Paramveer Singh: This is Param Singh on for Ittai Kidron. So firstly, I want to understand what are the areas within communications you were able to cut back on overhead? Was it because of excessive hiring in ’21? And how much of that cutback are, you would say, some international, which has a significantly lower gross margin profile?
Jeff Lawson: I don’t think we entirely heard your question. So, I’m just going to try to play it back for a second. What I understood the question is being that in what areas were we able to cut back in the communications business? And what proportion of that was international relative to other markets? Is that right?
Paramveer Singh: Yes. That was the general crux of it, but I also wanted to understand like was — is this because you over-hired in ’21 in communications that you’re getting back to more normalized pole, are there other areas of streamlining a communications business that were previously not identified? So, I just wanted to understand some of the dynamics behind the restructuring that we announced in the past since September?
Khozema Shipchandler: Yes. I mean I guess what I would say is that there’s a couple of parts to it. So, if you go back to the fall and the restructuring that we did at that time, I would call that like kind of more cost cutting. Obviously, it had the unfortunate impact of us having to part ways with about 11% of our workforce at the time. And that obviously is something that we feel bad about, but that was more kind of in the cost-cutting vein. And I would say this time around, it was more a restructuring around two different businesses that we think can drive better outcomes, both for our customers as well as our share owners just given the different buying cycles that have economic aspects of the two different businesses. In terms of where the costs came from, I would say it was pretty much across the board.
Like I wouldn’t necessarily point out that it was heavier international necessarily relative to the way that it played out domestically. A lot of our roles are kind of global facing. Certainly, once you get out of go-to-market, the rules are very global facing, especially in engineering and G&A. So, I wouldn’t say that we pulled more out of international than in any other kind of region. One of the things to point out in international, in particular, is that — and we talked about this at our last Investor Day, the unit economics of that business are actually quite strong. And so, we want to continue growing in international markets so long as those unit economics are good. And we’re going to continue pursuing business in that way. But that hopefully gives you a little bit of color in terms of the costs that we try to take out this time.
Paramveer Singh: Absolutely. Thank you for that. And then if I could really quick. I want to understand the level of investments you’re making in software, considering this past quarter is only 22% growth and 434 or 1 million of the like. So, I just want to understand the impact of your operating headwind that you’re going to have in the near term while you bring this business to hopefully $1 billion-plus business.
Khozema Shipchandler: Yes. I mean, we’re not going to break out that number specifically. What we did do is say in our prepared remarks that we’re guiding in the current year to about $250 million to $350 million of non-GAAP operating profit. Offsetting that or included in that number is about $150 million of incremental OpEx. And there’s two dimensions of that, that we specifically broke out. One was an increase in the way that we’re going to compensate employee’s vis-a-vis bonuses to help us offset some stock-based compensation headwinds that we’ve seen over the last few years that would otherwise continue. And then the balance of that will really be predominantly investments in Segment and Flex. We think those are smart investments because we think those can accelerate the growth of those products. And then there’s a little bit of other stuff in there as well, but we’re not going to break out that number specifically.
Paramveer Singh: Thank you, so much.
Operator: Your next question comes from the line of Taylor McGinnis with UBS. Your line is now open.
Taylor McGinnis: Hi. Thanks, so much for taking my question. So, lots of great incremental color on the call. But one area that you didn’t discuss was the 15% to 25% revenue outlook you provided at the Analyst Day. I would imagine here, given some of the changes that, that outlook might be a little bit stale. But any color you could provide on how you’re thinking about the revenue potential now? And then as a second part to that question, just looking at the 1Q guide, could you maybe talk a little bit more about what’s embedded in that rev guide? And particularly how it might relate to some of the changes you made in any risk of disruption?
Khozema Shipchandler: Taylor, this is Khozema. I’ll take that question. So, the 15% to 25% is really a medium-term guide. We both provided a revenue guide on the overall business of 15% to 25% in the medium term, which we labeled as three to five years during our Investor Day as well as 30% plus in the software business. And those aren’t changed. Beyond that, what we have said a few times now is that just given the dynamicism in the macro environment, that we’re going to continue guiding quarter-to-quarter on the top line for now until we see the macroeconomic picture kind of clear up. We haven’t seen that play out really. In fact, we’ve seen it kind of get a little bit more rocky over the last couple of months. And so, we just want to be smart about the way that we guide things.
I think that the 14% to 15% that we called out in Q1 is kind of reflective of that. It is a tougher macroeconomic environment. I think in spite of that, we’re going to be able to put up pretty good growth numbers on a year-on-year basis. But I think its basically macro signals that we’re seeing that are kind of making us think about the business in light of a number of different things that could play out, and it just seems prudent to us to kind of plan and run the business conservatively in light of that.
Taylor McGinnis: And then my last quick follow-up is I appreciate that you’re talking near term about EBIT dollars and gross profit dollars and putting the focus there. But just as we think about the guide, that’s — the medium-term operating margin guide is on a percentage basis. So, can you just talk about what gives you comfort in that 300 to 400 medium-term outlook that you provided?
Khozema Shipchandler: Yes. I mean, I guess the way that I would say it is, is that you got a couple of factors in the mix. So, first is that we gave you $250 million to $350 million in the current year. That gives you some sense of kind of how we’re anchoring 2023 to give us a base off of which to grow. As we look out over the next several years, we’re obviously taking into account our medium-term revenue guide with some appreciation in software, given that we’ve called that at 30% plus. And so, if you kind of run the math out over the next several years and assume a few different things around gross margins and the gross profit dollars that each of those two businesses will kick out, that kind of gives us a sense of how profitable a business that this can become.
And then I think some discipline on the OpEx side, which I think we’ve shown over the last couple of periods and certainly the most recent actions, really give us a sense of just how simplified and efficient we can run the business, that kind of gives us the confidence to say, as we look out, we can drive additional op margin accretion, which ultimately will yield GAAP profitability in 2027.
Taylor McGinnis: Thank you, so much.
Operator: Your next question comes from the line of Nick Altmann with Scotiabank. Your line is now open.
Nick Altmann: Great. Thanks guys. Just a follow-up on the prior question. Just given how significant of a level of the restructuring you guys have done and you look at sort of the 1Q guide, how much of the headwind to growth is coming from the restructuring and having less quota-carrying reps versus some of these macro factors and the shift of focus to data and applications?
Khozema Shipchandler: Yes. Nick, this is Khozema. I’ll take that one. Not much, to be honest. I mean, the reality is, is that in the short term, there may be some impact, so I don’t want to suggest that they’re going to be zero. But I think, by and large, the Q1 guide is not informed by some of the restructuring actions, either that we undertook in the last half of last year nor the ones that we took just a few days ago. The revenue model and the way that the bookings play out, it takes a little bit of time for things to catch up. Again, as I said, I’m not going to say that it’s going to be zero. But as we kind of put our planning assumptions together, we felt pretty good about the way that we guided in Q1. And took whatever impacts there may have been into account.
Jeff Lawson: I’m going to add one bit of context to that, if you will. So, this is Jeff. I want to underscore something that was said earlier that I think bears repeating, which is that we have a usage-based pricing model. And in a usage-based pricing model, we see an accelerated headwind in a macro environment like this. And I think that’s what you’re seeing in our recent results and in our guidance. What we’re not seeing, though, is a real change in, for example, our competitive situation, right? I think what you’re seeing is a representation of just consumer activity and the general economic activity being slightly muted during this period of time. But I think this also can play to our strength as you see economic recovery occur because that can be an accelerated tailwind for us as well.
And that’s also the nature of a usage-based pricing model. And as we mentioned earlier, like we saw in the early days of the pandemic when people were using our product for many new use cases. And so, I think we are an accelerated view into the macro economy based on the usage-based model. And as we do move towards the economic recovery, I think you’ll see a company that is in a really good position because we are more streamlined. We are more focused. And we’ve got a great customer base to enable us to see the tailwind from that recovery, including the business model. And I just think it’s worth again pointing out the nature of the usage model, which is, generally speaking, a great benefit to us during these times, feels like a little bit of a headwind for us.
But I think in the long term, it’s still the right model.
Nick Altmann: Great. And then just as a follow-up. Earlier, you had said that the $250 million to $350 million operating profit outlook does not embed any gross margin expansion on the communications side of the business. But now that you’re sort of managing the business in two separate units, can you maybe just walk us through the margin implications for the communications side? I mean, would you guys ever sort of disclose that business unit as a separate entity in reporting? Do you have plans to pay a little bit more attention to the gross margin profile there and maybe be a little bit more disciplined on discounting on that part of the business?
Khozema Shipchandler: Yes. I mean, so there’s a couple of things that you said in there. So, in terms — let me just take the latter part first, and then I’ll come back to the first part of the question. So, we actually are pretty disciplined already in the way that we price the product. And so, I feel quite good about the way that the pricing mechanisms work. The unit economics are very strong, whether they’re domestic or international, and we tend to be priced higher than the other guys. And as Jeff said a moment ago, we’re not losing share. And so, we feel very, very good about the way that the product is priced and more importantly, about the value that our customers get from the product. In terms of disclosures, which I think is kind of the other aspect of your question, what we committed during our Investor Day is that we provide additional transparency in terms of what we’re now calling communications and then our data and applications businesses.
And we’re going to continue doing that as we have in the current quarter. And I think one of the things that we’re going to work through over the next few quarters is just to develop a little bit more robust reporting as we operationalize the business units. And we expect that, that probably will lead to additional disclosure over time.
Operator: Your next question comes from the line of Fred Havemeyer with Macquarie Capital. Your line is now open.
Frederick Havemeyer: Hi, thank you. A question perhaps for Jeff and for Khozema. Firstly, it’s great to see and hear that you are returning to the north star in communications of the product-led growth story there. I wanted to ask, with that — with that shift in the emphasis of a sales-led motion back towards more product-led growth, should we anticipate any sort of change in, say, quarterly cadence of revenue within the Communications segment relative to what we’ve seen in prior years? And I suppose also in that context, since you’re guiding fiscal ’23 on non-GAAP operating profitability, should we be thinking revenue of revenue at this point as less of a kind of a key metric for the company and something that will ultimately just be driving your operating margin outlook or rather operating profitability outlook?
Jeff Lawson: Fred, this is Jeff. I’ll take the first part of your question, and then I’ll hand it to Kho for the second half of your question. For the first part, if I understand the question, I think you’re asking like how will it affect revenue given that we’re moving to more of a product-led growth strategy. And I would say, look, the goal — once we win a customer, a lot of the growth in the account comes from their growth in the market of taking something they built from prototype that they’re testing to a beta when they test out the idea to rolling it out to the entire customer base and then the growth of their business and their customer base. And so really, it’s about getting that kind of design win. And that’s where developers are often very influential in the life cycle of adopting some of these communications products.
And so, by moving back towards more product-led growth, what I think you’re seeing is we’re going to be investing in the things that make those developers and the companies that are in the early stages of adopting Twilio really successful in onboarding. And I think we see a lot of opportunities to go streamline the product, make it easier to get up and running, but also to scale these products as customers scale globally. And the product can do a lot more heavy lifting in areas where I think we’ve relied on people to actually help our customers over the line in recent periods. And you’re right, this is a return to the roots of Twilio, which is to make the product enable our customers to find success quickly and easily with a really powerful product.
And so that’s what we’re focused on. So, I think it will help us enable bringing on new customers as well as continuing to scale our existing customers in a way that customers will actually appreciate because it’s going to be easier and faster for them to do so. So, for the second part of your question, I’ll hand it to Kho.
Khozema Shipchandler: Fred, in terms of the second part of the question, I guess the way that I would think about it is just maybe take a step back and then I’ll drill down for a second, is that one of the things that we thought a lot about as a company and as a management team is, is that we’ve become a really big business, but we also want to become a really profitable business. And so, paired with becoming a large revenue generator, we also wanted to make sure that, that revenue threw off a lot of profit. And so that’s why you’ve seen some of the restructuring that we’ve done into these two business units. We do think we have an opportunity to better focus in that way and generate a lot more profitability, for example, in the communications business while fueling what we believe can be a tremendous amount of future growth in the Data and Applications business.
With that said, we certainly haven’t given up on growth in the communications business. We still think there’s a ton more growth for us to go get. What’s fortunate for us is that we’re operating in end markets that are still growing at very, very rapid rates. Our share is maintaining. And if anything, the pie is growing. And so that kind of bodes well in terms of a great growth setup going forward. We’re still underpenetrated, I would say, internationally, and so that’s a real opportunity. And then I think on the Data and Applications business, really, for us, the sky’s a limit. We see a lot more growth opportunity there. As Jeff and Elena have both said during the course of this conversation, we think that our data capabilities pair really well with our communications capabilities, too.
And so, we think that will yield some additional growth, too. So, profit will certainly be a key feature as part of these calls. We want to give folks a sense of confidence that we do see line of sight to GAAP profitability, but please don’t confuse that with any lack of focus on the growth side.
