Twilio Inc. (NYSE:TWLO) J.P. Morgan 51st Annual Global Technology, Media and Communications Conference May 22, 2023 10:00 AM ET

Company Participants

Jeff Lawson - Co-Founder, CEO & Board Chair

Conference Call Participants

Mark Murphy - JPMorgan

Mark Murphy

Okay, good morning, everyone. Welcome to the conference. I'm Mark Murphy, Software Analyst with JPMorgan. And it is a wonderful honor to be here with Jeff Lawson, who is the Founder and CEO of Twilio.

First of all, Jeff, thank you for making the long trek out here.

Jeff Lawson

Thank you. The longest trek was actually getting down from the seventh floor, the elevator.

Mark Murphy

That can be the case.

Jeff Lawson

Yeah.

Mark Murphy

I've encountered that myself. So welcome to the conference. Maybe you could begin by just giving a very brief introduction of yourself and Twilio for the benefit of anyone out there in the audience who is not aware?

Jeff Lawson

Yeah, absolutely. So hey, everybody. I'm Jeff Lawson. I'm the CEO and Co-Founder of Twilio. Twilio is a customer engagement platform. We allow companies to understand their customers and then connect with their customers across all the different parts of a business that talks to a customer, whether it's sales, service, marketing support.

We're building this platform that allows companies to understand customers, based on every data point that a company has about this customer, everything they buy, everything they scroll, every visit, every click, and then use that to go create more engaging interactions over emails, calls, texts, every touchpoint that company has with their customer, be able to make those into greater lifetime value, creating conversations with those customers.

So we're the leader. Where we started is in communications, with a leader in this market called CPaaS, which is communications platform-as-a-service. We powered over a trillion interactions between companies and their customers last year, between calls, texts, emails, and then we acquired the leading customer data platform called Segment, that has powered over 10 trillion data points between companies and their customers in the past year. And now we're marrying those two together to build this customer engagement platform.

Question-and-Answer Session

Q - Mark Murphy

So we helped take the company public back in 2016. At that time, less than $300 million in revenue. The business boomed every year, all the way through the pandemic. You're approaching $4 billion in revenue today, over 300,000 customers. When you look at where we stand, the economy has slowed, right? The cost of capital has changed pretty materially. You've done some substantial layoffs. You've split the company into these two divisions.

From your perspective, where do you think we are in the evolution of Twilio? And can you help us maybe to envision where you see this business heading a couple years down the road?

Jeff Lawson

Yeah, absolutely. Right. So we've got this more mature $3.5 billion communications business. And the goal we've set for that communications businesses is to throw off a substantial amount of profit. So where we are in terms of the company, that was where we started 15 years ago. It's a large business. And we expect that it can throw off a substantial amount of profit. And we're focused on that -- with that part of the business.

Now the flip side is our data and applications business is a newer set of products. It's about $400 million. And those are in market capture mode. And so we're really focused on scaling up the go-to-market activities for the data and applications business, in order to grow that side of the business much faster. And so we split the business in these two business units to be able to separately pursue those two goals, right, efficiency, and growth for comps, as well as market capture and higher growth for our data and applications business.

That was a change that we made early this year, February this year, when we did a restructuring of the business and split into these two. Now I believe that this helps us to go accelerate our ability to achieve this goal that we have of building this one customer engagement platform. Because you think about talking to your customer over one of these channels, and actually understanding them and knowing what to say and being really smart about how you engage that customer, those are two sides of the same coin. Because if you if you have a channel open with a customer in terms of being able to talk to them, you don't know what to say, guess what, customers close that channel.

They're like, you're irrelevant, stop, unsubscribe, go away. And so these are two sides of the same coin. And now you think about where are we going? Well we're going into a world where artificial intelligence, and I'm sure that's the buzzword, everyone's weaving into their presentations today. But like, it's absolutely true that the amount of excitement out there in terms of customers, buyers, but also what's going to be possible, like we have reached that inflection point. I am absolutely confident.

I'm a software developer by background. I'm a technologist I've been doing -- I've been in the in the industry for 30 years. And I think this is the next big platform shift. And I think a lot of other people are saying this too. I'm not alone in this, that this is the next platform shift, shift like PC to web or web to mobile. Well AI is going to be the next platform shift. And what that implies is that when the platform shift occurs every market experiences this reset button moment where what buyers want, what customers want changes based on now what is possible.

And the decisions that you made 2, 3, 5, 10 years ago about your technology stack, and the decisions you made, are suddenly all up for grabs again, like that's what happens in a platform reset moment. You saw it when mobile came out where what was possible changed all of our expectations about getting into a stranger's car or renting someone's spare air mattress, or what all sorts of new things became possible that you didn't even imagine. And therefore, where you'd stay when you went on a vacation, or how you got around town, completely changed.

So that's the consumer world. In a B2B world, what it does is it resets all of the technology decisions that a company has made. And you say, suddenly, well, now we're going to optimize for a new set of things that are possible, that obviate a lot of the decisions that we made a while ago. And I think that is happening now for all different categories of B2B software. And we have an amazing set of assets to go into companies. Because the data that we have about our customers' customers, their end users, to me is the most important thing that companies are going to need, as they think about building out AI to go serve those customers.

I think about a world where, let's say, you've got a variety of AI doing a number of tasks for your customer, whether it's sales, service, marketing, or like all of those fields are going to get revolutionized because of what machine learning can do. And in any one of those scenarios, if I'm like, I've got an automated thing that is trying to do marketing, or sales or service for a customer, and in one universe, that thing does not know anything about who it's talking to, hello, hello, customer, how can I help you today? Versus the version of that where they know exactly everything there is to know about that customer, because you've been able to take every data point about that customer, coalesce it into one golden profile, and then use that profile to teach the language model that whatever AI it is, to understand that customer and to serve it differently, you're going to get a very different outcome. Hello, Mr. Murphy, I see you're a longtime customer, with a high likelihood of churn. How can I help you today? Or now you got my -- you know what I mean, right, and all sorts of things.

And the interesting thing is the last generation, the mind naturally goes towards a conversation for say, service and support, right? Our minds, as consumers, or as business people often go towards like, well, that's an obvious use case for this technology. Well, when you think about those interactions, it used to be that you would build it out very intentionally. You'd be like, okay, this decision tree in a company would say, oh, well, if they say this, then you're going to say that, and they kind of model these interactions out very tightly, because that was how the technology worked.

They called it intent. What's your intent? Your intent is to buy, your intent is to change your flight, your intent -- and you narrow the model, these very discrete activities. Well, now you just hand all the context of that customer to a large language model. And it's just going to figure it out. And that's the amazing thing that changed in the last six months with the advent of these large language models. And so it figures it out, world that we're now in, changes everything.

Mark Murphy

And you have 10 trillion of those data points in segments, I believe you said earlier.

Jeff Lawson

Yeah, last year alone.

Mark Murphy

In last year alone. Okay, so I didn't even have to ask you about AI. We went there naturally. But I want to come back and double click on that in a few minutes. Before we do that, I can hear the excitement in your voice. And I've known you a long time. You personally bought Twilio shares years ago, in the 20s. You did that again, recently, at a little higher level. The company has authorized a $1 billion share repurchase program. You used it pretty actively, right in Q1.

The stock is trading around 1.5 times revenues, you have $16 a share in cash, you have much more than that per share in NOL. So it feels a bit washed out. Where do you see investor disconnects at this point in time that are kind of driving -- that are driving your buying…

Jeff Lawson

Given the fact pattern you just stated, wouldn't it make sense for why we'd be buying, and I'd be buying? Just say it.

Mark Murphy

Yeah.

Jeff Lawson

What's the disconnect?

Mark Murphy

I think it's -- when so when you sit down and speak with investors, what do you think? What do you think at this level they're under estimating if I could rephrase that?

Jeff Lawson

Well, I think there's two things. One is I think there's certainly disappointment in our guide because we got into a low growth guide in Q2. And I think part of this is we are with a usage-based model. So the $3.5 billion of communications revenue is a usage based model that in the economy it'll mirror some of these economic activity and what's going on outside of the walls. So during the high growth era of the last decade, we were able to show industry leading dollar base revenue expansion and growth numbers at our scale. And now we're seeing the flip side of that, which is, the headwind does disproportionately impact us, in terms of seeing less economic activity outside of our walls.

I was just telling the story upstairs to some buy side, about how I was trying to buy the new Zelda game. And I went to Best Buy, and I got a text message that the game was going to get delivered. But I had to get on my flight. And it hadn't come in time. So I cancelled it. And I got another text message saying cancel your order, right? So that transaction equals two text messages. So if there's less transactions going on in the world, because consumers are not spending as much at say a retailer, it would be fewer communications. Kind of makes sense.

The communications are coming out of this customer is often a function of how much transaction volume is going on out there. So we will see an accelerated headwind during this period of time. But then I also look at it and say, okay, well, two things are going on. One is when the macro economy turns than we -- I have the opportunity to see an accelerated tailwind again, which is I think, one of the benefits of the platform and usage based model.

And number two, is during this period of time, we are seeing the -- we are seeing all of the core KPIs of the business, for communications look really good, like we are not losing share. We are not feeling price pressure, like our pricing power is holding up. So these are all the things that you want to see during a period of time like this, to say, hey is the business fundamentally healthy? But yes, there's some macro headwinds, or is there anything else going on? And we took a look at -- we called out several industries. First of all, crypto.

So we disclosed last year 3% of our revenue is crypto -- was from crypto companies, not is crypto. And to have an industry that represents 3% of revenue just completely implode over the course of six months, obviously that sucks. And that's going to present a headwind for you, which we're certainly seeing. We've also talked about how we're going to lap most of that in Q3 of this year. And that represents a 300 bps headwind of growth for us. So there's that.

Then we looked at the other industries, we called out retail, we called out social media, we called out a couple others. And we kind of like -- what we did is we squared away, here's what we're seeing in the usage patterns. And then we went looked at the top five companies, in each one of those sectors, and what are they saying on their public earnings calls? Like, we compared and these things squared away really well, in terms of what growth rates were they talking about a year ago versus today, and what were we seeing a year ago versus today.

And so we look at these industries, we say, yes, so there's some macro headwinds going on. But we're well situated to be able to capture that. So when we look at our medium term growth target that we put out of 15% to 25% year-over-year over the medium term, where medium term is 2025 through 2027, we feel very confident that we are going to be able to hit those growth rates because of really four reasons.

Number one, is we are seeing our usage volumes stabilize. So through the end of last year, and the beginning of this year, we saw continual degradation of those usage volumes, in terms of, hey, this is what we think the platform is going to be doing in terms of volume, but the actuals that are materializing are less. And so we have to keep bringing down our estimates of what's going to happen. Well, now we are seeing those stabilize as we get into it -- as we're in Q2, which feels good.

Second, is what I mentioned in terms of the core KPIs of the communications business being solid, right? We're not losing market share, we're not losing to competitors. We're not seeing price erosion or anything like that. In fact, if anything, we look at our publicly traded comps, we are much larger and growing faster in terms of our Q2 guide, or Q1 results than anyone else out there. So if anything we're taking share in this market. Again, good things to see.

Third is, we are working on the go-to-market investments for our data and applications business. Those are coming together nicely. It's still early, but we're really invested in the reconstitution of our go-to-market for our data and applications business post our restructuring. And that is going very well. And then fourth is obviously the tailwinds that AI and all the things our customers want to do with AI now that are driving a lot of the conversations with our customers.

I mean, I see a tremendous opportunity ahead. So those are the four reasons why I look at it. And I'm like, look, we've put out this 15% to 25% annual growth goal for the medium term. And I think investors out there are saying, well, are you really going to be able to do that because we guided to single digits for Q2, which I get it. That sucks. But we are confident in this medium term guide because of all those reasons I just gave you.

Mark Murphy

Jeff, when you -- you made this comment here that you're seeing usage volumes stabilize as we're in Q2 and I just want to clarify, you're talking about core, SMS, text, are you talking about email, are you talking about video, talking about…

Jeff Lawson

Communication.

Mark Murphy

…the whole aggregation, the entire communications platform? Yes, okay. So you've been operating, as you just described in this quite challenging business climate, software companies are seeing that left and right all over the place. But very quietly under the radar, you have announced some customer wins that we think are rather head turning. You had -- you closed your largest email deal ever in Q1, right? One of the largest Verify deals, you closed a Flex deal with Sanofi, largest ever network authentication deal today with a Fortune 100 company. What do you think we should read into that? How -- why are there companies that are leaning in with some of these larger commitments, even during this environment?

Jeff Lawson

Yeah, and a large segment deal that we announced in our Q4 earnings call with JPMorgan.

Mark Murphy

I'm familiar with that one as well.

Jeff Lawson

Yeah, you heard of them?

Mark Murphy

I have.

Jeff Lawson

So what's happening? It was -- thank you for advertising some of our big customer wins. What's happening out there in the market? Well look, the services that we offer, of helping connect a company to its customer, by better understanding that customer, and then using all this digital technology to build a digital relationship with that customer. And doing so to increase the lifetime value of that customer relationship or to decrease the cost of acquiring that customer. That's -- everything that people do, it's really a ladders up to one of those two.

It ladders up to acquiring customers more cost efficiently with these amazing stories. One of my favorites is Domino's Pizza, where they took Segment, and they said we're going to understand our customers better. And then based on that we're going to target ads betters. So they ran this experiment in Mexico where they said we're going to target our customers who are most likely to buy. And in doing so they had a 700% increase in return on ad spend. When she talked about acquiring customers and revenue and getting a 700% return on ad spend increase, that's the kind of story that customers want to hear in this type of macro environment, right.

And so we've got all these different stories about customers getting more efficient, in terms of like understanding of customers allows you to acquire them more efficiently, allows you to retain them more efficiently and allows you to unlock more lifetime value from those customers. And so I think that the way that we've been able to position our platform during this period of time has been really fruitful in terms of aligning to the things that our customers care about during this economic cycle.

And so I think that's what -- when I -- like the personal conversations that I'm having with a lot of companies, a lot of the more hand wavy type outcomes that a few years ago, maybe customers were interested in talking about, now have gotten very much focused on ROI. And we have gone straight there with our customers, I think to great success.

Mark Murphy

So there's this -- you're talking about the economic cycle. There's also this -- the customer experience investment cycle itself. And I recall this during the pandemic, you had run a customer survey. You found that organizations were saying they had -- they had accelerated their communication engagement strategies by six years, right. So we did go through a wave where you had the pandemic as an accelerant.

Can you walk us through how customers are thinking about the category today? And if we try to map it to the durability of Twilio's core offerings, because they've been in -- they had gotten into this digestion mode, certainly for front office revenue generating software. They've been in a digestion period. How do you think that kind of rolls forward? What do you think? When do you think they sort of reengage or what prioritize?

Jeff Lawson

Well, I think there's two different things you have to think about. One is the usage-based model for use cases that have already been deployed. And that's not an active decision by a company. A lot of software companies, during this period of time might be saying things like, oh, well, we're not seeing the renewals that we maybe historically said. And that's not what is driving Twilio. For us if a company put in that use case of like, pay will [ph], text you when your ecommerce purchase is made.

Then generally speaking, it's like if there's fewer purchases, there's fewer text messages, just to be blunt. It's not an active decision that a buyer has made. It's just a fact of the matter, which is both good and bad, right? It's bad in the terms of like, oh, well, what's in your control, Jeff? Well, what's in our control is can we go use this period of time to go win more market share from our customers? Can we go close new relationships? Can we go help our customers consolidate vendors and do things like that? I think there's a lot that we can do and we are doing in terms of vendor consolidation during a period of time like this.

But the other thing is, as usage rebounds, then usage for us grows and revenue therefore grows. That's having a usage-based model. But the flip side, on the software model is in terms of bridging what it is that we do to the things that customers care about most? And look you would say, well, isn't that what go to market always does? And yes, but it's even more important, you're focused, because people don't have the time or attention to work on side projects today.

There may be a -- in a couple of years ago, maybe there are more hobbies going on in terms of ideas that executives and companies were pursuing that may bear fruit one day, well, the ROI of those types of initiatives is now much more scrutinized and much closer than it has been in the past. And so when I think about it, the use cases that got installed during COVID, except for the ones that are literally only about the pandemic, like those use cases are still out there. And they are going to be subject to macro. Macro grows, they are going to grow with macro strength [ph], whatever.

Yeah, and there's a small number of use cases like vaccinating people, and we help power the messages to help get about half a billion people vaccinated around the world. I'm really proud of those use cases. We helped educate and coordinate the logistics of people getting life saving vaccines, but those use cases are going to go away. And that's a good thing. We can celebrate when that's not -- you're exactly right. But that's a relatively small amount of our revenue.

There's some of that going on. But the vast majority of everything that like companies like say, retail, or hospitality, or real estate, or transportation, or any of those companies deployed, those use cases live on. And if anything, the pandemic brought us into new customer relationships with new companies that therefore we have the ability to go in and expand those relationships, expand the use cases, and the pandemic got us in the door with those types of organizations. And so I think that's the opportunity that we look at now.

We have to align what it is we do with the things they care about today. If two years ago, it was about responding to the pandemic and digitizing all of these processes, like well, we did a good job of capturing a lot of the demand. Now let's go in and figure out okay, well, what are the other use cases in that customer today, and how do we, over the course of time end up going wall to wall inside of that customer when the relationship began because of the pandemic?

Mark Murphy

Okay. Can you give us a few words on the challenges and opportunities that you may see coming out of the headcount actions? As everyone in the audience knows, it's been a very widespread trend across the software landscape? It's a subset that have done multiple rounds of headcount actions. You have parted ways with 26% of employees. So there is a real magnitude here. Can you comment on why you took such aggressive action? And how would you kind of steer us to look at the challenges and opportunities that arise from that?

Jeff Lawson

Well, like I said, before, we are focused on building profitable growth into the company now, right. And I think that -- like, if I look at the first 13, 14 years of the company, we were focused on market capture, and doing so responsibly, but really growing our presence in the market. In that course of time, we built a nearly $4 billion revenue business, which I'm extraordinarily proud of. And I think that's the right thing to do during the expansionary phase of a market. When the cost of capital is low, you got to take the market.

Now we're on the other side of that curve, which is to take your leadership position, and turn it into a profitable growth story, and take that leadership position and turn it into the next era of the company, which is to go then solidify your position in that market and then expand out from there. And that's what we're doing. And so the cost actions that we took in terms of restructuring, or the reductions in force, were a part of turning the corner for us from a purely growth-oriented company to a profitable growth company.

And I like -- when I look at it, for a long time, we did put off the notion of driving and focusing on profit. And we told investors look, we are focused on top line growth, not bottom line growth. And at the time, yeah, we said it in our IPO in 2016, and multiple times after that, it's the right decision to make, and to go capture the growth. And we did. We went from the year before IPO, I think we were 140 million revenue to now $4 billion. I think that's the right thing to do during that period of time.

Now we take that leadership position, and we parlay it into the next era of profitable growth. We've committed this year to profit in terms of throwing off on our profit this year. We've also committed to 300 to 400 bps of sustained growth year-after-year after this. And so we have also said that we feel confident that we can hit those growth goals in any macro environment. So we have our hand on the wheel in terms of moderating our spend. And our biggest source of spending, as you can imagine, most technology companies is headcount.

So we are moderating any of our hiring or backfilling of employees, based on the performance of the company, so that in any economic environment in this period of time, we feel very confident that we can hit not just our 2023 profit goals, but also our medium term goals that we've set out over the next several years.

Mark Murphy

It's good to hear that confidence. So -- but let's touch on…

Jeff Lawson

And I've heard investors ask like, hey, how committed to that are you? And so I'm here today to say, look, we are absolutely committed to those goals. And we have our hand on the wheel to be able to accomplish those in any macro environment, yes.

Mark Murphy

So that's come hell or high water type of…

Jeff Lawson

Yes, totally.

Mark Murphy

Well, there were some comments, though kind of tucked into the script and the Q1 earnings call about potential to accelerate growth in the back half of the year. Right. And actually, it related to both divisions of the business. It was -- there was a comment on the communication side of the business, right. I read that as a real time usage based kind of revenue type of a comment. And then there was a bookings comment about the potential to reaccelerate at the back half of the year on the other side of the business, the data and app side of the business.

Can you touch on that for a moment? Because you probably get -- there's probably some debate around well, what is going to happen in the trending of the actual -- the environment and the economy in the back half of the year. So what is underpinning that type of an uptick?

Jeff Lawson

Yeah, well, I mean, first, there's just some technical things going on in terms of lapping some hard compares, lapping, crypto, which I think peak crypto was Q2, Q3 last year. So lapping that, and then some of other factors that just made some hard comparison. There's a technical aspect of that. And we've disclosed a lot of the details of that. But then the second thing is when I look at -- okay, first of all, do I think that macro is going to be up or down from here. Look, I don't have that crystal ball, I don't know for sure. That's why I think we have to be prudent in how we think about guiding for the year.

And so I think that we are doing the right things to capture the market as it exists today. And to go capture more market, we're not necessarily just betting on oh, we're going to have a macro recovery. No, like in the macro environment that we're in, we're going to optimize, to go serve our customers, win market share, and go help our customers through this period of time as well.

Then the second thing I look at is on the data and application side of the business, really making the investments that we need to do to get the go-to-market machine humming again. And we talked about last year about how we had combined our go-to-market teams, which turns out was the wrong answer. And so we split them apart. And our business unit structure now solidifies that in terms of the entire business units. And now we have a rebuild of a lot of the go-to-market capabilities.

So we talked about that on our analyst day, last year in November. And we are well on our way. So now we sit here, we've got our butts in seats in terms of our sales team. And we are training, enabling and making those folks productive. And as we do that, we would expect the productivity of that sales team to follow. And that's why I look at the latter half of this year, I look at the things that we're doing in terms of hiring great folks, enabling them to go build pipeline and go sell our data and applications products. Our products there are fantastic.

And so enabling that team is the key to making them productive in the market. And that's exactly what we're doing. So I see all the right things happening in order to get us to that productivity that we want in order to show the revenue growth, which is obviously the outcome of doing all those things well, slightly delayed.

Mark Murphy

Great, it's great to hear that optimism as well. So we're down to about 2.5 minutes, I wanted to do a quick check and see if there's any quick question in the audience. And we do have to get you a microphone. So let's go to Imran right here.

Unidentified Analyst

So Jeff, a huge fan of you and what you have done. But looking at the company, it feels like that, you have a high growth business, you have a mature business. And investors are not necessarily looking at the -- at least the valuation aligned having bought companies together. Does it make sense to spin off the communication business?

Jeff Lawson

I think that will be a big mistake. So there's a reason why we're building this as one platform because I believe we can unlock more value than either parts alone. And that's the point here. Now we've got a lot -- obviously a lot of work to do to make those two pieces come together. But if anything, I would say a lot of the advancements that are going on right now in AI, machine learning, make the case for an integrated platform even stronger than they were before the advancements of say the last year.

And the reason is because understanding your customers and then engaging with them are two sides of the same coin. And we can make every communications more valuable by infusing understanding into those communications. And likewise, we can make the data asset all that much more valuable by taking the content of all of those trillion communications and helping them to accelerate the building of those profiles of the customers.

And so this is a nice flywheel. Because when you understand your customers really well, by taking all that data, turning it into insights, personalization and making every touchpoint you have with that customer more relevant and insightful, what happens, customers are more likely to engage with you. They're more likely to click on that email, go to your website, browse, buy. They are more likely to respond to you versus saying stop, unsubscribe, go away.

And so the more engagement you get from that customer, the more data you have. The more data you have, the better you understand them. This is the virtuous cycle that companies like Google, Amazon, Facebook, they know you're not -- you and my Amazon home pages are completely different. Why? Because they take every bit of data about us, and they use it to personalize that service. And as a result, we say thank you, what a great product. I'm going to buy more stuff from Amazon, not less.

That's the virtuous cycle. That data turns into understanding, which turns into more engagement, which turns into more data. That's what we're building. And in doing so, we can unlock more value for both communications and for the data than those being independent entities. And more importantly, we can unlock more value for our customers in integrating those things together into one flywheel.

Mark Murphy

Perfect timing. The clock hit zero. I don't know how you did that so well, Jeff. But I can't thank you enough for being here. That was super engaging. And thank you for taking the time to be with us.

Jeff Lawson

Thank you, Mark. Thank everybody.