Twilio Inc (TWLO) 2017 Q1 法說會逐字稿

Good afternoon. My name is Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio Q1 2017 Earnings Conference Call.

(Operator Instructions) Greg Kleiner, VP of Investor Relations and Treasurer, you may begin your conference.

Thank you. Good afternoon everyone and welcome to Twilio's first quarter 2017 earnings conference call. Joining me today are; Jeff Lawson, Twilio's Co-Founder and CEO and Lee Kirkpatrick, Twilio's CFO.

The primary purpose of today's call is to provide you with information regarding our 2017 first quarter performance, in addition to our financial outlook for our 2017 second quarter and full year.

Some of our discussion and responses to your questions may contain forward-looking statements, including but not limited to, statements regarding our future performance, including our financial outlook, impacts and expected results from changes in our relationship with our largest customer, our market opportunity and market trends, the growth of our customer base, customer adoption of our products, our momentum, the benefits from our business model, timing and focused on expenses, and our ability to execute on our vision.

These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should any of our assumptions as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual Company results could differ materially from these forward-looking statements.

Discussion of the risks and uncertainties related to our business is contained in our Form 10-K filed with the SEC on February 22, 2017, and our remarks during today's discussion should be considered to incorporate this information by reference.

Forward-looking statements represent our beliefs and assumptions only as of the date at such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law.

Also, during this call, we may present both GAAP and non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago. We encourage you to read our earnings release as it contains important information about GAAP and non-GAAP results, as well as the reasons why we present guidance for non-GAAP financial measures of loss from operations and net loss per share, but not the comparable GAAP measures. The earnings release is available on the Investor Relations page of our website, and is part of our Form 8-K furnished to the SEC.

Finally, at times in our prepared comments or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly or annual results. Please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investors.twilio.com to access our earnings release, periodic SEC reports, a webcast replay of today's call, or to learn more about Twilio.

And with that, let me turn the call over to Jeff.

Thanks, Greg, and welcome everyone. We had another strong quarter in Q1 as the business showed continued progress across several of our key initiatives. At a high level, base revenue grew 62% year-over-year to $80.6 million. We saw further expansion within our existing customers as dollar based net expansion came in at 141% for the quarter.

We also added 4,000 to new active customer accounts in the quarter, ending the period at 40,696 accounts, up 42% year-over-year. However, before I go further into the highlights of the quarter, I want to discuss some changes at our largest customer Uber, which we expect will dampen our growth this year. As you may recall, Uber uses Twilio for a variety of use cases, including driver and rider communication, driver marketing, and several others.

Uber has successfully leveraged our global communications infrastructure as it has rapidly grown its business around the world at an unprecedented pace. As a result, Uber grew as a percentage of total revenue in each quarter throughout 2016, ending the year at 17% of our revenue in Q4. In the first quarter of 2017, Uber accounted for roughly 12% of total revenue, and as Lee will outline in a moment, we expect their contribution to decline further this year.

Uber continues to grow rapidly, but they are changing the way they utilize and consume communication services. Previously, they had used our platform to support most of their use cases in the majority of their operating territories. Now, they are optimizing by use case and by geography, resulting in a more active multi-sourcing program.

In addition, they plan to move communications for some of their use cases in-app. We believe that Uber will remain an important customer for us going forward, but their tremendous growth and the resulting magnitude of their communication spend has resulted in this change in approach.

While it's not uncommon for large companies with mission-critical use cases to dual source key technologies, communications included, there are very few companies in the world with the global scale and engineering prowess to take on a project of this magnitude. Most companies are unwilling or unable to navigate the complexities of integrating into multiple vendors and optimizing at a geographic level for each specific use case, much less taking on the risk inherent in doing so. We do not believe this is representative of most companies and is more indicative of Uber being an outlier.

I'd like to point out that after Uber and WhatsApp, we have very little customer concentration. Our third largest customer is about 2% of revenue with a gradual slope after that across the rest of our customer base. So while the changes in our relationship with Uber will restrain our overall growth in 2017, this does not change our belief about the health of our business or our long-term outlook.

Absent Uber, our base revenue grew by 60% year-over-year in Q1, a level of growth that we have met or exceeded consistently throughout recent periods. Our business continues to grow rapidly and we remain excited about the broad-based opportunity we have in front of us.

So let me transition to some of the highlights and continued momentum we are seeing. We had success in the quarter with new customer launches, with customers like Life On Air, makers of the popular host party app. Newport Group and (inaudible) along with existing customers like Shopify and Ticketmaster. On the enterprise front we added household names in a variety of industries like pharma, security, retail, technology and banking to our customer roster in Q1.

We have good momentum here and we'll continue adding further resources to our enterprise go-to-market efforts. One example I want to highlight is a new relationship with one of the world's top investment banks. This is another great example of our success using developers as an entry point in large organizations. The engineering team originally brought us in to help address their compliance and communications needs involved in migrating thousands of financial advisers still using BlackBerry's to a new BYOD solution.

As this project gained visibility within the organization, we engage with the leadership of the wealth management division on another use case, improving the customer engagement of their financial advisors through new and enhanced communications channels. At the heart of both projects is the desire to create more engaging communications between the Company and its customers. But also to do so in a compliant way across the organization. We look forward to driving success for both of these initiatives and seeing what use cases we can tackle next.

We made further progress with customers outside the US as well, highlighted by the addition of Grab, a leading technology company that offers the widest range of ride-hailing and on-demand services across Southeast Asia. We will be working closely with Grab to provide anonymous calling, ensuring security and privacy for the communications between passengers and their more than 780,000 drivers across the region. This is a testament to the progress we've made in establishing a local presence in the APAC region to fully support our customers there and the opportunity we have globally.

Also in March, we were thrilled to announce a further expansion with our longstanding partnership with Amazon Web Services. As a reminder, Amazon is a customer, a supplier, and an investor in Twilio. We are helping to power three AWS offerings, the simple notification service, chime, and now Amazon Connect, their new contact center offering. Our support of AWS is another successful example of our work with solution partners.

Not every company is going to be willing or able to build a contact center, for example. So by working with solution partners like AWS, we can help to address the entire market whether build or buy. We look forward to supporting AWS as they continue to roll-out these products around the world.

On the product front, we announced several new innovations and important milestones. Our new IP messaging product, Programmable Chat is now generally available as of this morning. Now, our customers can have real-time IP based chat into web, mobile and desktop applications. We've seen some interesting use cases from the early adopters across fields like, buyer-seller interactions, customer service, team collaboration, contextual in-app chat and many more.

For example, we have a well-known global fashion brand building high touch communications with their customers. Notify, our cross platform notification product moved into beta recently. When we talk to customers, the heterogeneous and complex nature of communicating with their end customers is a large and growing pain point, and one that Notify can help them to solve.

We're excited to open up access to let any developer build solutions with Notify. One example of an early adopter is a customer using Notify to send lead alerts to tens of thousands of real estate agents through SMS, push, and Facebook Messenger.

We also announced general availability of the first portion of our Programmable Video family, Peer-to-Peer Rooms. This API enables end-to-end encrypted, multi-party video calling between web and mobile devices. We're seeing customers implement applications for tele-medicine, recruiting, social chat and more. A great example here is doctor's on-demand, as they've embedded this product into their mobile app, where it powers the video calling experience between doctors and patients.

And what started as an internal hack from some of our developers became a reality for customers as we launched Programmable Fax recently as well. Though we timed the announcement ironically on April Fools' Day, fax is still a vital tool in a variety of industries including healthcare, legal, and government institutions, and broadly, in countries like Japan, Germany and Israel. Even in the restaurant world, fax remains an important part of daily life.

As an example, we have a customer called Slice, who provides online ordering services to over 6,000 independent pizza shops across the United States. So once again, we have taken what used to live in hardware and transferred that to the world of software. We look forward to discussing these latest launches and plenty more with customers and prospects at our SIGNAL conference coming in May.

We also made an important addition to our management team in the first quarter; George Hu, the former CEO of Salesforce.com joined Twilio as our Chief Operating Officer. He will be responsible for our go-to-market efforts on a global basis as well as operations broadly. In this role, George will be focused on the continuing evolution of our customer engagement model and adding the people and processes necessary to drive further growth.

There are very few executives with a resume like George has and we are thrilled to welcome him to the organization. Over his 13 year career at Salesforce, George held a variety of leadership roles and helped Salesforce scale revenue from $20 million when he started to over $5 billion at the end of his tenure. George's focus, knowledge, and operational experience at global scale will serve the Company well as we pursue our ambitions for further growth.

In closing, while we're clearly not pleased about the change in the relationship with Uber, the remainder of our business continues to perform well. Customers continue to choose Twilio not only for the innovation we're providing, but also the quality and reliability of our platform. This is due to the hard work and passion for driving customer success from Twilions around the globe. We have a tremendous opportunity in front of us and feel we are positioned to fulfill on our mission to fuel the future of communications.

And now, I'm going to turn it over to Lee to discuss our financial results. Lee?

Thank you, Jeff, and good afternoon everyone. Our results in Q1 show continued strong revenue growth though restrained by the quarterly decrease in Uber revenue that Jeff mentioned earlier. We continued to add new customers at a rapid clip and drive success for our existing customers.

Base revenue for the first quarter of 2017 came in at $80.6 million, up 62% year-over-year from the first quarter of 2016. This compares to our guidance of $78 million to $79 million. Total revenue for the first quarter of 2017 was $87.4 million, up 47% year-over-year from Q1 in 2016. Base revenue as a percentage of total revenue improved to 92% in Q1 compared to 84% in Q1 of last year.

Our top 10 customer accounts were 25% of the total revenue in the quarter. Uber was the largest customer at 12% and WhatsApp was 5%. The next largest customer continued to be around 2%, then it's going down gradually from there. We have a range of customers of all sizes as we go further down the list, extending out to the long tail.

As of March 31, 2017 active customer accounts were 40,696, up from 28,648 as of March 31, 2016. This includes [353] active customer accounts from the Beepsend acquisition that closed in Q1. Also within this figure were seven variable customer accounts in Q1 of 2017 compared to nine in Q1 of 2016. Our dollar based net expansion rate was 141% in the first quarter as our platform business model continues to drive our growth.

Before moving on to profit and loss items, I'd like to point out that I'll be discussing non-GAAP results going forward. Our GAAP financial results along with the full reconciliation between GAAP and non-GAAP results can be found in our earnings release. Non-GAAP gross margins in the first quarter of 2017 were 58.6%, up from 54.9% in the first quarter of 2016. The year-over-year increase was due to the combination of efficiency gains and the mix of international usage.

We saw continued activity in the regions outside the US, where our margins are a little higher, and carryover from Q4, which you may recall, I discussed on our last earnings call. We expect this to normalize in the current quarter, so we do not expect gross margins at this level in the short term.

Please recall that we're currently operating our business to optimize for reach and scale to drive revenue growth rather than maximizing for gross margin. Gross margin may fluctuate in the near term as we pursue this deliberate strategy to further extend our market leadership.

Non-GAAP operating expenses in the first quarter of 2017 in total were $55 million or 63% of total revenue. This compares the $35.8 million for the first quarter of 2016 or 60% of total revenue. We're continuing to invest across all segments, particularly R&D and sales, to capitalize on the market opportunity ahead of us.

Non-GAAP operating loss was $3.7 million in the first quarter of 2017 compared to non-GAAP operating loss of $3.2 million in the first quarter of 2016. This was better than our original guidance of a non-GAAP operating loss of $5.5 million to $6.5 million. Our non-GAAP operating margin improved by approximately 100 basis points year-over-year from negative 5% to negative 4%. We ended Q1 with 829 employees.

Our non-GAAP loss per share in the first quarter was $0.04 based upon a weighted average share count of 88.6 million shares. This compares to non-GAAP loss per share of $0.05 in the first quarter of 2016, based upon a non-GAAP weighted average share count of 71.3 million shares, which assumes the conversion of preferred stock at the beginning of that quarter. We ended the quarter with $289 million in cash and investments compared to $306 million at the end of the previous quarter.

Now, let me turn to guidance. For the second quarter ending June 30, 2017, we expect base revenue in the range of $81.5 million to $82.5 million; total revenue in the range of $85.5 million to $87.5 million; non-GAAP loss from operations of $10.5 million to $9.5 million; non-GAAP net loss per share of $0.11 to $0.10 based on 91 million weighted average shares outstanding.

For the full year ending December 31, 2017, we expect base revenue in the range of $340 million to $343 million; total revenue in the range of $356 million to $362 million; non -GAAP loss from operations of $29 million to $26 million; non-GAAP net loss per share of $0.30 to $0.27 based on 92 million of weighted-average shares outstanding.

Please note that the reduction in our guidance is due to the changes in our relationship with Uber that Jeff discussed earlier. And while we do not plan on providing regular guidance on specific customers going forward, I thought it might be useful to describe some broad assumptions on Uber inherent in this guidance.

Prior to this quarter, we've been forecasting modest gross for Uber in 2017, but clearly not at the same rate as we experienced in 2016. We've now taken our Uber forecast assumptions down significantly. Currently we're modeling for their contribution to our revenue to decline both sequentially in Q2, and on a year-over-year basis in 2017 as a whole.

While our revenue from Uber was down sequentially in the first quarter, it did grow faster than our overall base revenue on a year-over-year basis. Specifically, base revenue absent the contribution from Uber grew 60% year-over-year in Q1. This also positively impacted dollar based net expansion as that figure would have been 137% without Uber.

Also, to give you some historical perspective on both figures, in 2016, base revenue absent Uber grew by 70% versus 79% including Uber. Similarly, dollar based net expansion absent Uber was up 149% compared to 161% including their contribution.

Looking to the balance of the year, as Uber contribution to our revenue decreases, it will negatively impact the reported figures for both base revenue and the dollar based net expansion rate. We plan to provide both sets of numbers to help with your evaluation of our business for the next several quarters as underlying momentum on both metrics remain strong.

In terms of profitability, given the reduced revenue run rate, we are currently targeting breakeven in terms of non-GAAP operating income in Q3 of 2018. Our forecast for the balance of the business outside of Uber remain very strong and even with these changes, we expect overall base revenue to grow by roughly 40% in 2017. We remain enthusiastic about the opportunity to help migrate communications to its future in software.

I'll now turn the floor over to your question.

(Operator Instructions) Mark Murphy, JP Morgan.

Yes, thank you very much. I wanted to ask you a question about the active customer additions. It looks like a surprisingly high number at about 4,000. I think if we take out the acquired ones, it is still around 3,700, and in the last 12 months, you've been averaging about 2,800. So it's a much bigger number. Would it be wrong to think of that as a decent barometer for the broader cross-section of the business? For instance, is there anything unusual in that number or does that cohort not have proportionally more future revenue potential than the cohorts from prior quarters?

Thanks Mark, this is Jeff. There is nothing unusual in that number. We feel confident the inputs remain strong to our business and that number, I think, represents really a lot of investments that we've made in streamlining our inbound funnel, our customer acquisition model, a lot of improvements to help customers get started more easily and more quickly, and so you see that uptick there and I think it's a result of the hard work the team here has been doing to get developers onboard faster than ever before with better doing.

And as a follow-up, I wanted to try and ask you Lee, if we exclude Uber or the impact of Uber; directionally, what are you doing with the base revenue guidance excluding that customer for the year. Are you raising it, are you maintaining it, or are you reducing it?

As I discussed in our prepared comments here, this adjustment to our guidance is driven by Uber and the core business remains extremely strong, as evidenced by the new customer additions and the expansion rate.

Okay. So Lee, let me try and ask you this. So, you're reducing the base revenue guidance by, I believe, in round numbers, something like $11 million. So can you just clarify, is it an exactly $11 million reduction in your guidance to us relating to Uber?

Yes, I'm not going to get into specifics, but the overall view of the guidance does reflect the changes in the relationship with Uber.

And then, Jeff, here's one for you. I'm wondering how many customers do you feel you have that realistically have the scale and the resources to be economically viable to try to dual source or multisource dynamically across providers.

I guess I would think the customer would have to be either a web-scale company like an Uber or Facebook or Lyft or Google or someone like that or otherwise spending many millions of dollars with Twilio, just to contemplate that kind of a move. Is that reasonable, because I think what we're trying to understand -- I think we've probably all expected, when companies do have the kind of customer revenue concentration that you have from the two customers where you have that level of concentration.

I think it is generally assumed that over time that that would begin to change and I think what we want to try to understand is whether it's reasonable to think that it would most likely be contained to the specific two customers?

Very few customers or very few companies have the means or the desire to really do something like this. In this regard, Uber really is an outlier, because this is a substantial undertaking on their behalf. And if you look at our customer base, after Uber and WhatsApp, we have very little customer concentration that follows.

And so, while we're happy with our position in the market and we think the value we're providing is great, we do look at customers and you'd need to spend a lot of money to really justify the substantial undertaking that Uber is undertaking in this regard and so, we don't feel it's representative of anyone else in our customer base beyond those two.

Heather Bellini, Goldman Sachs.

Thank you, this is Mark Grant on for Heather. Really appreciate the additional color around Uber and then, commitment to provide that for the next couple quarters. Just following up real quickly on that, outside of just scale, is there anything around geographic distribution or a use case between Uber and WhatsApp that gives you confidence that we wouldn't see a similar change like this in WhatsApp or any of the other customers?

Yes, I think in most ways Uber is an outlier here, right. This is, for someone with the size of Uber, who can afford to undertake this kind of undertaking is really unique to them as a result of the scale of their business and the sheer geographic nature of it and just the number of engineers they have and their engineering prowess to be able to undertake something -- a project of this size. So it doesn't feel like a -- necessarily a concept of like a particular use case, but really it's more of the nature of the company and the size of their spend that made Uber make this kind of decision.

Bhavan Suri, William Blair.

Hi guys, this is Sarah Shizas in for Bhavan. Just have one, again, on Uber. Just when you guys started to see the shift in the relationship with Uber, I know you said, in Q1 it was down sequentially, but grew better than your overall revenue growth. Just wondering when this kind of shift started and if you're seeing this in any other customers?

Thank you, Sarah. Yes, this is an ongoing development. This is really unfolding right now. It's not something that we're going to get into much more detail beyond that, but it's an ongoing development and not something we're seeing a broader trend.

And I'm assuming they didn't breach any of their minimum revenue contracts, there was maybe just higher expectations for them to exceed their original commitment in the first place and that's why the guidance have now been revised?

That's correct. Similar to other base customers, their spend was well above their minimum commitments.

Richard Davis, Canaccord.

Thanks. So, one other question regarding this. So when customers say that they're dual sourcing, are developers using multiple vendors tools on the same projects and use cases or are the cases more segmented. So basically what people are wrestling with is, this is a commodity that I can just -- it's like switching from Bing to Google or Yahoo or whatever. And so what I'm trying to help explain is, to what extent is that, is it easy or difficult to flip from one tool to another? Thanks.

Yes, it's got mostly to do with the size of the customer, right, and there, the scale that they're operating at, it's coming from larger customers. It may make sense for them to use multiple vendors for various parts of their technology stack and that's not really communications alone, its different databases for different use cases, they use different operating systems, things like that.

And so, it's not uncommon for a company who is large enough to be able to put in multiple vendors and sometimes that's for redundancy, sometimes it's for cost savings and some of that's based on the requirements of a particular use case, maybe it's a geographic reach thing or something like that. But in each of these events, we believe that if there is a dual vendor situation, which is not uncommon in large companies that Twilio performs well and we earn the trust of our customers.

Patrick Walravens, [JMP Securities].

Hi, this is actually Natasha on for Pat. Just basically looking at your largest two customers; for Uber, how did your gross margin on Uber's revenue compare to overall gross margins? And what may you have done differently, looking at a 2020 hindsight? And then, shifting over to WhatsApp, what are you assuming in your guidance for WhatsApp and what steps are you taking in light of Uber's experience?

We really don't comment on gross margin per customer. Keep in mind our gross margin can vary, cost cuts [would develop], it varies by an international mix of traffic, product type, scale and what have you. And there is that second part of your question, if you could repeat that?

Yes, I can. So basically shifting over to WhatsApp, what are you assuming in your guidance for WhatsApp, and then, what steps are you taking with respect to WhatsApp in light of the Uber experience?

Yes. So, WhatsApp has been in our variable customer category for a while. We've called it out and we report that as variable customer separately. And really no changes, we really focus on base revenue and drive the business by base revenue. So, no changes with WhatsApp.

Michael Latimore, Northland Capital.

Hey guys, this is Nick Altmann on for Mike. Thanks for taking my questions. Can you just give a little bit more detail on Uber, where you guys displaced in a certain use case where you're displaced as the primary provider and perhaps you're now the secondary provider. Does this have anything to do with the troubles that have been going on at Uber? Just really any more information you could give would be really helpful. Thanks.

Yes Nick, this Jeff. I'll take the question. So what's going on really varies by the use case and by the geography. So there is no single answer to how they plan to use Twilio along with potentially other vendors, but we did want to provide this visibility. And this change has nothing to do with Uber, their growth continues.

Jonathan Kees, Summit Redstone.

Great, thanks for taking my questions. No substitution here, this is Jonathan for Jonathan. (inaudible). I wanted to, I guess, deviate from the Uber questions and ask about Amazon and congratulations on the Connect win there. Just curious, before Connect as also with Chime and the other application and other products here, were those competitive bids or dual sourced or did they just say, since they're an investor, Twilio we're just go with you outright?

Yes, this is Jeff. Thank you, Jonathan I will take the question. So as a matter of practice, AWS and Amazon as a company, they dual sourced everything. And so, while Twilio is not the sole vendor in there, they do dual source things. We do feel really good about our position as a vendor.

So would you say you're the dominant vendor then if that's the case?

We don't have perfect visibility. You'd have to talk to Amazon to really understand that, but we do feel it's a great relationship and we do think that within certain products, we're definitely dominant but Amazon Connect for example, the new product just coming out. So it's very early to say.

Okay. If I can sneak in one more. I want to ask about visibility, it seem like Uber, I guess I will also pivot back to Uber that kind of surprised you there with this change. Even though that they're a base customer with contractual obligations were obviously minimum use, is there a chance that there is others, and I realize your number three only 2%, but there is others I think could deviate in short timeframe, and therefore, provide a challenge in terms of your visibility?

Yes hi. This is Lee, I'll jump in. As indicated, I mean Uber is an outlier and they were a significant amount of revenue, 70% of revenue in the fourth quarter. Jeff indicated earlier, our next largest revenue in 2% of revenue. So even though most of our customers are over the base of minimal commitment, we have strong predictability with those customers. So we don't expect any similar changes as what occurred with Uber.

(Operator Instructions) Ittai Kidron, Oppenheimer.

Thanks. Sorry to beat the dead horse here. But Jeff, going back to the Uber situation, can you give us a little bit more color on -- first of all, when did Uber announced this changed to you, number one.

And number two, when you say that they will take a more active approach by use case and geography and as a result of that, you expect to lose some business, is that just a reflection of price?

Does that mean that they'll go for the lowest price by use case or by geography, or do you feel that technology wise, in some cases, whether they'd be technology use cases or specific regions, your technology is not up to par with some competitors and therefore they will use another technology provider?

Yes, thanks Ittai. As far as the question of how we learned about it, this is an ongoing situation, but we did want to provide visibility into this. As far as the question of how they make their decisions, it does depend on the use case, it does depend on the geography and what they're going to do is they're going to look at the combination of price as well as quality and make decisions about which vendors they might use.

And I think that Twilio focuses quite a bit on quality and so we feel great about that and they're going to do the math. They're going to figure out how they value quality and how they value price and make decisions, and probably not just once on how they're going to prioritize quality and price in their decision making.

So, when you look into your guidance and in the way you factored Uber in the next quarter, for example or in the fiscal year ahead, are you already seeing lower activity level or is it you are making an assumption that based on what was communicated to you, you will lose business. I'm trying to understand how much of it is you kind of looking at the crystal ball, trying to figure this one out or you're already seeing this as changing [pre-argument] business activity from that customer?

Yes, hi this is Lee. As I mentioned in my prepared remarks, we do expect it to be down sequentially next quarter and year-over-year.

This concludes today's conference call. You may now disconnect.