Q4 2024 Twilio Inc Earnings Call
Again a beautiful day
Speaker Change: Good day and thank you for standing by. Welcome to the Twilio Inc. 4th Quarter 2024 Earnings Conference Call.
Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star-one-one on your telephone. You will then hear an automated message advising you your hand is raised.
Speaker Change: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bryan Vaniman.
SVP of Investor Relations and Corporate Development. Please go ahead.
Speaker Change: Good afternoon, everyone, and thank you for joining us for Twilio's fourth quarter 2024 earnings conference call.
Khozema Shipchandler: Joining me today are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer.
Khozema Shipchandler: As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors.twilio.com.
Khozema Shipchandler: We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described.
Khozema Shipchandler: Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-Q and our forthcoming Form 10-K.
Khozema Shipchandler: Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. And with that, I'll hand it over to Khozema and Aidan, who will discuss our Q4 and 2024 results, and will then open the call for Q&A.
Speaker Change: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today.
Khozema Shipchandler: Twilio had a terrific Q4, reaching $1.195 billion in revenue, an 11% increase year-over-year.
and our second consecutive quarter of double-digit growth.
Khozema Shipchandler: Q4 also marked an important milestone for Twilio, as it's the first time we've delivered quarterly gap operating profitability in the company's history.
well ahead of our initial target.
Khozema Shipchandler: For the full year, we generated $4.458 billion in revenue, representing 9% organic growth year-over-year.
Khozema Shipchandler: Over the past two years, we've dedicated ourselves to transforming Twilio's business from one primarily focused on growth
to one that balances innovation, growth, and profitability.
Our results demonstrate the success of those efforts.
Khozema Shipchandler: Not only have we recently accelerated revenue growth, but we've also significantly boosted our non-gap profitability, while meaningfully accelerating our path to gap profitability, plus reducing our net burn rate and outstanding share count.
Khozema Shipchandler: And, we've increased annual free cash flow by nearly $1 billion since 2022.
Khozema Shipchandler: All of this illustrates our commitment to operating the company with more discipline, rigor, and focus.
Khozema Shipchandler: And while there's more work to be done, the results speak for themselves.
Khozema Shipchandler: At our Investor Day a few weeks ago, you got a chance to hear about the new Twilio, including our product strategy, growth levers, and financial framework that we have in place to win a much larger addressable market.
Khozema Shipchandler: As marketing, sales, and customer support converge into customer experience as a service,
We strongly believe that Twilio's leading communications platform
Khozema Shipchandler: plus contextual data powered by Segment and our innovations with AI position us to win in this massive market and reinforce our vision.
Khozema Shipchandler: that every digital interaction we power between brands and consumers is nothing short of amazing.
Khozema Shipchandler: While we provided a lot of details during our investor day, today I wanted to take the opportunity to reinforce a few of the key takeaways, while also sharing some of the highlights from Q4.
Khozema Shipchandler: On the innovation front, in 2024, we launched 251 products, enhancements, and services.
Khozema Shipchandler: These innovations align to our strategy of building a trusted, simple, and smart platform that enables brands to drive more secure, relevant, and personalized interactions with their customers.
Khozema Shipchandler: Throughout the quarter, we continue to invest in our core capabilities to drive even greater customer value.
During Cyber Week, Twilio powered more than 5 billion messages.
Khozema Shipchandler: delivered more than 65 billion emails and supported 678 million calls
all while delivering 100% uptime.
Khozema Shipchandler: During the fourth quarter, we expanded our trusted channels to meet our customers' evolving needs by adding new capabilities to support existing channels, including RCS and WhatsApp.
Khozema Shipchandler: For RCS, we also recently announced that rich content cards, media, and rich card carousels are now available and supported by our Content Template Builder that helps streamline development.
Khozema Shipchandler: RCS is proving a valuable expansion vehicle for existing messaging customers.
Khozema Shipchandler: Customers like MarketBeat are able to benefit from Twilio's streamlined approach to development on a single messaging API and our universal template management system.
Khozema Shipchandler: It's also clear that Twilio continues to be at the center of the AI value chain.
Khozema Shipchandler: as we already have 90% of the Forbes 50 AI startups building on Twilio.
Khozema Shipchandler: We continued to drive ROI with our AI-enabled products, benefited from emerging AI companies that chose Twilio as an essential component for their customer engagement layer,
Khozema Shipchandler: and partnered with key AI players in the ecosystem like AWS, Databricks, Google Cloud, OpenAI, and Snowflake.
Khozema Shipchandler: In Q4, Conversation Relay, which helps simplify the process of building robust AI voice agents, went into public beta.
Khozema Shipchandler: While it's still early, we believe that AI will drive a renaissance in voice, and everyone, from enterprises to startups, will begin orchestrating new voice experiences.
that are two-way and personalized.
Khozema Shipchandler: On the segment front, the AI innovations that went live throughout 2024 are beginning to generate tangible results for our customers.
Khozema Shipchandler: As an example, with predicted audiences, one company realized a 70% improvement in audience accuracy.
Khozema Shipchandler: And in Q4, found an average of four weeks of data science time saved by giving marketers the ability to predict behavior.
Emerging AI startups are continuing to build on Twilio.
Khozema Shipchandler: Paradox.ai, one of Twilio's AI Searchlight winners, is using conversational AI for recruiting and leverages their AI assistant, Olivia, to help with frontline recruitment.
Khozema Shipchandler: Starting as a self-serve customer in 2017, they reached unicorn status in under five years. And today, Twilio powers over 150 million messages a month on their behalf.
Khozema Shipchandler: But more importantly, with Twilio Messaging, they've been able to help companies like McDonald's, Workday, and SAP get interviews scheduled in minutes versus the manual process that used to take anywhere from five to seven days.
Khozema Shipchandler: And finally, we're continuing to partner with established AI companies like OpenAI.
Khozema Shipchandler: During the quarter, we helped OpenAI launch calls and WhatsApp messaging through their Twilio-powered number, 1-800-CHAT-GPT, which has seen incredible volume since launch.
Khozema Shipchandler: Our innovation strategy and execution continues to pay off as we were named a leader in multiple analyst reports.
Khozema Shipchandler: During the quarter, IDC named Twilio a leader in its market scape.
Worldwide customer data platforms focused on B2C users.
Khozema Shipchandler: And, Omdia also named Twilio a leader in two of its reports, the Omdia Universe Customer Engagement Platforms.
and the Omdia Universe customer data platforms.
Khozema Shipchandler: With respect to distribution, we continue to focus on our key growth levers, self-serve, cross-sell, international expansion, and our partner ecosystem, while also optimizing for scale and efficiency.
Khozema Shipchandler: In Q4, our go-to-market team continued to deliver improved execution, as evidenced by strong, large-deal activity during the quarter.
Khozema Shipchandler: On the communications side, we closed 78 deals worth $500,000 or more, up 47% year-over-year.
Khozema Shipchandler: And in Q4, we closed our largest segment deal ever with one of the world's largest financial services companies.
Khozema Shipchandler: Within self-serve, we saw a continued acceleration in signups, upgrades, and revenue growth, a testament to the improvements we've delivered in our self-serve experience over the course of 2024.
Cross-sell and up-sell continues to be a massive growth opportunity.
Khozema Shipchandler: During the quarter, we had terrific wins, including one with a long-standing Twilio Voice customer that's a top health system in the U.S., which operates 33 hospitals.
Khozema Shipchandler: The customer adopted Twilio's RCS messaging, branded calling, and engagement suite in order to increase call adoption, establish a stronger brand presence, and increase messaging deliverability and engagement.
Khozema Shipchandler: Additionally, we also signed a deal with a leading web hosting provider.
The company has been a long-time Twilio messaging customer.
Khozema Shipchandler: and expanded their use to include Twilio's Conversations API to power two-way SMS and voice channels.
Khozema Shipchandler: With Twilio, the company has integrated the product into their own proprietary unified inbox, giving customers the ability to manage their business communications needs on their smartphone and simplify the communication with their own customers.
Speaker Change: International expansion and partner distribution continue to help us unlock an under-penetrated addressable market.
Speaker Change: As an example, during the quarter, Twilio expanded its relationship with Klaviyo with several SMS deals in European markets.
Speaker Change: In pre-sales, we're using data to lead the identification process, which is shortened sales cycles.
Speaker Change: Additionally, today 80% of our new inbound leads are being handled by AI, which has led to a faster signup and upgrade process for prospects due to faster responses, multilingual support, and depth of knowledge.
Speaker Change: Post-sales, our help center assistants, have garnered a 75% ticket deflection rate when AI is engaged.
Speaker Change: I'm proud of how our discipline, rigor, and focus has helped position the company well for the years ahead as we drive strategic, customer-centric growth with innovation at the core.
In many respects, 2024 was about rebuilding the foundation.
Speaker Change: 2025 is the year we'll stay focused on executing against our ambitious innovation roadmap to unlock the power of communications, contextual data, and AI.
Speaker Change: And, as we unlock it, every consumer that interacts with the 325,000-plus active customer accounts that we power will benefit.
Speaker Change: Our strategy is clear, our execution is focused, and our impact is real.
Speaker Change: I'm incredibly proud to see the hard work paying off as we enter this next phase of growth and create more value for our shareholders in the years ahead.
And with that, I'll turn it over to Aidan.
Thank you, Khozema, and good afternoon, everyone.
Speaker Change: Twilio finished the year with a strong Q4, delivering our second consecutive quarter of double-digit revenue growth and our first-ever quarter of GAAP operating profitability.
Speaker Change: For Q4, we generated record revenue of $1.195 billion, which represented 11% year-over-year growth.
Speaker Change: For the full year, we generated revenue of $4.458 billion, representing 9% organic growth.
Speaker Change: Non-GAAP income from operations of 714 million dollars and free cash flow of 657 million dollars.
Speaker Change: We also completed our prior $3 billion share repurchase authorizations, returning over $2.3 billion to shareholders in 2024 alone, and reducing our outstanding share count by 16% since the start of the year.
Speaker Change: Revenue in our communications business for the quarter was $1.121 billion, up 12% year-over-year.
Speaker Change: Messaging revenue growth accelerated for a second consecutive quarter while email performance remained strong, driven in part by strong volumes during Cyber Week and the holiday season.
Speaker Change: Political revenue contributed roughly 60 basis points to our reported revenue growth rate.
Speaker Change: This was partially offset by a 40 basis point headwind associated with sunsetting the software component of our Zipwhip business, which we have now fully lapped.
Speaker Change: Segment revenue for the quarter was $74 million, down 1% year over year.
Speaker Change: We were encouraged by the go-to-market execution in the quarter with bookings slightly accelerating year-over-year along with over half of new bookings coming from multi-year deals.
Speaker Change: Our Q4 dollar-based net expansion rate was 106%, representing our best performance since Q1 of 2023, and reflecting the improving growth trends we've seen in our communications business over the last several quarters.
Speaker Change: Our dollar-based net expansion rate for communications was 108%, and the dollar-based net expansion rate for segment was 93%.
Speaker Change: We delivered record non-GAAP gross profit of $621 million, up 10% year-over-year.
Speaker Change: The decline in gross margins was driven by expected higher hosting costs during Cyber Week, as we referenced during our Q3 earnings call, along with an increase in revenue mix from messaging.
Speaker Change: Non-GAAP gross margin for our communications business unit was 50.6% down 10 basis points year-over-year and 110 basis points quarter-over-quarter.
Speaker Change: As we referenced on our Q3 earnings call, the sequential decline was driven primarily by higher hosting costs associated with the holiday shopping season, as well as higher messaging revenue mix.
Speaker Change: The sequential improvement was primarily driven by benefits from our segment infrastructure migration project, as well as hosting credits in the quarter.
Speaker Change: We largely completed this project during the fourth quarter, which we expect will help support segment gross margins as we move into 2025.
Speaker Change: Our non-GAAP operating margin of 16.5% was up 40 basis points year-over-year and sequentially.
Speaker Change: As I referenced at Investor Day last month, in Q4, we incurred $17 million in bad debt expenses related to our customer, Oi, a Brazilian telecom company, as a result of a slowdown in their ongoing payment activity.
Speaker Change: For the full year 2024, we generated non-GAAP income from operations of $714 million, up 34% year-over-year, and our non-GAAP operating margin of 16%, was up 320 basis points year-over-year.
Speaker Change: Non-GAAP income from operations for our communications business was $275 million in the fourth quarter. For the full year 2024, our communications business generated over a billion dollars in non-GAAP income from operations.
Speaker Change: NOMGAP lost firm operations for our segment business with $10 million in the fourth quarter.
Speaker Change: Segment operating losses improved sequentially as a result of the gross margin improvement in the quarter and ongoing cost discipline.
Speaker Change: Our segment business remains on track to achieve break-even non-gap income from operations by Q2 of this year.
Speaker Change: Stock-based compensation as a percentage of revenue was 13%, down 60 basis points quarter over quarter, and 240 basis points year over year, as we continue our efforts to reduce equity compensation.
Speaker Change: Full year 2024 net burn rate was 3.3%, down 160 basis points year-over-year.
Speaker Change: We continue to manage dilution on a net burn basis, which we define as the number of employee stock units granted in a year, net of forfeitures, and divided by the prior year ending share count.
Speaker Change: We generated free cash flow of $93 million in the quarter, down sequentially as we anticipated, driven by incremental vendor prepayments totaling roughly $130 million.
Speaker Change: As a reminder, we periodically pay certain vendors early to secure favorable terms and pricing.
Speaker Change: For the whole year 2024, we generated $657 million in free cash flow, up 81% year-over-year, and representing a margin of 14.7%, which is up 600 basis points year-over-year.
Speaker Change: In 2027, we're targeting non-GAAP operating margins in the range of 21 to 22 percent, up 500 to 600 basis points compared with our full year 2024 results.
Speaker Change: From 2025 to 2027, we expect to generate $3 billion plus in cumulative free cash flow.
Speaker Change: We're targeting GAAP operating profitability in fiscal year 2025 and each year thereafter.
Speaker Change: We continue to focus on managing stock-based compensation and dilution responsibly. And we're targeting stock-based compensation at about 10% of revenue, and net burn at less than 3% in fiscal year 2027.
Speaker Change: Finally, our board recently authorized a $2 billion share repurchase program expiring at the end of 2027, and we're targeting an average of 50% of our annual free cash flow in capital returns to shareholders from 2025 through 2027.
Speaker Change: Moving to Q1 guidance, we're encouraged by the growth acceleration we saw in the second half of 2024, but we're continuing to plan prudently given our usage-based revenue model.
Speaker Change: The quarter-over-quarter decline in revenue reflects both the Q4 seasonality dynamic that we've seen in the last couple of years, as well as a modest impact from Q4 political revenue.
Speaker Change: I would also note that there are two fewer days in Q1 vs. Q4 and one fewer day in Q1 vs. the year-ago quarter.
Speaker Change: That being said, we continue to feel good about our guidance for the year, and we're maintaining our full year 2025 Organic Revenue Growth Guidance range of 7 to 8%.
Speaker Change: Turning to our profit outlook, for Q1, we expect non-GAAP income from operations of $180 million to $190 million. And for the full year, we expect non-GAAP income from operations in the range of $825 million to $850 million.
Speaker Change: This will limit free cash flow generation in the first quarter.
Speaker Change: That said, we continue to expect to generate strong quarterly free cash flow over the balance of the year, and for the full year we expect free cash flow in the range of $825 to $850 million.
Speaker Change: We are confident in our plans to drive durable revenue growth, continued margin expansion, and strong free cash flow generation in 2025.
And with that, we'll now open it up to questions.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster.
Speaker Change: Hey guys, thanks for the additional color here following the Animalist Day. Well done again at the Animalist Day.
Speaker Change: Try to understand, given some of the macro stuff that's going on.
Speaker Change: How much of the strength you guys are seeing in messaging and email is due to somewhat this return of the crypto world?
Speaker Change: Hey, Jim, this is Aidan, and I'll take that question. So I'd say from a crypto perspective, we do see those customers exhibiting stronger volume, though it's, I would say, nowhere near returning to the levels that we saw in 2020 to 2022. So it's a bit better, but it's relatively immaterial to the grand scheme of things. So not a big driver for the business, messaging or email.
Speaker Change: And then just it was nice to see segment here in terms of like while revenue was, you know, a little bit down year on year. If I look at that
Speaker Change: deferred revenue build, it seems that implied billings was up north of 20% if I get most of that over to that side. Is the segment business seeing a bottom or how much is the sort of billing strength attributable to that big deal you referenced?
Speaker Change: Yeah, maybe I'll comment on the RPO and if Khozema wants to say anything on the business, he can do so.
Khozema Shipchandler: Yeah, both the RPO balance you're looking at, the CRPO balance as well, they're really driven by segment. And so the growth really is driven by a combination of bookings growth, as well as the percentage of new bookings that are tied to multi-year deals. And what we saw in the quarter was bookings were up a bit, but also that over 50% of the deals that we booked in the quarter
Khozema Shipchandler: were multi-year. And so that's been a point that the team has been working on and focused on, and we're starting to see that kind of show up in the bookings metric. So that's part of what is driving it.
Khozema Shipchandler: And then I would say, I would note that any of these metrics that you're kind of looking at, any of these deals, that they're
Khozema Shipchandler: They're 12 months or less in initial duration when you look at the actual metric that you're looking at on the balance sheet. So they're not fully representative of Segment's book of business.
Khozema Shipchandler: That's a little bit on the metric. I don't know if you want to add anything on the business, Khozema. Yeah, Jim. All I would say is that I think this has been sort of a steady as she goes story, right? Like I think that there've been a number of operational improvements that we made in the business. I think going back to
Jim: The operating review that we announced, you know, last year, there were a number of things that we wanted to do to improve performance, both on the technology and innovation side.
Jim: but also in terms of the way that we were running the business. And I think you're starting to see a lot of that show up in the balance sheet item that you referenced.
that we laid out during the investor day.
Speaker Change: Helpful. Thanks, guys. Thanks. Thank you. And one moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of Michael Turin with Wells Fargo Securities. Your line is open, please go ahead.
Michael Turin: Hey, great. Thanks very much. I appreciate you taking the question and congrats on the return to double-digit growth. I was hoping you could maybe just spend some time...
Michael Turin: Speaking to ways you aim to ensure the growth improvements you're seeing prove durable. What are you using to build those initial 2025 assumptions? And then what are some of the swing factors we should contemplate that could keep you at the more aspirational double-digit growth level?
Michael Turin: Yeah, maybe I'll start by kind of what we saw in the quarter. And I think what's important when we look at the growth in both Q3 and Q4,
Michael Turin: First of all, it really wasn't driven by political. In Q4, we talked about it being 60 basis points. That was largely offset by
Michael Turin: the end of life of our software business in ZipWhip. So it's true, 11% operational growth.
Speaker Change: And importantly, it wasn't one thing driving it, right? When you look at it by product, we saw strength again and accelerated growth and messaging. Emails been strong all year, continue to be strong. We had a record breaking cyber week with strength in messaging, email and voice. Khozema kind of gave you some of those stats.
Speaker Change: in his prepared remarks. ISVs were strong, self-service strong. When you look at it by industry, we disclosed the top five at our investor day, but we saw strength in tech, financial services, healthcare, retail, e-commerce, advertising, they all exhibited healthy growth. And then geographically, it was similar. So
Speaker Change: I think that's important for us, right? It's not one thing that's kind of driving the strength, but it's...
Speaker Change: It's pretty broad overall. From a planning perspective, and as we think about, you know, what we're guiding to, which is 7 to 8% for the year, you know, we feel pretty good about that. We know that we're running ahead of that, obviously, in the second half of 2024, but just given the usage-based nature of our business.
Speaker Change: We think that it's prudent to continue to plan, or smart to continue to plan prudently.
Speaker Change: In terms of what swing factors could be to drive, you know, double digit growth, you know, as we talked about yesterday, that's how we're orienting the business today. We are running the place internally that way we're planning a bit more prudently, but we'll continue to drive that those actions internally.
Michael Turin: Yeah there's nothing, there's nothing Michael that I would really add. I mean I think
Michael Turin: I'd certainly echo all of what Aidan said. I think you know when you break it down by some of the channels like we feel pretty good about the activity there. I think we referenced during the investor day as well as during today's conversation the fact that we are seeing a number of AI green shoots.
Michael Turin: I think that's pretty positive. I think the most important part of the story, frankly, is A, that
Michael Turin: and the way that we're kind of tuning and running the place is towards that double-digit number. And so, you know, guidance aside, like, that's the way that we are running the place. And then I think on the other side,
Michael Turin: There's just a lot of momentum in terms of the number of things that we have underway that's ultimately going to spring from innovation and technology, but we feel pretty good about the way that things are shaping up. And look, we just did our investor day a couple of weeks ago, so we're just a few weeks on from there. And
Michael Turin: You know, in the context of the framework, we feel really good going forward.
Michael Turin: That's great. Just as a quick follow-on, on gross margin, know that the line can move around a bit. If we're looking at 4Q relative to the rest of the year, is that more seasonal traffic-driven, and are you confident in the ability to continue to deliver some level of gross margin expansion as you progress towards those 27 targets? Thank you.
Michael Turin: Yeah, so what I would say, I'll answer that in two pieces. So in terms of Q4, it's, and we kind of signal this a little bit coming into the quarter, we always have higher hosting costs in Q4, just given how much traffic's going over the platform. And so we provision for that because it's important to us that we maintain trust with our customers.
and are resilient in terms of being able to deliver.
Michael Turin: you know, important traffic during things like Cyber Week. So hosting costs were a factor. You'll see if you look from Q3 to Q4 in 2023, that was a similar dynamic. The other thing that happened in the quarter was there was a greater mix of messaging product revenue as a percentage of total. So we talked about the fact that that business
Michael Turin: was strong. It accelerated from a growth perspective in Q4, and so that had a mixed effect as well. As you know, that business carries lower growth margins. Now, as we think about the plan for the framework that we provided at Investor Day and the 21 to 22 percent operating margin target by 2027,
Michael Turin: You know what we said is that that assumes basically constant growth margins. We aren't assuming
and uplifting growth margins to achieve that framework.
Michael Turin: Now, is there opportunity over time? I think so when you look at the mix of our products and how many of them carry software-like gross margins. But I think the reality is in the near term, messaging mix, both from a product perspective as well as where traffic is terminating geographically will have an impact. So we're planning for roughly flat gross margins over the next several years.
Thanks very much.
Speaker Change: Thank you. One moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of Nick Altman with Scotiabank. Your line is open. Please go ahead.
Speaker Change: Awesome, thank you. You guys alluded to a large deal strength in Q4 and at the investor day you highlighted how that $1 million plus customer cohort was
Speaker Change: I believe the fastest growing. So Khozema, can you just maybe talk about the high end and what's driving the strength there?
Speaker Change: Is that more volume driven? Is it more cross-sell driven? And then my follow-up is, when you look at the improvements in the communications expansion rate, how much of that is being driven by those larger deals or the high-end customers? Thank you.
Speaker Change: Yeah, so let me just step back for a second. I think that as we look at a lot of these larger deals, it's always going to be a combination of new land and then, of course, expand via cross-sell.
Speaker Change: But I think what's really important and interesting for our business is you kind of think back to the investor day is that
Speaker Change: A lot more of our customers are seeing value from using multiple of our products on the one hand.
Speaker Change: And then I think even more importantly, by using the combination of products, especially as it relates to the way in which communications and data interact, and then as we start to use AI.
Speaker Change: I'd say increasingly the larger, more sophisticated use cases that we're seeing deployed, enterprise customers, they're all kind of heading down that path.
Speaker Change: But it's always going to be a combination of, you know, expansion through cross-sell. But there are, you know, a handful of, well, more than a handful of new deals in there as well. So it's kind of a combination, but I think it's customers increasingly moving towards our vision.
Speaker Change: Remind me, Nick, what was the second part of your question related to expansion?
Nick Altman: Yeah, just on the communications DBNRR, that looked pretty good. How much of it is driven by larger deals? Yeah, yeah.
Great. Thank you.
Thank you. One moment for our next question.
Mark Murphy: Our next question is going to come from the line of Mark Murphy with J.P. Morgan. Your line is open. Please go ahead.
Speaker Change: authentication or something that ties into an app download at the front end of the cycle.
versus something that might align with an ongoing...
Speaker Change: and then is that AI business driving any tangible tailwind to revenue growth? For instance, is that greater than where the political contribution tailwind was?
Did you say the last part again, Mark?
It's a huge tailwind to our revenue right now.
Mark Murphy: Yeah, I think similar dynamic in terms of use cases. I mean, it really, it spans the spectrum there, Mark. I think you certainly do have folks that are doing
Speaker Change: 2FA as a part of it. I think, you know, one like really good example vis-a-vis usage, you know, 1-800-CHAT-GPT, obviously that was a pretty cool use case.
Speaker Change: to launch, saw a lot of volume. I think, as well, like you're seeing a lot of vertical...
Speaker Change: the business at large. But I think what's most encouraging about it is, again, the fact that we have as many as we do, the way that we'll be able to grow with these folks over time.
Speaker Change: I think the folks that are in the vertical spaces in particular, the ability to use data as well will enrich those use cases down the road. And again, having broad-based strength here is a good thing.
Speaker Change: one recently. Should we think of it as being an annual possibility in Q4 if you're going to be benefiting from some great terms and conditions, or do you think it's going to be more episodic than that?
Speaker Change: I think it'll be more episodic than that, Mark. I mean, we happen to have a large prepayment, as you said, $130 million in Q4. I just think that, you know, the way we think about it is just given the strength of our balance sheet, this is something we want to continue to do with different strategic vendors from time to time. It really allows us to secure better unit economics and pricing and better terms for the business.
Speaker Change: and so it won't necessarily be every Q4 to answer your question directly but you know from time to time in different quarters you will see these different prepayments.
Speaker Change: There's always kind of a run rate level in the business every quarter. But like I said, some quarters may be bigger than other. I just wouldn't assume it's gonna be every Q4. It doesn't necessarily play out that way. Very clear, thank you, appreciate it.
Speaker Change: Thank you. One moment as we move on to the next question.
Speaker Change: Our next question is going to come from the line of Ryan Koontz with Needham & Co. Your line is open, please go ahead.
Speaker Change: Great. Nice to hear some of your progress in the RCS market, some early wins there.
Speaker Change: You know, as we look at this, how would you characterize, you know, where the market is today? Can it scale? You know, what are the keys to success here from the industry? Is there multi-operator interconnect working today? Does it work internationally? Can you walk us through just a minute on where we are? Thank you.
Khozema Shipchandler: Yeah, Ryan, this is Khozema, I'll take that. So I think in terms of where we are, it's incredibly early.
Khozema Shipchandler: I think, you know, again, you know, you know, the story pretty well, like RCS actually been around for a long time. I think we're encouraged by some of the early deployments.
Khozema Shipchandler: But I still think that, you know, there are a variety of challenges that still exist in the ecosystem and interoperability being one of those. All that said, I think that we're ready. I mean, we want to support customers. I think the part of it that we're actually the most excited about
Khozema Shipchandler: not having to go to an app or a website or what have you. I think, you know, we've talked in the past, I think the utility of it.
Khozema Shipchandler: has a limited set of use cases depending on how the the RCS works and so
Khozema Shipchandler: I think where we are on it is very much ready. We'd be excited if it really took off. I think we're kind of cautiously optimistic about the way that it plays out. I think we view it as being sort of neutral to modestly accretive to the way that we kind of think about things.
Khozema Shipchandler: And in some, you know, very, very early days, I think the volumes that we're seeing, I mean, they're certainly taking off relative to where they were, but it's off a pretty low base. I assume the Android ecosystem is kind of far ahead of the Apple ecosystem right now?
Yeah, much further ahead.
Got it. Yeah, Android, right. Thanks so much.
Speaker Change: Thank you. One moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of Mehta Marshall with Morgan Stanley. Your line is open. Please go ahead.
Mehta Marshall: Great, thanks. Maybe you could just give a sense, I know obviously you have a lot of existing customers and you'll get an idea of their business performance by usage, but just kind of what you're seeing kind of on the business environment as we start the year, just kind of as you go through sales cycles. And then maybe as a second question,
Mehta Marshall: On the segment piece, you know, the net expansion rate still kind of being below 100 percent. Just kind of when do you expect some of the new winds and traction that you are seeing can kind of help, you know, improve that metric? Thanks.
Mehta Marshall: Yeah, Hamida, I think we feel pretty positive about the business environment. I mean, I think, I don't want to get ahead of.
Mehta Marshall: that go with that, that they can avail themselves of. I'd say pretty positive on balance. I mean, again, I don't want to get too far ahead of it, but we feel pretty good about the business environment. I think just one thing I'll note is
Mehta Marshall: We always kind of plan around a neutral macro so so nothing that we've kind of said or and certainly nothing in the business really
Mehta Marshall: I wouldn't take from that that, you know, we're planning for like a rebounding macro or anything like that. We're planning for neutral, we'll certainly be a beneficiary of a
Mehta Marshall: of a higher macro. And if it gets worse, you know, we can see us get clipped from that a little bit, but we're planning for neutral. In terms of net expansion, like we're not, it's not like a metric that we per se run the business to. What I would say about it is, is that
Mehta Marshall: When we look at some of the key inputs into the way that we think about the stand-alone segment business, I'd say, number one,
Mehta Marshall: You know, we're seeing a lot more stickiness in terms of the deals because they are more multi year. Number two, you know, we've done some work on the technology side to get customers activated much more quickly so that they're getting ROI.
I think that certainly helps. And then I think three...
Mehta Marshall: That all ends up being good for the business. I'm sure you heard the question earlier about the balance sheet dynamics with the business. We feel better about where it is. I think it's work in progress. We want to make it even better, of course.
Mehta Marshall: and revenue and the expansion characteristics will kind of follow all that.
Great, thanks.
Speaker Change: Thank you. One moment as we move on to our next question.
Our next question comes from the line of...
Speaker Change: Aran Bhatia with William Blair. Your line is open. Please go ahead.
Perfect. Thank you, guys.
Speaker Change: Maybe the first one I'll focus on NRR on the other side of the business, the com side, the 108 is pretty impressive here. I'd be curious to hear how much of that
Speaker Change: improvements and gross retention versus, you know, certainly there's been a focus in the business and investing in innovation product cross sell. So the split between that would be interesting to hear. And then how do you expect this to evolve? Is this a sustainable level going forward as some of those initiatives play out or, you know, is Q4 maybe, you know, so there's some seasonality in there that we should consider going forward? Thank you.
Speaker Change: Yeah, I'll take that, Arjun. This is Aidan. So, you know, the comms DB&E accelerated to 108% in Q4. I'd say it generally tracks revenue growth, right, if you look at it over time. But when you break it down, obviously, like I said, we had accelerated growth messaging, we saw strong performance in email. So I'd say from a product perspective,
Speaker Change: largely coming from there. When you break it down between the different, you know, churn, contraction, expansion elements of DBNE.
Speaker Change: churn was low. It has historically been low, continued to be low. We really saw the improvement through increased expansion. I'd say a modest reduction in contraction, like that's how I'd characterize it.
Speaker Change: When you look at DV&E by our different sales segments, I'd say the two that I would say performed really well were ISVs as well as self-serve. And we talked about them at our investor day. Those are key go-to-market segments for us. They continue to perform well in the fourth quarter as well. And then by industry, it was a number of different industries, but that gives you a sense of how to think about it a couple of different ways. In terms of how to think about it going forward, I just say like it attracts revenue. We don't guide to this metric, so I'm not gonna provide a specific number.
Speaker Change: Okay, yeah, I think that's helpful. And then maybe zooming out a little bit, you know, at
Speaker Change: Investor Day we talked a lot about kind of cross-sell as a big driver of growth and I think
Speaker Change: He had mentioned you. I think 63% of customers are single product.
Speaker Change: When you think about the cross-sell opportunity, like how do you bucket it in terms of, maybe like here's kind of the layup products that you can sell and like, you know, are there others that are home runs that are maybe longer sales cycles, but where customers could, you know, significantly increase in size? Like how are you approaching that from a product and go to market perspective?
Speaker Change: Yeah, hey Arjun, that's a good question. I think a couple answers, so one is, you know, we have
Speaker Change: concentrated incentives as part of the sales incentive plan to make sure that our teams are focused on it and I think you know they're excited about that alignment there.
Speaker Change: I think second thing, kind of to the real heart of your question, like are there, I think the word you used was layups. I mean, it's it's never a layup, but I think on some of the easier side, if you will, you know, you would imagine that.
Speaker Change: and voice in combination, like some of the kind of classic channels or, you know, if it ever, if it really took off, like with RCS, like being able to kind of reinforce some of that activity
a voice workload afterwards.
Speaker Change: two channels at the same time or complementary versus just one. So we can point to a lot of evidence there too where customers are getting a lot of value. So I'd say...
Speaker Change: of data with communications, like there's a lot of work that's going on in our
Speaker Change: And I do think we're seeing a lot of interest there. I think it'll take a little bit more time, but the easier that we make it, if we can make it completely self-servable, like that's really where we're headed with it. And I think that'll start to take off, but that'll take some time because of the R&D investment cycle.
All right, perfect. Very helpful. Thank you.
Speaker Change: Thank you. One moment as we move on to our next question.
Speaker Change: Our next question comes from the line of Alex Zukin with Wolf Research. Your line is open, please go ahead.
Hey guys, I wanted to ask, um, just...
Speaker Change: Maybe, again, we're still early into this whole kind of consistent guidance framework and coming out of the Analyst Day, where you did a great job. Maybe just talk about how much conservatism, how you've thought about conservatism baked into your work.
Speaker Change: both Q1 and as we get through the year. And then just a quick question about that debt expense, the operating income seemed one time that impact in Q4. If you could just dive a little bit deeper into that, those would be the two.
Speaker Change: Yeah. Hey, Alex, this is Aidan. So, you know, I think, again, we're really pleased with the performance in the second half of the year, saw strength across a number of different areas. As it relates to the guide for the year, we're guiding to seven to eight percent.
Speaker Change: As we said in Ambassador Day, we're orienting the business for double digits.
Speaker Change: That's just kind of how we're running the place. But again, the nature of our business matters, right? We are usage-based, we're not subscription-based. And so with that, there's a little bit more volatility, a little bit less visibility in terms of forecasting.
Speaker Change: As it relates to Q1, you know, we're guiding to eight to nine percent year-over-year growth. That's a point higher than we guided in Q4. So you are seeing that these trends that we're seeing in the second half
Speaker Change: that we saw in the second half of 24 are positively impacting our forecast. But again, just given the nature of the business, given that it's a fairly dynamic market, we'll kind of continue to plan prudently. As it relates to the bad debt expense that I mentioned, maybe just a little bit more color. So,
Speaker Change: It was a $17 million charge in Q4 related to a Brazilian telecom customer.
We really saw a slowdown in their ongoing payment activity.
Speaker Change: This is a customer, by the way, that we called out in our 10-Q for several quarters. I think what was different is historically...
Speaker Change: They had been making ongoing payments, which limited our, I'd say, bad debt exposure to partial reserves. This quarter, their behavior changed a bit and resulted in a bit more risk, and so we fully reserved their receivables.
Speaker Change: in the fourth quarter. So it was a bit of an unusual for us. It was about 140 basis point impact on our margins in the quarter. But like I said, we're fully reserved on that customer at this point. We don't expect additional charges related to OI, which is the name of the customer in the future.
Speaker Change: Perfect. And then just anything on the competitive environment and the competitive front as you go forward, particularly as you continue to kind of
Speaker Change: combine the or level up some of these conversations around a broader platform based offering.
Speaker Change: Yeah, I mean, we feel great competitively, right? I mean, I think we're the market leader in two really important categories. I think you're seeing
Speaker Change: Some of the recent success that we've had, especially in what I think is going to be really a secular trend around AI, that's very encouraging.
Speaker Change: We're growing at a faster clip than any of the other guys. And I think we want to take that strength and not rest on our laurels, but instead.
Speaker Change: convert that energy into new R&D investments, which kind of lead to, you know, a double digit mentality over time. And I think that's going to be a really good setup for the business. And I think some of the R&D investments that we're making are really exciting, and they're going to unlock a lot of value for customers.
Thank you, guys.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Patrick Wall-Ravens with Citizens JMP. Your line is open. Please go ahead.
Speaker Change: Oh, great. And let me add my congratulations. Aidan, can you remind me how to think about the operating margin ramp from, you know, like 17% to 18% and 25% to the
21 to 22 and 27
Speaker Change: I mean, I have 26 pretty flat currently with 25. Is that the right way to think about it?
Speaker Change: what I would say so we committed to 21 to 22 percent you know that
Speaker Change: given the guide that we gave for 2025, that implies roughly 17.5% in 2025. So you should assume accretion each year. We didn't give a specifically, you know, how to think about 26 and 27, but...
Nick Altman: Okay, I'll go in the middle. And then, Khozema, where are you, can you, can you maybe give us some examples of where you're using agents internally? You reeled off a number of areas during the analyst day, but where is it, where are you finding it's really working?
for your own internal audience.
Khozema Shipchandler: Yeah, good question, Pat. So I think there's two areas where we've seen really a marked difference in the way that we're operating.
Khozema Shipchandler: I think the first would be in customer support, where we're seeing a significant amount of deflections as a result of employing AI agents.
Khozema Shipchandler: That's made the workforce a lot more productive on the one hand, but on the other hand, it's also gotten customers to an answer much, much faster in effectively a self-serve fashion. So that's been very exciting for us, and we're going to obviously continue going deeper there. The other side of it, though, is
Khozema Shipchandler: with respect to SDRs. So instead of, you know, necessarily attaching a person to every incoming inquiry,
Khozema Shipchandler: were able to vet a lot of those now through, again, AI agents. And the reason that one, I think, is even more impactful in some respects is, obviously, there's a cost savings, but more importantly, you know, when the rep attaches themselves to
Khozema Shipchandler: the vetted account, it's just that it's been vetted, right? So it's a much more high quality lead so that the rep ends up pursuing business that's probably going to materialize versus just chasing something that happened to come in.
Thank you both.
Khozema Shipchandler: Thank you. One moment as we move on to the next question.
Speaker Change: Our next question comes from the line of Ryan McWilliams with Barclays. Your line is open, please go ahead.
Ryan McWilliams: Hey guys, thanks for taking the question. Love to hear about how you're seeing any changes in the macro, you know, through the end of the fourth quarter or to start this year and if you notice any changes from a usage perspective from a geographic standpoint in North America versus the rest of the world.
Speaker Change: I'd say, hey, Bryan, I'll start. So I'd say nothing I'd call out specifically from the end of Q4 through kind of early Q1. What I will say is for us, you always see a drop off in volume because you're coming off of a very high holiday season. That's not atypical this year. That's just kind of the seasonality of our business. So I don't think there's anything I'd call out specifically US versus rest of world as it relates to the volumes I'm looking at kind of daily.
Speaker Change: Yeah, no, I agree with Aidan. I mean, there's obviously a lot going on. It's dynamic, but I don't think that we've seen necessarily anything that would really impact our business this far.
Speaker Change: Perfect. And then, Khozema, you know, voice AI, we're still really early days, and I'm sure this is going to change, like, 10 different times over the next few years. But as we think about, like, the potential voice AI use cases that would make sense for Twilio versus might make sense more, like, over the top via, like, Siri or Alexa or something, like, what use cases do you think, or have you seen early days that people want to use Twilio for and that you guys are the rails for for your customers? Thanks.
Khozema Shipchandler: Yeah, I'll give you maybe like an anonymized example. I mean, I think that we have
Khozema Shipchandler: customers who are actively in beta and piloting different use cases right now. So basically, I mean, think about it this way, right? You have a customer who previously may have been using an IVR as the mechanism to handle an incoming workload and, you know, in many instances
Khozema Shipchandler: at some point that IVR has got to then flip to a human agent who's got to be able to handle like whatever that transactional workload is.
Khozema Shipchandler: and when that happens you know the only measure really of what's going on there is cycle time.
Khozema Shipchandler: And not only is it just cycle time, because of the fact that that's the case, you know, there's no real opportunity to
Khozema Shipchandler: You know, the customer that I'm specifically referencing in this case, what they're doing is, is that they're using
Khozema Shipchandler: The voice product that they were but layering on top of that our voice intelligence capability So all of the traits from that call
Khozema Shipchandler: are getting stored. They're using AI on top of it so that instead of even going into an IVR, the AI agent is handling it from start to finish. In addition to that,
Khozema Shipchandler: Because it's an AI agent, you know, you're not paying a person to handle that volume and so there's no constraint.
Khozema Shipchandler: What's especially interesting in this particular case is that it allows time for upsell, right? And so using some of the data that can be referenced from prior transactions and data history with that particular customer.
Khozema Shipchandler: You can use that data to go forward and say, you know, by the way, you ordered X, Y, Z last time. Here's an opportunity to do it the next time. And it drives more volume, ideally higher margin volume for those customers.
Khozema Shipchandler: and you know on the back end of that we can actually add a channel to thanking them for their business on the other side. So that is a kind of real life one that is in motion right now. It's not a singular example. We're starting to have that.
Khozema Shipchandler: conversation with a number of our other customers as well. And I think that is right at the heart of this idea of communications plus data plus AI, which is why we're so excited about it, is that we are actually starting to see the green shoots.
Khozema Shipchandler: That sounds much better than being stuck in Iberia Hill. Thanks Khozema, I appreciate the cover.
Sure.
Speaker Change: Thank you. And that was going to be our last question. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.