Twilio Inc. (NYSE:TWLO) Q4 2022 Earnings Call Transcript

Twilio Inc. (NYSE:TWLO) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: 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 Fourth Quarter 2022 Earnings Call. . Thank you. Bryan Vaniman, SVP, Investor Relations, you may begin your conference.

Bryan Vaniman: Thanks, Emma. Good afternoon, everyone, and thank you for joining us for Twilio’s fourth 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; Khozema Shipchandler, COO; and Aidan Viggiano, SVP of FP&A. As announced in our Q4 earnings press release, Elena, Khozema and Aidan will be transitioning into their new Twilio roles effective March 1. 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 forward-looking statements, including statements about our future outlook and goals. These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that are described in more detail in our most recent periodic reports filed with the SEC, including our most recent report on Form 10-Q and subsequent reports on Form 10-K or Form 10-Q and any amendments to any of the foregoing and are available on our website 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, then we’ll open up the call for Q&A.

Jeff Lawson: Thanks, Bryan, and thank you all for joining us today. As you may have seen, we’ve made a number of significant changes to our business that we believe opt to perform in both the short, medium and long term. As I mentioned in my prepared remarks, we are confident that this is the right set of actions and the right path forward for our customers, for our teams and that will enable us to create more value for our shareholders. And I’m sure you have questions, so let’s hop right into it.

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Q&A Session

Operator: Your first question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall: Great. Thanks. I appreciate it. Maybe a couple of questions for me. Just maybe to start, I know at the Analyst Day, you guys have talked about a lot of changes that you were making to kind of the data and application sales force and just the driver to growth that, that would be in the future? And just as you have gone through the process of splitting the business units, just where do you think you are on some of those initiatives? And I guess, kind of as a second question to that, where do you feel like there are synergies or dissynergies from kind of splitting the segments as far as kind of getting customers to go from communications customers to kind of those data and applications customers? Thanks.

Elena Donio: Meta, it’s Elena Donio here. Thanks for the question. A couple of things that you hit on there, I’ll take them in turn and then pass it over to Jeff who can add a little bit of extra commentary. First question was about the data and applications business and kind of current state of growth and where we’re at in terms of that transformation that we’ve been talking about, let me hit that one first. We’ve — I’ve spoken across the last couple of quarters about investment there and about growth there. We also addressed a little bit of sort of the trajectory as it relates to the beginning of last year and a couple of missteps that we made along the way. We actually feel a lot better about that business and trajectory now.

And we believe that this movement in separating our sales forces into these business units more discretely is actually going to further amplify and accelerate that growth. So obviously, revenue growth lags bookings. We feel good about where our Q4 landed across our data and applications business, and we’re also confident in that reacceleration. I talked a little bit over the last couple of quarters about the hiring that needed to be done there, the onboarding, the enablement of those new reps. We feel really good about having built out those teams with the right set of skills and the right capabilities, doing some internal transfers as well as hiring from the outside with the right set of bespoke skills. So, I’m really confident in how that’s turning.

We’ve also talked about some macro headwinds. Those continue in a couple of areas, some lengthening of sales cycles pushing out of decisions and things like that from time to time. But with all of that in mind, we feel really good about the things we can control. We feel really good about the investments that we’ve made and the trajectory ahead. And we also have really — we still believe and we shouldn’t — we don’t think that this movement across two different business units should say anything different. There is a better together story here. Our products really amplify one another. But what we found is that having very specific sales focus across the unique needs of each of these buyers is a really important one. And we think having moved our segment and Flex teams into separate spaces last year started that momentum building.

And now this business unit move is one more step in that direction of focus. I think that hit both of the questions, but I’m going to hand it to Jeff for a little bit more commentary.

Jeff Lawson: Yes. Thanks, Elena. I think your — the second part of your question was really about like synergies, dissynergies, et cetera. So, I’ll tell you how we think about it. Every customer who comes to us for communications, like they actually have a use case of mind for how they’re going to engage with their customers, right? They need voice, maybe it’s because they need a contact center. They need messaging for identity verification or for customer contact two way. They need to e-mail for a marketing use case, right? There are these finite use cases for the vast majority of the things people use us for, and these use cases kind of cluster together. So, we have this opportunity to ask customers, hey, what are you trying to accomplish?

What are you trying to do with our platform? And by the way, have you looked at this other part of our platform that may actually help you achieve that better, faster or even cheaper in some cases. Our applications create value for customers by entering their need in a more direct way over the communications channels that we then just use to execute the delivery of those messages. And so, I think this is how this space is going to be won over time. It’s getting it to why customers are sending these messages and doing these communications with our customers, in addition to powering the messages themselves. So, you might say, Jeff, the two-business unit structure, well, it seems like that makes it harder to actually bring these two worlds together.

And first for us that may have to be the experience. But today, let me tell you, what we’ve learned what didn’t work — let’s have everything lumped into one back of a sales rep. And we’ve talked about that reason in the past the way I just hit on it, right? So, at this stage, what we’re focusing on is the unique needs of the various buyers with specialization there and focus. But we’re also going to collaborate and partner utilizing our own data and intelligence to uncover opportunities to incentivize cross-team collaboration and to go understand which of our customers need which of these use cases, and therefore, would be really good customers of our applications and our data stack. But I think it’s important to distinguish here — this is the important part — between the short and medium term and the medium and long term.

Because in the short to medium term, it’s clear that we’ve got work to do to make communications more profitable and to take our data and applications business and execute on the sales model. But I see these things as foundational, that the current environment is setting the stage for us to do, but we’re getting better at using our data to drive these cross-sell conversations both in things like marketing and our automation, but also in our sales conversations. And then over time, we build more and more product connectivity between these various products. And it’s obvious, how with better customer data in terms of segment, we can power smarter, better, more effective communications, and that drives more usage of our platform. And so, I think that’s how the synergies play out.

But you do have to look at it short to medium term, medium to long term.

Meta Marshall: Great. Thank you.

Operator: Your next question comes from the line of Mark Murphy with JPMorgan. Your line is now open.

Mark Murphy: Hi, thank you so much and congratulations to all the new folks who have been promoted. My first question is regarding the $250 million to $350 million non-GAAP operating profit that you expect this year. Should we assume that all of that is being generated by the Communications business? Or perhaps more than 100% of that, if we were to assume that the data and applications business is unprofitable this year?

Khozema Shipchandler: Hi, Mark, this is Khozema. I’ll take that question. It’s really the latter part of what you said. It’s more than 100%, and that’s kind of intentional on our part. We do think that we can be very efficient in the way that we bring the communications business to market and that it can throw off a lot of profitability, while at the same time, the data and applications business, they’re in the middle of an investment cycle, and we’re early stages in that. And so, we do think it’s appropriate so long as we’re making judicious investments to be able to grow the top line of that business. It’s also gross margin accretive, which we think is important longer term. But it is going to take some losses in the short term, which will work themselves out over time.

Mark Murphy: Okay. Understood. And then as a follow-up, I looked at the prepared remarks and it says that some of the macro headwinds that you had mentioned still persist. So, I’m wondering if you could just clarify whether the buyer behavior feels any better out there. I mean in terms of the bookings cadence in recent months? Or would you say that, that is still continuing to degrade somehow?

Elena Donio: It’s Elena. I’ll take that one. I would say those factors persist. I wouldn’t say it’s all been flushed out of the system. But I think we’re also getting better at navigating it. So, we did — we are comfortable with where our Q4 bookings landed in our data and application space. And we’re — we think our products actually play a vital role in tough economic times. And so, we’re sort of navigating that headwind in the field as best we can. We’ve updated our messaging. We’re making sure that we’re very clear about why allocating budget to these kinds of products, at this time, in particular, is vital and important. And we think that message is landing. But definitely, economically, I don’t think we’re out of the woods yet. I’ll hand it to Kho for more commentary.

Khozema Shipchandler: Mark, just one other thing I wanted to add is that importantly, we do intend to drive profitability through whatever the cycle ends up being. We provided a relatively large range on the non-GAAP operating profit in light of the current macro conditions, which are pretty dynamic, but we do think we can be profitable through whatever the cycle is, and we intend to be.

Mark Murphy: Thank you, very much.

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

Michael Turrin: Good afternoon. Thanks for taking my question. I guess just a follow-on on the operating income guide because it certainly stands out just relative to what was expected. Can we just — I know you’re guiding specifically for operating income, but just anything you can add on what would get you to $250 million versus $350 million? And how to think about just gross margin in the context of that conversation relative to the potential growth outcomes that would drive the delta potentially?

Khozema Shipchandler: Yes, a lot there, Michael. So, let me just try to unpack it a little bit. So, in terms of, I think the way that we planned for it, is that irrespective of kind of the gross margin outcomes, we’re going to be able to deliver operating profitability within that range. I think the difference will be basically that if revenue kind of performs in line or kind of within a range of our expectations, then we’ll be at the higher end of the range. And if it doesn’t, then we’ll kind of be at the lower end of the range. Given how dynamic the macro is, we did want to provide a little bit of a cushion. We wanted to kind of plan and run the place a bit more conservatively in light of things that we’ve seen. Certainly, a lot of companies have reported similar.

But irrespective, we’ll be profitable, but that’s kind of the color behind why that range. In terms of gross margins, as I said, I don’t think that they’ll really have an impact on the way that this plays out. We’re really trying to orient the business much more towards gross profit generation. We talked a little bit about that during our Investor Day. So long as the unit economics are good, especially in the Communications business, they’re already very strong on the data and applications business, then we’re going to keep seeking gross profit dollars I think a key difference being going forward that those gross profit dollars will drive incremental op profit dollars.

Michael Turrin: Very helpful. It’s a substantial answer to a substantial question. Just a quick follow-up, if I may. On the expansion rates, we’re seeing compression in a number of different vendors across software. Can you just walk through what’s driving the expansion rate headwinds you’re seeing currently and how that informs the 1Q guide? Thank you.

Khozema Shipchandler: Yes. I think the expansion rate basically kind of follows some of the revenue growth rate decel that you’ve seen. One of the things about our business is that as macroeconomic factors kind of take the economy and other businesses down, given the usage-based nature of our business, we tend to feel those a little bit more acutely. Kind of in the same way that we felt them a bit more acutely on the way up, right? If you kind of go back a couple of cycles or even the most recent cycle to COVID, like we turn up very, very quickly as different macro factors kind of pulled markets up. And so, I think we’re starting to see that come down a little bit. In terms of the Q1 guide, I mean, we still feel quite good about our ability to generate revenue growth in spite of a very difficult macroeconomic environment on a year-on-year basis, and we’ll just continue to monitor it.

Michael Turrin: Thank you.

Operator: Your next question comes from the line of Ittai Kidron with Oppenheimer. Your line is now open.