution or their customer engagement solution. But as you move up to larger organizations, more legacy implementations, you actually see a lot more of install base. We have a fairly healthy augmentation business, as we called out in our remarks, that people are adding new channels and new capabilities in parallel with their legacy implementation. But we're also winning more and more replacements of legacy implementation. The example that we shared in our prepared remarks regarding Align, which is a great customer example, a very digital-oriented business that has a legacy supplier that actually faced some challenges, and the customer was able to rapidly spin up a replacement implementation on Filio that is now their standard for their requirements going forward. Now, that's not the way that you're necessarily going to win the business overall. We're not going to wait for people to fail. We're showing up and helping customers recognize that the next generation of engagement can't be satisfied with the legacy player in the way that flexes. And we have many examples that range from Fortune 100 banks to – a Fortune 100, pardon me, Global 2000 automotive manufacturer that has successfully implemented Plex to meet their full requirements. You know, Matt, this is Jeff, and I just thought I'd add one thing, which I thought was interesting. You know, when I was first getting to know Sideman before we did the acquisition, I was really struck by their penetration into the enterprise. And we've had a number of great enterprise customers uh speaking about their implementation of flex you know just in our ed signal we had proctor gamble who's a great customer we had an intuit uh the cto of intuit marianna tessel on stage talking about their use of segment across all their properties you know we have a fortune 100 financial services company that we just announced in this quarter that we signed We've got great enterprise customers who are using Segnum already. And so I'm struck by how early the need in enterprises has been apparent. I mean, think about the more complex the businesses, the more subsidiaries there are, the more brands they run, the more systems they implement, the more the need is for a customer data platform to help them make sense of all of it. So I've been really pleasantly surprised by the traction even before the acquisition. this segment already has in the market and therefore the needs for CDP.
spk03: All right, great. Thankful. Thank you. Very helpful.
spk08: Great. We are up at time. I know there's a lot of folks that still have questions in the queue. We will catch up with you this afternoon. So otherwise, thank you everybody for joining and look forward to catching up over the rest of the quarter.
spk00: This concludes today's conference call. You may now disconnect.
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