Twilio Inc.

Hello and welcome to the Twilio first quarter 2023 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 1 on your telephone keypad. I will now turn the conference over to Brian Vanneman, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Sarah. Good afternoon, everyone, and thank you for joining us for Twilio's first quarter 2023 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, Twilio Data Applications, Kazama Ship Chandler, president, Twilio Communications, and Aiden Vigiano, Chief Financial Officer. As a reminder, some of our commentary today will include non-GAAP financial measures and key metrics. Reconciliations between our GAAP and non-GAAP results and further information related to guidance, definitions, and key metrics can be found in our earnings press release and the appendix of our prepared remarks, both of which can be found on our IR website. The information provided and discussed today also will include in more detail in our most recent periodic reports filed with the SEC, including our most recent annual report on Form 10-K and our forthcoming quarterly report on Form 10-Q, which are available on our website and at sec.gov. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly, and we expressly assume no obligation to update any forward-looking statement except as required by law. With that, I'll hand it over to Jeff for some opening remarks, and then we'll open the call for Q&A.

Thank you, Brian. Before we hop into the call, I wanted to really take note of three things today. First, I wanted to note that the substantial actions that we took in Q1 are working, as you can see from our strong non-GAAP operating profit results. One quarter in, we're really starting to show the profit potential for this business. We're also one quarter into our new structure, and as you can see from our Q2 guide, we're We're looking into continued headwinds as we built the sales capacity of our data and apps business and doing that in a very tough macro environment as well. But the good news is I see our leadership role continuing and even expanding in this environment. And I don't see things like changes in our churn or us losing share in the market. I see moderation in our consumer-facing usage patterns as well as us lapping our peak crypto usage from last year. And these are some of the headwinds that we'll talk about. But through all of this, what I really want to do is to thank the Twilio team. We've been navigating a lot of change over the last quarter, and I see Twilions every day navigating these changes with grace, with energy, and understanding of the job that is to be done here. And it's truly energizing for me and for the rest of the leaders of the organization. That's really, truly the Twilio magic in action. So thank you. Second, I'm sure this is on people's minds. The AI platform shift is upon us. Like the PC to web transition, the web to mobile, this is the next major technology shift in our society. Working with customers, we see many ways to activate customer data in segment across the whole customer lifecycle using artificial intelligence. Now, we'll have more to say about this during the course of this quarter and, of course, at Signal in August in terms of products, in terms of partnerships, and in terms of customer use cases. Really looking forward to that.

And the third thing I wanted to mention today, and lastly, is go Dubs. Now on to your questions.

Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. Your first question comes from the line of Mark Murphy with JP Morgan. Please go ahead.

Thank you very much. So a question for Elena. You mentioned being in a strong position to actually re-accelerate bookings later this year. And Kazima, in their prepared remarks, you're mentioning optimism in being able to re-accelerate growth as the year progresses. I'm wondering if you can just shed a little light on what is underpinning that positive thought process and could it mean that Q2 might mark a bottom actually for the revenue growth rate or a local bottom for the revenue growth rate.

Hey, Mark. It's Elena here. I'll start and then I'll pass it over to Kazima for some commentary on the communications business. First, let me just kind of walk you through the path to here to provide some context and groundwork for what's to come. First of all, I joined the company a year ago, exactly this week. And at the time, Jeff asked me to sort of re-architect and rebuild our go-to-market muscle and motion. And what that meant was two things. One, more substantively impacted communications, and one on the data and application space. So we realigned, re-architected our sort of resource map and went through some of the big cost-cutting initiatives that you've seen, and you're starting to see the results of that. And that was primarily around our go-to-market muscle in the comm space. At the same time, we were sort of reinvesting in the data and application space. And the job there has been to rebuild and grow our talent base there. So we had some, you know, early in 2022, we had some turnover, some attrition, some changes in how we set up the sales team, which we then unwound and began to rebuild from there. And so that rebuilding effort has taken us the last few quarters. We're now fully hired for the most part, but we're not fully ramped. So we're all over that over the next couple of quarters is getting that field organization, both at the AE level and the manager level, Emily Early- fully ramped so right now, our big focus is not on enablement it's on getting those wraps from kind of their first deal to their 10th deal and really showing. Emily Early- we're really showing sort of what that team is capable of i'm just back several investor just back from our delayed sales kickoff. Emily Early- Where it was a very much a training focus events and enablement focus event. And having spent a bunch of time with our people across the last few weeks, I feel really comfortable about the team that we have in place. That's a big reason for optimism, as you asked. I think we're also doing all of this work during a pretty tough macro time, as we've also talked about. We're seeing evidence of that in a couple of areas. So we've talked in the past about things like cycle length, average selling prices. TAB, conversion rates across the funnel and a little bit of contraction we're definitely seeing all that, at the same time that we're rebuilding reengaging re energizing a field organization so. TAB, With all that said, I just want to close out with the things that give us real optimism number one that Jeff talked about in this kickoff we're start we're seeing sort of great customer wins amidst all of this. TAB, I had a couple of my prepared remarks cricket wireless he was current willio customer became a segment engaged customer. Web Health, a large BPO, becoming a sizable Flex customer. We've had a couple of other really key wins in the financial services space across this quarter and last. And so we're seeing great strides there as well as great strides in our innovation agenda. Our product teams are really taking down a lot of the roadmap, delivering a lot of new capabilities from Segment Unified to Flex Unified, which ties together Flex and Segment. with some customer wins across each of those as well. So team, just our enablement journey is in full swing. Our product delivery is in full swing and bringing down some pretty exciting customer wins. Those are the things that give me faith that we'll begin to see ourselves climbing out of the trough that I think was in part self-inflicted, as we talked about throughout last year, and in part driven by the headwinds in the economy. I'll let Kazima, talk about the corollary on the comp side.

Hey, Mark. What I would say is, first of all, I totally echo Elena's enthusiasm about the path ahead here. I think there's a lot to be excited about. Our sales kickoff was at the same time, and we kind of did them together, and so there's a lot of energy among the sales rep force. So just to maybe go to that first, first of all, sales rep productivity remains quite high, as Elena mentioned. We did a lot of work on cost structure, but even in spite of that, I think we feel very, very good about rep productivity. Second thing is that we are maintaining share in what continues to be a tough macro environment. We feel good about a lot of our most recent customer wins. We talked about two deals in the script specifically where, you know, they were our largest ever on email and silent network authentication. So I think those are indicators that, you know, customers are continuing to, we're continuing to win with our customers. They're continuing to grow with us, albeit at slower rates than where they were. And third, and perhaps most importantly, especially as you look at our financials, is like we have a really tough comp relative to last year. You know, crypto was really outsized in the way that that part of, you know, the impact in our business grew and we're kind of hitting the peak points in as we're lapping that. And so I think just naturally as we come out of the next couple of quarters, you're going to see just some natural acceleration in the growth rate as a result of that. I would hesitate to call it bottom. I mean, it's very dynamic, obviously. And so I don't think we're necessarily prepared to say that, but I think we're very, very excited about the setup for the back half of the year and especially with our energy with customers.

Wonderful. Thank you so much. Thanks, Mark.

Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Appreciate it. I just wanted to, you know, you mentioned kind of anniversary and peak crypto, but if you could just give a sense of what verticals you're seeing the most headwinds and then just on the communications side, like what does, reduced marketing budgets mean? Is that we cut certain use cases? Do we just kind of send fewer emails? Or, you know, is it just simply from a reduction in transactions? I think just as we try to kind of think about how to model a recovery, just trying to get a sense of how those use cases or the bounce back would evolve. Thanks.

Hi, Mita. This is Aiden. I'll start and I'll hand it over to Kuzema. So just to talk about some of the industry headwinds, we've called some of them out in the past, and we continue to see headwinds persist on the social side, consumer on demand, e-commerce, and in particular, crypto. So those continued in the quarter. And as it relates to crypto, again, as Kuzema said, we saw volume peak on our platform kind of in the Q2, Q3-ish timeframe last year. And that's creating a few hundred base points head when year over year on the road.

Yeah, I mean, I would largely echo what Aiden said. I mean, I think as she mentioned, crypto is pretty significant last year. And so as we lap that, I think we feel pretty good about our ability to come out of that. I think the marketing spend that we referred to was much more on kind of the customer side, if you will, not necessarily on our side. And so, you know, obviously some of our products end up serving use cases that are marketing related. And so as customer marketing volumes have come down a little bit, you know, frankly, that impacts both sides of our business to a degree, but it honestly impacts probably the communications business a bit more significantly upfront. You know, we talked about the dynamics and meet at yummy, you know, the company really well, you know, and on the way up, like we react very, very quickly and on the way down, unfortunately we wrecked very, very quickly. And so. As things kind of moderate, I'm really optimistic that we'll be able to come out of it pretty fast. And otherwise, it's kind of business as usual. I mean, Aiden called out some of the industries, but otherwise, we continue winning, we continue expanding, and we continue to maintain our share. And we're not seeing really any pricing pressure out there either.

So I feel pretty good otherwise.

Great. Thanks.

Your next question comes from the line of Michael Turin with Wells Fargo Securities. Please go ahead.

Hey, great. Thanks. I appreciate you taking the question. Just on guidance and what's assumed, given there are a number of moving pieces mentioned in the prepared remarks, can you just maybe walk through what you're assuming in terms of the macro and what you're seeing in expansion rates? Is this a consistent environment that's assumed? And then just also thinking through the progression of some of the go-to-market improvements that you're making, is there a way for us just to think about the timeline and progression of where expected benefits from those might start to play through. Thanks very much.

Here, I'll start with a bit on the second quarter, and then this is Aiden, by the way, and then go a little bit into some of the traction for the year. So it's largely macro as we think about the second quarter. So the market continues to be pretty dynamic, and we're feeling the impacts of a broader slowdown. And so you see that reflected in our guide. I think the other thing that's important to remember is that the majority of our revenue comes from our communications business, about 85% of our revenue. And as Cosima just said, that's a consumption model tied to consumer activity. So in that business, we are dealing with a combination of macro as well as the tough comparisons that we just talked about on crypto. And so again, that's creating a headwind year over year as it relates to the second quarter growth rate. On the data and application side, Elena has talked about it as well, but we are rebuilding. Elena talked about our efforts there to ramp up the sales force and really enable the team further. And we're also doing that in a tougher macro cycle. So I'd say on the communication side, it's a combination of macro, some tough comparisons. On the software side, it's a mix of our efforts to rebuild plus some macro, and we factored all of this into our guide. So I'd say some choppiness on growth in the short term, but Despite that, we're focused on what we can control, which is delivering profit in any environment. As we think about the rest of the year, we're not going to guide quarter to quarter. We're going to continue to guide quarter to quarter. We're not going to guide beyond the second quarter at this point. Again, given the fact that most of our revenue is communications and usage-based, it makes it a little bit tougher to call. In light of that, we'll continue to plan conservatively, guide quarter to quarter, I think the other thing to consider is as the macro recovers and the consumption-based model comes back, our growth will improve, our DVNE will improve alongside it, and we'll be well-positioned on the other side with a much more efficient cost structure.

I appreciate the detailed answer. Thank you.

Your next question comes from the line of Ryan McWilliams with Barclays. Please go ahead.

Thanks for taking the question. Just one housekeeping piece. How much potentially is the potential sale of your IoT business potentially taking out of the second quarter guide? And are there any products or geographies where you're currently de-emphasizing revenue as part of these go-to-market changes? Thanks.

So as it relates to – this is Aiden and Brian. Thanks for the question. So as it relates to the sale of our IoT business, it's a relatively small contributor on revenue. in kind of the mid to high single-digit millions. We'll provide some more of that as we go forward. It will be adjusted out of our organic calculations going forward as well, so you'll get an apples-to-apples comparison on revenue growth, but relatively small contributor overall. As it relates to any specific regions, no plans to de-emphasize revenue in certain geos.

Your next question comes from the line of Etai Kidron with Oppenheimer and Company. Please go ahead.

Thanks. My question is for Elena. I was wondering if you can kind of double-click on the data and application business, and more specifically, when you look at the growth of the unit in the quarter, help us understand what products are growing faster versus below this average segment in gauge flicks. which ones are growing faster than the 19% you delivered versus lower. And then since we don't have the historical data on this, maybe you could talk about what deteriorated the most over the last two, three quarters and what part perhaps you expect to recover the fastest over the next two, three quarters. Thank you.

Sure.

So we don't break out product by product. And just I'll remind you a couple things. One, a number of these products are new. So the Unify product, Engage, like a lot of those things have only been in market for months to a handful of quarters. And so we're excited about the momentum and the progress, but we shouldn't expect to see those meaningfully impact the the Twilio data and applications business units revenue in the very near term. Again, we won't be breaking that out product by product. I would just say and reiterate something I said earlier that the real path to reacceleration, the real path out of this deceleration comes down to two things. Number one is making sure that our team is in-seat and enabled. We're putting a lot of emphasis on that. And then number two is just playing through the tough macro environment and really making sure that we're setting ourselves apart from what's happening in the competitive landscape and ensuring customers that even in a time of belt tightening, this is a really good investment and it makes each of your marketing dollars work harder to meet this question earlier. That's really what we're playing for right now. But at the end of the day, like I would say a lot of the same themes are hitting both our flex and segment products largely. And we're working on ramping and building the team to work through that.

When you look into the next quarter guide, is there another significant step down assumed in this business from a year-over-year growth standpoint? This business was not impacted by crypto. So I'm just trying to understand the drag on the next quarter. How much of that is the communication business versus the data and applications business?

Yeah, hi, Itai. This is Aiden. I'll take that. So we don't provide guidance by business unit on revenue, but as you think about the second quarter, you can generally assume that the slower growth is attributable to both businesses, though I would say given the much larger size of communications, it obviously has a bigger impact on our consolidated growth.

Thank you.

Your next question comes from the line of Taylor McGinnis with UBS. Please go ahead. Yeah, hi.

Thanks for taking my question. Just looking at the 1Q REB, so 1Q REB declines sequentially, and the 2Q guide, I think even if you strip out IoT, assumes something similar. I know you mentioned that there hasn't been much change in churn, so can you just provide more color on the drivers there? It seems like it might be some seasonality, but if that's the case, as we look throughout the rest of the year, any other seasonal patterns to keep in mind?

hi i'll start here and then if the landing because they might want to add they can um you're right on a churn overall has been you know relatively consistent where we are seeing some impacts is we are seeing a bit higher contraction again uh really we think due to just lower spending on the part of our customers and we attribute that to the macro on the expansion side we are seeing that at a bit lower rates than where we've been historically and again we think that's Amy Nunez, customers being budget conscious scrutinizing their spend and you know that's really a function of the macros. Amy Nunez, The macro the one area where we are seeing a little bit of an impact on new business elena's already talked about it, but is on the data and application side. Amy Nunez, And as she has mentioned, you know we expect to gain traction there over the years, we ramp our sales for salesforce and we expect bookings to accelerate towards the end of the year. That just gives you a little bit of color. In terms of how to, you know, think about revenue for the rest of the year, we're going to continue to guide quarter to quarter, just given how dynamic the macro is. The only other thing I'll call out, which we have already, is that we do have some tough comparisons here in the second quarter.

I would just say just a little bit more color on contraction for Twilio data and applications. I think the good news there is that when we see contraction, it is not that we're seeing competitive loss or competitive takeouts and things like that. It's really just customers' belt tightening, their marketing spend going down, or their transaction usage, for example, on segment or utilization on segment just going down because they are contracting. And so we take heart in the fact that the product is extremely valuable, extremely usable, but as customers are going through tough times of their own, We see that show up in some of the contraction numbers that we're seeing. So, feel good competitively, but we've got obviously a contraction happening that is a newer dynamic over the past few quarters.

I appreciate you. This is my caller. Thanks.

Your next question comes from the line of Derek Wood with Cohen. Please go ahead.

Great. Thanks. This is for Kazama. You know, one of the questions we had was whether growth and consumption from the base would be impacted by the sales restructuring since you were taking so many reps out of that business. Given the net revenue retention rate down at 106, how much of that pressure is coming from the macro versus how much is kind of the pullback in your own growth investments and As you look at a few months into your new low-touch structure, what do you feel like is working well? What do you feel like you'd like to see some improvements on?

Yeah, that's a good question, Derek. I would say, in general, I would attribute it almost all to macro. I think the reduction in investments that we made on the sales and marketing side, I think that they were difficult decisions, obviously, that we went through and TAB, Mark McIntyre:" Obviously there was impact to employees and you know we feel bad about that, but I do think that with the going into it, and now with the benefit of hindsight that it was absolutely the right thing to do. TAB, Mark McIntyre:" And that we're seeing the benefits of the efficiency, you can see this fall through the bottom line, and I think. TAB, Mark McIntyre:" In terms of any impact and dvd and or overall growth like we're just not seeing it right now, so what I would say is is working is that. You know, kind of in this BU structure, I think having reps aligned to a certain set of products that are very tightly aligned to an economic buyer on the other side that matches the product set, I think that has been hugely impactful for our business. I know Elena would say the exact same thing about her business as well. And so I think adopting this BU structure in that way is proving to be very, very useful. I think the two other things that I would call out specific communications is As a result of those reductions, we tilted much more towards a self-service, product-led, growth-oriented, go-to-market motion. And I think we're definitely seeing a lot of early successes there. There are various aspects of the experience, like onboarding, like compliance, like cross-selling, like getting additional products into the bundle, that we're just working on making a lot easier for customers so that they can adopt You know, Twilio really at a speed that they want to be able to operate at versus us, you know, having to gate any of that. So I think that's been quite good. I'd say, you know, we probably tilted a little bit more towards marketing dollars versus, you know, kind of rep-oriented dollars. And so I think that's worked pretty well too. It's obviously all a work in progress still, but I feel really good about where things are headed and cautiously optimistic about where things are going for the back half of the year.

Got it. Thanks for the color. Thanks.

Your next question comes from the line of Nick Altman with Scotiabank. Please go ahead.

Yeah. Thanks, guys. Just building on Derek's question, it sounds like you guys haven't seen much pressure on the growth side of the equation from the communication side from the headcount reduction and some of the go-to-market changes. I'm just wondering, can you maybe parse out for us how significant those changes were on the communication side? I mean, I know you guys have talked about sort of this reversion to low-touch model, but is there any way to sort of give more granularity around what's the split of quota-carrying reps focusing on data apps versus communications? And then Just as that sort of progresses throughout 2023, how will you guys sort of measure that impact and make changes, so to speak? Like, if the communication side sort of sees further growth decel, will you start to sort of, you know, allocate more reps to that side of the business? Just any more granularity around that would be super helpful. Thanks.

Sure. So, this is Kazama. I can start the answer, and then if Elena wants to add some additional color, she will. I think what's important to remember as we went through the restructurings that we did over the last six, eight months is that they were almost entirely impacting the communications business. There were impacts to other G&A categories, but otherwise they were almost entirely impacting the communications business. And so as you think about the cost that came out of the business, it was really largely out of communications. In fact, you know, to say it a little bit differently, in the data and applications business, as Elena mentioned in some of her remarks earlier, in fact, what we're trying to do is make good investments right now because we see a really big opportunity going forward. And we think we'd be remiss, quite frankly, if we weren't investing through this cycle. And so, you know, in a way, like, we're trying to optimize for profit. on the communication side while continuing to optimize for growth on the data application side. We haven't historically given a split of rep count or anything like that, like between businesses or how that splits necessarily between products. What I would say about that, though, is we did definitely make reductions in rep count as it related to our communications business. I mean, that was part of kind of getting ourselves much more towards a self-serve oriented motion. We retain reps on strategic accounts, obviously those that are kind of larger spenders, more enterprise-like. And then we continue to grow our rep count in the data and applications business. So hopefully that provides you with some additional color. I can't go exactly there in terms of the rep splits.

I would just add because Sam and I partnered on this together and we started orchestrating this move when I was still in the head of go-to-market role. I would say we looked at what is the ROI of each cohort of sellers and supporting roles within the go-to-market organization and really took a close look at where a rep in was yielding discontinuous growth and where it wasn't, we cut that out and we made a concerted effort to make sure that sort of everywhere we are at injecting human capital, we're seeing a return for it. And that's how I think about the fitness level that we've created across go-to-market now in both communications and data and applications.

Yeah. And I guess just the last thing I would add, Nick, is that, you know, in spite of all these changes that we've kind of undergone in communications business, We've maintained share. Customers have stayed on the platform. We haven't seen any elevated churn. And we continue winning with some really material accounts. So that, to me, is a significant number of proof points that things are moving in the right direction. There's obviously more work to do. But starting off the year with strong profitability, which is kind of where we were oriented, was really important for us. And now the rest of it is execution.

Great. Thank you.

Your next question comes from the line of Samad Samana with Jefferies. Please go ahead.

Hi, good evening. Thanks for taking my question. So, you know, I wanted to ask maybe on the software side of the business, and I was a little bit late, so I apologize if this has already been asked, but just as you think about the, I know you're investing for growth, but if you think about the bookings trends, even as maybe customer spend on marketing is a little bit less, just should we think about the the changes and how that's driving maybe leads into the pipeline the type of conversation that you're having is it is it changing the nature of where customers are viewing you versus just maybe the near-term financial results which have been impacted by all changes and then have a follow-up great i'll take that elena here um so we don't disclose our booking metrics but

We did say in prepared remarks and probably throughout the first question that we are seeing headwinds of a couple different flavors. I think the first thing for you to take away is that of the sort of work we're doing to rebuild, reorient, and specialize the organization, like that work's still in progress. And so while we're making great strides there, we've hired the team, we've got dedicated sellers in place for both segment and flex, and that's what makes up the Twilio data and applications business or software business, as you called it. The heads are in seat, but they're not fully ramped. And that's what we're working on over the next couple of quarters is making sure that these reps are ramped and fully productive and have what they need to be successful. So we're working through that. We expect to hit that stride over the next couple of quarters, but that we're also doing that during a tough macro time period. You mentioned marketing spend and things like that. And that is exactly the sort of customer messaging breakthrough that we're seeking to have and making sure that customers continue to allocate budget to these kinds of things because we think that they're particularly helpful in this kind of a time where we're producing things like a return on ad spend that's higher than it would be without segments. And so that messaging is really important right now, but at the same time, we do see substantive, you know, like we do see headwinds from a macro perspective. So customers, you know, adding people to the sales cycle, adding approval levels, which will elongate sales cycles. We see a small decrement in average selling price and things like that. And so we're playing through that period of time, but we feel good about the wins that we're seeing and innovation that we're laying down in order to, number one, play through this time, but number two, prepare ourselves really well for as spend comes back online, we think we're first in line to go take it.

Great. And then maybe just a follow-up. There's been some scuttlebutt. Google recently was talking about rolling out something called PassKeys, which is meant to kind of limit the amount of 2FA that you need and or changing just the nature of passwords in general and maybe accessing different apps and websites. I'm curious if you guys have any thoughts on maybe what the opportunity is for Twilio. I know 2FA has been a revenue driver in the past and just how you guys are thinking about that and maybe what you're doing as how we get authenticated evolves over time. And if you have any thoughts on that, that'd be great.

Yeah, absolutely. This is Jeff. I'll answer that one. You know, the way I think about authentication these days is basically, you know, there's typically multiple forms. There's something you know, there's something you have, et cetera. And that's what we've come to understand as best practices for how to authenticate yourself. And past keys are really evolving the evolution of past works, right? And they're easier to use. They're more secure. You can't reuse them. There's a lot of advantages to using this for authentication. instead of a password. But it's almost like the computer is generating the password for you, as opposed to you having to type it in and remember it. It's a way to maybe simplify the notion there. But what it doesn't do is provide you any information about who is this customer? How do I identify them? How do I know who they are? And that's things where like an email address or a phone number actually provide a notion of a person and their identity, as opposed to just a way to have a shared secret or some way to re-authenticate yourself. And so these things typically work together. And if you think about our Verify product, Twilio Verify is actually, you know, it does the identity verification of saying you are who you, saying you are who, or proving you are who you say you are. But it also does the work of saying, and this customer has this phone number. And therefore, I know who that is. I can talk to them at that phone number. When they come back to me, I know who they are. And so I think that FIDO and WebAuthn, which Passkey is basically, for all intents and purposes, the same thing, it's a way of essentially presenting a password that is more secure, but it doesn't provide a sense of identity. Who is this person? Here's an email address, a phone number, something you can use to actually contact them and uniquely identify them in the world. That's what we offer. So these things actually work well together. And we've been evolving our offering in terms of, you know, things like Verify that offer silent network authentication, as well as other forms of identity verification, like through WhatsApp, all wrapped up into one really nice product. And that product is selling really well. If you'll see, we had a very large Fortune 100 entertainment company that we sold the largest verified deal to, as well as a very large AI company that we sold verified to in this past quarter. And so the product is selling very nicely, even in an environment where Fido and WebAuthn have been getting a lot more traction for a number of years.

Great, Jeff. That's very helpful. Thank you so much. Absolutely.

Your next question comes from the line of Matt Stoddler with William Blair. Please go ahead.

Hey, guys. This is Alex Fastian for Matt. Thanks for taking my question. I just wanted to speak about the partner channel. If you could talk to any updates you might have there, especially with the GSIs and the regional SIs. How are you enabling those partners? Do you have any thoughts on expanding the partner contribution going forward? Thanks.

I will take that one. It's Elena here on the data and application side. We see a big role for partners both today and going forward. We've got a vibrant ecosystem of partners and particularly partners on the SI side, not just global SIs, but regional as well. And so I'd say that the SI community is performing well in the segment ecosystem as well as FLEX. Those tend to be different partners. We also have a couple of others that I wouldn't necessarily put in the SI bucket, but are, I think, pretty interesting for us today. Segment's a top partner. within the AWS ISV Accelerate program, which connects AWS sellers into our sales process. We're seeing some good deals from that. And then on the Flex side, we've got several partners that sort of span just the SI world, but also build product side by side with Flex as well. And so, you know, I'd say that we are, I've said over the past couple of calls, actually, that this is an area of focus and investment for us. I think we're seeing some good green shoots there. Lots, lots more to do. I don't know if Kasima has anything to add on the comp side. No, we're good.

Thanks. Your next question comes from the line of Fred Havemeyer with Macquarie Capital. Please go ahead.

Hi, thank you. I wanted to ask about some of the segment wins that you were talking about there. I think the selection of customers was actually quite interesting. You have a healthcare company, you have a database company, you have a wireless company that has a more expansive relationship with Twilio. So, you know, can you talk about perhaps some of the use cases that these companies are using segment for and where those companies are finding value right now with segments?

You know, a thing that's super interesting, we talk a lot about B2C, and there's definitely fantastic brands that are direct to consumer or have a big consumer element to what they do that are really out there working to find, identify, engage, acquire, and just better nurture those kinds of relationships in a way that is cost effective. really fast and pithy and gives them the ability to do things that they can't do with their traditional kind of cobbled together CRM infrastructure. That said, we do have a percentage of our segment customer populations that's also B2B. And some people that play in both B2B and B2C that are finding ways to sort of cross-pollinate Their own channels and their own customer identity is using the power of segment and so. We see customers do everything from sort of the the core sort of data platform use cases and really using us for things that are that are quite simple but hard to pull off. And then we have we have customers in a growing set of customers that are adding on capabilities so engage, for example, and and our new unified capability that we talked about in our prepared remarks so. Those are a couple of things that we're doing. I think long game, we expect the customer data platform to sort of be at the center, but for there to be a lot that we do with that. And so from Engage, for example, actually engaging your customers, getting out via our different communications channels, to utilizing segment information to have better experiences with FLEX in the call center or in a digital sort of in-app communication mechanism that a customer might be using with FLEX. So we see a ton of extension capability here with that CDP at the center.

Elena, thank you. I think as a follow-up question, I was noticing that top 10 customer accounts are now down to about 10% of total revenue. I wanted to ask, is that a function of just diversification of Twilio's revenue base, or is there anything to read in there in terms of how your top customers are also trending their own usage of Twilio?

Hi, this is Aiden. I'll take that. Yeah, it's largely a function of continued diversification. We're well diversified across industries, across customers, and so that continued. I'd say in terms of lower usage, we have seen that generally across companies. the communications and the DNA business. And that's, again, largely a function of the macro. But as it relates to the top ten, it's continued diversification.

Thank you. You know, Fred, this is Jeff. This is Jeff. You know, you asked about some use cases for Segment. And, you know, I thought I'd expand because I think there's a few that are interesting that I thought would be worth sharing because one of the really cool things about Segment and having this customer data is, like a great platform, once the customer puts it in, I think they find that there are multiple, like many benefits of having the customer data in a spot, having it clean, having it good governance over it, and then ways in which you can activate it across many different parts of the customer lifecycle. And so, you know, I was talking to a, you know, global Fortune 100 this morning about, you know, a segment opportunity and they rattled off like, You know, five different use cases from CRM to personalization across properties to tracking their customers across multiple acquisitions they had done. And knowing if a customer in one customer base was the same as the customer of other product customer base, so they could do more effective cross selling and more effective retention of those customers. And so I think, you know, in M&A cases, for example, there are great opportunities because you have different identifiers for customers. You know, there's one customer that I think is a great meat use case that I really like, which is they brought in segment so that they could personalize their IVRs. And the idea was, you know, the thing they had seen was if you are trying to log in, say, to the website or a mobile app, and you consistently can't log in, like, you know, your password's not working. they can see that in real time using segment and flag your profile as someone who is likely having a password problem. And when you call in, which probably at the scale of this customer happens, I don't know, 100,000 times a day or whatever, they will put the first thing in the IDR is, having issues logging in, press one. Which ordinarily you have to go like 10 menus deep to get to that one probably. But for you, because they saw your behavior on the website, is clearly you're having trouble logging in, they dynamically reprogram that. I mean, like, these are the kinds of use cases we see customers building across many different parts of their customer lifecycle, marketing, sales, product, service, support, that allow customers to serve their customers better. And that's why I think data as a platform in Segment is such a great product.

Aidan, Jeff, thank you.

Your next question comes from the line of Alex Suckin with Wolf Research. Please go ahead.

Hey, guys. Thanks for taking the question. I guess maybe just the first question is the gross margins in the quarter were actually better, I think, than we anticipated. I think they're the best performance since Q1 of last year. You know, international didn't go down as a percentage of the total revenue. Was there something else that you're maybe walking away from business more that had a lower gross margin in the quarter? I know that we're not guiding to it, but at least from a trendlining perspective, how should we think about that? And then I've got a quick follow-up for Jeff.

Hi, Alex. This is Aiden. Yeah, so it was 52.3% in the quarter, and that was up sequentially about 170 basis points. So that was positive, although I would say you know, we'll continue to see variability on this line. And so it's largely a function of the mix of products and also within the messaging business, the mix of geography where the traffic terminates, which is a little bit different than the international percent of revenue that you're looking at, which is based on customer headquarters. And what we saw this quarter relative to last quarter is there was a different mix in terms of where traffic was terminating, and that drove the better gross margin overall. As we think about going forward and how to think about this, we're really orienting the business more to gross profit dollars and to gross margin rates, given the strong unit economics, in particular in the messaging business. And so that'll continue to be our focus as we move forward, is really orienting the team to gross profit dollar generation. And as long as we can do that with the right cost structure, we think that's good business to keep doing.

Got it. And then maybe, Jeff, one for you. You talked about AI and generative AI with respect to segment and CDP. I guess one common question we get is the notion of bi-directional messaging, conversational messaging seems like that trend is having a massive moment right now in the marketplace. Can you maybe talk about the puts and takes and the potential tailwinds to the communication side of the business from generative AI, what you're seeing in customer conversations that you're having existing or new around that?

Yeah, so just to give you a quick backdrop, you know, I mentioned at the beginning of the call that, you know, generative AI is the next platform shift in technology. And by the way, it's not in technology, it's actually in society. And if you think about the But when these shifts occur, like the arrival of the PC and the PC to the web and the web to mobile, you can see the kind of disruption that occurs market after market when these transformations happen. In fact, it's interesting. There was a Wall Street Journal headline today that says, is this the iPhone moment? And I think absolutely. I would answer yes. Yes, it is. Now, there's an interesting question, though. Um, you know, if you remember the early days of, you know, say the web where companies were trying to figure out, oh, what do we, what do we do? Do we have a brochure on the site? Remember when companies used to say, like, we're not allowed to link off of our site because there's a legal problem with that. Everyone was like, what? So people have to figure out how to use these new technologies in the corporate setting. And I think that's what the conversations I'm having with customers now are exactly that, right? Is this ready for an enterprise use case? Or is a bot that I put in front of my customer going to start like talking, saying stuff that I don't want to say? Is it going to start having a dialogue with my customers about, you know, God knows what? Or are they going to stay on topic and talk about my products and my services and all that kind of stuff? And so I think that's where a lot of the work is going right now. And I think there's really good questions that are getting answered every day that work we are doing, work others are doing in terms of like how to keep these these large language models on topic and provide boundaries for them so that they are useful in a corporate context. And that stuff is getting resolved, I think, pretty quickly. And so I'll put you into a conversation I had with a customer recently, which I think is indicative of what I think is going to happen. I was talking to a customer, a very large financial services company, and they were telling me how they had spent the last seven years building out all of the intents to have a bot for their service use cases that could contain, you know, customer calls, right? Containment is the, you know, didn't have to reach a person. And they say, well, as containment was, you know, after seven years of work or whatever, it was about 40%. And so 60% of the calls made through your Q and D. And I asked, and you know, we were talking about large language models and I said, you know, do you think you're going to keep that investment? Or do you think you're going to start from scratch in the large language model world? And the customer said, no, we'll keep that investment. But hopefully, large language models will help us move it forward from 40% up from there. And through the course of the conversation, we talked a lot about what's possible in the architecture of these new language models and how they can work with segment customer data and things like this. And at the end of the conversation, I asked again, do you think you're going to keep that 40%? The investment you made over the last seven years that got you to 40% containment. And the customer said, no, it's going in the garbage can. Every decision we've made for the last seven years about what's possible is now like a relic of the past and is re-opted for re-litigation and potentially new approaches, new vendors, new ways of implementing it because the large language model world just upends what is possible. And I think that is why it is a gift in terms of creating new opportunities for companies like Twilio who is helping our customers activate their customer data across the customer lifecycle. Take CRM, which has historically been this kind of sleepy area of just a database, now activate it, make it useful across many different touch points. Large language models are an absolute gift, and I'm very happy that we bought Segment when we did, because the data that is in Segment enables a company to customize these interactions based on who they're talking to, the end user, the customer of our customer. And that is very powerful. So anyway, this is day zero of large language models. And you'll be hearing more from us in the course of this quarter. Obviously, we have Signal in August. And I would not be a responsible technology leader if AI wasn't prominently a part of what we're talking about at Signal. So we'll have more coming. And I hope everybody joins us at Signal in August.

Perfect. Thank you, guys.

Your next question comes from the line of CT Penegrahi with Mizuho. Please go ahead.

Hey, guys. It's Phil on for Citi. Thanks for taking my question. In your prepared remarks, you guys noted a flex win with a major financial services company. Would love to learn a bit more about this win. Was it sourced through an SI partner? And how well is flex positioned to compete with the other CCAS vendors?

Yeah, so a couple things. I don't believe that one was partner sourced, but it's a deal we've been working on for a few quarters. It is a legacy takeout, and it is sort of a contact center-specific use case. But I would say, because you asked about Flex, that's really not our only use case. We're starting to see sort of a coalescing around three or four key things that we see really playing well on the market. So first is sort of this in-app digital communication, in-app digital concierge kind of capability. And we see a lot of great direct consumer brands utilizing Flex in that way. Second is sort of a high-touch contextual sales kind of moment, and we see sort of large retailers and some other financial institutions playing in that area. And then lastly is sort of our core contact center use cases in the service and support area. And this example that you mentioned happens to live right in that area, and that's the one that was in our prepared remarks today.

Okay, thanks.

Your final question comes from the line of Michael Funk with Bank of America. Please go ahead.

Yeah, thank you for squeezing me in here. Two, if I could, quickly. So, Aidan, one for you, if I could. In the operating margin guidance for 2Q, I saw you called out a number of factors, pressuring that sequentially. However, I would have thought the full quarter of the headcount reduction, potentially positive mix shift, would have offset the reversal, for example, you call it other things. Are there other factors going into that?

Thanks for the question, Michael. So we try to be pretty transparent about this in the prepared remarks because we are expecting profit to be down quarter over quarter. So I gave a lot of information there and I recognize it's a little bit counterintuitive given the timing of the restructuring in the first quarter. So let me just like walk through some of the pieces and I'll talk about you know, what will continue beyond the second quarter as well. So first, the first quarter benefit is from a $12 million one-time accrual reversal related to the sunsetting of our employee sabbatical program. That won't repeat in the second quarter or beyond. We guide it to lower quarter-over-quarter revenues, which directly impacts our gross profit as well as our operating profit. And then we expect a number of different cost items to be ahead with quarter-over-quarter. First, merit goes into effect in the second quarter as it does every year. And so that will obviously go into effect Q2 and for the rest of the year. We're moving some employees. We talked about this in the prior earnings bubble. We're moving some employees to cash bonuses from equity-based awards. This is for a subset of our employee base, but it'll help moderate stock-based compensation expense growth going forward. But that in the period presents an OPEX headwind. We've also made some changes to our incentive compensation structure for the communication sales team to better align to Twilio's financial goals. And while that doesn't result in any difference in cash being paid to a specific sales executive, there's a bit of a difference in accounting in terms of what is incurred in period versus what is deferred over time. And so that creates a little bit of a headwind And then lastly, we do expect more normalized levels of marketing and travel spend in the second quarter. I'd say we were pretty light in the first quarter just post the reorganization as teams were settling into the new structures. We just didn't spend as much as we had planned we would. And so all of those items more than offset the full quarter benefits of the restructuring actions that we announced in February. But we're still guiding to 65 to 75. We raised the low end of our guide. for the year to 275 to 350, and we're tracking really well, you know, to date.

That's very helpful, Keller. I appreciate it. Thank you. This concludes the conference call. Thank you for