Twilio Inc (TWLO) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to Twilio's Q4 2017 Earnings Conference Call.

My name is Sheryl, and I will be your operator for today's call.

(Operator Instructions)

I would now like to turn the call over to Greg Kleiner, Vice President of Investor Relations and Treasurer.

Mr. Kleiner, you may begin.

Thank you.

Good afternoon, everyone, and welcome to Twilio's Fourth Quarter and Year-End 2017 Earnings Conference Call.

Joining me today are Jeff Lawson, Co-Founder and CEO; George Hu, COO; and Lee Kirkpatrick, CFO.

The primary purpose of today's call is to provide you with information regarding our 2017 fourth quarter and full year performance in addition to our financial outlook for our 2018 first 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 large customers; our market opportunity and market trends; the growth of our customer base; customer adoption of our products; our momentum; the benefits of our business model; our delivery of new products and new product features; 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 these 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-Q filed with the SEC on November 14, 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 of which 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 may contain 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 as a 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 may be onetime 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.

I'll now turn the call over to Jeff.

Thank you, Greg.

Welcome, everybody, to this quarter's call.

I'm incredibly proud of Twilions around the world for finishing out 2017 with yet another strong quarter of results.

As you can see from our guidance, we feel we are poised for a great year ahead.

The investments we're making on both the product and go-to-market front are working well.

1 quarter after total revenue exceeded $100 million, base revenue did the same thing in Q4, coming in at $105.3 million.

Base revenue was up 40% year-over-year and even higher at 62% when excluding Uber.

And from a product mix point of view, application services revenue eclipsed 10% of total revenue in Q4.

Additionally, we successfully diversified our revenue base in the last year, reducing our customer concentration while growing the top line substantially.

All in all, a great way to finish the year.

A few weeks ago, we held our annual company kickoff called Gather to prepare the company for the year ahead.

The top 2 priorities for 2018 that I outlined to the Twilions who came in from around the world were to continue our evolution into a strategic software platform for customer engagement while expanding our position as developers' first choice for communications.

All Twilions, from the R&D teams tasked with delivering continued innovation for our customers to the go-to-market teams tasked with engaging our customers to the G&A teams supporting this growth, are all aligned around these priorities.

But this kickoff had a special significance, as we are kicking off our 10th year as a company.

10 years ago, we saw that the future of communications was going to be software and that the world's software developers would build this future.

So we started Twilio to bring programmability to the world's communications and make communications a first-class citizen in the toolbox of every developer building applications, whether in the dorm room or in the cubicle, whether the startup inventing a new market or a Fortune 500 company reinventing itself.

So we set out on our mission to fuel the future of communications by democratizing access to this large but esoteric industry, and we started by building out our voice API and then soon after, our SMS API.

And making a phone ring or sending a text message with software, well, that's just magical for a developer.

The opportunity with these traditional channels alone is massive, and we will continue to invest here to further differentiate our offerings.

Voice and messaging are the primary drivers of our revenue, and we expect these products to power our growth for many years to come.

But we also innovate beyond traditional voice and messaging because the full opportunity here is so much more, and each new capability leverages the one before it to make the whole even more powerful.

So we began building out a wide variety of other channels: VoIP, video, push, chat and beyond into voice assistants like Alexa and social channels like Facebook Messenger, all as components for developers to embed in their web and mobile apps to bring about new means of communications.

Because now advanced, rich, contextual communications can be built right into the app, changing the nature of what's possible due to the sheer flexibility of pure software.

And as companies look to harness this growing list of communications channels to engage with their customers, we saw familiar patterns emerge over and over again.

And the Engagement Cloud was born out of the many thousands of customers that we've worked with over the years, designed to address specific use cases and go deeper in each market.

The Engagement Cloud accelerates our customers' road maps and gets them productive faster.

Yet with all these forms of communications -- voice, messaging, in-app, assistant, social networks and more -- companies are finding that more communications isn't the endgame, but in fact, they need better communications, more meaningful, more relevant, more tailored, more contextual.

See every company needs to harness the power that software brings and the optionality present in all these new means of communications.

And while these last few years have been about a proliferation of new channels, mediums and apps, it's also brought out a new frontier in machine learning and artificial intelligence.

Last year, we started to drive more intelligence in our customers' communications with our speech recognition API leveraging Google platform and capabilities in 119 languages.

And with Twilio Understand, our Natural Language Understanding [agent], built to enable free-form machine understanding of human speech, spoken or written, voice or chat.

Now any developer can have the power of a smart bot or assistant in their app and leverage the channel that is best for that use case.

And this flows naturally into the Engagement Cloud as well.

We can now target specific use cases in an omnichannel way with the intelligence built in to help companies engage naturally with their customers across the entire life cycle in whatever channel they prefer.

And Twilio Studio, which just entered beta, is designed to help our customers leverage these bots and automated workflows, too.

We wanted it to become even easier for our customers to build out these complex workflows across the full spectrum of what our platform can now enable and, in particular, allow users other than just developers, to be a part of building them out, expanding our opportunity even further.

This continued evolution is what's driving our traction with new customers and growing our relationships with existing ones.

Developers are bringing us into companies large and small, new and old.

As Twilio's products become more strategic, we're increasingly getting enterprise-wide scope and C-Suite visibility.

Relationships started by developers are now moving across and up our customers' organizations.

In our quarterly calls, it's our goal to highlight some of the most interesting new deals in the quarter to relay our progress.

Let me turn the call over to George to discuss our progress on the go-to-market front.

George?

Thanks, Jeff.

The fourth quarter 2017 was spectacular for our go-to-market organization as we continue to see encouraging returns from the investments we're making in quota-carrying resources.

Our team closed a record number of transactions in the quarter, successfully converting both accounts coming from our inbound funnel as well as deepening our relationships with existing customers.

These include new relationships with companies across all geographies and segments, including Domino's Pizza Enterprises, the largest franchisee for the Domino's Pizza brand in the world; Dansk, a leading European retailer; 1-800-Flowers; CallRevu, SalesLoft; InSolutions and many, many, many more.

We're also continuing to see tremendous momentum in the enterprise, and I'd like to highlight some of our new enterprise relationships.

One of our most exciting wins in the quarter was with the GSA, or the General Services Administration.

The GSA is launching login.gov, a single website allowing the public to easily and securely access the programs of all the participating government agencies.

Login.gov is a part of the government's overall initiative to modernize its infrastructure and transform how the government manages its cybersecurity.

We're proud to help the GSA with this effort, enabling two-factor authentication as part of the sign-in process to help secure the underlying systems.

Login.gov is designed to be a shared service amongst government agencies with the CBP's Trusted Traveler program as the initial adopter of this service.

We've already begun to provide QSA for well over 1 million users.

And going forward, we'll be working with the GSA to potentially bring other agencies on board the program as well.

Another new relationship I'm particularly excited about is with a major Fortune 100 retailer.

This relationship came about due to our ability to work across both the business and technology groups, establishing ourselves as a key partner in the evolution of their customer experience and technology infrastructure.

Our initial use cases involve messaging solutions for both consumer-facing applications and internal IT operations as well as employee notification systems.

But the ultimate goal is to help them create a centralized messaging service, a service intended to support communication that will improve in-store and digital customer experiences, logistics coordination, call deflection and automation for their contact centers and increase the responsiveness of internal incident management.

The opportunities here are simply tremendous, as we're bringing our broad product suite to bear against a large variety of potential use cases across a number of groups within the company.

We also kicked off a new relationship with another Fortune 100 company in Q4, this time a major U.S. airline.

This relationship started to take shape many months ago when both their technical teams and business leaders attended SIGNAL, our annual user conference.

The initial project is aimed at reducing the load on their contact center by sending notifications regarding flight status, gate changes, cancellations and other messages via SMS.

But this is just the beginning as we're evaluating several other opportunities across the organization.

Our pace of innovation and leading omnichannel capabilities were key to establishing this new relationship.

We also had success expanding existing enterprise relationships in the quarter.

One of these I'm particularly excited to highlight is with a Fortune 500 provider of insurance, banking and retirement products to more than 10 million customers.

This is yet another successful example of our developer-led model.

And what started with a self-service developer account spending less than $5,000 a year ago, has now expanded through our sales efforts into a 7-figure transaction using multiple products across both the Programmable Communications Cloud and Engagement Cloud.

This organization selected Twilio over its incumbent provider based on Twilio's superior reliability, product breadth, service level and innovation.

So as you can see, our go-to-market effort is working well.

We're always looking to expand our reach to maximize our opportunity.

One of those opportunities I'm very excited about for 2018 is Studio, which expands the number of users who can build on top of the Twilio platform.

Since announcing this product at SIGNAL London in the fall of last year, we've already seen tremendous response from customers and prospects, and we just launched a Studio certification program for our sales force.

And we expect to bring Studio to an even broader audience in 2018.

Another strategy I'm very excited about is to find new ways to engage both developers, technical decision makers and the business at the same time, and that's where our Engage City Tours come in.

We held our first 2 events in New York City and Melbourne, Australia and the response has been fantastic.

We see tremendous attendance, customer response, momentum and pipeline come out of these 2 events.

And so we'll be expanding these across the country and around the world in 2018, bringing the future of customer engagement to companies of all shapes, sizes and industries.

Last but not least, I'm excited that we are building a go-to-market leadership team that can help Twilio scale to $1 billion and beyond.

First, Sara Varni has joined us to become our Chief Marketing Officer, where she'll be tasked with scaling our marketing efforts around the world.

Being the CMO of Twilio comes with some unique requirements.

A candidate needs a strong understanding of how to both engage developers as well as the enterprise.

Sara has gained deep experience in both worlds over her last tenure at Salesforce, starting with extensive work in the Salesforce platform early on in her career, and then eventually becoming the SVP of Marketing for Salesforce's flagship product, the Sales Cloud.

I've had experience working with Sara and have witnessed her passion and creativity for building brands and success in taking products to market firsthand.

We're all thrilled to have her on board.

Another key pillar of our strategy to expand our market presence is building out a world-class partner ecosystem, which I believe can be a key multiplier for our growth plans.

Historically, Twilio has done a great job developing our solution partner channel, but we haven't focused as much effort on systems integrators.

To help expand both these programs, we just welcomed Ron Huddleston as our Chief Partner Officer, where he will be responsible for unifying our partner experiences for Twilio across solutions partners, SIs, VARs and resellers and growing our overall partner ecosystem.

I believe this is a massive opportunity, and so does Ron.

Ron comes to us from Microsoft, where he was the Corporate Vice President of the One Commercial Partner Organization, leading their efforts across all channels, ISVs and systems integrators.

Prior to Microsoft, I had the pleasure of working with Ron at Salesforce, where he was the Senior Vice President for the ISV Cloud and AppExchange Partners, and he was instrumental in building out our entire app exchange ecosystem as part of the Salesforce partner program.

We're very excited about what Ron and his collective experience scaling world-class partner programs will bring to our business in the future.

Overall, our go-to-market model is seeing tremendous momentum.

We're growing our relationship with developers, we're adding capacity across all go-to-market functions globally to meet the demand, and I couldn't be more excited about the future.

Let me past the mic back to Jeff.

Thanks, George.

Before I turn the call over to Lee, I wanted to reflect on the past year.

2017 was a year of order of magnitude achievements for the business.

We expanded the breadth and depth of our product line, added more fuel to our sales engine and added hundreds of thousands of developers around the world.

We hit volume milestones that I could have never imagined 10 years ago: $100 million revenue quarter, 100 million messages sent in a day, 100 countries with phone numbers.

It's amazing to think that a company launched based on a RickRoll is now being used regularly by Fortune 100 companies to engage with their customers.

Just phenomenal achievements.

Even as we enter our 10th year, the pace at which we are growing and evolving as a company continues to amaze me.

Yet amidst all of this change, in the next 10 years, I'm certain one thing will remain the same: a relentless focus on customers.

You've often heard me describe Twilio as a success-based business model.

We succeed when our customers succeed.

Our collective efforts to put customers first and deliver value in all of the services we provide is driving this success.

We're honored that a growing list of companies of all types are placing their trust in us as we lead this industry forward.

I couldn't be more excited to lead this company into the next 10 years as we have a lot left to do.

Make no mistake.

We're in the early stages of a communications revolution, and this massive opportunity isn't confined to one vertical or one use case.

It's driven by the near ubiquitous need to reimagine the communications experience at virtually every company on the planet.

In fact, Gartner recently projected that 30% of enterprises will embed communications into digital processes using APIs and modules from CPaaS vendors by the year 2020, up from just 5% in 2017.

Communications, and particularly customer engagement, remain incredibly fractured as many companies have barely begun to understand what's possible with a modern communications platform.

We have just scratched the surface of the communications market, but I know that we're up to the task to fuel the future of communications.

Before I turn the call over to Lee, I did want to say a few things about the announcement we made today.

Lee will be leaving us this year after we find the right person to take over for him.

Lee has been an amazing leader for Twilio and has contributed tremendously to our growth and success throughout his 6 years with us.

So Lee, on behalf of all Twilions, thank you for all you've done for us.

Now to turn it over to Lee.

Thanks, Jeff.

It's been an honor to work with you and the rest of the team over the past 6 years.

I started at Twilio as the second employee in the finance department.

It's remarkable that when I started, we had a run rate of less than $20 million and today, we're at a run rate in excess of $450 million.

To be able to contribute to our rapid growth and help drive the outlook for this time period has been an amazing experience.

But after 6 years here at Twilio, I've decided to take some time off.

I'll be staying on board as long as it takes for us to find the next leader to help Twilio scale further over the next phase of its life.

With that, let's go deeper into another quarter of excellent financial results.

Business performed quite well once again in the fourth quarter as we saw continued momentum across our product line and around the world.

Base revenue grew 40% year-over-year in Q4.

And excluding Uber, base revenue grew 62%.

Our dollar-based net expansion rate was 118% on a reported basis.

And without Uber, it was 136%.

Q4 was a toughest compare against prior year Uber result, so this drag should lessen as we move past this peak throughout 2018.

Accordingly, we will continue to disclose these differentials through the next several quarters to help you with your modeling.

As we rapidly grow out our revenue, we have also diversified our business, reducing top 10 account concentration from 29% in Q4 2016 to 17% in Q4 2017.

WhatsApp came in at 7% and Uber at 5%.

Overall, Uber has played out largely as we've expected.

They actually came in a bit higher than we outlined in our Q3 call.

Some of the changes we anticipated didn't occur as fast as we thought, so we may see a modest decline in the next few quarters.

Going forward, we still expect Uber to remain an important customer for us.

However, given the reduced concentration and the overall high growth rate of the remainder of our business, revenue changes at Uber, up or down, will no longer have a material impact on our numbers.

Going forward, we will be returning to normal practices and no longer providing customer-specific guidance.

We had 6 variable customer accounts in the fourth quarter, flat sequentially and compared to 8 in the fourth quarter of 2016.

Moving on to gross margins.

Q4 results came in a touch higher than Q3 results at 53.5%, consistent with what we outlined in our last call.

For 2018, you should expect gross margins around this level or better.

We discussed a number of the puts and takes at the Analyst Day, and I'd like to emphasize that gross margins are stable and under our control.

As we've described since the IPO, we remain focused on doing the right things to grow the business long term rather than maximizing gross margins in the near term.

We ended the year at 996 employees.

You have our full year guidance in the release, but I want to provide some additional color on the expected quarterly progression of our earnings throughout this year.

At a very high level, you should expect Q2 to be fairly similar in terms of operating loss to Q1 as we absorb the full impact of a front-loaded hiring plan.

We are still targeting Q3 for breakeven on the operating line, and you should expect something similar in Q4 as SIGNAL will now occur in October.

So to wrap up, we're extremely pleased with our continued execution, Q4 result and the outlook for the business.

The core of our business continues to post strong results, and we're excited for the road ahead.

The twin engines of product innovation and our successful go-to-market efforts bode well for continued growth in the future.

Before turning over to the operator, I wanted to thank everyone who has contributed to Twilio's success during my tenure.

There's never a perfect time to leave a company, but I'm thrilled to leave Twilio in such great shape for the road ahead.

Operator?

(Operator Instructions) Your first question comes from the line of Mark Murphy of JPMorgan.

Lee, we're so sorry to see you go and just wanted to wish you all the best.

Thanks, Mark.

So Jeff, I wanted to ask you, the growth rate of 62% in the core business, ex Uber, it's really staggering.

It's hard to think of many other cloud revenue streams that are growing like that at this scale.

And we understand that nothing grows 60% forever, but is there a certain glide path that feels like it would be very sustainable for a while, maybe 20% or 30% or even more?

Or if you don't think about it that way, could you maybe just comment on the health of the business inputs overall or maybe the signals that you're seeing out there from the marketplace?

Yes.

Absolutely, Mark.

This is Jeff.

I'll answer at a high level and then I want to hand over to Lee to talk about modeling or things like that.

At a high level, we feel very good about the developer-first go-to-market that we've been building, where developers come in, they get started with Twilio and they bring us the opportunities in many shapes and sizes.

And as we've noted in the past, there's also multiple growth vectors that we have in every account, whether that is customers, developers getting on board, building a solution, prototyping and that prototype turns into a beta, which turns into a GA, which turns into global release like that.

Product development life cycle drives growth because every time you expand, you drive more usage, and it drives more revenue to Twilio.

The second vector is when a developer builds the next use case because you can use Twilio for many things.

Well, that's also driving growth in an account.

And then the third is just as our customers are growing their own businesses and have more people to communicate with, that drives more engagements, which, again, drives more revenue to Twilio.

So those are the high-level, the engine of growth that we have, and we're very happy with that.

Now, let me hand over to Lee, and he can talk about specifics as it relates to modeling, and how you might think about that.

Mark, we feel very good about the growth rate in 2017.

Keep in mind, we did have some benefit from Beepsend, but overall, extremely strong growth rates across the company with and without Uber.

Looking at next year, we are guiding into the low 30% growth rate in terms of base revenue, which we expect to -- which we feel really good about at our scale, and we expect to grow at the strong rates going forward in the future.

Okay.

Great.

And then as well, George, I just wanted to try to clarify something from your comments.

Are you saying that in Q4 alone, you added new logos in the enterprise which included a Fortune 100 retailer, a Fortune 100 airline and then the GSA?

Which I -- we sort of think of as the gateway to a lot of U.S. federal government.

Are all of those new relationships in Q4 or were some of those expansions?

Those were absolutely new relationships in the quarter, and I did talk about the financial services transaction, which was an expansion, which is different than the rest.

So we see momentum in both areas, new logos as well as expansion with existing customers.

So then, I guess what I want to ask, so all of those being new wins, what does it say about the cohort value, if you will, that you added in Q4?

I mean, am I right to think if you've added 3 discrete opportunities of that kind of magnitude, am I right to be thinking that the cohort value you added in Q4 when you think about what it could translate into in future years, that that's a pretty big dollar amount?

Well, you have to remember that in our model, when we sign a transaction with a customer, they, of course, have to build their application, and then they have to scale it and get going.

And so there is a ramp to revenue.

Every one of our customers tends to start at a small revenue level and ramp over time.

However, I think you're right in that we are excited about the potential of these accounts and all of the new accounts that we added throughout the year and in Q4, and I think that it speaks to the potential for this company in 2018 and beyond.

Your next question comes from the line of Ittai Kidron of Oppenheimer.

And Lee, also good luck to you going forward.

Twilions, I guess, it's a new term, almost like cryptocurrency, another cryptocurrency, I guess.

Twilions have been around longer.

Yes.

I can tell.

Very good and will last longer after that as well.

Wanted to dig in a little bit into the dollar expansion rate.

Very nice to see that, excluding Uber, it's holding up very nicely, which is quite impressive to see how through multiple years, customers keep expanding and keep expanding.

I guess, Jeff, maybe you can give us a little bit more color on how much of that expansion right now is really driven by application services versus your traditional voice and messaging business.

How much take or attach rate do you see?

I mean, you've talked about how it's 10% of revenue, but maybe you can help us understand the attach rate of application services to customers.

Yes.

The application services is overall a small portion.

We're excited by the growth hitting 10% this quarter.

But remember, the application services still pull through the core communications revenue.

Because generally speaking, those application services are either used to power the communications or a result of the communications, like in the event of like a recording sources like that.

And so the application services are, generally speaking, almost always attached to some amount of communications with a customer's spend.

And the exact percent may vary based on the use case or exactly which application service it is.

But they do go kind of hand-in-hand together.

But we are seeing nice uptake of those application services, and we're excited by the growth that we're seeing there.

Is there any concentration revenue-wise in the small number of customers for application services?

How broad-based is this adoption?

There's no customer concentration issues with application services.

Okay.

Good.

And then lastly, Lee, for you on the gross margin, you've talked about it being at current level or better through the year in 2018.

But can you help us kind of specify a little bit more detail what are your working assumptions around that with regards to FX, with regards to Uber contribution?

Any other important puts and takes that might influence this number?

Help us put that in context.

Yes.

So as you point out, there are puts and takes.

The FX at current levels, and we have accounted for that in our gross margin.

We have talked about how we expect Uber will remain an important customer for us, but they're not overly material going forward.

And if we go back to the Analyst Day, some of the key drivers of the business with the application services having an impact -- positive impact on the gross margin and then offsetting that, the impact of international business, which we like because that brings a scale and opens our opportunities, but that has a dampening impact.

But overall, we feel really good about gross margin.

They're in our control.

They're stable.

And again, we'll manage those puts and takes going forward.

Your next question comes from the line of Pat Walravens of JMP Securities.

This is Matt Spencer on for Pat.

Who do you guys compete with most frequently, I guess, in Q4 specifically?

And also, if you could drill in a little bit on the large deals you highlighted in the enterprise in Q4.

Were there competitive dynamics you could share with us in those as well?

Sure.

So good question.

So first of all, our competitive dynamics have not changed materially since I gave the update on the Analyst Day.

We have a very fragmented competitive environment where there is no one single or even few single competitors that are dramatically bigger.

It's a very fragmented landscape.

So obviously, there's not one that's worth pointing out.

In terms of the specific transactions, they're all different and -- based on the use case and based on dynamics.

So there was no like common competitor in those transactions.

In fact, I think they're all different, so if my memory serves me.

Your next question comes from the line of Brent Bracelin of KeyBanc Capital Markets.

Lee, it's been great working with you and certainly wish you the best on the next endeavor.

One question for you and then a follow-up for Jeff or George.

I wanted to go back to the kind of gross margins.

It looks like we're seeing gross margins stabilize here at 53% this quarter and last.

Do you think this is kind of the bottom?

Or how are you thinking about kind of gross margin for 2018?

Obviously, there's lots of puts and takes around FX and Uber, but do you think this 53% is now kind of the bottom, and we should have some levers that could improve it going forward?

Yes.

And thanks for the kind words, Brent.

Yes.

Essentially, yes, subject to any puts and takes at the end -- or subject to a noise, excuse me.

All along, as we've been looking at the business, right, we've told you we're focusing on revenue growth, making customer successful long-term business.

So we're not managing the gross margin line item in the near term.

That being said, as gross margins are stable and under control.

And yes, we feel very good about these numbers going forward.

Okay.

Fair enough.

And then, I guess, Jeff or George, as you think about the philosophy on the tradeoff between growth, your $1 billion kind of revenue goal and achieving kind of positive cash flow, obviously, the free cash flow burn was nearly double kind of this year versus last year.

What are the levers as you think about this tradeoff between kind of the growth goal, the $1 billion goal and achieving positive cash flow?

Specifically, when do you think this business can become free cash flow positive on a sustainable basis?

And are you willing to kind of continue to invest to get to the scale that you want but before you get there?

Just trying to understand how you're thinking about growth versus breakeven positive cash flow.

Yes, this is Jeff.

I'll talk about it philosophically, and then I'll hand it over to Lee to talk more numerically about that.

As far as philosophy goes, I think that we are obviously optimizing for growth.

We see huge potential.

And we're at the earliest stages of a very long game doing in market in a very large market opportunity.

That is the shift of communications to software.

With that said, we do believe that with financial constraints are reality and that we can grow the company responsibly, which is something that we've always done over the history of the company, and I think you'll see that.

So we think that responsible growth is a good way to build a company for the long term, and that's what we've been investing in.

And so with that, Lee, why don't you -- you can address the sort of more quantitative aspects of that?

Yes.

I mean, from a financial standpoint, I mean, George had discussed some of the go-to-market momentum we have.

And we have great unit economics across the business in terms of sales rep productivity and revenue expansion.

We also have great product development velocity.

So we are going to continue to invest and grow the business.

We are committed to breakeven in the third quarter, and free cash flow positive should follow a quarter or 2 after that.

So we've got great economics on the business.

We're going to invest to win, but we are -- one of our values is being frugal, so we'll be breakeven and cash flow positive soon.

Your next question comes from the line of Mike Latimore of Northland Capital Markets.

I guess, just on the international side of things, what percent of revenue or traffic came from international markets, if you can share that?

Yes.

I think it was that 25% of revenue came from companies headquartered outside of the U.S.

Okay.

And then in terms of the Studio product, I mean, if that's successful this year, what kind of revenue levels would you sort of envision that generating?

Is it sort of single-digit millions or tens of millions?

I'm just trying to get a sense of the potential impact from Studio.

Yes.

I got this.

This is Lee.

I'll take that.

Yes.

So as we talked about with our products, as we launch them, they do take some time to ramp up.

We don't give specific revenue guidance by product, but we'll bring them on board.

That will have an important impact, and then, of course, the corresponding pull-through revenue will be important.

But again, these products do take a time to ramp up.

And that contributes to that very consistent expansion rate we talk about.

So we launch products, we bring customers on board, and they very steadily and consistently grow, which leads to that steady dollar-based expansion rate.

And Mike, one other thing to consider.

This is Jeff.

Studio, we're really excited about it.

We launched it at the very end of Q3.

We just got it into beta at very beginning of January, which we're very happy about, but we're still in the stages of learning from customers about the early stages of bringing a product into market.

So while we're very bullish on it, it is early in the product life cycle.

Your next question comes from the line of Charlie Erlikh of Baird.

Could you unpack the Q4 revenue outperformance a bit more for us?

What were the sources of the upside this quarter exactly?

Any details there you could provide would be great.

Yes.

So I mean, it was an outstanding quarter for us.

I mean, I think there's a few factors.

We're definitely seeing the benefits of the go-to-market enhancements that George and team have brought on board, so that's an important factor.

Q4 is traditionally a strong quarter for us, and so we did see some seasonal impact in terms of retail, crypto and ridesharing.

And again, a strong quarter like that reflects the power of our platform.

Customers can get on board and scale and grow quickly and easily.

And when they're successful, we share in that success, which means the upside in revenue.

Your next question comes from the line of Bhavan Suri of William Blair.

I am going to start off with a gross margin question.

Lee, we're going to miss you, but maybe it's the last one I'll ask you.

So I know you're not guiding to gross margin specifically, but you said a couple of times now breakeven kind of Q3 time frame.

So just doing the math, that sort of implies like mid-50s gross margin.

Again, I guess, I'm just trying to figure out, does that make sense to you?

Because obviously, the investment in sales and marketing and R&D will continue.

So if I was to back into that, does that seem logical?

I guess, that would be my first question.

Yes.

I mean, we did give a little more specific guidance than in the past in terms of gross margin being around the levels of Q4 or better.

We feel really good about the number.

I mean, we will continue to invest in go-to-market.

We're going to continue to invest in product development.

But based on momentum of the business, we're committed to hitting that breakeven number.

Got you.

Got you.

Okay.

Helpful.

And then I'd love to touch on the partner channel, this could be for whomever, but how is the partner channel shaping up with the SIs?

You know you just announced the addition of Ron to lead the partner channel.

I guess, as you think about that, what are the first sort of initiatives to build out that channel?

And sort of you've got lots of different types of partners: technologies, OEMs, VARs and then SIs.

How are you thinking about that?

I'd love for you to give us a little more color strategically.

Great question.

So I'm excited about our partner opportunity.

Historically, Twilio's had tremendous strength with solution partners.

We had at our Analyst Day, we had Zendesk, for example, which is a great solution partner built on our platform.

But we have huge untapped opportunities in, you mentioned SIs as a great example.

And from my experience, I think that the way you build an SI ecosystems is, first of all, it takes time to do it.

And you typically start with an approach of smaller regional systems integrators to kind of build capacity, build momentum, learn.

And then you also plant the seeds for longer-term GSI, Global System Integrator relationships.

Those take years to cultivate.

When I was at Salesforce, it probably took like a decade to really get the full power of that flywheel going.

So I think we have tremendous potential with the systems integrators.

Our platform model, our kind of bias with customers to kind of build custom solutions is an amazing fit for systems integrators.

And I'm excited because Ron has deep experience in this area, so I think that's definitely an area that I expect him to plant some material seeds.

One thing that we've already done is launched our first partner certification program, so you can get SI, individual consultants certified on the platform.

I think that's a first step.

We'll continue to grow our capacity there and onboard more systems integrators over time.

But certainly, this is a long game, and I'm excited about the potential of it.

(Operator Instructions) Our next question comes from the line of Stephen Bersey of MUFG Securities.

And Lee, I wish you all the best.

As a Twilio API developer for over 6 years, Studio beta user, I got to say I was pretty impressed by the Studio release.

And I guess, I'm just wondering about if there's any initial user feedback so far, anything to bite on there, whether it's from usage data or direct comments that's encouraging for you?

Yes, Steve.

Feedback has been great, probably similar to what you just said.

Accelerates time to development, allows more people to collaborate on it, leading to all sorts of new conversations inside of customers as new people are able to start building out solutions on Twilio.

Common feedback has been, of course, get it into beta.

And now that's in beta, get it into GA.

So of course, we hear that loud and clear.

More widgets to do more things and that sidebar just adds to the capabilities of Studio.

But all in all, we've had a good degree of customer feedback and a good response so far, given the product's give or take 3 months in the market.

And maybe if you can just help me out on Studio as far as looking at it.

The way I'm looking at it really from usage is it's a catalyst really across all your core APIs.

That's what's being accessed.

That's what's being dragged and dropped.

So I'm looking at it as accelerating adoption of your APIs as well as your new Twilio apps.

And I guess, I'm just wondering if that's the way investors should be looking at it.

Yes.

I think so.

Like we talked about application services, the adoption of application services, of which Studio is certainly one, drives usage of our other APIs of our other communications capabilities as well.

So when you use Studio, you typically are building some sort of interaction that then will drive SMS, voice calls, chat, video, et cetera.

And so it's providing a faster on-ramp for customers, and it's also expanding the universe of people that we can touch and we can reach and who can start building on top of Twilio.

So I think that is a good way to think about it.

Your next question comes from the line of Jonathan Kees of Summit Research.

My first question is focused more on your investment priorities for next year.

And if we can dig a little deeper, that'd be great.

You talked about optimizing for growth, product development.

I guess, I also -- I'm looking at your new CMO, your new partnership program.

Are you looking to ramp up OpEx there with S&M coming up a little bit higher there as you invest more in reaching out to the end users and developers?

Are you looking to expand your sales team there?

Obviously, you're going to -- since you're still developer-focused you're going to ratchet up your R&D.

And though I was trying not to, any details, like are you going to focus also on your gross margins, which I know has already been asked in this call already, but are you looking to like push down your pricing with the carriers, anything like that?

Yes, Jonathan.

This is Lee.

I'll start with the first product question and then hand off to George.

So in terms of sales and marketing, we're really just enhancing the go-to-market efforts we have in place.

What we're doing, we are investing significantly; that's inherent in our guidance.

We have an extremely efficient model, the developer-led model, where we take advantage of the platform.

So we have the luxury of being able to invest -- to continue invest in sales and marketing but still have an extremely efficient revenue acquisition model.

So this year, we've made some major investments.

And in Q4, sales and marketing was only 21% of total revenue, about half of what you would see from similar companies with similar growth rates.

I don't know if George wanted to add anything else on the sales and marketing?

Yes.

I mean, first of all, let me say that I think that Twilio is a very special model with its developer-led acquisition.

It's a more efficient model, and so therefore, I don't expect that we're going to invest in sales and marketing to the level of like what we did at Salesforce in terms of percentage of revenue.

I think it's just a very different model, it's an apple and orange.

And so the way I think about these leadership hires is not that we're going to ramp up sales and marketing expense to those types of -- like Salesforce-like levels.

But that I think that we have an opportunity here to do -- to add to our developer motion, to expand it and to add -- I talked about, for example, our engage programs to engage technical decision makers, engage the business and just, I think, broaden the reach of Twilio.

And so by being able to speak to the business, by being able to reach systems integrators, partners of all stripes, I think that we can get more leverage out of what we have.

And then continue to get more value out of this, I think, very intelligent investment we're making in go-to-market that we're seeing great returns from.

Okay.

All right.

That certainly makes sense.

And then I'm sure for R&D, you're just going to continue your normal product development.

Are you guys going to try to focus anything in terms of negotiation with the carriers?

Is that -- I realize, it may not be as much of an investment priority, but just curious if that's something that you're looking to try to do for 2018.

Yes.

Yes, Jonathan.

That's a constant motion, so our super network team is continually negotiating with carriers to get the best rate, get the best quality and make operational improvements to provide a higher quality service for our customers.

There are no further questions at this time.

Thank you for participating in today's conference.

You may now disconnect.