Q3 2019 Earnings Call

Good afternoon, and welcome to the Twilio Q3, 2019 earnings Conference call My.

My name is neat and I will be operator for today's call.

At this time all participants are in the only mode.

Later, we will conduct a question and answer session.

We'll now turn the call over to Andrew Neely Vice President.

Investor Relations.

Just to see the you may begin.

Thanks, Good afternoon, everyone and thank you for joining us for third quarter fiscal 2019 earnings conference call.

I'll discuss releases that you see filings and replay of todays call can be found on our IR website at investors not to go dot com.

Joining me today are just blocking co founder and CEO , George Hill, COO and goes I'm not sure Chandler CFO .

As a reminder, some of our commentary today will be a non-GAAP terms reconciliations between GAAP and non-GAAP results and guidance can be found in our earnings press release a.

Additionally, some of our discussion and responses may contain forward looking statements, which are subject to risks uncertainties assumptions.

Should any of these materialize or should our assumptions prove incorrect actual company results could differ materially from these forward looking statements.

A description of these risks uncertainties assumptions and other factors that could affect our financial results are included in our Sep filings, including our most recent report on Form 10-Q , and our remarks during todays discussion should be considered to cooperate this information by reference.

These statements represent our beliefs and assumptions only as of today such statements are made.

No obligation to update any forward looking statements made during this call to reflect events or circumstances after today or to reflect new information well the occurrence of unanticipated events, except as required by law.

With that Oh handed over to you Jeff.

Thanks, everybody and welcome everyone to this quarter's earnings call before I begin I'd like to take a moment to recognize and take the nearly 5000 brave firefighters and other first responders doing their best to keep the fires and Sonoma County, a pay protecting the wives homes and livelihoods of our neighbors to the north.

In absolutely horrifying conditions. Thank you now onto our call.

Our third quarter results were strong with total revenue growing 75% tremendous growth. That's a scale that reinforces our view that we are still in the early days of this market opportunity. While we're the leader in the category today, we had much bigger aspirations, we are investing across the business.

In new products, new regions and much more to position us for long term success to take advantage of this fast growing market, we're very confident that the demand environment for our customer engagement platform and the importance to our business are strong.

Recognize the base revenue came in slightly below our guidance and because they know will go into more detail on that but that doesn't change our perspective that we've only scratched the surface and are excited about what lies ahead. We continue to help companies reimagine their customer engagement as every company needs to focus on building great digital it's pretty.

Incentives for their customers our commitment to innovation and customer success is driving relationships with companies of all sizes as the breadth of our product offering and our developer first approach physician twilio as the platform of choice for building meaningful relationships with customers I'm, particularly excited.

How about some of the new companies you started working with in Q3, which George will talk about shortly.

And nowhere witnessed developer first approach more evidence that our annual customer events should know, where we welcomed more than 3200 customers prospects developers and business leaders and introduced a number of new products and features and it signal I told you we had over 6 million registered developer.

It's on our platform well today that number is now north of 7 million and climbing innovation has always been at the core of Trolio and you can see that in the new products and features we announced that signal the biggest being trialed conversations everyone has had the experience of getting a message for brand only to find out.

The most times responding to that message doesn't work, but weve reached a point where customers expect this kind of easy frictionless engagement with brands and signal I mentioned, some brands will figure out the importance of meaningful two way conversations with their customers companies like Nordstrom, Macy's list redfin and others.

We put them in many customers, especially as we launched flags that they see this is an opportunity to transform the way they engage with their customers and that's why we don't conversations to make it easier for every company to build this kind of two way engagement across channels and deliver a better customer express.

Yes.

We also announced ads for Twilio celebrated a new offering within our marketing campaigns product to address the more than 300 billion dollar digital AD spending market.

Second good ads synchronizes across all of you know contacts and allows you to targeted ads across three of the major advertising platforms, Facebook Instagram and Google ads. This is all managed from a single you I am more importantly, the ads are informed by the intelligence of the email channel. So your ads can be.

Harder, we also announced the email validation <unk>, which validates email addresses before companies tend to them decreasing outrage and improving send a reputation inbox placement.

There's always a tremendous amount of energy at signal and this year was no different I want to think our team and everyone. Good tended for making this stuff best signal yet.

No. It's a great example of the innovation that Twilio continues to deliver to our customers and because of this innovation focus on customer success and our extensive customer engagement platform.

I was recently recognized as a worldwide leader it'd be I'd see marketscape foresee past being named this backfill icon of the seat past segment for our vision and strategy to drive digital transformation.

Important highway to the public school Yelp has almost single handedly created a new communication segment, and specifically mentioned our recent focused on solutions such as flags. This is great validation that our constant innovation and our vision of powering the future of communications is bearing fruit.

Speaking of blacks, we're continuing to see great interest and traction with the product as we just pass the first year of GA, what continuously innovating to add high valued features our customers are asking for it back and signal, we announced the media streams apiay to get companies to access the voice media of the calls coming in.

Reflects allowing real time transcription conversation analytics and more we also announced needed C.G.I. integrations between flux and Zendesk and brought autopilot GA within the flux Council, while it's still early for flex, we're seeing some great wins as companies of all sizes can.

Can you their digital transformation efforts and look to move their contact centers to the cloud to better drive omni channel customer engagement.

One of the other announcements we made a signal was verified by Twilio a new feature that allows branded trusted phone calls that are authenticated by Twilio. This is yet another step that we are taking to take back the voice channel in combat unwanted global color.

No I know that investors have concerns about the impact of locals and potential legislation on our business. We've talked about it on previous calls, but given the amount of noise I wanted to address it head on today.

When people talk about automated calls or tax there's really two kinds of behaviors they might be referring to automated unwanted calls and tax such as those you might get from a sportster and automated but wanted calls impacts such as those you might get from your child school to be clear, we do know.

<unk> support unwanted automated calls for tax on our platform since day, one we've had many preventative measures in place and since the beginning we have proactively kicked customers off of our platform grew up in bad actors. We welcome legislation that will further impinge. These bad actors and are working with the FCC.

Carriers Congress and industry groups to support this.

That said, we do support customers, making automated warranted calls and tax think about doctor's appointment reminders flight changes far alerts or emergency notifications.

There's a valid concern that legislation a regulation designed to target the bad actors could impact. These good use cases, so let me address what we're doing there.

Today, both the house and Senate and past wallboard called legislation that we support and we expect a bill focused on shaken stir implementation to be sign in the coming weeks as a reminder, should consider using digital certificates based on common public key cryptography techniques to ensure the call wouldn't number of.

Telephone call is not speak.

We've made great strides to help ensure calls and our platform will be signed under shaken stir and expect to have those pieces in place by the end of the year inline with the industry goal for initial go lives.

Just yesterday, we announced that we have joined the board of access the standards group, but there's no shaken sir.

Also a member of U.S. Telecom the industry Association, primarily responsible for advancing illegal robo called mitigation efforts and our general Counsel Karen Smith sits on the airborne with our involvement at Atlas in U.S. Telecom truly always furthering our commitment to protect voice and messaging channels partner with carriers.

Another boys providers to combat illegal mobile calls protect our networks and ensure we have strong federal policies that benefit consumers and businesses.

We continue to anticipate the carriers will proceed cautiously when blocking calls as they understand the consumers want and need to receive calls and checks from their doctors schools teachers, pharmacists and others and importantly, since carriers would given the option to automatically blocked calls back in June we have not seen in it.

Our customers traffic. However, even if you look at the most extreme case of carriers are legislation that allows the blocking ever wanted communications, including text messages. We currently estimate based on historical data that a single digit percentage of our total revenue could be impacted this is obvious.

Finally, the worst case scenario, but we expect the actual impact will be de Minimis. We feel confident that we are taking the necessary steps to ensure our platform is ready for these changes and importantly, the FCC as classified text messages as our title one service, which indicates that the.

Commission intends to keep this channel largely regulation free the carriers all support this approach as others in the ecosystem, including Twilio. So to close we are still in the early innings of this massive market opportunity as evidenced by the great customers George is about to talk about our.

Growth rate at this scale and the demand for our platform. We're focused on managing the business for the long run to help every company reinvent how they engage with their customers in this digital era I want to thank all of our customers for trusting twilio as their customer engagement platform and thank all the totally owns.

Around the world for yet another great quarter and for their enlist dedication to our customers and with that over to your George.

Thanks, Jeff our team delivered another strong performance in a third quarter as we continue to build out and go to market Foundation for the future for multiple initiatives expanding our enterprise presence expanding internationally and building a strong partner community and these investments are paying off in fact during the quarter, we signed new or expansion agreements with more than 50.

Global 2000 accounts, a great side of the traction we are seeing in the enterprise.

Internationally, we opened an office in Japan, having a strong executive and Yoshihiro Cano to lead the region.

We continue to see success with our engage road shows when we bring together a community to learn and develop the future of communications were holding a huge events around the world would stop coming to Washington, DC, Toronto, London, Paris, and Televisa in coming weeks.

At the signal, we heard from great customers like Netflix lifts Morgan Stanley and others on why they chose truly to power their customer engagement.

Let me highlight a few of the exciting deals from the third quarter.

We entered into the new relationship this quarter with the U.S. Department of Agriculture is national financed under the shared service provider for financial and HR services for approximately 650000 employees.

The U.S. da is using programmable messaging to authenticate air employed via SMS. When they are lobbying to review pay subs W. Twos for one k. allocations and more in addition to onetime password authentication the national financed under will use SMS to periodically sent account notification and reminders to their employees.

This is an exciting new relationship with one of the largest departments or the federal government.

We also expanded our relationship with time, the fastest growing U.S. Challenger bank platform focused on helping their members of Chief financial Health.

So comedy their incredible growth chime chose Twilio studio, our innovative digital application builder to build an inbound ivy are completely from the ground up.

I mean banking customers for any level of support on their account.

Our disrupting the banking industry and we're excited to support them on their journey.

Last year, we started our expansion in Australia, and we're excited by the progress there we entered into a new relationship with Westpac, Australia second largest financial institution and a global 2000 company, but the market value of Australian $100 billion.

Wes pack is rapidly expanding its digital efforts and needed a new solution for accounted for occasions for its tens of millions of customers.

Yes, actually trulia notify as its standard across its brand as we offered the most complete omnichannel platform with global scale.

We look forward to working together with Westcott, because they continue to meet the demands of the modern customer.

What continues to be top of mind for our customers and we've heard great feedback since you became GA in October 2018.

This quarter, we signed a new relationship with Alianca SC the world number one ensure and one of the world's largest financial services groups working with a close business and developer approach Alianca directs chose flux to power their customer and contact center agent experience in combination with our partner develop I'll answer Rex has rolled out flux in several regions.

We also entered into a new relationship a copy comm systems, a subsidiary of all of office depot that provides and managed services technology and consulting to enable the digital workplace.

As part of their strategy to Reimagine their customer experience copy conscious flex to provide more seamless customer interaction regardless of channel for more than 2000 agents.

These are both great examples of the massive shift into contact center space and we're excited to help companies the coffee comment aliano adapts to the changing needs of their customers the fully programmable flux platform.

The total sanguine cross sell efforts continue to progress well and this quarter, we had a cross sell weighted with a major global airline they've been a trulia SMS customer for a few years and in Q3, we expanded our relationship by adding Trulia sunbird email, which the company will use for millions of notifications each month, including flight changes checking reminders delays and more.

This was a strong team effort and shows the value of combining messaging and email for customer engagement I want to personally. Thank all of the amazing Sangar team members, who are working hard to make deals like this possible at all he built the product capable of supporting great customers.

As you expand our penetration into a market like travel well continue encouraged that this opportunity truly spans companies of all shapes and sizes.

On the I don't see fine, we signed an agreement with Mason, a leading mobile infrastructure as a service provider Forbes called petroleum for tablets needs. There was created to help companies building scale smart hardware products and its customers have used it services for ordering kiosks patient engagement in hospitals and more they were looking for partner to scale their edge computing business and tried to Twilio Super.

Tim to connect to customize tablets, they built for their customers.

While the I don't see market. It's very early we're excited about the continued traction of our IR GE offering.

Overall, we're well positioned as we head into Q4 and into 2020, we're making the key investments a fuel continued growth going into next year and we'll continue executing our strategy to grow our enterprise presidents scholar partner ecosystem and expand internationally with that I'll pass it over to because Emma.

Thanks, George and good afternoon, everyone Q3 was another strong quarter for the business high growth at this scale is a testament to the powerful iOS platform and showcases how our customers continue to choose twilio as their trusted customer engagement platform.

Now diving into the numbers based revenue, which includes trulia send grid grew 79% year over year to $276 million in the third quarter organic base revenue for Trolio was $227 million growing 47% year over year.

Trulia sangria grew 31% year over year to approximately $49 million.

As Jeff mentioned, while the growth was very strong base revenue came in a bit lower than we expected we've experienced rapid growth with that comes from growing pains. Consequently, a few of our older systems, sometimes fall short of where we'd like them to be.

We faced some of these growing pains in the third quarter as we discovered some errors in our billing processes that resulted in a few 110 credits being issued the customers totaling approximately $5 million, which will also impact our ongoing run rate importantly, our internal controls identified these errors and we understand the root issues.

And are working to improve our billing related processes and other systems. We will continue to invest in systems to support our strong growth trajectory into the future.

Let me take a moment to discuss our current revenue disclosures and a change we're planning to make.

Given the size and scale Trulia has achieved we believe the variable revenue designation has become less meaningful and that total revenue is a better way to evaluate the overall business variable revenue has materially declined as a percentage of the total 7% this quarter, 7% last quarter and less than 10% in 28.

I mean prior to the closing of the secret acquisition versus 16% in the quarter before we went public.

Accordingly, beginning in Q1, 2020, we will no longer breakout based and variable, but we expect to continue to disclose the contribution from what SAP through 2020, which constitutes the majority of the variable revenue category.

One important note regarding this change is that dollar based net expansion is currently calculated on base revenue. So we will be shifting the basis of our expansion metric to total revenue on an ongoing basis and we will provide historical data using total revenue to normalize your models.

Dollar based net expansion rate was 132% in the third quarter, a very strong rate at the size and scale, especially coming off of difficult compares from 2018.

Additionally, the credits I mentioned impacted DB any by a few points in the quarter as we approach. The ended the year, let me provide a bit of context around what to expect for expansion rate over the next several quarters first recall that strong political traffic and the ramp of a large international customer benefited growth by about 10%.

In Q4, 18, and we do not anticipate those to occur again, this year, making for a difficult comp in Q4.

Second Sandridge historical dollar based expansion rate had been about a 115% give or take a few points in any given quarter and will therefore lower the overall expansion rate once combined next year.

As you May recall Syncrude was acquired on February one 2019, and therefore only contributed two months to our Q1 2019 results as Q1 2021 of the benefit of an extra month of revenue from San grid. Our expansion rate will also benefit we expect a sequential increase from Q4 to Q1 before.

Impacting the combined expansion rate will be realized in Q2 2020.

Moving on we had approximately 172000 active customer accounts at the ended the quarter top 10 active customer accounts contributed 13% of total revenue in Q3 flat sequentially and down from 18% in Q3 2018.

Gross margins were 58.4% in the third quarter within the mid to high Fiftys range, we've been communicating.

Going forward, we continue to expect to operate in the mid to high Fiftys, while the normal puts and takes customer product country mix carrier fees, FX and others may cause minor fluctuations it'd be carrier fees had no impact during the quarter as they have still yet to be implemented.

I do not have any updates with regards to timing, but we will provide the piano impact during the earnings call post implementation.

As anticipated operating profit was slightly in the red coming in at a loss of $3.6 billion, primarily due to signal our annual developer and user conference, which was held in August . Additionally, we refined our process for accumulating inputs that feeder capitalized software process, allowing us to make better estimates.

This could potentially reduce the amount, we capitalize and more closely align our PNM with cash usage.

As we get into Q4 in fiscal year 20, we see a tremendous opportunity ahead of us to continue to increase market share and grow the company.

George has talked about some key priorities in the go to market efforts, we believe investing in these areas today as well as our product innovation will position us to take advantage of this massive market opportunity in that context. We now expect to finished 2019 with a slight operating loss versus our earlier guidance of $5 million to $8 million.

Profitability, we believe these investments will drive multiple years of elevated growth.

Staying on profitability for a moment, while we're not optimizing for this today I want to reiterate that this is an important long term focal point for the company. We are in the early stages of a number of changes internally to drive efficiencies over time.

Including changes to strategic sourcing working capital and stock based compensation to name a few we've heard your feedback on our stock based compensation dilution and are actively working during both of those numbers down overtime. Some of these levers will also closed the delta between GAAP and non-GAAP results, we don't have an.

He specific items to highlight today with regards to these items, but we will provide more information when the time comes ultimately the investments being made today enabled SILEO to extend our market leading position and take full advantage of this generational opportunity.

With that thank you everyone for joining and ill now open the call for questions operator.

At this time in order to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound key.

Please standby, while we compile bikini wax there.

Your first question comes from the line.

Hi drawn from Oppenheimer.

Thanks, Hey, guys.

Hi, Chris Meyer, just because they might want it to really focus on this.

Systemic issue of about $5 million credit just to make sure.

I understand is this a cumulative effect over multiple quarters. It has to be clear in a quarter or this is just happened in this quarter itself and.

Help me get my hands around this.

Yes, it's a little bit of both.

So thanks for the question.

We said on the call I think.

Just based on the growth that we've experienced as a company I think one of the things that we've looked at is that our systems are going through some growing pains as we explained and this particular issue was related to our billing system, where specifically some.

Order forms were input incorrectly and sort of a manual fashion and obviously this is not the experience that we want for our customers given that customer trust is really Paramount and we went back and did a thorough analysis of the problem and once we found some of these manual inputs, we probably issued credits to the customers that were in.

Impacted and there were a couple of them that were in the quarter. There were a couple of them that were preceded a couple of quarters. We think we've got a good handle on what caused the errors historically and we've got controls in place now to address this going forward.

So just to make sure as I think about the shift from September actual results to December to September results already.

This credit the into effect fully into effect than December is now guided with this in mind.

So still theres very little quarter over quarter growth in your core business from September to December I, and I understand it last year you had that.

At one time.

The political the mid terms and the one time large customer, but it seems like business activity or the volume of for tough transaction is still decelerating quite substantially from September to December is there anything else in here that you think requires highlighting and understanding this.

Yeah, I wouldn't characterize it that way, let let me give you a little bit of the financials and then I'll have Jeff gives you a little bit more the detail and George as well maybe from a customer perspective, I think in terms of the December quarter, we did take or guidance down by a bit more than the ongoing run rate.

I think we feel like we've got good handle on the issues and we're certainly actively working there correct them, but I think we felt it was warranted to put in a little bit of an extra buffer and so we're absolutely certain that all the issues are addressed and we're not necessarily quantifying that but I think we felt like it was prudent to do so as we work through the fixes that are that are entailed.

With that as it relates to kind of the year over year I mean.

Anyway that you look at it really we feel like that we've got terrific growth at scale that it's really impressive the comps as you mentioned.

We've signaled for a long time, we're going to be difficult in the back half of the year you pointed to the political traffic I think we reiterated again for example that we had.

Kind of a onetime customer that ticked up, particularly last year and I think we've been pretty clear that around our expectations that the growth rate and expansion rate would slow down a little bit in the back half of the year just maintaining these rates is obviously hard at this size.

And then again the credits that we referenced those impact a little bit our base revenue growth as explained a moment ago, and we'll have a little bit of an impact on on DB any too, but we still feel great about where the business is headed and let me turn it over to Jeff maybe to add a little bit more color, yes page I. So I mean, despite the manual errors I think we turned in a quarter.

Going forward from 7% year over year organic at nearly 1 billion dollar run rate and so I'm really proud of what we've accomplished so we're one of the only companies growing at this scale at this rate and we're very proud of that we're focused on the long term opportunity. This is one of those once in a lifetime changes that's happening and how companies engaged to their customers using all of these new did.

Digital channels, and we heard to capitalize on that Mega trend and we're hearing all the right things from our customers about what they need and our ability to provided so I look at it. It's a great market. We've got a great business model, we've got a great team and I see them all getting better as we grow so I'm really excited about what lies ahead.

Very good luck guys.

Hey, good luck.

Your next question comes from the line NAV Evine Terry from William Blair.

Hey, guys. Thanks for taking my question.

So the billing prior to that because I guess I did want to touch on the dollar base net expansion rate.

Even if we had a few hundred basis points from from the credits the billing.

Issue it feels like it decelerated.

Reasonably quickly I guess I'd, just like to understand sort of obviously scale matters, but it was.

Basis point or 100 beds to 200, Bips and that's just trying understand.

If you could provide some color dynamics that affect this metric I guess are you seeing changing spending habits when the customers or was it just the volatility of how applications have launched the dries up and down.

The speed of that I guess, just some of the color would be helpful.

Yes, again, let me provide a little bit of the math and then maybe I'll have George comment from a customer perspective in terms what are you seeing but I guess just as a as a starting point I would say.

The short answer is no again, maybe just to reiterate but I think from our perspective I mean the growth at the scale that Weve reached is really strong and I think again, we always knew that we would have pretty difficult comps in the back half of the or if you recall Q3 18, we had growth that was approximate that was approaching.

Saying, 70% and then going into Q4, we had growth it was approaching 80% and we had a little bit of political traffic in there that was elevating that than we had this onetime customer that we actually tried to back out of the results last year to try to normalize it a little bit.

That had an impact as well and the expansion rates back in that period and so as we lap the year I think we've been pretty clear and our expectations that DB any would in fact fade overtime in part because of the comps in part because the businesses just becoming a lot larger and we're running into the law of large.

Numbers and then the foot fold in this if you will as this manual error issue that we that we elaborated on as it relates to billing associated credits and so you put all that together and that's what kind of results in the math that you saw in the DB any that we got in the quarter, but I don't think it's anything related to some of the issues.

That you pointed to but but let me turn over to George and he can color on that a bit more.

Sure. Thanks to the amount I mean, I would say that we don't see any fundamental change in our demand environment, we still see a lot of interest from customers and we havent fundamentally going to shift except for some of the dynamics that because then we talked about which are nothing to do is really our customers. We're excited we're investing and we still plan to capture the opportunity in front us.

Okay helpful. Let me, let me quickly just as a follow up on flex here.

Nice nice win there I guess, maybe George but maybe touch on what sort of demographics are you seeing from the early adopters and then how are the initial conversations going with the var channel to something you would I've talked about multiple times in the past systems get called those two thank you.

Great question, So I mean in terms of the demographics so to customers.

I would say generally speaking it was consistent with what we said before you know it's still a newer products. So we're still mostly in the early adopter phase we have a lot of interest from kind of digital economy customers and a very techforward companies. We're excited now with all the all is a copy calm just started to.

Let's see the beginnings of expanding not more towards the mainstream but I would caution I. You know this is not the the normal pattern or not yet.

We haven't yet crossed the chasm, it's still into our product, but we're excited about these green shoots and I think it speaks to the power of the value proposition of the product in terms of the partners. We're excited about the traction we're seeing there and as I've mentioned I believe in the past you know we've not really historically, it's really had a strong.

Our reseller motion or frankly infrastructures for resellers.

We've been investing in that this year.

And our bringing some some initial resellers onto that platform. We're testing it right now I think it'll be something that we'll be able to onboard more in 2021, I don't they will be material for a while for us, but we are investing in and certainly I think flux is definitely the catalyst that is growing interest in that for us.

Great. Thank you guys.

Thanks, Brian it's Rob.

Your next question comes from the line now Mark My fee from JP Morgan.

Yes. Thank you the could zima, the 5 million dollar billing impact to Q3 is it also 5 million in Q4 and I'm just wondering for for how many quarters do you think that would continue into 2020.

Yes. Thanks for the question Mark Good question I don't think.

We see it necessarily continuing into 2020 in the way that your question intimated I mean, obviously.

It will impact kind of the way that we evaluate our run rate from an M&A perspective, but in general I mean, we feel pretty good about.

How things look after Q4 would obviously not guiding to that today. So I don't want to get too far down the road on that one but as it relates to Q4 itself and the way that we characterized our guide.

As I said, a moment ago. It definitely does have an impact on the ongoing run rate.

It's about a full $5 million I think as you probably.

Understood based on the comments that we gave a moment ago.

It is a little bit we have put a little bit of a buffer if you will into the way that we've guided into Q4, just until we have our arms fully around the issue. We just felt like did that was the smart thing to do in terms of the way that we communicated the way that things would play out for investors and while we feel like we have good handle on the issue we do want to get through all the fixes.

But it's kind of a onetime thing in Asia, we feel we caught it ourselves and we think were more or less out of the words, but we want to be smart about the way that we convey it.

Okay, Great and then how many customers will be receiving the credits.

I don't have that number off the top my head markets pretty small I mean, we're talking about a single digit number. So I don't know it also have but it's in that realm.

Okay.

The other question I had for you I think we're looking at base revenue growth if we look at it sequentially.

It's around 7% in Q3, and then you're guiding about 9%.

For Q4, and if we if we trended that out and just considered how that would look across four quarters. I think you would get us to something like low thirtys two to mid Thirtys and so I'm. Just curious why would you view that as a fair assessment of the glide path on the base revenue currently.

And maybe how we trended into next year or would you look at this and say, it's it's artificially constrained I guess again due due to the.

The billing errors and what sounds like a little extra Christian for Q4.

Yes, Mark I'm, just not going to comment on anything into 2020, I mean, we'll all guided that obviously when we do the Q4 call I would simply say that in the back half of this year, we have some tough comps as we signaled previously we obviously had the political we had.

That one time customer that we've alluded to previously and we've got this billings thing and so you know where you're going to have to kind of put that together in your model, but I think we just not in a position to be able to guide out too.

So beyond 2020, I, what I will say is is that we feel great about what the results were in the current quarter, 47% organic in spite of the conference bite of whatever the self inflicted issues and we feel great about the overall inputs to the business.

Thank you.

Your next question comes from the line Brent Bracelin from Piper Jaffray.

Yes.

Thank you and good afternoon, one for because im and one for Jeff if I could because im I want to maybe take a little different slice at the said the slowdown you saw here I just look at.

The top 10 customers contribution.

Yeah versus the revenue outside the top 10, it looked like.

The bulk of the slowdown in effect you had $11 million sequential decline in revenue at the top 10, but growth outside the top 10 actually accelerated from 84% growth.

5% growth in the quarter. So as you think about the cohort of top 10 customers that did decline.

Is it safe to assume that that's where some of the bulk of the credits were applied and maybe could you just to talk about net expansion rates looking at this cohort outside the top 10 that actually accelerated in the quarter is their broad base changed the net expansion rate or do you think some of these top 10 customer decline.

Actually.

Our having a bigger impact on just that calculated net expansion rate and then again one quick follow up for Jeff.

Okay.

In that particular question.

So just to start off with.

In terms of the credit itself and where that was placed or the credits.

There were as I said earlier, there were a handful of on single digits.

There were a couple different customers that.

Would've been in our larger customer base I'll start my head I don't think they were in the top 10, maybe top 20, but among our larger customers to be sure.

In terms of the overall dollar value generated from that top cohort of customers.

We're.

Tripling that up here, but I think overall that was up actually on a quarter to quarter sequential basis and so.

You know feel good about obviously, the fact that the percentages to of total was about flat, which speaks to the concentration of our overall top 10.

Kind of holding steady or declining as time goes on but.

I think the premise of the question is is incorrect will follow up on the exact math with you offline or in the call backs, but I don't think Thats right.

I thought it was 18% last quarter, 13% top 10 next this quarter. It was 13 last quarter 13 this quarter.

That's right that's right.

Okay, and then Jeff are you getting some questions around Rcs, obviously, you saw four months ago, Google going kind of direct with Rcs.

Four months later, but that was in Europe for months later now you have ryzen sprint and T and T mobile joining up.

I guess the question we're getting from from investors here is how should we think about the potential impact of pricing relative to kind of this next gen SMS Rcs service.

This new consortium and what that has to do what potentially impact it could have the overall business. If you think about the next couple of years. Thanks.

Yeah, absolutely Brent Thanks for the question about Rcs. So first of all too has supported Rcs since early 2018 and were strong supporter of Rcs as a channel and just as a reminder, you alluded to this but think of Rcs as an upgrade to SMS right. So the reaches similar economics are similar but it adds new capabilities.

Is that you can do within the message things like commerce or maps are called action buttons and more and this is really exciting because we end the developers building on twilio can build even more rich experiences inside of the core messaging App that's already on all the Android phones, and so that's really exciting it opens up new opportunity is now the.

My the cost carrier messaging initiative that was announced by the four carriers in United States. This week is about building interrupt between those four carriers, which we view will hasten its implementation and its rollout which is good so that we and our customers can really start leveraging it because the promise of Rcs has been out there for a long time, it's just.

All been dependent on carriers rolling it out and when you get the top four carriers in United States agreeing on rolling it out and how they're going to do that and optimize each other that's good it means that our customers can get the benefit of Rcs, probably sooner than if the four carriers werent interrupting and cooperating on the suffered.

Your next question comes from the line of Nicole May be Leo.

Hi, Thanks for taking my questions. My first question for bulk charge and consumer when you look at the expansion that I, specifically the cost them a cohort outside of the top then.

What are you seeing other new venue cohort trending in line with all the cohort.

And Bob My question is are you happy with expansion that type of the older cohorts.

Hi. This is George you have for our newer cohorts I wouldn't say that the expansion rate characteristics to them have changed materially from quarter over quarter.

Okay, and I get a different question for you both sales and marketing as percentage of revenue picked up for the first time about 25% for awhile.

Historically, 20% to 25% of revenue is 25% to 30% kind of like the new normal in terms of like sales and marketing spent as you guys overlay of direct salesforce.

Yes. This is because aim I wouldn't say per se that it's the new normal I mean, I think what we've said for a while is that we feel like that we want to continue making investments in the sales and marketing engine.

So long as.

So long as we believe those investments are efficient I think the one particular outlier as you look at the Q.

Excuse me Q3 number is signal, which shows up as a large onetime expense and also is a driver for the loss that we took in the quarter. So I think your can vary a little bit of an apple and an orange there in terms of Q to Q2 to Q3.

Got it thank you.

Yes. Thanks.

Your next question comes from Alex docking with RBC capital markets.

Hey, guys. Thanks for taking the question so maybe just.

On the favorite topic of dollar based that expansion again.

In terms of the guidance for Q4.

If we add and I know this has been asked a little bit but am I try to differently. If you add back the credits you do still see a fairly material drop off that I think I mean by our math.

Correct me, if im wrong looks like it's in the very low one twentys for Q4, you mentioned, both the extra cushion and the bounce back.

In Q1.

In terms of dollar base that expansion and then the Anniversarying.

Completed completing the anniversary. So is there anyway, you can help us just.

Understand kind of which ZIP code should we be thinking about for a sustainable dollar base that retention.

Is it into one twenties is in the one teens as it is at higher than that just any help there would be appreciated the quick follow up.

Yes, I'll give you just because AMA. Thanks for the question I'll give you a little bit of directional math that we don't guide on DB any specifically, but all I will try to help you in terms of updates your model I think the way to think about it as this is that in Q3 in Q4 boats as I mentioned earlier, we had an extra.

Namely elevated growth rates in Q3 gene in Q3, nine skewed Q3 aging Q4 18 and.

Approaching 70% in Q3, and then approaching 80% in Q4 and as a result, you had this onetime political dynamic obviously, which contributed pretty significantly and then you also had this onetime customer that we called out and so those impacts are obviously stripped out in the back half of this year in the absence of an election and with that customer.

Our behavior, having normalized the second dynamic is is that as you pointed out you do have this credits issue.

Which also affects a little bit our revenue run rate into Q4, as well and so you do have a little bit of a fade in both Q3 in Q4 relative to prior periods in terms of that overall DB any.

And so again I mean, we don't guide on that number specifically I think you're a little low.

Based on the way that you marked it but I don't want to provide any real specificity beyond that as we get into Q1, it becomes a little bit more complicated obviously, because you've got to January stub maam.

And then you've got the anniversary of the standard acquisition at which point, we'll start to fold in that DB any with their overall the be any which just by definition is going to make it come down a little bit.

But based on the way that we're currently calculating it what I will say is that we don't expect that combined rate to come down as much as I previously suggested and again, we're not providing guidance around it for Q4 out into 2020, but we feel quite good about.

Continued expansion out to 2020.

Got it.

And then maybe just a follow up.

For George on Flex adoption.

You signed a nice customer Allianz I think there you guys have previously talked about this business potentially being a pretty meaningful contributor to overall revenue over the next few years and I'm just curious.

How should we think about this business.

Over the next two years from a contribution to revenue perspective.

On a on a decent timeframe.

Most George so without commenting specifically on like revenue time frames I'll, let cause them to take that on.

The question adoption, we are excited about the adoption, we're seeing of our customers and I think that's obviously people that are.

Interested in buying flats are obviously talking to our existing customers and I think that's a that's that's a sign that we are seeing success with existing customers in the field and we're encouraged by certainly these data points kind of continue us on our our journey and like I said, it's a long long journey, our early but whats.

A huge market opportunity, we think we're very differentiated value proposition and yeah. We definitely think that this is something that has the potential for the long term to all the meaningful.

In terms of its contribution to revenues because aim I think.

It's in our revenue today, obviously, when we generate revenue off of the product.

Today, and obviously that will continue to grow as time goes on it's not really a material contributor to revenue yet we certainly expected to be overtime I think what I've signaled in the past is that our expectation is certainly that that would happen over the next several years and we expect that to be a fairly material number as time goes but I think in terms of its material contribution.

Into revenue I wouldn't really anticipate that until really the back ended 2021, maybe 2022, but you know as George said, we feel great about where things are headed and some of the most recent customer wins.

Perfect. Thank you guys.

Thank you.

The next question comes from Heather Bellini with Golden Goldman Sachs.

Hi, This is Dan church on for Heather Bellini I just have a quick question. It's been about nine months since the Sungard acquisition any color commentary you could give us on in terms of how cross selling initiatives have tracked relative to expectations.

Yes, Hi. This is this is George yes, I mean, I think you heard our or example of the airline.

We close in Q3, so I would say generally speaking we're on track.

We've.

Fully integrated at this point the Salesforces.

And we are going together to existing customers and new customers to to cross sell across all the products. So.

Yes, I think I would characterize them as on track.

Helpful. Thanks, I think there are some I've asked thank you.

The next question comes from the lineup Mehta Marshall with Morgan Stanley .

Yes.

Great. Thanks I.

I wanted to refer to kind of the extension agreement you alluded to in the prepared script and just to get a sense of timeline of those contracts close or perhaps more broadly you look as you head of applications, what you're seeing around sales cycles, when they're not dealing directly with the developer and then maybe on a second question on gross margins, obviously remains very healthy.

In the corner is there any customer account churn, we should be kind of thinking out from pricing competition or deals that you kind of walked away from thanks.

This is George so I would say that in terms of the sales cycles I.

I think I think you asked a good question in the sense that we definitely do you see two types of sales cycle I think the ones, where we have a developer self service start in the accounts are definitely.

Can be relatively shorter cycles and in our commercial segment those can be intra quarter transactions at times, so start and complete within the quarter.

For as we've said for example on the other side of the spectrum of reflects which typically is not going to be started by self service developer start it's more of a sold products so to speak.

We've been saying now that for for enterprises. These are going to have longer sales cycles of and I think we're seeing that to be true there, having what I would describe in more normalized.

Enterprise enterprise cycles, and I think thats frankly to be expected and I think is totally fine.

In terms of came I mean, the second half your question I guess margins gross margins in terms of customers, leaving and we haven't seen like a a material change in like churn or logo churn customers, leaving.

From that perspective, so on a because they must providing more gross margin color, but that's that's what we're seeing this yes, I mean as it relates churn I think George answer the question I think the only other thing I would say about gross margins is it's in the zone that we.

I have been signaling for a long time, it's kind of where we expected to be the only thing to really call out as it was clips by about 60 bips due to the billing issue that we've talked about a lot. During the course of this conversation, but otherwise you know it moves around a little bit within that zone due to a variety of factors and we've talked as the best.

Great. Thanks.

Your next question comes from the lineup.

Don.

Lottie with Guggenheim partners.

Hi, Thanks for taking my question.

So as you.

Merged the basic and variable revenue streams.

What maybe.

Wait to to think about leading metrics as we head into next year.

Well I mean I think.

Maybe just to take a step back for second I mean, I think the reason that we're doing that in the first place on I think that variable revenue designation.

Has become a lot less meaningful certainly in terms of the way that we manage the company internally the way that we run the company and so I think it was a change that we felt like we should make it was certainly something that I've been thinking about a long time and since I joined the company.

But kind of wanted to see the way that it would play out this year.

Terms of that particular metric its also declined pretty substantially.

In a 7% of revenue now so I think what you'll see from us going forward around growth Assembly that total revenue.

Instead of necessarily breaking out base or variable we talked about the fact that we would continue to provide some data around whats app given what a significant percentage of variable revenue that's been in the past.

But otherwise I think we feel pretty comfortable around.

Total revenue as the metric will obviously report on things like DB, any and ARPU et cetera, but otherwise that's the suite of metrics that you should expect from us.

Thank you.

The next question from the line that will power with Baird.

Great. Thanks, Yeah, just a couple of follow up questions, yet because I would just come back to just quickly to the adult based expansion rate I guess the one other piece.

Maybe I missed.

I think you said you've pulled the variable revenue.

Into that calculation as well was that was second that began in 2020 that you do that and what's what's the anticipated impact just in terms of kind of level setting in front of the firm again, what's happened the variable revenue being part of that.

Hi, well.

You mean on DB any specifically, what's the impact associated with folding in variable as part of the total Cal.

Yes.

Yeah, I think its can be pretty de Minimis honestly, I mean, I think thats one of the many reasons that we've been thinking about doing this for some time I think you won't see immaterial impact I mean, there could be an impact plus or minus 100 basis points.

But I don't really think it'll be material and something for you guys to think about.

Okay. It was our second for the question.

Yes that was that I, just wonder whats the timing of the change the timing of.

Yes, sorry, the timing of the changes, we'll make that change in Q1.

And we'll provide you all with a bridge.

To make sure that you can see the different moving pieces. So we're not just bringing a number on you guys for the first time will kind of walk it through.

Okay, and then maybe just a question.

For.

Jeff or George just the conversations.

It seems like a lot of excitement that signal from that recognized.

To here, but any any further color you can provide on early use cases customer feedback.

You're thinking about the excitement here, saying is that.

Yeah moves into 2020.

Yeah, absolutely well this is Jeff so just a quick background, we launched conversations to help companies to connect better with their customers that we have like we've all that experience. A few years ago is kind of novel when you've got a text message, saying your your flight was delayed or your flight was boarding or packaged got delivered and that was exciting.

Then when you replied to the message it was like nothing would happen in the Bakken automated thing that side, if you need help call us like its solid great experience and so what we're seeing the leading companies out there do is say hey, look obviously has a lot alerts and things like that and then you should have applied and the company's spend a lot of simply you can best healthier sometimes it's an in store employees, sometimes it's a contact center employee.

It's a variety of workers, who instead of like 20 years ago. All these people may have been sitting at dusk till the desk phone and now people out and about they've got to be LTE device in their pocket and messaging is the for medium and so really the way consumers connect with the employees of the company has changed in conversations is the product designed to capture that change and enable every company to.

To be able to service their customers in the wave that those customers really want to talk to the company.

I will say that's brand new product, obviously, we just announced it at signals. So it's a beta product. So it's a very early stages that product, but I think theres a macro trend here going on that starts as often happens in the consumer will with how we engage with each other and then bridges into how we want to engage with companies and like that notion that I want to Texas with the company is that.

So you know just in the past its been a one way thing for most companies and what conversations we're trying to answer the call of making that a two way dialogue and what I'll say is that since we announced conversations no. No pun intended it's created a lot of conversations with customers and so I think we've struck a nerve there and it started to pick interest from customers, but it's.

Super early in the lifecycle that product.

Yes. Thank you.

And your last question comes from the line Rich Valera with Needham and company.

Yes.

Follow up question on send grid.

Doing the math it seems like it grew just over 30% in the quarter, which is I think a little better than it's been growing recently and well above the I guess, the 25% sort of bar you'd initially set so I'm just wondering given that you're still I think somewhat early in the cross sell process, where you think the growth rate for that could go in could.

We see that.

Sustained at a 30% plus growth rate in next year as as you kind of really flush out the cross selling initiatives.

Yeah, Rich hi, this is because AMA.

In terms of the growth rate for the quarter. It came in at 31%. So your math is ray just about 30 31.

We feel pretty good about the growth prospects of the business M&A again, we're not going to guide out into next year, but I think as I've said previously you know we would be disappointed I think if the growth rate fell below that and I think we have a really great shot at it being above that and so thats kind of in the zone of our expectations again I want to provide any like detailed guidance around the number.

Yeah, but our expectations of consistently been.

Somewhere in that range.

That's great just one follow up a kid on the expense side should we think of the for Q.

<unk> expense levels, that's sort of the run rate for going forward and sort of scale scale upward from them as we head into next year are there any or is there anything exceptional in Q4 that we would back out or is it sort of a good run rate to serve as a base going into next year.

Yes. That's good question I mean, I think we're still figuring out what the 2020 plan is going to be right. So I wouldnt, one way or the other read anything into Q4 necessarily I would I will say is this is that I think the way that we think about it is is that so long as we see multi year elevated gross adds scale.

We certainly see great opportunities to put investable dollars and so there's an opportunity for us to continue investing and continuing generating great returns for investors Theres nothing one time per se.

But otherwise we're looking at our investment deck for 2020, as we speak and those are the kinds returns that were expecting is kind of what you saw in the Q3 from us 47% growth organic at scale and hopefully we can deliver something elevated in the future.

Okay. Thank you.

There are no further questions at this time. Thank you for participating in today's conference you may now disconnect.

Good bye.