Twilio Inc.

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio First Quarter 2022 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, again, press the star one. We ask today that you limit yourself to one question and one follow-up. Thank you. Brian Vanneman, SEP Corporate Development and Investor Relations. You may begin your conference.

Thanks, Emma. Good afternoon, everyone, and thank you for joining us for Twilio's first quarter 2022 earnings conference call.

Our prepared remarks, earnings, press release, investor presentation, SEC filings, and a replay of today's call can be found on our IR website at investors.twilio.com. Joining me today for Q&A are Jeff Lawson, co-founder and CEO, Elena Donio, president of revenue, and Kozema Ship Chandler, COO. As a reminder, some of our commentary today may be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and further information related to guidance can be found in our earnings press release. Additionally, our discussion and responses contain forward-looking statements, including our projections and expectations regarding future performance. These forward-looking statements are subject to risks, uncertainties, and assumptions, and 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 SEC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-B. 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 to 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. And with that, I'll hand it over to Jeff for some opening remarks, then we'll open the call for Q&A.

Thanks, Brian. We delivered another strong quarter of results and continue to execute against our long-term strategy to build the world's leading customer engagement platform. We remain confident in our ability to deliver 30% plus annual organic revenue growth through 2024, and we're committed to delivering annual non-GAAP operating profitability starting in 2023. To achieve this goal, we'll continue to make the necessary investments in 2022 which will put us on a solid trajectory to deliver against our growth and profitability targets over the coming years. And as you likely saw in our prepared remarks and press release, we're really excited to welcome former Twilio board member Elena Danio as our president of revenue. Elena is a remarkable executive and a leader with deep knowledge of the Twilio business, our market, our value proposition, and our culture, having served on our board since 2016. Elena has extensive experience leading massive growth and scaling go-to-market activity as the former CEO of Axiom and the former president of SAP Concur. Elena will help to elevate Twilio to its next phase of growth, and I'm thrilled to officially welcome her to the team. And of course, I want to thank Mark Boroditsky for his partnership and contributions to Twilio over the last seven years. And lastly, may the fourth be with you all. With that, let me open the call for questions.

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Again, we ask that you limit yourself to one question and one follow-up. Thank you. Your first question today comes from the line of Mita Marshall with Morgan Stanley. Your line is now open. Perfect.

Just maybe starting on the CRO transition, You know, could you just give a little bit more background of what the thinking behind that was and just given kind of recent management changes, any continuity kind of efforts or considerations that you had in making that change? Maybe as a first question, then I have a follow-up.

Absolutely. So, look, I've had continuing and ongoing conversations with Elena throughout the years as she was considering her next operating role. and about the opportunity to get her more actively involved in Twilio's leadership team. And we're incredibly fortunate that with Mark's intended departure, we had the perfect person to step into the role and the perfect role for her given her experience. And she was already tremendously familiar with the organization, the team, the people involved, the opportunity, our customers, et cetera. And look, I always believe when you have an opportunity to bring on a world-class leader of Elena's caliber, you jump at the chance to do so. In addition to her tremendous insights into our company, the culture, and our products from her time on the board, she obviously brings a wealth of direct experience in software and SaaS and go-to-market and products and scaling organizations while managing costs through a period of rapid growth. And those are all the things that we're focused on doing. So I'm extremely excited to have Elena join the company as president of revenue and to lead us forward in our go-to-market efforts. And by the way, I'm incredibly grateful to Mark for his enormous contributions to Twilio over the years.

Got it. Appreciate that. And as a follow-up, I mean, clearly you guys have noted in the past that there would be quarter-on-quarter kind of volatility in the organic growth rate and that growth may not be 30% on any given quarter, but just any trends that you think are worth noting in just the Q2 guidance that maybe caused the sequential downtick in growth or in sequential growth rate? Thanks. Hey, Mita.

Not really. I mean, I think the big thing to keep in mind here is that the 30% organic target is obviously on an annual basis, and we've been pretty consistent about communicating that. And then last year in Q2 21, we had a really, really strong organic growth quarter at 50% year over year. So as we look at the second quarter at 36 to 38 reported, and then 27 to 29 organically, we feel pretty good about Q2. And then as we look out for the balance of the year, we see a more favorable set of comparisons as we go through the second half. And so we do feel good about 30% for the year, and we also feel pretty good about 30% for 2023 and 2024, as we've communicated previously.

Got it. Thanks. Appreciate it.

Thank you.

Your next question comes from the line of Cash Regan with Goldman Sachs. Your line is now open.

Hi. Thank you very much. Much appreciated. Jeff, I'm curious if you could give us some thoughts on the broader environment. Obviously, there's been a lot of volatility in rates and customers' propensity to deploy tech, or maybe that has not changed. Give us your State of the Union perspective on how customers are prioritizing their investments in Twilio. And also, secondly, it's laudable to see the company gear more towards operating leverage, et cetera. What are the things operationally that Twilio has done Determine that will provide sources of operating leverage in the future. That's it for me.

Thank you so much Yeah, so hey Cass, this is Kazama. There's a couple things in there Why don't I start and then if Jeff has anything to add you can you can comment as well So just in terms of the macro, I think that's where you started. I Think obviously it's like the economy were to dip into like some sort of significant recession. We're not necessarily immune from that and But what we see based on both our internal studies, and you know, we alluded to the customer engagement report, as well as a number of external studies is that digital transformation remains a top boardroom priority. And that obviously benefits Twilio as a variety of companies look to invest in their engagement strategies going forward. And we're not, it's not like we don't see the macro environment, whether it's economic or geopolitical, but We just think this business is extremely well-positioned to capitalize on ongoing companies' digital transformation efforts. And despite impacts that we see that are inflationary, whether it be supply chain, which we've talked about in the past, or labor inflation more recently, or interest rates, as you mentioned, we've built those impacts into our models. We also have the benefit of having a really strong balance sheet, which obviously helps in these environments. And as I said in the prior question, we feel good about our guidance. um at 30 plus revenue growth you know through 2024 and again about non-gap annual profitability or operating profitability in in 2023 more to your question on the profitability because i think that's where you ended you know what we've been saying really over three years is that there are a number of investments that we felt were very important to make and you know these were planned investments and in general They were in flex in our go-to-market capabilities. Obviously, more recently with segment, as we see that as a crucial piece of our customer engagement stack. And we're kind of coming to the peak periods of growth in those investments. And it's not like we're not going to invest going forward, but the rate of cost growth in those investments is going to be lower than where we've been historically. And so, Slowing that cost growth, I think, will be the way that we end up getting there into that non-gap profitability for next year.

Wonderful. Thank you so much. Thanks, Cash.

Your next question comes from the line of Michael Ternan with Wells Fargo. Your line is now open.

Hey. Thanks. Good afternoon. I appreciate you taking the question. If gross margins saw meaningful improvement sequentially, the prepared remarks still reference just some near-term fluctuation potential. Just in sort of adding some more context around that, I guess the question is just why wouldn't that be at least somewhat bottoming if we're looking at sort of a point in time where U.S. growth is moderating? Some of these 10 DLC impacts are playing through. Are you at all comfortable that gross margin can at least remain around a similar zip code regardless of how messaging mix plays through or anything else you can just provide to help us think through normalization and what those fluctuations can look like?

Yeah, that's a good question. I mean, I think with respect to the gross margins in Q1, we are obviously happy with them improving to 53%. I think, you know, Michael, the thing I encourage you to keep in mind is that just the size and scale of our messaging business is what tends to drive it. And so that's why we're kind of signaling some level of fluctuation in gross margins in the near term. I think it'll be in the zip code. I mean, I'm not going to be prepared to call um the bottom or anything like that but i i'd also remind you that you know we like the messaging business a lot and while it does carry that lower gross margin it also generates a lot of gross profits that we reinvest back into business and you know we've spent some time over the last few quarters talking about this in and up strategy and messaging still serves as that important foot in the door with our customers so that we can execute on on that in and up and Obviously on those deals, we evaluate every one of those opportunities looking at whether or not they're going to drive lower gross margins and making sure that there's real strategic value there. I think the flip of all of this is that our emerging software business continues to grow at elevated rates and obviously does carry significantly higher gross margins. And as we think about our long-term targets around 60% plus over time, You know, we continue to see a lot of tailwind there, and we continue to like the software businesses quite a lot, and we just have to continue executing on that strategy that we've been talking about for the last several quarters.

Yeah, that's all really useful. And then I think great to see Elena coming off the board onto the field. Can we just go back to just how you keep continuity and making that change mid-year? Are there any near-term changes we should expect or how should we assess the transition there? It looked like sales and marketing spend maybe ticked down a touch sequentially. So if you could just kind of hit on those, I think that's also useful. Thank you.

I will answer it through the lens of maybe go-to-market results. And then I'd love for Elena to maybe just introduce herself and provide some of her own comments. But I think in short, we don't really expect the transition to have much of an impact, certainly on the short term. And I think in the long term, We certainly anticipate that Elena is going to have a very positive impact on the business. Right now, we've got a great team in place. That go-to-market leadership team is very strong. We have a clear plan for execution. The results that we've already seen in Q1 are a good setup for the rest of the year. As I said, I think with Elena coming on board, I'm very excited personally, and I think she's going to have a really positive impact. I think her track record speaks for itself and to bring a person of her caliber onto the management team is really lucky on our part. But let me maybe just turn it over to her for a moment and she can tell you a little bit more about how she's thinking about things.

Thanks, Ko. Hi, Michael. Nice to meet you.

You know, having served on the board for the past six years, which was just really the ride of a lifetime, I have become really familiar with the company. But with all that as a backdrop, knowing our products, our sales mission, our customers, our team from the board lens is quite different from knowing it from an operating lens. And so I look forward to bringing my own background, skill set, and lessons learned to the team, but also doing a ton of listening and learning, particularly in the early days. I've spent my whole career driving operations and hopefully delivering operational excellence, growth, and scale I see a huge opportunity to bring that capability into the company. We start with a fantastic team. I'm really, really proud of everything they've done in the past and the role in that. But I think the road ahead is perhaps even more exciting. I'll also say I'm actively engaged with many of our team members, customers, even investors. And so I feel like I have a pretty good perch to sit from. But I'm also really excited about continuing to learn from here, to meet the rest of the team, to congratulate them on all of their accomplishments historically, but also to jump on the ride with them from here and envision a great future as the leader in customer engagement.

That's great. Thank you very much.

Your next question comes from the line of Mark Murphy with J.P. Morgan. Your line is now open.

Yes, thank you very much.

And forgive me, I joined a minute or two late in case it's redundant. But last quarter you had mentioned some domestic friction on the ADP registration side. Could you just describe that a little? And I'm trying to understand if the friction is kind of solely related to the onboarding process versus anything about the fees themselves. And then was there a deadline for customers to get that done during March and have a quick follow-up? Yeah. Hey, Mark. This is Kazema. Good to hear from you. So the growth slowdown just kind of domestically generally and the friction associated with 10DLC was really to do with the onboarding process for both new and existing customers. And it does create some friction in the short term, but over time creates a lot more trust on our platform. And as a result of some of the friction that we saw, we have built a number of features to make that registration process more seamless. for our customers and the majority of our traffic has now been able to get through that registration process. And so we believe that that's behind us. With respect to your question about a deadline, there was a deadline and that was March 1st. And I think now with that behind us and the majority of our traffic also having completed that initial process, we do expect domestic messaging to normalize through the balance of the year. Okay, got it. And then just a quick one for Jeff on the topic of two-way messaging. In the past, I believe you said that still early days. And so now you've got another quarter under your belt. You've got the Conversations API and the Frontline product developing. Do you see any more activity or is there any kind of a backlog building perhaps in terms of two-way messaging?

Yeah, thanks, Mark. I think that there's a tremendous opportunity, as I've long said, in two-way messaging. First of all, the interesting thing is that the one-way messaging, where the world and the market has been for the last decade or so, is actually a great place to be opening the door for two-way. It's a great lead-in to all those customers who are using messaging for alerts and notifications and all that kind of stuff. It just invites you to reply. And then the question the company has is, okay, when do you want to talk to us? What are we going to do about it? And increasingly, companies are saying, look, when our customers want to talk to us, are we actually trying to ignore them? Are we actually going to say a customer that wants to talk to us, we're just going to give them radio silence or give them some automated reply that says, call us? Or are we going to listen and pay attention to our customers? In fact, customers wanting to reach out to us like, hell, on the other side of the business, we pay advertisers to get customers who want to talk to us. And then over here, we're ignoring them. And so it just makes a ton of sense that you would open the door for these two-way conversations. And we're seeing it. Like, you know, in certain markets like financial services, right, you saw the large fine levied against one of the major banks because they were doing noncompliant two-way messaging. okay, that whole industry has now taken attention to this matter. Other ones like retail, clienteling, and we've got a lot of customers that we've pointed to over the history of using us for that, whether it's companies like Nike who use Flex to allow their salespeople, they call them athletes in the stores, to be able to talk to customers who are in the app or on the website saying, hey, I want some expert advice. It gives you a lot of opportunities there. And that's why we're investing in the product roadmap that we are, is because we are hearing from companies that, yes, engaging in that two-way conversation is really the future of how they're going to build a real relationship with their customers. And so you're right, conversations is the API layer, is the substrate to connect the dots between multiple conversations, whether they're multiple parties in a conversation, whether they're occurring over different channels like SMS, and WhatsApp and Facebook and even voice and things like that, combine them all together. And then we express conversations through our products in Flex, in Frontline, and elsewhere so that companies can start to see the through line of all of these different points of contact in the company with their customer as one long-running conversation. At the end of the day, by the way, that's how we see it as a consumer. When you're on the other end of it, you see it as one conversation with this company. Yet they might see it as, well, I've got 20 departments and 50 people, and everyone will be like, well, your customer doesn't care about that. They actually just care, number one, if they try to talk to you, are you there listening? And number two, is it a coherent conversation or is it completely destroyed across a bunch of different phone numbers and short codes and all sorts of stuff, or does it make sense? And that is the really big opportunity, and we've been investing in that for a while. And I think we see increasingly more and more companies are adopting these. Actually, I'll give you a customer example. that I experienced just a couple of weeks ago. And I can't tell you who it is, but it's a company that sells musical gear. And I placed an order at this company. And they're actually a customer, a really cool company. And when the package shipped, I got a text message from my salesperson that said, hey, Jeff, I just wanted to see that your package shipped. It was really cool. And I was showing actually somebody this example. I was like, oh, this is neat. And somebody said, oh, yeah, what happens if you reply? I'm like, oh, it seems like it's from a person. Let's find out. I replied with some question. I felt a little bad. I was wasting his time. But I was like, let's see it. I asked him a question. And sure enough, turned around and got back to me. Oh, yeah, I can help you with that. And sent me some links to some blog posts that were on their blog about how to set up this and that. And I'm like, look at that. It's an amazing, amazing customer experience. And now I've got a person I can talk to at this company. And I'm telling everybody, including everybody listening to this call now, about the amazing customer experience this company has. Yeah, I think that two-way messaging is fantastic, whether you're buying a mortgage, a banking product, a musical instrument, or a snorkel.

Maybe you could play us some music sometime. You don't want that. You'd rather go snorkeling. All right, either way, thank you very much.

Your next question today comes from the line of Derek Wood with Cowan. Your line is now open.

Great, thanks. Jeff, I guess for you first, you know, you guys have seen a lot of leadership change over the last year. It sounds like there was a little bit of increased attrition in the quarter in Q1. We've seen this certainly for many companies that have scaled so quickly and have to evolve into a much larger organization. But just curious, you know, have all these changes been, you know, had any disruption kind of looking backwards or looking near-term forwards? And then as you just look at, you know, adding kind of headcount and backfilling some of the attrition in Q1, what are the plans in terms of investments for the rest of the year?

Thanks, Eric. I'll answer the question about the executive. If I could, it's a fair question.

You know, you never like to see executive turnover, for sure. And attrition is elevated across the market. That's not just Twilio. It's not just tech. It's actually the entire economy, basically. And do you see it broadly? And, you know, especially true in companies that are growing as quickly as Twilio is. And so in some ways, it's the reality we're all living in every company, but it's also a reality for any fast growth company. But what I really look at is that we have been consistently able to attract incredible leaders to Twilio with highly relevant expertise necessary to take the company to the next level. And that's what we are always looking doing as we grow the company and very appreciative of the leaders that have gotten us to where we are, but also looking forward to the leaders who are going to take us wherever we go. And you can do both those things at the same time. And Elena brings a tremendous wealth of direct experience in software, in SaaS, in building go-to-market, and in product, and in scaling organizations while managing costs through rapid growth. And look, these are all the things that we are doing right now and that we are going to be doing for the coming years. And so, look, I'm incredibly excited to have her driving our go-to-market efforts going forward. And, you know, look, I always, you know, it's always bittersweet, right, when you say goodbye to an executive, you've been in the trenches, you work with folks, but you also then really look forward to the people coming in who are here to bring you where you're going. And I've been running Toyo for 14 years. So, like, yeah, I've seen groups of executives come in to help me build the company to where we are today, a $3.5 billion revenue company growing very quickly today. And it's just sort of part of what happens when you grow a company incredibly quickly.

No doubt you've had incredible growth. That makes a lot of sense. Real quick, Kazama, for you, I know we're not getting specific numbers on application services, but anything to share in terms of how growth trended or how that performed against expectations? And anything to share around the efforts in training the broader Salesforce around segments?

Yeah, I mean, I'd say in general, it's kind of a repeat of what we've talked about in the past, which is we feel really, really good about the segment product. We feel great about the performance of it. And certainly that team has been really, really additive to the long-term success of Twilio. More specific to your question, that software category more generally has been growing at elevated rates. and obviously based on the margin profile um you know we clearly like that a lot and that certainly underscores our faith that we can get you know to our long-term gross margin targets of 60 plus and i think having you know as many people trained up on the product as we possibly can obviously should accelerate its growth um over time so feel really good about where we are with segment and um it's gonna be really important to us as we build out our customer engagement leadership

Thanks for taking my questions. Thanks, Derek.

Your next question comes from the line of Samad Samana with Jefferies. Your line is now open.

All right, great. Thanks for taking my questions. I guess the first one for you, Kozema, when I think about the disclosure on 4Q, the international versus U.S., and I go and put that mix back in, I'm just curious how we should think about the gross margins. I don't want to re-litigate 4Q necessarily, but usually the U.S. domestic higher gross margins than international. So I'm just curious if it was not mixed, maybe was there something else that we should think about for the 4Q gross margin pressure? And then I have a follow-up for Jeff.

Yeah, it's a fair question. So maybe first off, just to kind of own what happened, you know, there was a discrepancy in the mix of that domestic versus international revenue, and it should have been caught in Q4. Luckily, it was caught as we ran the closing process in Q1, and we noticed the discrepancy then. We have put in place some additional analytics as well as some additional controls to make sure something like that doesn't transpire, but I did want to own it before answering your question. In terms of, you know, that split, the way that we provide the disclosure, that split is based on the IP address or the mailing address of a customer at the time that they register with Twilio. And so effectively, it's something that we use for reporting purposes, but it's not actually how we manage the business day to day. And I mean, Tamad, you know the business pretty well. Like where we focus tends to be on where those messages actually terminate. And we continue to see very strong growth in messages that terminate outside of the U.S. And if you go back a couple of years, Signal, when we did the investor day, you know, we showed then that that split is about 50-50, and it's continued to grow from there, and that tends to be the much more significant impact of gross margin. Obviously, there is some correlation between destination messaging as well as what the customer origin is, and it can deviate obviously from period to period, but that's the gist of why that commentary from Q4 remains true today.

That's really helpful, and I definitely appreciate the additional clarity there. I think that clears a lot of it up. And, Jeff, I want to follow up with something that Kazemma touched on, which is knowing the business and look at the end of the day, the growth is still very strong on big numbers. So I guess when I think about... the company and the growth going forward, what are the maybe go-to-market changes that you think are going to happen? Or are there go-to-market changes that are anticipated in kind of reiterating that 30% plus guidance? Or how should we just think about it based on the changes in the management team?

Thank you, Samad. Why don't I have Elena answer that question?

Awesome.

Thank you.

So first of all, I'd say a lot's going well. We really like our long-term growth trajectory, and I intend to continue along that trajectory. And so when I think about how I spend my first couple months, first and foremost, it's obviously about getting to know the team and customers more deeply so that I can internalize their aspirations and really get to know them as we hatch our plans. But I would say there's a couple really important short-term priorities that go along with that. Number one is accelerating software growth, especially segment and engage once launched. Number two is calibrating our resource model explicitly towards the greatest efficacy possible. And so that means nurturing our product-led growth engine that we've built over time in messaging, but also amping up our direct and channel sales capabilities in software. And lastly, doing both of those things while driving additional operating leverage and go-to-market overall so that we're ultimately paying off the investments we've made over the past number of years.

Great. Thanks, Elena. Looking forward to getting to know you better.

Thank you. You too. Your next question comes from the line of Atai Kidron with Oppenheimer. Your line is now open.

Thanks. Maybe, Jeff, I'll start with you on Twilio Engage. Can you be a little, perhaps, a little bit more specific on timing? When is that finally going to be available? And any color you can share with regards to the trial activity with customers, how should we think about traction and adoption here once it's out?

Yeah, thanks, Itai. So, first of all, timing. We're looking at GA and Engage in the second half of the year. And second is on the, what are we learning from our early customers? And as you know, You bring a new product into the market, you do it in a beta format, and you bring on your handful of early customers, and they help you guide the roadmap, and they tell you where to be focusing. And so we have great feedback from the early customers at Engage. We actually have more customers requesting beta access than we can accept, and that's always a good sign. But we've been receiving great feedback from those pilot customers, and they're taking the steps, responding to the feedback, really understanding the problems they want to solve with Engage and making sure we're building the product that lets them solve their problems uniquely. And look, I think Engage is filling a hole in the market with a platform that is built to help B2C companies in particular, first of all, really understand their customers in terms of data and then execute on that understanding by personalizing every part of the journey and empowering the employees with these engagement apps we're building. And so when I think about what Engage is doing, it is taking a data-first approach to marketing. And that is the modern way companies are marketing, especially in this whole privacy-forward world where you can't do the lazy thing with third-party anonymous cookies and IDFA and just kind of turning through customers that you bought on an advertising platform. Really, modern marketers are saying, I need to understand my customer. I need to personalize the journey that that customer is on and pay really good attention to them so that they become loyal, happy, repeat customers. And so those are the types of companies that we are seeing early on in our pilot or who are requesting access because they're saying, look, the tools out there to do this are not what we need. And so Twilio is filling this gap. And look, in the fullness of time, I think all marketing is going to go this way. I think every marketer is going to, first of all, be spending money on their having the best data, which is where all of this starts, and then going to need to have a platform that really is about activating data as opposed to blindly sending campaigns and just measuring, well, how many people opened it, how many people unsubscribed. I think those days are over. And the other neat thing about using data as the basis for the marketing tool is that you can optimize for the outcome the business cares about. Because segment sees the flow of data from a variety of systems. We can tell the marketer not just, oh, like, you know, this campaign, you know, you got this many opens and this many clicks. Companies don't make money with opens and clicks. They make money by making sales. And Segment sees that too. So they can say, hey, this campaign resulted in this amount of dollars of sales. This campaign is working. This one is not. That's amazing. And so you think about the value proposition you'd be able to give to a company and to the marketer who now can justify the spend on that tool because they're saying, look, we're making money at it. So I think it's a really great value proposition. But obviously, still early in the lifecycle of that product, but we anticipate bringing it to GA in the second half of the year.

Okay, that's great. And then follow-up for you, Kazima, just on the gross margin again. Great to see the progress. I'm just trying to tie that to the registration date, March 1st, where I think you talked about you expect messaging to normalize. I assume that that means that around that date, messaging was somewhat depressed because some customers were not registered. And so as I think into the second half of the year, political activity is part of your adjusted gross margin, and that clearly is going to come at a higher volume the second half of the year. And you also have normalization around the messaging volumes in the second half of the year. So should we not expect any incremental, perhaps, gross margin improvements between now and the year end just because messaging, these two elements are going to inflate messaging volumes in the second half of the year? Is that the right way to think about things?

Yeah, Itai, I think if all of that broke our way, it's possible, but it's certainly not something that we're necessarily forecasting. As you know, I mean, we don't guide on gross margins. I would say the factors that are really going to drive it more than anything are going to be just the way that the messaging business kind of fluctuates up and down. I mean, it's so big and the scale of it is such that it really tends to be the principal driver. And you know, based on what I said in the prior question, you know, the way that those messages end up terminating and who drives that traffic and how that all plays out. I mean, it's a fairly complex mix of things. And so I think it's going to be in the zip code, you know, but it's not something that we're guiding to today.

Okay. Very good. Thanks.

Thanks.

Your next question comes from the line of Joe Goodwin with JMP. Your line is now open.

Oh, great. I think that might be me, Pat. Elaine, I have a question for you, which is I would love to hear any sort of learnings that you have from, you know, your time at Concur or some of the other boards you're on or other companies that you think might be relevant and might be things you can apply at Twilio.

Yeah, thanks for the question very much. I hope there's a lot of learnings.

You know, I started at Concur when my little startup was acquired in 1998, and so I've saw some amazing years from the early 2000s and the dot-com boom and bust through to 2008 and all of the product and kind of market transitions that went along with that. So moving the company from on-premise shipping CDs to a SaaS company, from a company focused on sort of a web front end to mobile, from a company that sold one product in expense reporting to one that sold travel invoice management and a whole host of others and ultimately became a platform company while growing overseas, growing into the US federal government, growing down market. So certainly have seen a lot of different transitions and take a lot of lessons away from that, including moving into the president role when we were required by SAP in 2014 and all that came with a period of intense change for our people. And so maybe those are some of the things that I think I pride myself on the most is sort of navigating a period of fantastic growth, but equally embracing our people, making sure we're thinking about careers and growth and the human side of leadership. So I'm excited to bring as much of that as I can to the process in terms of other boards. Twilio was a great learning ride for me over the last six years, and I think it's given me an interesting and unique lens into the business, but that lens will shift as I move into this new operating role. Lastly, I'd say I think board work in general, I do still sit on a number of other private boards, and I think that board work in general just keeps me in the mix, hearing from other boards, other investors, other leadership teams, building other products that I think are both interesting as opportunities to learn from. And so I'm excited about that. I'm excited to continue to do that work and bring the best of that set of learning into the halls of Twilio. but also vice versa, I hope, still be a mouthpiece in the industry as I learn here from all the wonderful talent that will be around me here in this building virtually.

Awesome. All right. Well, thank you very much for that perspective.

Your next question comes from the line of Frank Havemeyer with Macquarie. Your line is now open.

Close. Fred Havemeyer, and I'm happy to be on the line here and chatting with everyone. I wanted to firstly ask, you know, we've discussed a couple of the executive changes that have happened within Twilio recently. And I noticed that recently you made a couple of actually two prominent privacy and trust-related hires. So I just wanted to ask, you know, what is the importance of both privacy and trust to Twilio as you're expanding globally and also perhaps as you are navigating the inherently trust-based environment of 10 DLC policies?

Yeah, hey, Fred. Go ahead, Jeff.

Hey, Fred, this is Jeff. I'll answer it. Look, I mean, privacy and trust, I mean, these are some of the most important concepts of our era, right, for companies to be investing in privacy and obviously trust with their customers. And it's, you know, as I think about privacy in particular, we've talked a lot about privacy. and how it's changing the way companies acquire and serve and build relationships with their customers. And the privacy landscape is really changing the nature of advertising companies and where the revenue is coming from. I think you see some of that coming through in earnings. I think that you see the way companies go about building their customer bases. I think about it. Every time I go to a website and – You know, you're greeted with that dialogue that's like, do I want to sell your personal information or not? And you click no, and then you've got like three layers of like, yes, please don't sell my not private information. You're like, well, I can't put it on here. And you're like, this is really the world we have. This is getting in the way of everyone's growth is the fact that the privacy landscape and the way companies have to navigate it to do what their customers want, not just the government, is incredibly complex. So not only is Tullio obviously doing that for our own customers and our own employees and everything like the things that every company is doing to comply with privacy, we're also building products that are helping our customers through this, like Segment. Think about what Segment does. They help companies understand their customers better so that they don't have to rely on third party shenanigans and cookies and all this kind of stuff and navigate the IDFA changes that Apple has brought about because A, the platforms are dictating it, and B, consumers want a world where their privacy is respected. People want to be tracked across the Internet. And so this is one of the largest shifts that has gone on since the Internet became a vehicle for business, honestly. And so helping not only Toyo navigate that, but helping us help our customers navigate navigate that is incredibly important. So Amy is going to lead the team responsible for navigating this complex compliance program and the privacy regulations and the shift of this utterly enormous change on the internet works.

Thank you for the thoughts on that. And now I'm supposed to be the analyst to ask the M&A question, but you have solid positioning on your balance sheet. Just wanted to ask with valuations having compressed in this market, Generally, how is Twilio thinking about its M&A appetite? And then, you know, as a kind of related question, could you give any update on where or how the Cineverse relationship is progressing? Thank you.

Yeah. Hey, Fred. This is Kazama. Let me take the second part first. In terms of Cineverse, I think subject to the closing conditions of the agreement, We do anticipate closing that transaction by the end of May. I think that's probably what you're getting at. And the relationship with that organization remains great. And we think that'll be an important part of how we go forward, certainly, in the messaging business. Relative to M&A more broadly, I mean, you're right. We do have a very strong balance sheet. We're certainly going to remain optimistic. And we look and evaluate different opportunities all the time and maintain a game board. I think if something comes along and we feel like it's a good fit, then we'll certainly take a look, but there's nothing necessarily imminent planned at this time, and that's really all that I can say about it.

Great. Thank you. Thanks.

Your next question comes from the line of Matt Stotler with William Blair. Your line is now open.

Hey, everybody. Thanks for taking the question. I guess just one, kind of looking at... application services, but specifically Flex and Segment. So, I mean, just kind of looking at the overall trends in the market and what we're seeing and kind of spending intentions and what's happening with customers and partners, I mean, it seems like we're setting up for a pretty interesting year for Flex in terms of opportunities, right? Obviously, it's been growing quickly, but it seems like we're in a particularly advantageous position right now. So, I'd like to maybe just get some color or just expand thoughts on How that pipeline is developing, any thoughts on, you know, kind of the year for that? Obviously not asking for product guidance, but more qualitative. And then in terms of how it relates to the CDP, you know, what kind of interest you're seeing in bundling there? And if, you know, the addition of segment is kind of having a pull-through effect as you're looking at the ramp of FLEX over the course of this year.

Yeah, thanks, Matt. This is Jeff. I'll answer the question. Look, we're really excited with the progress we're continuing to make with FLEX. And we continue to see really great traction with customers. And in particular, pay attention to the customers that we call out on earnings calls. You see a really nice selection of companies in different verticals, different sizes, everything from the digital disruptors all the way up to enormous Fortune 500, Fortune 100 legacy companies. And so you see a really great set of customers who are the adopters of Flex. And we consistently hear from companies that, And the thing is their legacy solutions really just can't provide the flexibility or the channels that they need to address customers in the digital world today. And this is why we remain so excited about the traction we've seen with Flex and the opportunity ahead of us. I mean, we're seeing customers take Flex on like for the first time, like Compass was the one we talked about in the prepared remarks today. But we also see companies expanding their use cases, like a global 2000 financial services company, a global 2000 automaker. I mean, these are companies we've referenced on prior earnings calls. And so overall, our traction is strong. We're just scratching the surface of what's possible. Also with our partner ecosystem, and we've talked about the partners we've brought on board to help accelerate our go-to-market and to actually take it into verticals and take it into different types of segments of the market. So we're really excited about the market we're addressing here. We think it's an amazing opportunity for the partner ecosystem that we're building, for the direct customers that we're serving. And I love the fact that we're seeing, look, you've got your digital disruptors, you've got your enterprises, you've got everything in between, all around the world also, if you notice, using Twilio or using Flex in particular. And so I just think those are the signs you want to see, which is you're hitting a broad market need

And you see a great set of customers helping you that way and proving out your hypothesis. That's what you see. Got it. Thank you very much.

Your next question comes from the line of Taylor McGinnis with UBS. Your line is now open.

Yeah, hi. Thanks so much for taking my question. Another one on gross margins. When we look at the 1Q sequential increase, is there any color you can provide on how much of that would have been driven by maybe a recovery in domestic growth versus segment and some of the other high-margin businesses becoming a bigger portion of the mix? And I guess, too, as we look ahead, based on what you're seeing today, any thoughts on the mix of messaging versus customer engagement in the revenue line and how that could evolve just you know, given the tough comp that there is in 2Q and then easier compares as we get throughout the year and how that might just be influencing your view that gross margins could stay in the zip code?

Yeah. Hey, Taylor. This is Kazama. So a couple questions in there. So let me just try to unpack it a bit. So in terms of just the comp set for Q2 and then the second half of the year, I mean, I was really alluding to The business in total there, not any specific pieces. Q2, you know, relative to last year, last year was a 50% organic growth quarter. And so, therefore, that's why we guided in the way that we did for Q2 this year, whereas the second half next year provides a more favorable setup for the back half of this year. And that's why we continue to feel great about our 30% plus guidance for the year. In terms of the margins themselves that are kind of underneath that, looking at sequential Q4 to Q1, I mean, I think, you know, obviously we're happy with what you're inspired, but in our business, just given the relative size of messaging, most things are driven by, you know, various fluctuations in the way that various accounts are behaving in that part of the business. where they're terminating, what their margin rates are, what have you. And so the mix of messaging tends to drive kind of the mixes of Twilio more broadly. And as I alluded to earlier, we're comfortable with the gross margins of that business. We love the gross profits that it throws off. We reinvest those profits. And probably most importantly is that messaging provides a very interesting entry point for us into customers, and we just make sure that those deals hurdle in a meaningful way, that the margins that they provide are not just accretive, but also strategic relationships. In terms of the software components of the business, as I said, we still feel really, really good about Segment. You heard Jeff's comments a moment ago about Flex and the energy that we have around that product. And that part of the business and other application services, too, continue to grow at elevated rates. They do carry higher gross margins, as you said. And I think as we go over time, we feel great about our longer-term gross margin guidance of 60% plus. And, you know, it'll take some time, given the size of messaging, but we do anticipate that that next shift happens over time. And we gave you some indication of that in our disclosures in the prior quarter.

Great, thank you.

Thanks, Taylor.

Your next question comes from the line of Ryan McWilliams with Barclays. Your line is now open.

Great, thanks for taking the question. So we heard from some customers that there could be a price increase this month on Twilio US SMS. If this is the case, like this looks like the first price increase in recent memory in the US. So how should we think about maybe the thought process behind that, if that's true? and maybe what this can mean for U.S. rep growth.

I didn't hear the last part of your question, Ryan.

What could it mean for what? U.S. rep growth. U.S.

revenue growth, is that what you said? Yep. Yep. Okay. So, yes, it is true. We did update SMS pricing in both the U.S. and Canada to reflect our underlying costs, as well as continuous improvements to our infrastructure and software, and to provide, you know, trusted and reliable global messaging. The price changes that we put through, they'll take effect on the 11th of May, and it doesn't affect our customers who are locked into a fixed price, and we don't necessarily expect a material impact on our results in the short term, and, you know, we're still evaluating whether or not additional price increases make sense in other products. But we obviously are in an inflationary environment, and so it felt like it made sense to us, given the value that we offer to customers, the technology, and just given the current environment.

Thanks, Nick. I'll just follow up really quickly. Just on the first quarter REV line, the $10 million beat to the high end of your guidance revenue. Is this kind of in line with your commentary of what you were thinking last quarter about, like, a new guidance philosophy going forward around guidance? Thanks.

Yeah, pretty much. I mean, you know, as we mentioned, we did refine our guidance approach. We wanted to provide guidance more consistent to actual, to just give investors a better approximation of where things are headed, and that's basically the way that Q1 played out.

Okay. Thank you.

Your next question comes from the line of Alex Sukin with Wolf Research. Your line is now open. Hey, guys.

Thanks for taking the question. I want to follow up on pricing first. So if we think about it, was this driven more by, you know, kind of the inflationary environment? And if you think about it, is there an opportunity to do this globally? Is there a way to tie this to, you know, a more strategic interaction with the customer around the application environment? Just walk through, you know, is pricing a strategic lever here or was this more of a one-time kind of adjustment that you haven't really exercised over the course of the company's life? Yeah, I mean, I think it's a lever. I wouldn't say that we have necessarily grandiose plans to roll it out globally or across every single one of our products. I think we're still evaluating stuff like that. But just maybe to take a step back, I mean, we have done price increases before. in the past not necessarily it's been a while in sms but we have done them for example um in the email business we've done them a few times actually even under our ownership um they've also been done in other parts of the business most notably in in segment and so it's not like it's something that's uh that's not planned or something that you know hasn't happened before in twilio and so i don't want to leave you with that impression um i think for us you know we were seeing enough inflation in the environment you know both based on our variable cost line, as well as the labor inflation, that we felt like it was appropriate to pass through a price increase. Like I said, while those changes take effect on the 11th, there are a lot of customers that are still on fixed price contracts. And I don't think it's going to be material in the short term, but it's something that we'll evaluate as we go through the balance of the year and we'll see how things play out. Perfect. And then I guess with respect to the second half, you called out the more favorable comparables from the prior year. You know, this maybe goes back to Cash's question about just the macro environment. Like, is there any adjustment or anything you're doing in your models at all to take into account, you know, any impacts from Europe or revenue in Russia and Ukraine? And then separately, as we, you know, are coming out of the pandemic, hopefully, are there any verticals that you're starting to see where use cases bouncing back stronger than others? Okay, there's a lot there. So let me take them one at a time. So on, you know, Russia, Ukraine, I wouldn't say there's been really much of an impact at all. You know, volume in that region is a pretty small piece of our global traffic, and we haven't seen a material impact in our business to date. What I can tell you is that for any new business in Russia, we've suspended doing any. And to the extent that we had any traffic with state-owned customers, we've terminated that. And then we've seen a little bit around the fringes with some isolated customers, you know, who might pause their traffic to, to Russia, but it's a pretty de minimis impact to our business. And yes, we have modeled it to the extent that it would even impact us in terms of broader macro. I mean, we're watching all the same factors that you all do. I think what I would go back to is, is that what we're finding both based in, our conversations on the ground with customers, what we're seeing in our revenue line, what we're seeing in some of the research that we've done and what others have done is that digital transformation continues to remain a top boardroom priority. And so we see that as a very secular trend, not one that's cyclical. And so, you know, as that continues to happen over a long period of time, we feel like, You know, there's a lot of tailwind here for Trulio. And, I mean, of course, there are economic factors, geopolitics, supply chain, labor, et cetera. But all that stuff is largely built into our models. And so our 30% plus growth confidence, as well as being profitable next year, has a lot of those impacts baked in. And we obviously have a strong balance sheet as well. I'd say... There's one other part of your question I thought I can't remember, Dan. The verticals that are coming back are stronger than others. Yeah. I mean, what we saw, you know, kind of transpiring going into the pandemic, I mean, obviously rideshare, travel, hospitality were pretty significantly impacted to the bad. And, you know, based on some of the reports you've even seen recently, like those industries are coming back pretty nicely. And obviously, you know, that drives some additional volume to us. I think, you know, the thing to bear in mind there is that we're very, very diversified now in terms of our customer base. And so no one industry necessarily drives an outsized impact on our revenue line. I think the things that we saw during the course of the pandemic that we expect to be quite durable are, for example, e-commerce, healthcare, financial services, A lot of the use cases in those categories became elevated, but I think what we're hearing from our customers in those verticals is that now that they've gone down the path of digital transformation and they've seen such significant ROIs, they want to keep going. And so we've just gotten started with those verticals, and I think there's a lot more that now Elena and her team are going to be able to do and helping customers solve their different problems in those areas, and we stand ready to do that with them. So I'd say a bit of tailwind in some of those industries, and then a bit of tailwind in those that I referenced earlier that were down on the early part of COVID. Got it. Thanks, guys. Operator, I think with that, we're going to wrap it up as far as questions and answers. Thank you, everybody. who joined the call. Certainly, the IR team is available subsequently, and we welcome your questions afterwards. Thank you very much, and we'll talk to you soon.