Q4 2022 Twilio Inc Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Twilio fourth quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one.
We asked today that you limit yourself to one question and one follow up thank you.
Brian Vandeman SVP Investor Relations you May begin your conference.
Thanks, Tim and good afternoon, everyone and thank you for joining us for <unk> fourth quarter 2022 earnings Conference call.
Our prepared remarks earnings press release, Investor presentation, and SEC filings and a replay of today's call can be found on our IR website at investors that Twilio dot com.
Joining me today for Q&A are Jeff Lawson, <unk> co founder and CEO .
Elena Danielle President of revenue.
<unk> Chandler CFO .
<unk> SVP of PMA as.
As announced in our Q4 earnings press release, Elena <unk>, and we'll be transitioning into their new trulia roles effective March one.
As a reminder, some of our commentary today will include non-GAAP financial measures and key metrics reconciliations between our GAAP and non-GAAP results and further information related to guidance definitions and key metrics can be found in our earnings press release and the appendix of our prepared remarks, both of which can be found on our IR website.
The information provided and discussed today also will include forward looking statements, including statements about our future outlook and goals. These forward looking statements are subject to known and unknown risks uncertainties assumptions and other factors that are described in more detail in our most recent periodic reports filed with the SEC, including our most.
Recent report on Form 10-Q, and subsequent reports on Form 10-K, or Form 10-Q, and any amendments to any of the foregoing and are available on our website and at SEC Gov.
Forward looking statements represent our beliefs and assumptions only as of the date such statements are made.
Actual results may vary significantly and we expressly assumes no obligation to update any forward looking statement, except as required by law with that I'll hand, it over to Jeff for some opening remarks, then we'll open up the call for Q&A.
Thanks, Brian and thank you all for joining US today as you may have seen we've made a number of significant changes to our business that we believe sexually off to perform in both the short medium and long term.
As I mentioned in my prepared remarks, we are confident that this is the right set of actions and the right path forward for our customers for our teams and that will enable us to create more value for our shareholders and I am sure. Your question, So let's hop right into it.
As a reminder, if you'd like to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of meta Marshall with Morgan Stanley . Your line is now open.
Great. Thanks, I appreciate it.
Maybe a couple of questions for me first maybe to start I know at the Analyst Day, you guys had talked about a lot of pain does it you were making to kind of the data and application sales force and just the driver to growth that that would be in the future and just you know as you have gone through the process of splitting the business units.
Just where do you think you are on some of those initiatives.
I guess kind of as a second question to that.
Where do you feel like there are synergies or dis synergies from kind of a split in the segments as far as kind of getting customers to go from communications customers to kind of does data and applications customers. Thanks.
Hey me to ethylene Antonio here. Thanks for the question a couple of things that you hit on there I'll take them in turn and then pass over to Jocelyn can add a little bit of extra commentary.
First question was about the data and applications business and kind of current state of growth.
Where we're at in terms of that transformation that we've been talking about we had that one first.
Silicon across the last couple of quarters about.
Investment there and about growth there, we also addressed a little bit of sort of the trajectory as it related to the beginning of last year and a couple of missteps that we made along the way.
We actually feel a lot better about that business and trajectory now and we believe that this movement and separating our sales forces into these business units more discretely is actually going to further amplify and accelerate that growth. So.
Obviously revenue growth lags bookings, we feel good about where our Q4 landed across our data and applications business and we're also confident in that Reacceleration I talked a little bit over the last couple of quarters about the hiring that needed to be done there the onboarding and the enablement of those.
New routes, we feel really good about having built out those teams with the right set of skills and the right capabilities.
Doing some internal transfers as well as hiring from the outside with the right set of sub scale. So.
Im really confident in how that's turning we've also talked about the macro headwinds those continue in a couple of areas the lengthening of sales cycles.
Pushing out of decisions and things like that from time to time.
But with all of that in mind, we feel really good about the things we can control we feel really good about the investments that we've made and the trajectory ahead.
And we also have really.
Still believe and we should and we don't think that this movement across two different business units should say anything different there is a better together story here our products really amplify one another but what we found is that having very specific sales focus across the unique needs of each of these buyers is.
A really important one and we think having moved our segment in black tea flex teams into separate spaces last year started that momentum building and now this business unit move is one more step in that direction.
Yes, I think that had both of the questions that I'm going to have a job for a little bit more commentary yes.
Yes, Thanks, Matt I think your the second part of your question was really about like synergies dis synergies et cetera. So I'll tell you how I think about it every customer.
Who comes to us for communications like they actually have a use case in mind for how they're going to engage with their customers they need.
Voice, maybe it's because they need a contact center related messaging for identity verification refer for customer contact to way the email for our marketing use case right. There is finite use cases for the vast majority of things people use us for in these use cases kind of cluster together. So we have this opportunity to ask customers.
What are you trying to accomplish what have you what.
What are you trying to do with our platform and by the way have you looked at this other part of our platform that may actually help you achieve that better faster and cheaper in some cases, our applications create value for customers by answering their need in a more direct way over the communications channels that we then just used to execute the delivery of those messages and so.
I think this is how this space is going to be one over time is getting at the why customers are sending these messages and doing these communications with our customers in.
In addition to powering the messages themselves. So you might say John the two business unit structure, while it seems like that makes it harder to actually bring these two worlds together.
First washed out.
That may have been the periods, but today, let me say, what we've learned what didn't work.
So if everything lumped into one back of et cetera.
And we've talked about that recently passed away and that just hit on it right. So at this stage what we're focusing on this unique needs of the various buyers with special specialization and focus.
But we're also going to collaborate and partner utilizing our own data and intelligence to uncover opportunities to incentivize cross team collaboration.
And to go understand which of our customers need which of these use cases, and therefore would be really good customers of our applications and our data stack.
I think it's important to distinguish here. This is the important part.
Between the short and medium term and the medium and long term because in the short to medium term. It is clear that we've got work to do to make communications more profitable and to take our data and applications business and execute on the sales model, but I see these things as foundational that the current environment is.
Setting the stage for us to do but we're getting better at using our data to drive these cross sell conversations.
In things like marketing and our automation, but also in our sales conversations and then over time, we build more and more products connectivity between these various products and it's obvious how with better customer data in terms of segment, we can power smarter better more effective communications and that drives more usage of our platform and so I think that's.
How the synergies play out, but you do have to look at it short to medium term medium to long term.
Great. Thank you.
As a reminder, we ask yourself to limit yourself to one question and one follow up thank you.
Your next question comes from the line of Mark Murphy with Jpmorgan. Your line is now open.
Thank you so much and congratulations to all the new folks who've been promoted.
First question is regarding the $250 million to $350 million non-GAAP operating profit that you expect this year should we assume that all of that is being generated by the communications business.
Or perhaps more than 100% of that if we were to assume that the data and applications business as unprofitable this year.
Yeah, Hey, Mark this is <unk> I'll take that question.
Really the latter part of what you said, it's more than 100% and that's kind of intentional on our part we do think that we can be very efficient in the way that we bring the communications business to market in that it can throw off a lot of profitability while at the same time.
They did it and applications business. They are in the middle of an investment cycle and we're early stages in that and so we do think it's appropriate so long as we're making judicious investments to be able to grow the top line of that business. It's also gross margin accretive, which we think is important longer term.
But it is going to take some losses in the short term, which will work themselves out over time.
Okay understood and then as a follow up I looked at the prepared remarks, and it says that some of the macro headwinds that you had mentioned still persist. So I'm wondering if you could just clarify whether the buyer behavior feels any.
Better out there I mean in terms of the bookings cadence in recent months or would you say that that is still continuing to degrade somehow.
Yes.
Okay ethylene I'll take that one.
I'd say those those factors persist.
I wouldn't say, it's all been flushed out of the system.
But I think we're also getting better at navigating it.
So we did we are comfortable with where our Q4 bookings landed in our data and application space and.
And where we think our products to actually play a vital role in tough economic times.
So we're we're we're sort of navigating that headwind in the field as best we can we've updated our messaging, we're making sure that we're very clear about why allocating budget for these kinds of products at this time in particular is vital and important and.
And we think that message is landing, but definitely economically on the ground of the woods, yet I'll hand, it to call for more commentary Hey, Mark just one other thing I wanted to add is that importantly, we do intend to drive profitability through whatever the cycle ends up being we provided a relatively large range on the non-GAAP operating profit in light of the current macro condition.
Which are a pretty dynamic, but we do think we can be profitable through whatever the cycle is and we intend to be.
Thank you very much.
Your next question comes from the line of Michael <unk> with Wells Fargo. Your line is now open.
Hey, there good.
Good afternoon, thanks for taking the questions.
Just to follow on on the operating income guide because it certainly stands out.
Just relative to what was expected can we just I know you're guiding specifically for operating income, but just anything you can add on what would get you to 250 versus 350 and how to think about just gross margin in the context of that conversation relative to the potential growth outcomes.
The delta potentially.
Yes, a lot there Michael So let me just try to unpack it a little bit. So in terms of I think the way that we've planned for it is that irrespective of kind of the gross margin outcomes, we're going to be able to deliver operating profitability within that range. I think the difference will be basically that if revenue kind of performs in line or.
Or kind of within a range of our expectations then we'll be at the higher end of the range and if it doesn't then we will kind of be at the lower end of the range given how dynamic. The macro is we did want to provide a little bit of a cushion we wanted to kind of plan and run the place a bit more conservatively in light of things that we've seen certainly a lot of companies have reported.
Similar, but irrespective will be profitable, but thats kind of the color behind why that range in terms of gross margins.
As I said I don't think that they will really have an impact on the way that this plays out we're really trying to orient the business much more towards gross profit generation, we talked a little bit about that during our investor day. So long as the unit economics are good, especially in the communications business. There are already very strong on the data and applications business, then we're going to keep.
Seeking gross profit dollars I think a key difference being going forward that those gross profit dollars will drive incremental op profit dollars.
Very helpful. That's a substantial answered a substantial question just a quick follow up if I may on the expansion rates, we're seeing compression.
Of different vendors across software.
Can you just walk through what's driving the expansion rate headwinds youre seeing currently and how that informs the <unk> guide.
Yes.
Yes, I think the expansion rate basically kind of follows some of the revenue growth rate <unk> sell that <unk> seen one of the things about our business is that as macroeconomic factors kind of take the economy and other businesses down given the usage based nature of our business we.
We tend to feel those a little bit more acutely kind of in the same way that we felt them a bit more acutely on the way up right. If you kind of go back a couple of cycles or even the most recent cycle. The COVID-19 like we turned up very very quickly as different macro factors kind of pulled.
<unk> is up and so I think we're starting to see that come down a little bit in terms of the Q1 guide I mean, we still feel quite good about our ability to generate revenue growth in spite of a very difficult macroeconomic environment on a year on year basis.
We will just continue to monitor it.
Thank you.
Your next question comes from the line of <unk> Kidron with Oppenheimer. Your line is now open.
Alright. Thank you. Yes. This is part of them staying on for Tycho drawn.
So firstly I wanted to understand what are the areas within communications you were able to cut back on overhead because of excess of hiring in 'twenty, one and how much of that cut back I would say some international which has a significantly lower gross margin profile.
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.
Yes that was the general cost of it but I also wanted to understand like was is this because you're over higher in 'twenty, one and communication that youre getting back to a more normalized level are there other areas of screen.
Streamlining our communications business that were previously not identified so I just wanted to understand some of the dynamics behind the restructuring that you announced in the past since September .
I guess, what I would say is is that there is 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 shareowners just given the different buying cycles that are economic.
<unk> 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 or kind of global facing certainly once you get out of go to market.
<unk>.
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 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 tried to take out at this time.
Absolutely. Thank you for that and then if I could really get.
To understand the level of investments Youre, making in software considering this past quarter is only 22% growth.
434, 1 million was a little light so I just want to understand the impact of.
Youre operating headwind that youre going to have them in New York, While you grow this business to hopefully a billion dollar plus business.
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 or two about $2 50 to $3 50 of non-GAAP operating profit offsetting that are included in that number is about $150 million of incremental opex and there is two dimensions of that that we specifically broke out one was.
The increase in the way that we're going to compensate employees vis 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 theres, a little bit of other stuff in there as well, but we're not going to break out that number specifically.
Thank you so much.
Thanks.
Your next question comes from the line of Taylor Mcginnis with UBS. Your line is now open.
Yeah, hi, thanks, so much for taking my question, so lots of about 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 given some of the changes that that outlook might be a little bit stale, but any color you could provide on how youre thinking about there.
Revenue potential now and then there's a second part to that question just looking at the <unk> Guide could you maybe talk a little bit more about what's embedded in that guide and particularly how it might relate to some of the changes you made at any risk of disruption.
Yeah, Hey, Taylor. This is <unk> 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 arent changed.
Beyond that what we have said a few times now is that just given the dynamics in the macro environment that we're going to continue guiding quarter to quarter on the topline 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 it's 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.
Thanks for that and then my last one quick follow up is I. Appreciate that you are talking near term about EBIT dollars and gross profit dollars and putting the focus there, but just as we think about the guide.
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.
Yes, I mean, I guess the way that I would say it is is that you've got a couple of factors in the mix. So first is is that we gave you to $2 50 to $3 50 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.
<unk>.
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 our 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 in 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 at.
We can drive additional growth.
Margin accretion, which ultimately will.
GAAP profitability in 2027.
Great. Thanks, so much.
Thank you.
Your next question comes from the line of Nick Altmann with Scotiabank. Your line is now open.
Great. Thanks, guys.
Just to follow up on the prior question just given how significant of a level. The restructuring you guys have done.
And you look at sort of the <unk> 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.
Yes.
<unk> 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 impacts 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.
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'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.
Got it okay, great add one bit of context to that if you will this is Jeff.
Underscore something that was said earlier that I think bears repeating.
Is that we have a usage based pricing model and.
And in a usage based pricing model, we see an accelerated headwinds in the macro environment like this and I think thats, what youre seeing in our recent results and our guidance.
What we're not seeing though is a real change in for example, our competitive situations.
Brian I think what Youre 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 accelerated tailwind for us as well and Thats also the nature of our usage based <unk>.
<unk> model and as we mentioned earlier, what we saw in the early days of the pandemic when people are 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 youll see a company that is in a really good position because we are.
A 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.
I just think it's worth again pointing out the nature of the usage model, which is <unk>.
Generally speaking a great benefit to us during these times it feels like a little bit of a headwind for us, but I think in the long term, it's still the right model.
Great and then just as a follow up.
Earlier, you had said that the two.
$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 communication side.
I mean, what are you guys ever sort of disclose that business unit as a separate entity and reporting.
<unk> to pay a little more attention to the gross margin profile there.
And maybe be a little bit more.
Disciplined on discounting on that part of the business.
Yes, I mean, so there's a couple of things that you said in there. So in terms of 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.
The other aspect of your question.
We committed during our Investor day is that we would 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.
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.
Great. Thanks, guys.
Your next question comes from the line of Fred Meyer with Macquarie Capital. Your line is now open.
Alright. Thank you question, perhaps for Jeff in for <unk>.
Firstly.
Great to see and hear that you are returning to the North Star and communications of the product led growth story there.
Wanted to ask with that.
With that shift in the emphasis of 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.
It was also in that context since you're guiding fiscal 'twenty three on non-GAAP operating profitability.
Should we be thinking revenue of revenue at this point is less of a.
Kind of a key metric for the company and something that.
It will ultimately just be driving your operating Martin margin outlook about their operating profitability outlook.
Hey, Brad This is Jeff I'll take the first part of your question and then I'll hand, it to co plan for the second half of your question, but the first part.
If I understand the question I think youre 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.
Lot of the growth in the account comes from their growth in the market are taking something they built from a prototype that they're testing beta with a 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 lifecycle of adopting some of these communications products and so by moving back towards more product led growth, but I think youre seeing as we're going to 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 to make it easier to get up and running but also the scale of 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.
It's 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'll 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 co pay.
Hey, Fred in terms of the second part of the question I guess the way I would think about it is just to maybe take a step back and then I'll drill down for a second is that.
One of the things that we've thought a lot about as a company and as a management team 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.
Hi, 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 and 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 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 <unk>.
Terms of a great growth set up 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 the 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 wanted 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.
Okay. Thank you there and then just quickly for Atlanta, as Youre thinking or when Youre looking at the portfolio of apps on Twilio, where are you thinking about really prioritizing your investments into the software and services in the platform.
Okay.
I think.
We are not going to obviously break that out in a lot of detail, but what I will tell you is that our flex product is just at a different stage of play than our segment product. So it's got fewer resources behind that your sales reps behind it et cetera, but we both see a ton of Greenfield, we see build opportunity across.
Both of those solutions segment is creating connectivity to our comms platform through our engage product.
That product actually will ultimately fuel flax as well as we utilize our data capabilities to power better engagement through flax and so we actually see them.
Some real opportunity to bring them together and for them to be better together as well as fuel our communications business and vice versa.
We think they're all equally important in our portfolio, but.
This segment business is sort of just at a different stage of play. So it's got a little more girth in <unk> then the flex business does but the flex business is growing at a healthy clip as well.
Thank you.
Your next question comes from the line of city Pentagon here with Mizuho. Your line is now open.
Hey, this is Phil on for Citi I, just wanted to touch on the last question. So for flex and I was one of your key strategic priorities.
Is it performing in this environment and what sort of changes can you guys make to increase share in the <unk> market and also what kind of traction are you guys seeing on the engage platform.
I'll take that and I'll do them in reverse order. So just as a reminder, engage with general availability in Q4. So just a couple of months ago and we're excited about the trajectory that we're seeing there we've got a couple of dozen new customers.
Playing a lot of really new and interesting use cases on engage and throwing through.
All of that new SMS messages as part of that and so we've also talked about a couple of those customer wins.
In the back part of our prepared comments there are a couple of others that.
We haven't been able to share directly but we're we're pretty excited about in terms of their utilization of engage and segment both from a renewals perspective as well as a good chunk of net news.
We're excited to bring live over the next couple of months.
Strong performance, there with engage and we think real opportunity going forward.
<unk> had good performance in Q4, as well and as I've mentioned in prior calls.
We're in the process of building out the specialized sales forces.
A fair amount of hiring enablement, onboarding and as we see our sales reps coming online getting out into the market.
And beating the competition had to had in these deals we are.
Optimism is growing for how that product performed in this space.
<unk>.
Just to kind of cap it off with a word on the competition, we're not seeing new competition and we're not necessarily seeing.
Loss.
Rates that are bothersome in any way. This is a matter of sort of getting out there into the greenfield opportunity embracing at making sure. We've got the right marketing messages campaign regeneration programs.
And then bringing those deals through the cloud so.
Good momentum beginning to kick in as we see these new AE coming online.
And looking forward to sort of how that plays out here in 2023.
Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is now open.
Hey, guys. Thanks for taking my question.
Honestly congrats on one of the best I would say presentations, thus far that we've seen from the company.
Many quarters.
Multiple fronts, including the buyback.
I guess the first question is.
Maybe I missed this or I.
I missed it in the letter, but can you maybe just go a little bit deeper into the headwinds that you saw on growth on both the communication side and the application side in Q4, maybe also commenting on the linearity of the business in the quarter and what Youre seeing into Q.
One both the headwinds I guess, but also the tailwind to the point of.
Well.
Yes.
You can be in both markets that are up and down.
Yeah, Hey, Alex This is <unk> I'll take the question and then if you have other color you'd like Atlantic can certainly chime in as well. So I guess, what I would say is that all just kind of echo something that Jeff said earlier, which is that number one we're not losing share and so that gives us a lot of confidence that the business.
<unk> is headed in the right direction number two.
We're just seeing a lot of dynamicism in the macro environment and as our business is usage based in large part is certainly on the communications side.
We start to feel those effects much sooner than many others do because we're kind of a leading indicator in some ways both on the way down as well as on the way up.
So you saw a little bit of that obviously in our expansion rate and youre seeing a little bit of that as well in our reported Q4 results as well as the way that we're guiding in Q1 in terms of some of the headwinds.
Theres nothing beyond really kind of the things that we called out previously I mean, I would point to general macro which is a very broad category, but some of the stuff that we called out previously is crypto and social and E comm retail.
All of those industries as you know.
<unk> been impacted pretty significantly and you see that in various earnings reports you see that in the new cycle and so we're just kind of caught up in the same and I think what's important for US is that we play through that we continue to grow through whatever the environment is and importantly that we generate profitability and spa.
Whatever that macroeconomic environment is so that's the way that I would really characterize it I don't know Elaine if there's anything else that you would add.
I think that's good.
With that.
And I guess, just maybe following up from that so if we look forward from here.
I know I always ask the question about net retention, but if I think about that one pad number and I think about the progression through the year. When you start to anniversary some of those negative effects and to Jeff's earlier point.
On the way up.
The consumption model it can be or the usage model can be really good.
If you think about the linearity of the year understanding that youre not guiding how should we think about that progression or how are you thinking about it internally is it a back half normalization stabilization of that retention rate.
Is it something that.
Shifts to more net new what's the right way to categorize it.
Alex I wish I did no I don't.
I think that we're planning conservatively basically given the macro I think it's just a really dynamic environment and so we're not necessarily forecasting an uptick per se.
Could it be better maybe.
I think we're all sort of hoping it's going to be but we can't plan for that and so we're going to plan for it kind of playing out the way that it has been maybe the last few months last few quarters.
And kind of hope that it gets better obviously, our field teams are going to win like whatever the business. They can do.
We're going to try to grow share in every way that we can off of our existing base where to keep growing with the accounts that we have but how that plays out in terms of <unk> I, just don't know and as you know like it's not something that we've historically forecasted to all I'd say is is that as the economy picks back up our business will definitely.
Only picked back up and we're certainly looking forward to the time that that happens.
By the way also appreciate your comments at the start of your question. Thank you.
Thank you guys congrats again.
Your next question comes from the line of Derrick Wood with Cowen your.
Your line is now open.
Great. Thanks, guys.
As you look at driving more efficiency in the business can you talk about how partners are going to play a role and maybe what youre doing to drive more partner leverage, especially in light of shifting to a two business unit strategy.
Hey, Derek it's Elena I will take that one.
We think partners play a vital role they are helpful in bringing in some of the flagship customers you heard us talk about both this quarter and over the last couple of quarters.
Put them in a couple of different counts theirs and implementation partners that also can be reseller referral partners and then there's also just straight up referral partners that might have a piece of technology that works together, well with with one or more of our products and so we are in the process of actually creating.
Bespoke partner acquisition partner enablement and partner co selling teams across our.
Our newest took a business unit structure, we think that will create a lot more focus on the opportunity there and.
We're not going to sort of break out exactly what that trajectory looks like but we do believe that partnership will play an important and growing importantly role in our growth and new bookings both across the data and applications business as well as across the comms business.
Got it great maybe a follow up for you Elena as well on segment.
Wondering how the progression of growth trended over the year you guys. Obviously, you had a lot of organizational change.
Just was hoping to get a comment on that and then as you look at kind of how Q4 ended and going into Q1, what end market demand looks like for CV CDP investments in this macro condition.
Yes, Thanks, Eric.
And I think even the way you phrase the question is right.
And at the beginning of last year is when we had some stumbling lost a fair amount of key talent and then began to rebuild that was a huge priority of mine when it came online in may.
And we've worked to sort of execute through that hard time, and I think really finally, starting to get our legs under us.
In Q4 with a couple of really great customer wins there.
They are listed in the in the documents from us that Jpmorgan Chase with a fantastic win across multiple business units and we'll engage and segment.
Box in a couple of others and we had some great new.
Seven figure.
<unk> brand wins, as well and that we look forward to bringing life. So.
Excited about their trajectory a lot more work to do as I mentioned, these aes or accounting facts are still coming online and getting their legs under them, but we're excited about the trajectory.
I think the CDP space is still in early innings, but I think the also the important thing to know is sort of where we take it from here. So we think the data and the CDP can create amazing power across our applications and then we also are seeing what we're building in terms of orchestration with engaged also in terms of connectivity to our.
And communications platform as well as to flex really just creates such an incredibly powerful.
Set of capabilities for our customers, but also competitive differentiation so.
It's a matter of getting people to start with precious budgets right now and we feel like we've got a great message. There we feel like we really do create less four brands, particularly in a time like this when it's really important to be super surgical about how they spend every single one of their marketing dollars.
But when AD spend and marketing spend and are impacted and are strained people just want to spend a little bit more time in the sales cycle, a little bit more time, making sure that it's exactly what they want but we also know and when we get to proof of concept, we tend to win and so that's really what we're focused on is making sure we get into the game.
And get those deals closed over time, so I wish I had a.
Crystal ball on the macro environment that we play through and we think we do well in that context.
This is Jeff and then one other thing I'll just add.
One other thing if you noticed we tweaked a lot of our messaging at signal last year for the buyers of this market.
Right, we said look.
This is about acquiring customers more efficiently and then increasing your lifetime value your revenue with those customers and so that really is a targeted message based on how our products are relevant in this period of time.
And I think youll see some of the results that we put out both in terms of J.
J P Morgan adopting engage.
Fox, who was a longtime segment customer moving into engage but also a leading e-commerce company that they adopt us in order to improve their AD spend I mean these are really good examples from our customers that we could talk about in our prepared remarks of exactly what we see going on in the market.
That's great color. Thank you.
Your next question comes from the line of Rishi genre with RBC. Your line is now open.
Wonderful thanks, guys. So much for taking my questions. Two from my end first I wanted to continue talking about segment, maybe just one for later as we.
Think about the core communication side kind of returning to its <unk> roots, how should we be thinking about the kind of evolution of segment go to market, especially considering the CDP market is a little bit more evangelical it is a little bit more greenfield and maybe alongside that as we think about potential.
Sure.
Larger vendors trying to get into this space in a big way be it salesforce with its own offering and genie or Adobe, what's kind of the plan to maintain segments market leadership as the larger software company is try to get into this space and then I've got a follow up.
Thanks, Rishi this is a strategic sales motion getting in getting the product introduced getting customers using it and proofs of concept and things like that and so we have really focused our attention on just building fantastic enterprise sales capability and blanketing the market with.
Our message and getting in there and helping customers through sort of putting their dreams into action in the product as we show them, our capabilities and turn them into paying happy customers and so while there is definitely more we can do in terms of.
Demo and.
The sort of the developer message. This really is an enterprise sales motion and we're investing in that accordingly.
I think the price tag, obviously accommodate that as well so.
That said.
Connectivity across our the rest of our products is a real opportunity for it left and so finding examples within our communications business, where the data can be useful and where then we can turn around.
And through the orchestration of engage.
Push communications back out I think everything ultimately becomes better together and the developer as discover of those communications channels sort of opens the door for us from the communication side and then I think we get to go back in from the segment and engage side as well.
And part of what you talked about was the big competition and we're certainly aware of.
Our big competitors.
But we love our chances that we have the better product we have 100%.
The focus on the very specific and bespoke things to you in the CDP space.
The customer engagement platform space and we think we continue to stay ahead from a capabilities perspective and.
And just will continue to invest in the product to make sure that we stay ahead.
The work for us is going to be to make sure that we're competing every single time one of those decisions is made and we're orienting ourselves to do just that.
Got it that's really helpful. And then just a quick financial one.
Hey, Mark.
Look I appreciate the longer term guidance and commitment to GAAP profitability.
I was just kind of think about looking out and it's hard to predict two quarters out let alone five years out but maybe.
Maybe let's try so youre talking about GAAP profitability in 2027, as well as bringing down your SBC to 10% to 12% of revenue.
I mean that just implies that your non-GAAP operating margins, though in 2027 as you pivot more towards profitable growth and presumably reached a substantially larger scale that your non-GAAP margins would be in that 10% to 12% range and.
And maybe just given all of the kind of areas of focus that seems like it's maybe a little bit low as a target to reach four can you maybe walk me through that.
That process here, and maybe where I may be wrong in my thinking on the long term framework. Thank you.
Yeah, Hey, Rishi. Thanks for the question. So I think just one add it to what you said and I don't know if you misspoke or not but I think what you said towards the end it was that.
Our long term framework was 10% to 12% op margins and that's actually not the case. So the the way that we're thinking about it is is that there is the 250 to $3 50 in the current year.
You can kind of run the math on what the implied might be based on our Q1 guide obviously, we're not guiding quarter to quarter right now or we are going quarter to quarter, we're getting through the year just given how dynamic. It is post that we see three to 400 bps.
Per year, and I guess the way that we think about it is is that if you stretch it out over those.
That five year period is that number one we get to something that probably looks like if we can execute well and at the upper end, 20% plus.
One two that if we can get to.
10% to 12% that I talked about.
That we disclosed in the remarks on the SBC side, which we feel pretty good about just given some of the changes that we've made.
In terms of compensation and moving more from stock base to cash based.
And then.
Three I think that the.
Net of those two obviously yield some GAAP profitability overall as well so that's kind of the math that we're doing I mean could it be better perhaps but that's certainly not something five years out that I would want to commit to we feel good about that.
Set up certainly in the current year, we if we execute we can be on the higher end of that.
If revenue is tough will be at the lower end, but all the same will be very profitable in 2023, and then over multiple years out we see really strong op margin accretion, which we think is a good signal.
And then being GAAP profitable is really the name of the game, obviously and our ability to control SBC is going to be the principal lever and we know how to do that.
Alright, great. That's helpful. Thank you so much.
Thank you.
Your next question comes from the line of Willpower with Baird. Your line is now open.
Okay, great. Thanks a.
Couple of questions. Let me start I guess on the communications segment I'm, just trying to think through go to market and potential impacts to growth. There. I think you suggested earlier you didn't expect limited growth, but limited impact I'm just trying to understand just given the magnitude of the changes taking place there how are you.
You get comfort that there's not a more meaningful impact to revenue growth in any parameters you could maybe provide around what you expect for for growth next communications segment, whether this year next couple of years.
So I'll take that in my capacity.
We have my prior role just covering and go to market writ large the Lady here and then David can jump in if you've got anything else to add so.
I understand the point, we obviously did a substantive cost cut here and I think the important or Theres. A couple of important things to think about and that we've sort of started to talk about over the last couple of quarters and it was really important to us to begin to demand more of our products more of our tooling and more of our process.
As we think about the right go to market model for communications and so we believe there is a lot of efficiency to be gained there or making progress against all three of those dimensions.
Now and plan to even make more improvement in how we create efficiency across the team going forward by increasing our capabilities in product led growth and in self service.
I think when you actually really sort of peel the layers back and how we are servicing our customers historically.
And we had a number of people involved in any kind of any sort of customer experience and we believe we are a bit over levered there.
And when you kind of get underneath.
There are efficiency was great and where it wasn't.
We think we can provide those fantastic customer experiences and really benefit from our customers usage of twilio without having people involved at every stage of the process.
And really a reserving that human capital for the times when our customers are really and truly need us and that's when they're making a decision when they're deciding whether to turn left or right with their use cases.
And when they're struggling with something we're solving a problem and so that's really where we want to apply that human.
Human capacity and capability and we're not going to like we will still be there for our customers when they need us.
But as it relates to sort of new customer acquisition. That's also more human capital intensive at times, when it's big customers, making running big loads on Twilio will be there for those customers as well.
But there was a lot of space, where we have begun to see that our efficiency was degrading as we added large numbers.
Talented.
Individuals over the last number of years. So we just don't feel like that's necessary for us to continue the growth trajectory given our penetration in the space given how our tooling and products are coming along.
Given what we believe that we can deal with the human capital we have around keeping our customers.
Satisfied.
Okay.
Maybe just to follow up with you just shifting over to your new primary focus congratulations on that by the way.
Thinking about applications and software can you, maybe just remind us as you think about.
<unk> segment, what are the synergies there might be on.
Go to market.
I know you've got some specialized.
Folks who are hiring probably for each of those southern so I'm just trying to think through.
The synergies differences and kind of how you balance that with those two different products.
Yes for sure we really see sort of the vast pieces of flax being where a customer is running a digital contact center, where engagement is key we have got some great use cases of customers using flex where they're actually in selling environment not just <unk>.
Our support environments and so we believe there is a really interesting synergy anti with segment.
The data will actually create incremental efficacy in those interactions that are happening in blacks and we're beginning to lay that track now we expect to see some of that capability here actually in 2023.
But I wanted to lay that track first before we begin to think about this as sort of one product or one.
Set of use cases, they are pretty different today, and so we're going to keep those sales organizations.
Specifically focused on those unique customers those unique buying patterns, where those customers need from us.
But we will be working on adding some of the benefits of segment into flax and we expect to see some of that.
Year.
Okay. Thank you.
Your next question comes from the line of Pat Walgreens with JMP. Your line is now open.
Yes.
Great. Thank you.
Gratulation on all the progress.
Jeff This is a very big picture, but.
Twilio has this unusual situation, where you have a dual class stock that collapses to a single class.
In years after the IPO so in June .
And as the founder I would just love to hear your thoughts and sort of the history on why.
You guys originally structured that way and now that we've hit the milestone.
How you feel about the decision and how things might be going forward.
Yes, Thanks Pat.
All along we run this business as owners and for the benefit of all of our shareholders and we're focused on driving attractive growth lowering opex, increasing profitability and we've extensively engaged with our shareholders over the last several months and over the whole time, we've been public top inform the actions that we take as management.
In terms of balancing growth balancing our customers' needs our employees' needs, our shareholders' needs and our goal is to create value for our shareholders and we believe in the strategy that we're executing is going to do that.
About it from the.
Prospective of a newly public company when we put this in place just prior to our IPO.
The idea is for a young company to get its feet as a public company.
And Thats why we thought of it with an expiration that was seven years in the future now at the time that felt like a long ways off and here, we are and so I think that it did its job to get us honor footing as a public company.
During that whole time, we were able to listen to our shareholders were able to make decisions as a young public company and now having the benefit of seven years in the public market.
We will come off and the scheduled expiration of our dual class really doesn't change any of that any of those ways in which we run the company.
So that's how I'd think about it as a founder as CEO and as a fiduciary.
Gary of the company.
That's really helpful. Thank you.
Okay.
This concludes our Q&A for this portion of today I'll turn the call back to the speakers for any closing remarks.
Thank you all for joining us today, and we will speak again soon.
Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
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