Twilio Inc. (NYSE:TWLO) Q4 2023 Earnings Call Transcript

Twilio Inc. (NYSE:TWLO) Q4 2023 Earnings Call Transcript February 14, 2024

Twilio Inc. beats earnings expectations. Reported EPS is $0.86, expectations were $0.57. TWLO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Twilio Fourth Quarter 2023 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Bryan Vaniman, Senior Vice President of Investor Relations. Please go ahead.

Bryan Vaniman: Good afternoon, everyone, and thank you for joining us for Twilio’s Fourth 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 are Khozema Shipchandler, Chief Executive Officer; and Aidan Viggiano, Chief Financial Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our prepared remarks posted on our IR website. We will also make forward-looking statements on this call, including statements about our future outlook and goals.

Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. With that, I’ll hand it over to Khozema and Aidan, who will discuss our Q4 and full year results and then we’ll open the call for Q&A.

Khozema Shipchandler: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio had a terrific fourth quarter to close out a strong 2023. We exceeded our revenue and non-GAAP income from operations targets for the quarter, delivering nearly $1.1 billion in revenue, $173 million in non-GAAP income from operations, and $211 million in free cash flow. Before jumping into the results of the quarter, I wanted to start this call, my first as Twilio’s CEO, by sharing that it is a privilege to be leading this company into its next chapter. I believe there is an incredible opportunity to unlock increased value for customers and shareholders. As we continue to innovate, we’re focused on combining the power of communications, data and AI to make every interaction more personalized and intelligent.

Our vision to become the leading customer engagement platform is unchanged, and we are executing on this from a solid operational foundation and a fundamentally strong competitive and financial position. We have a great set of products and hundreds of thousands of customers who are committed to Twilio, because we are bringing tremendous value to their businesses. Over the last year, we took significant steps to enhance our focus and execution, while optimizing our capital allocation strategy. We also took meaningful actions to streamline our cost structure, accelerate our path to profitability, and deliver durable growth. Our teams delivered on these objectives in 2023, and the numbers underscore this. During 2023, we generated $4.2 billion in revenue, improved our non-GAAP operating results from a non-GAAP operating loss of $4 million in 2022 to non-GAAP operating income of $533 million, delivered $364 million in free cash flow, and reduced our stock-based compensation excluding restructuring expense as a percent of revenue by 450 basis points year-over-year.

All of this hard work enabled us to take significant strides on our path to GAAP profitability. Our product teams have worked to infuse AI capabilities into our CustomerAI solutions, enabling us to continue on our promise of more intelligent communications for our customers. Our Twilio Communications business continues to demonstrate meaningful leverage, which helped to drive the impressive financial performance that Twilio delivered for the year, and we will build upon this momentum in 2024. At the same time, Twilio Segment is not performing at the level it needs to and I’ve already begun to take a closer look at this business to see how we can deliver improved performance. I’ll touch on this a bit later. Our Twilio Communications business, which drove 93% of Twilio’s revenue in 2023, had a very strong fourth quarter with revenue of $1 billion, and for the full year, it generated revenue of $3.859 billion and grew 11% year-over-year on an organic basis.

I had the privilege of leading Twilio Communications over the last year and I am extremely proud of what the team accomplished in terms of increasing both operational efficiency and product innovation. Throughout the year, we undertook a number of actions to drive increased operating leverage and further streamline our go-to-market activity. We continued these efforts in Q4, by moving both Flex and Marketing Campaigns into Communications and the results we are reporting today reflect this shift. With these changes, we’re better aligning how our customers want to buy our products and are also taking advantage of natural upsell and cross-sell opportunities. We also delivered on aggressive product roadmaps and saw early signs of success with CustomerAI.

In Q4, Twilio Voice Intelligence, an AI-powered capability that enables our customers to extract data insights from their call recordings, was released in beta and customers have already used it to analyze over 42 million call minutes. Our Traffic Optimization Engine and the Traffic Shaping algorithm are examples of innovations we introduced to drive greater flexibility and increased performance in our messaging products. Our products also set new records by sending over 4 billion messages and 64 billion emails during Cyber Week, with 100% uptime across core messaging and email, a testament to the scale and reliability of our platform. Our innovations are also getting recognized externally, as we maintained our position in the CPaaS industry as evidenced by the fact that Twilio is named a leader in the 2023 Gartner Magic Quadrant for CPaaS and a Leader in the Omdia Universe: Customer Engagement Platforms 2023 to 2024.

We’re continuing to deliver impressive customer wins. In Q4, we signed our largest messaging deal to date, a nine-figure commitment with a leading cloud communications software company. We’re also leveraging our network of ISVs and partners to accelerate our ability to reach new customers and expand our geographic footprint. For example, we signed a three-year, eight-figure deal with Airship. Airship’s mobile app experience platform powers trillions of interactions for thousands of global brands, and they will become an important partner where our customers will be able to leverage a fully integrated cross-channel orchestration solution for both messaging and email channels. Our partner channel is certainly proving to be an area of opportunity for us, and one we will continue to focus on this year.

Our Twilio Segment business, formerly Twilio Data & Applications, while still strategically important to Twilio, continues to underperform. Although we drove sequential bookings improvement in Q4, growth is not yet accelerating up to our expectations. We need to execute better and I believe that we can. Over the past five weeks, I’ve been working with the team to conduct an extensive operational review of Segment, and this work is ongoing. We plan to do a read-out of these results in March at which time I’ll be ready to share our findings, path forward, and any changes to Twilio’s financial framework as a result. That said, the Segment product teams are laser-focused on shipping updates to customers and we’re seeing a great response to our CustomerAI innovations.

Since becoming publicly available in Q3, 2023, CustomerAI Predictions has been adopted by over 150 customers. And, our CustomerAI Recommendations tool, which helps determine the products that are most likely to drive purchases and engagement for each unique customer, went live in a private beta in Q4. Staples Canada, a leading provider of services, tech and other merchandise solutions for work and school life was able to leverage CustomerAI Recommendations in its effort to provide more personalized recommendations to sell excess inventory and improve their cross-selling efforts. It’s abundantly clear that Segment is a powerful product that is driving meaningful value for customers and demonstrating market leadership, as evidenced by IDC’s most recent reports where Twilio is in the Leaders category in the 2023 IDC MarketScape on customer data platforms for the financial services industry and the number one CDP for 2022 market share.

We continue to see strong traction with customers recognizing the unique value proposition of combining our communications and data capabilities. In the fourth quarter, we signed a competitive, multi-year, eight-figure deal with a leading US financial services company whose usage of our platform spans both Communications and Segment. They chose Twilio to meet their needs both internally and externally with their customers. Internally, they’re deploying Segment so they can get a real-time and personalized view of their end users across multiple business units. They will leverage Segment’s Zero Copy Architecture to query their data warehouse directly, to efficiently and securely enrich Segment profiles. Externally, they’re deploying Verify so that the millions of customers who rely on them get a seamless and secure authentication process when logging in.

We also signed a seven-figure deal with an international salon management software company. With Twilio, this company moved away from the incumbent providers and now relies solely on Twilio Messaging for all of its one-to-one messaging with customers. And the company already deployed Segment for its B2B business so that they are able to have a better customer view of those purchasing beauty products directly from them. These customers are leveraging Twilio to not just bring their communications and data together, but to help them personalize and build lasting loyalty with their customers. Our team enters 2024 focused on making balanced and intentional decisions that will help us to deliver durable, profitable growth. Our priorities for the year are clear.

First, we need to continue running our business with better sales execution and we will continue to look for areas where we can accelerate growth. Second, we need to wrap up our business review of Segment and determine the best path forward that will position Twilio for long-term success, while advancing our objective of optimizing profitable growth. And third, we remain extremely bullish on AI and our ability to innovate across our portfolio, with several incredible examples in both our product roadmaps and in private beta. For the past 15 years, our Co-Founder Jeff Lawson did a remarkable job of leading this company from a disruptive startup to the admired company that it is today. I truly believe that we’re set up for success to build for the next phase of our journey and I’m grateful to follow in Jeff’s footsteps.

I also want to express my gratitude for the thousands of Twilions who make this company such a special place. Our employees have undergone a lot of change this past year, yet through it all they’ve remained committed to building a great company that’s focused on delivering for our customers. We will continue to run a financially sound and extremely innovative business. I’m continually impressed with the progress the team has made and how we’ve positioned the business to optimize for profitable growth moving forward. That said, we have more work to do and I look forward to leading Twilio in this next phase. And with that, I’ll turn it over to Aidan.

Aidan Viggiano: Thank you, Khozema. Twilio finished the year with a strong fourth quarter. We exceeded our guidance and delivered another record quarter of revenue, non-GAAP income from operations and free cash flow. For the full year, we generated $4.154 billion in revenue, 10% organic revenue growth, $533 million in non-GAAP income from operations, and $364 million in free cash flow. These results demonstrate the significant progress we’ve made over the last year from a business that was roughly breakeven on a non-GAAP basis and generated negative free cash flow in 2022, to one that is now generating meaningful levels of non-GAAP income from operations and free cash flow, while delivering double-digit organic growth. We came into 2023 committed to this outcome and we exceeded what we said we were going to do.

Fourth quarter revenue was $1.076 billion, up 5% reported and 8% organic year-over-year. Communications revenue was $1 billion, up 5% reported and 8% organic year-over-year. Segment revenue was $75 million, up 4% year-over-year. As a result of the operational changes Khozema highlighted regarding Flex and Marketing Campaigns, these products are now reported as part of our Communications business. For Q4, this represented $54 million of revenue that would have previously been allocated to Data & Applications. We have also renamed Data & Applications to Twilio Segment, which includes both our Segment and Engage products. As a result of these changes, all segment-level results and metrics have been recast accordingly. We continued to see stabilization in volumes across our usage-based products throughout the quarter, as well as strong seasonal activity around the holidays, which helped to drive our revenue beat in Q4.

Similar to the last two quarters, our Q4 revenue growth rate was negatively impacted by headwinds from customers in the crypto industry. Total Q4 organic revenue growth excluding crypto customers was 10% year-over-year and for the full year 2023, total organic revenue growth excluding crypto customers was 13% year-over-year. We expect Q1 headwinds from crypto to be roughly in line with Q4, after which we will have lapped the vast majority of the crypto impact. Our Q4 Dollar-Based Net Expansion Rate was 102%. Our Dollar-Based Net Expansion Rate for Communications was 102%, or 104% excluding crypto customers. Dollar-Based Net Expansion Rate for Segment was 96%, driven primarily by elevated churn and contraction, though we did see a modest improvement in churn and contraction versus Q3.

We delivered Q4 non-GAAP gross profit of $564 million, growing 9% year-over-year and representing a non-GAAP gross margin of 52.4%. This was up 180 basis points year-over-year and down 110 basis points quarter-over-quarter. The decline quarter-over-quarter was primarily driven by lower 10DLC campaign registration fees and international messaging. Q4 non-GAAP gross margins for our Communications and Segment business units were 50.7% and 74.4%, respectively. Q4 non-GAAP income from operations came in meaningfully ahead of expectations at $173 million, representing a non-GAAP operating margin of 16%. This was primarily driven by better-than-expected revenue and ongoing cost discipline, though we also benefited from savings related to our December restructuring and recognized a one-time $6 million gain from our settlement with the City of San Francisco.

As we continue to evolve our disclosures in support of our commitment to provide greater transparency on business performance and in response to investor feedback, going forward we intend to report quarterly non-GAAP income and loss from operations by business unit. Q4 non-GAAP income from operations for our Communications business was $248 million, and Q4 non-GAAP loss from operations for our Segment business was $18 million. As Khozema mentioned, we are undergoing an operational review of the Segment business in order to identify the appropriate path forward for improved execution and profitable growth. We’ll provide more details on the outcome of this review upon its completion in March. As a result of Segment’s business performance, we completed an impairment test on the intangible assets we acquired as part of our Segment acquisition.

The test resulted in a $286 million impairment of our developed technology and customer relationship intangible assets. No impairment of our Segment reporting unit goodwill was identified. Segment carried approximately $300 million in goodwill at year-end. Q4 non-GAAP loss from operations was $362 million, which includes $25 million of expenses associated with restructuring charges and the aforementioned $286 million intangible asset impairment charge related to Segment. Stock-based compensation as a percentage of revenue was 15.3% in Q4, excluding approximately $1.9 million of restructuring costs, down 260 basis points quarter-over-quarter and 360 basis points year-over-year. In Q4, we generated free cash flow of $211 million, driven primarily by strong non-GAAP profitability, as well as heightened collections and an $18 million one-time cash benefit related to our settlement with the City of San Francisco.

While we expect free cash flow to vary quarter-to-quarter, free cash flow remains a focus for us as we drive greater profitability in the business. Lastly, we continued to execute against the $1 billion share repurchase program that we announced in February 2023, and have now completed over $730 million of repurchases to date. Moving to guidance, for Q1 we’re initiating a revenue target of $1.025 billion to $1.035 billion, representing year-over-year growth of 2% to 3% on a reported basis and 5% to 6% on an organic basis. The expected sequential decline in revenue is due in part to elevated seasonal activity on our platform in Q4, which we do not expect to recur in Q1. This is a similar dynamic to what we saw last year. We continue to see volume stabilization across our Communications products, though we’re planning prudently given the usage-based nature of our business.

We do expect year-over-year growth through the balance of the year. Turning to our profitability outlook for Q1. We expect non-GAAP income from operations of $120 million to $130 million, down sequentially quarter-over-quarter primarily due to our lower revenue guide and an estimated $20 million of incremental expenses associated with a new cash bonus program. This new program will allow us to reduce go-forward equity grants as a proportion of total compensation and is part of our continued efforts to transition employee compensation from equity towards cash in order to reduce stock-based compensation expenses. We’re continuing to focus on driving operating leverage, and we remain committed to reducing stock-based compensation on our path to GAAP profitability.

Given the Segment operational review currently underway, it’s premature to provide full year 2024 non-GAAP income from operations guidance at this stage, but at a minimum, we expect to exceed our 2023 non-GAAP income from operations even after taking into account an estimated $90 million of incremental annual expenses for the new cash bonus program. We intend to provide a full year 2024 non-GAAP income from operations outlook and any updates to our financial framework following the completion of the Segment operational review in March. We’ve made significant strides over the last year in driving meaningful non-GAAP profitability and free cash flow generation in our business. We have strengthened our financial foundation and set ourselves up well to deliver durable, efficient growth in 2024 and beyond.

I’m proud of everything our teams have accomplished in 2023, and I’m excited for the opportunities ahead. With that, we’ll open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall: Great. Thanks. Maybe first question, just what are you looking at to see traction in the Segment business? Was there — I know in the past, you had said kind of improving pipelines or sales efficiency growing. You didn’t kind of give some of those same statistics. So just what can we use to kind of benchmark improving performance there? And then just maybe a second question on — generally we see a pickup in gross margins in Q4 on the Communication side of the business, just given a little bit more of that traffic ends up being North America focused. Notice the kind of step down sequentially. So just any commentary on gross margins would be helpful. Thanks.

Khozema Shipchandler: Yeah, sure. Hey, Meta, I’ll start with the Segment part of it and Aidan can answer the gross margin part of it. So on Segment, I mean, some of the indicators that we’re looking at is sequential bookings, and we did see improvement in Q4, but as we alluded to, it’s not exactly where we’d like it to be. And I think just the overall pace of the improvements that we were anticipating and that we would expect of ourselves, they’re just kind of not meeting our expectations. I think we’ve also seen consistent win rates over the course of the year. And again, we did see a modest improvement in the win rate in Q4. And notably, Q4 was sort of our best new logo bookings performance as well, actually since 2021. And so, we feel pretty good about that, at least in terms of trajectory, but again, have work to do.

And then just finally, it’s the number one CDP, at least based on the most recent report by Market Share as determined by IDC. And we think that just based on what we’ve been able to do with it and customer AI and how we can expand it across our Segment product portfolio that there’s just more that we can do there. But as we said, it’s strategically important, but we definitely do think we can do a better job in terms of running that part of the business.

Aidan Viggiano: Hey, Meta, I’ll take the gross margin question on Comm. So it was down quarter-over-quarter. We did see Q3 bump up quite a bit. So Q4 is still higher than what we saw in the first half of the year. The drop quarter-over-quarter was driven by lower US 10DLC registration fees quarter-over-quarter. If you remember, last quarter we made a push to get customers using 10DLC in the US registered that resulted in additional fees. And we are seeing some of that margin pressure kind of quarter-over-quarter driven by that. And in addition to that, within international messaging, we saw a little bit of margin pressure as well, primarily a function of just where messages are going within different countries in the international market.

So those are the two big drivers. But when you look at margins overall for the business, pretty good performance year-over-year. Communications is up 230 basis points quarter-over-quarter in Q4, for the year up 190 basis points. So generally a positive margin trend in the year, although down a bit versus Q3.

Meta Marshall: Great. Thanks.

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

Mark Murphy: Thank you. Khozema, I believe you mentioned a nine-figure messaging win and largest messaging deal that you’ve won to date. Can you just shed any light on how that came together? Anything on contract duration so we can annualize it? And then just perhaps when you think that might start contributing revenue? Not clear to me whether that could click in immediately or perhaps sometime later in the year. Then I have a quick follow-up.

Khozema Shipchandler: Yes. I mean, I can’t get too far into it because we can’t disclose the customer names, but we’re certainly proud of the fact that we’re able to score both of those deals. They’re each is a little bit unique just based on kind of the customer type that’s involved in each one. I think that those are both kind of multi-year arrangements, and so there’s an opportunity for that revenue to continue over a period of time. Like, that’s kind of the typical contract duration length that we typically see, and we should see that revenue over the next quarter or two.

Mark Murphy: Okay. Got it. Aidan, as a quick follow-up. What is it that drives a little different spread for Q1, where I believe you’re guiding fairly consistently or even a little better on the organic growth compared to how you guided Q4, and then it’s — but it translates to slightly less in the kind of revenue growth rate that we actually have to model? Is it possible to step us through that? Is it something relating to crypto impact or something else?

Aidan Viggiano: Let me take it, Mark, here. So there’s a couple of things that are happening. So we’re guiding to 5% to 6% organic growth. We were 8% in Q4. And so there’s a couple of things to consider. So on the growth side, we did talk about crypto, right? That was the 200 basis point headwind in Q4. We expect it to be a similar headwind in Q1. When you look at the rest of the business — the other thing to remember is, we didn’t mention this in our prepared remarks, so I’ll mention it here. We continue to streamline our product portfolio, really to focus on doing fewer things better. We are deprecating our video product as well as our software component of our Zipwhip business this year. Both are planned wind-downs of those products, but they will result in a roughly 150 basis point headwind to growth in Q1.

And I would say roughly similar impact on total year 2024 growth. So you have about 200 basis points from crypto. You have about another 150 basis points from the end of life of the video and the software business within Zipwhip. And then the last thing I’ll just say is, again, we’ll continue to plan prudently, just given the usage-based nature of our business, much different than a subscription business, which is more predictable. So we’ll plan prudently. We do expect year-over-year revenue growth throughout the balance of the year.