Twilio Inc (TWLO) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to Twilio's Q1 2018 Earnings Conference Call.

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

(Operator Instructions)

I will now 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 First Quarter 2018 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 2018 first quarter performance, in addition to our financial outlook for 2018 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 larger 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 or 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 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.

A discussion of the risks and uncertainties related to our business is contained in our Form 10-K filed with the SEC on March 1, 2018, 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 that 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 as part of a Form 8-K furnished to the SEC.

Finally, at times in our prepared remarks or in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or 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.

And with that, I'll now turn the call over to Jeff.

Thank you, Greg.

Welcome, everybody, to this quarter's call.

We are pleased by the broad-based strength across a number of areas in Q1, highlighted by strong expansion within existing customers and first-time deals with new customers.

The investments we're making in both the product and go-to-market fronts continue to pay dividends with Twilions around the globe driving this execution against our strategic plan.

Total revenue came in north of $129 million, up 48% year-over-year and now at an annualized run rate for our business of over $0.5 billion, an exciting milestone for us.

And base revenue, the core metric we focus on, grew by 46% year-over-year to $117.5 million.

The continued value and innovation we're providing for our customers, new and old, is helping to drive their success, which, in turn, drives our financial results.

This success is best exemplified by our dollar-based net expansion rate, which came in at 132% this quarter.

All in all, I'm proud of what the team here accomplished, a great start to the year.

But we have much more to do as we pursue our goal of fueling the future of communications.

On the last call, I shared our top 2 company priorities for 2018: continuing our evolution into a strategic software platform for customer engagement while expanding our position as a developer's first choice for communications.

We made further progress on both fronts in the last quarter, so let me spend a moment talking through some of the highlights.

The big announcement from Q1 in the Engagement Cloud was our unveiling of Twilio Flex, the first cloud contact center application platform that's programmable at every layer of the stack.

We announced Flex at the Enterprise Connect conference in March, the contact centers' major industry event.

And based on the reaction from customers and industry analysts, it seemed to be the highlight of the show.

So why go deeper into the contact center?

Because we hear from our customers and prospects over and over that they feel trapped by their legacy solutions, especially large enterprises.

These companies have traditionally required tremendous flexibility to customize contact center solutions to meet their unique needs with thousands of agents.

The benefits of deep customization get multiplied across millions of conversations annually.

The on-prem solutions of yesteryear allow this level of customization but with great pain requiring armies of professional services people all versed in esoteric technologies to complete the task.

And then these bespoke solutions become fragile, difficult to maintain and even harder to upgrade to modern capabilities.

To date, cloud offerings haven't had the same level of flexibility, and that's why large enterprise contact centers largely still sit in archaic on-prem solutions.

The contact center was once thought of as a relatively static asset: build and deploy a contact center and it will live for a decade or more.

Who can blame them?

The phonecall was the only way people communicated with businesses for nearly 15 years.

But now it's moving much faster, adding email and chat and SMS and mobile and social media, now even IoT-connected use cases.

The highly bespoke legacy solutions of old just can't adapt.

In a recent study, 40% of contact center managers said that their contact center systems don't meet their current needs, and 80% say it won't meet future needs.

And that survey was done 2 years ago, so that future is now.

We are unique in approaching the contact center from the viewpoint of a platform.

In fact, prior to the launch of Flex, Twilio had already been recognized as a leading contact center provider.

We took the learnings that we have acquired over the years from our large customers to take our products even further.

Twilio Flex is the first application platform built to address the needs of the modern contact center at scale.

By delivering a platform, we bring the reliability, supportability and global scale of the cloud with the complete flexibility that customers previously got by running the application on-prem.

Because Twilio Flex is built on our existing Super Network and Programmable Communications Cloud, it's very robust out of the gate.

For example, we support the full list of channels supported by our Programmable Communications Cloud.

Of course, there's voice and SMS and chat and video, but also emerging channels like Facebook Messenger, RCS, LINE and Alexa just work.

TaskRouter provides the sophisticated skills-based routing engine, the beating heart of a contact center.

Studio, our drag-and-drop visual application builder, enables a broad set of builders within the enterprise to build, edit, maintain things like Box, IDR, service and more.

The developers don't have to do all the work anymore.

Our newest part is the programmable Flex user interface, which allows developers to build fully customizable agent and supervisor desktops and our partner marketplace where partner plug-ins deliver speed and flexibility to incorporate new functions, applications, data sources and more.

So what does this mean for our customers?

They get virtually unlimited customization at every layer.

No more swivel chair contact centers where there's multiple desktops that every agent has to move between to get anything done because those systems can't be integrated.

Built with Twilio's API, Flex can be integrated with almost anything.

Customers get an instant omnichannel solution.

Any channel companies want to use in order to communicate with their customers, either through our platform or through their own channels, they can do.

Customers get contextual intelligence.

Combining the machine learning, voice recognition and intent extraction for our platform with our customers' datasets allows them to use AI to train models and use that learning to drive smarter interactions over time.

Customers get thrusted scale because Flex scales up to 50,000 named users per installation, a level that we believe most cloud solutions cannot handle.

Customers get the support of the world's developers, too, with more than 2 million developer accounts in our platform and many millions more with the standard application development skills in the market as a whole.

There is an instant critical mass of talent able to implement customer ideas.

You don't need esoteric proprietary training and skills.

This is just blended all in.

And customers also get a robust partner ecosystem.

Beyond access to our marketplace and pre-integrated solutions extending the value of Flex, we already have several system integrators in place from regional players to global partners.

With the launch of Flex, we will expand our efforts to start migrating the largest contact centers in the planet who want to move to the cloud but couldn't do it before.

A good example of this is Liberty Mutual, who we highlighted as our launch customer for Flex at Enterprise Connect.

Liberty Mutual approached us because they wanted to begin migrating their contact center to the cloud.

There was no solution they saw that provided them the flexibility they wanted with a modern architecture.

So they started to build their own using Twilio's platform.

We showed them Flex, and they said, "Flex enables Liberty Mutual to launch a fully customized cloud contact center to all of their agents faster than they could have done before," with the Liberty Mutual's CIO noting that "Twilio Flex allows us to move to a more programmable app model that provides full omnichannel capabilities."

It's also important to note that Flex was built with our solution partners in mind.

All along their journey in the contact center, some prospects have found that a SaaS application is the right solution for them.

And we're happy to get the customer on the right partner solution when that happens.

We're helping to bring customers and product to these partners.

The components of Flex can be embedded by our partners in their solutions to extend the value of their applications.

The goal here is to up-level the whole playing field as we work with our partners to attack this large market opportunity and help our customers move their engagement capabilities into the modern era.

For now, Flex is in a pilot program where we're providing a select few customers with early access to the full scope of functionality.

The target market for Flex is very large contact centers, think 1,000 seats and up.

Most of the components are mature parts of Twilio's product stack.

And now we're working to bring the newest components, especially the Programmable Desktop to parity for a broader launch.

I'm seeing a familiar trend play out as we introduce Flex.

There has always been a certain magic to Twilio.

When we show a developer for the first time that they can make a phone ring with a few lines of code, they start thinking of all the things they can now build.

With the launch of Flex and the conversations we've been having with contact center leaders, contact center developers, partners and end users, we're sensing that same magical feeling.

They're finally able to realize ideas they've had for years but that were too costly, too time-consuming or flat out not possible with legacy solutions.

We believe the migration of the contact center market from legacy vendors to the cloud is just getting started.

Industry experts estimate that the cloud has only penetrated 10% to 15% of the contact center market, so we have tremendous opportunity ahead of us for further traction in this market.

And we can't wait to see what our customers build.

In terms of our second priority for the year, expanding our position as developers' first choice for communications, we had several important announcements in recent months.

Our job as a platform provider is to enable communications and customer engagement for our customers, regardless of the channel.

One trend we pointed out many times is that communications is becoming increasingly heterogeneous.

New apps and devices are gaining popularity.

The capabilities of those consumer platforms are in constant flux, and consumer preferences are changing rapidly.

Most companies have barely begun to leverage traditional channels like SMS, and this growing complexity makes addressing these changing preferences even more daunting.

Our product aims to make this landscape accessible to developers and companies with a single API, much like we made the global carrier network easily accessible.

We made more progress last quarter on that mission.

We were excited to be a part of Google's broader rollout of Rich Communication Service, RCS, recently at Mobile World Congress.

RCS Business Messaging enables businesses to build more engaging, rich messaging experiences while leveraging the reach of SMS.

For example, companies can utilize RCS to send branded messages, share rich content like boarding passes, include carousels for scrolling through product images, suggest replies and actions and gain insight in how messages are performing with accurate read receipts and click-through data.

With Twilio, developers can use one API to deliver the best messaging experience for each end user.

This is a central point for many of our customers, including 1-800-Flowers, who's able to quickly extend their use of our messaging products to include RCS support.

They now use RCS to enhance their customer experience by allowing customers to modify orders, track shipments and place additional orders, all within the message.

By using our platform, all with the same API, we can help customers like 1-800-Flowers to determine which customers are capable of receiving messages in the appropriate format to maximize the experience for each of their customers.

More recently, we also expanded our channel capabilities even further by announcing support for LINE as well.

We will continue to build support for these channels as they emerge to help our customers navigate through the chaos and deliver the best customer experience possible.

We also announced that our Programmable Wireless product has moved into general availability.

Once again, we're cracking open a market that has historically been largely inaccessible to developers, wireless networks, and we made it easy for developers to get up and running quickly.

The Internet of Things market is expected to enable billions of new devices to be connected to the Internet, but providing this connectivity to the broader market has been restrained by carrier business practices that aren't supportive enough of innovation.

In order to get billions of devices deployed, we first need millions of developers to begin experimenting.

While in beta, we've seen companies from a variety of industries, like connected cars, fleet tracking, wearables, medical device diagnostics and more, take advantage of our developer-friendly API-first platform to begin building IoT solutions.

And while still early in its evolution, we're devoting significant resources to our Programmable Wireless efforts given the potential to unlock yet another massive platform opportunity for the company and continue to open new possibilities for the developers of the world.

Overall, I continue to be very pleased with our performance as we're executing against our strategic priorities across the board.

We remain in the early stages of a massive opportunity.

And as we execute on our platform strategy, we continue to unlock more and more of this market.

With roughly half of our headcount in R&D, our investments in innovation are extending the value of our platform and the success we're driving for our customers even further.

We remain committed to leading this market from its legacy in hardware to its future in software.

Now let me turn the call over to George to highlight some of the interesting ways customers are using our products and also to discuss our progress in the go-to-market front.

George?

Thanks, Jeff.

Our go-to-market model continues to build momentum.

We're engaging customers, developers and the market like never before with increased capacity and strong productivity across all go-to-market functions.

Our starting point is continuing to engage developers where they are to fuel our inbound interest and demand.

Our developer evangelists participating in over 90 events globally in the first quarter alone.

On top of that, we expanded our own Twilio Engage roadshow and Superclass, where we bring developers and business decision-makers together in key cities, including Atlanta, Dallas, Minneapolis and Chicago.

These events continue to be very successful in evangelizing the full breadth of Twilio's capability to our customers, and we plan to continue investing in this program.

As Jeff discussed, perhaps the highlight of the quarter from a marketing perspective was the launch of Twilio Flex at Enterprise Connect.

Not only was this launch tremendously successful in terms of generating customer interest, but with Flex, we also saw a strong level of interested partners, including launch partners like Accenture, Cognizant and Tech Mahindra.

We believe Flex will be a key way to attract and build our SI ecosystem and also a platform that many of our solution partners will build on as well.

All of these go-to-market efforts were part of a strong Q1 for the go-to-market team.

I'd like to highlight a few of our significant enterprise transactions that highlight the diversity and unique capability for the Twilio platform.

The first new relationship I'd like to highlight is Marks & Spencer, a Global 2000 retailer.

This was a significant transaction where we were selected for a next-generation intelligent IVR using Twilio Programmable Voice with speech recognition, natural language understanding and intent analysis.

The Twilio solution enables Marks & Spencer to evolve from a static IVR that simply forwards calls to stores into an intelligent, flexible IVR that can analyze the voice of the customer in real-time.

Another significant deal is with a cross-border division of a Fortune 100 logistics company, combining the power of the Twilio Engagement Cloud with Twilio Programmable Communications.

This customer will use Twilio account security across one-click checkout, the merchant and development portals and several other workflows.

The customer will also use Twilio's Programmable Messaging and voice authentication across several use cases, including billing alerts, shipping notifications and access verification.

[Being] selected for this project, we leverage our past success with other divisions of this customer, including longtime Twilio [fans, of DTO and] developer teams.

The customer also attended SIGNAL last year to connect with our team and solidify trust in the platform.

We also launched a new project with the Veterans Affairs medical centers.

The VA is currently in the midst of a patient service makeover, and it has secured funding to improve care and communications with an estimated 20 million veterans across the entire VA system.

One way to drive efficiency is through patient reminders of doctor's appointments.

Jeff had talked in the past about the [boids] rule of developers in organizations of all types, and the VA is no different.

One of the doctors in the organization is also a software developer and he was instrumental in bringing Twilio, to address their needs.

The VA is in the midst of rolling out application that sends appointment reminders via SMS notifications, replacing the manual phonecall-in process.

By reducing no-shows, the VA hopes to improve customer service and see patients more quickly, and we couldn't be more honored at Twilio to be a part of this process.

Finally, we closed a major transaction at a top 5 U.S. cable company.

They recognize the cable industry's poor reputation for customer care.

They're looking to be the face of disruption by [selling] a customer engagement.

After attending Twilio Engage New York, this company is determined that they could use Twilio in their new e-service application to be able to intercept and score all customer interactions surrounding the self-service channels or a live agent chat, improving customer satisfaction.

The company's enterprise agreement will enable them to access key Twilio products like TaskRouter, Programmable Chat, Studio, Functions, Enterprise Plan and more.

This transaction highlights the power of the full Twilio platform as well as the impact of some of our newer go-to-market investments.

So to close, I'm proud of our team for delivering such a strong quarter, and I'm excited on our momentum as we continue to build the go-to-market engine that can help Twilio scale to $1 billion and beyond.

Let me pass the mic to Lee to discuss our financial results.

Thank you, George, and good afternoon, everyone.

The implementation of go-to-market approach Jeff and George outlined earlier continue to drive customer success, which in turn fuels our revenue growth.

Base revenue grew 46% year-over-year in Q1.

Excluding Uber, base revenue grew 61%, which is consistent with recent periods.

Our dollar-based net expansion rate was 132% on a reported basis.

And without Uber, it was 145%.

The increase in our expansion rate over Q4 was driven by growth across the breadth of our customer base and reflects the power of our platform business model.

Our top 10 active customer accounts were 18% of revenue in Q1 2018 compared to 25% in Q1 of last year.

In this quarter, WhatsApp came in at 7% and Uber at 4% of total revenue.

We had 6 variable customer accounts in the first quarter, flat sequentially and compared to 7 in the first quarter of 2017.

Moving on to gross margins.

Q1 result came in at 55%, up from 53.5% in Q4.

As discussed in 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.

As we walked through at the Analyst Day, our gross margins can fluctuate from quarter-to-quarter based on multiple factors, including product, country and customer mix.

You should expect gross margins in the range of the last few quarters for the remainder of the year.

We ended the quarter at 1,027 employees.

As you contemplate our guidance for the balance of the year, please note that we lapped a partial quarter of the Beepsend acquisition in Q1.

But starting in Q2, our year-over-year revenue growth will include the full impact.

Also, as mentioned in our last call, we expect operating breakeven in Q3 with similar results in Q4 as SIGNAL will now occur in October.

So to wrap up, we're extremely pleased that we delivered another quarter of strong results and continued execution.

Our powerful platform model, continued (inaudible) innovation and successful go-to-market efforts position Twilio for continued high growth in the future.

Operator?

(Operator Instructions) Your first question comes from Mark Murphy with JPMorgan.

This is Albert Chi on for Mark Murphy.

For Flex, you mentioned now you're targeting the largest contact centers with 1,000 seats and above.

And so, one, have you talked about pricing?

And do you see any reason why Flex wouldn't be a wall-to-wall deployment?

And I guess, second, what vendors are you typically running into and replacing with Twilio Flex, knowing that you're still in the early stages of that?

Albert, thanks for the question.

This is George.

Yes, we're very excited about Twilio Flex.

We're definitely seeing a lot of interest.

There's certainly no reason why it could not be wall to wall for us within the contact center, and we're definitely talking to companies about those types of opportunities.

In terms of pricing, we have not announced pricing yet.

And we're continuing through the beta period to learn more as we work with customers, and we'll announce it before GA.

Got it.

And just one more follow-up.

So I'm looking at the fiscal year guidance raise, and not to read into things, but it looks like on a percent basis that you're revising the variable revenue to contribute -- it looks like 1 point higher than previously.

But looking at the beat in this quarter, it came from mostly the base customers.

So I'm wondering if there's anything on the large customer side that is worth calling out for the rest of the year.

Albert, this is Lee.

So I mean, in general, we're pleased with the results, and we had strength across the overall breadth of our business.

Regarding variable revenue, it's in that category for a reason.

So some of that guidance flowed through the year with overperformance in the first quarter.

And as always, we forecast that conservatively on an outward basis.

Your next question comes from the line of Richard Davis with Canaccord.

Just 2 quick questions.

So one, I was like in Europe last week and there was a lot of talk, not surprisingly, about GDPR.

How are you guys fitting into that regulatory dynamic?

I mean, some companies are offering like consent [paying back] and stuff like that, APIs and stuff like that.

And then the second one is just you've touched on it before, but there's a lot of talk about interactive bots and using [Stella] and Sinatra and whatever.

To what extent is Twilio core technology in that ecosystem?

So GDPR and bots.

Yes.

Thanks, Richard.

This is Jeff.

Regarding GDPR, GDPR is something we've been investing in for quite some time.

We actually announced at SIGNAL in London last year that we expect full compliance with GDPR, the May 25 deadline.

And we are currently plowing ahead towards that and expect to meet that compliance.

And we know that's critical obviously for European customers that we're leader in that.

But we also believe that taking the leadership role in data stewardship for all of our customers is critically important.

And then every customer no matter where you are in the world is going to expect a great degree of care paid to every piece of customer data that you handle.

And so we're treating that standard as a global standard for all of our customers.

And second with your question on bots.

We've had a number of bot implementations built on top of Twilio, whether via SMS, via chat.

Our Understand product, Twilio Understand that we announced last year, is designed to power those types of interactions, and we've got customers building those types of interactions on top of Twilio.

And as a quick refresher, Twilio Understand is a natural language understanding engine that allows you to take the things that a customer says or writes and turn it into the intents behind what they said so that a developer can write -- can programmatically write the answer to a question.

The first step to answering a question is understanding what was -- what the meaning of the question was.

And so that's what natural language understanding is, and that's what our Twilio Understand product is.

That product is still in the early stages, but we're working with customers.

We're getting great feedback, and we are very confident that, that's going to be a great product for us.

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

Just first starting on Flex maybe a little bit.

Just you've talked about some of the partners, but sort of just some sense of how the partner channel is playing out there.

Have you seen any deployments that the partners have led?

I know it's early.

I know it's still sort of in beta.

But sort of as the partners think about what they're going to do with call centers in this new omnichannel sort of world through digital transformation, like how are you seeing the partner interaction there?

And sort of [leading by] reach, how does that play out?

Just some sense of the partner activity in that channel?

Great question.

We're definitely seeing a lot of inbound interest from partners.

We're seeing -- we're talking every day, honestly, to the existing Cisco, Genesys and Avaya resellers that are trying to figure out how do they move to the cloud and to the next-generation contact center infrastructure.

And I think the starting point for us is we're working with somebody's partners right now and getting them trained on Flex and figuring out go-to-market models with them together.

I think it's really exciting time.

It's really early days for us.

But we've seen, I think, a level of interest driven by Flex that we really just have not seen before from SIs.

And I think that's a big opportunity for us, mostly going after the legacy base of the old vendors.

Got you, got you.

And then a quick follow-up on -- all my questions are on the long-term strategic nature.

But on the wireless -- Programmable Wireless product, with that -- there's 2 sets of partners.

There's the guys who implemented, but there's the IoT guys that are sort of saying, "I've got all these systems, I've got all these devices, I've got to sort of figure out how to embed applications around that." I'd love to just a little understand, a little more color of sort of who you're seeing playing there.

And then what does the partnership channel there look like?

Is it a combination of SIs and sort of guys like GE?

And sort of what's been the reception to the product from those guys?

Absolutely, Bhavan.

This is Jeff.

I'll answer the question.

Yes, I think that our hypothesis with wireless is that if you're going to connect billions of devices to the Internet over the coming years, you're going to need millions of developers to be doing that work.

And the same dynamics that we've been playing out with voice, with SMS where we built a Super Network, gave it to developers, let them get started with very little friction and then be able to experiment with their ideas.

And if experimentation is the prerequisite to innovation, then we wanted to bring that same product philosophy to the world of IoT, to the world of wireless connectivity.

And that's what we're seeing play out.

We're seeing developers pick up Twilio Wireless.

You can get started with a few dollars.

I think it's $5, you get a starter kit with 3 SIMs and [kind of everything] you need to get started and begin building.

And that's contrasted with the legacy business model of getting cellular connectivity with one of these use cases, which would be long negotiation periods, long sales cycles and big committed contracts to a carrier in order to get started.

And we just feel that lowering the barriers to innovation, making it easier for a developer to see their ideas play out and test them with customers is actually the key to having that innovation [force on] top of Twilio.

Now regarding the partnership opportunity, we see, first of all, carriers as big partners in bringing this product to market.

We've obviously launched with T-Mobile as our launch partner in the United States.

We see interest from other carriers around the world as well.

We also see other companies that are helping the IoT development ecosystem flourish as good partnerships, like people who make hardware and things like that.

And obviously, in the past quarter, we actually announced a partnership with Singtel in Singapore as well, a similar-type relationship.

And so we see a lot of opportunities to help put Twilio Wireless in the hands of the world's developers, whether that's a go-to-market that's in partnership with carriers all around the world who want to accelerate innovation on their networks, also via the hardware companies that are helping the developers get started with their prototyping on the physical side of it.

And I'm sure there will be more to come.

Your next question comes from the line of Nikolay Beliov with Bank of America Merrill Lynch.

This is actually Jacqueline Cheong on for Nikolay.

One question that we keep getting from investors is how gross margins are impacted by the mix between customers of different sizes.

And as more of the business comes from larger customers that get evolving discount, how does that impact gross margins?

Jacqueline, this is Lee.

So the gross margin is impacted by multiple items.

And one of those items is customer size.

As the customers get larger, we do give them volume discounts so they can get a better price as they grow and scale.

We offset this with efficiency gains and product mix, specifically our application software -- our application services, which have a higher-margin profile.

Okay.

That makes sense.

And can you also give us an update on application services revenues?

What percent of the mix were they in the quarter?

And what was the growth rate in kind of -- in 3 to 5 years, what percent of total revenues could come from application services revenues?

Yes.

I mean, application services were up sequentially on the quarter and did grow well above our corporate growth rate.

That's a metric that we'll give out just on a periodic basis as we achieve milestones.

But we do expect it to grow significantly faster than our overall corporate average over time.

But we haven't released any specific targets yet.

Got it.

And if I can just sneak one more in.

What drove the higher free cash flow number this quarter?

Yes.

That was really just working capital changes.

So just some timings in terms of some higher recruiting expenses, some delays in [payables].

And we expect that to revert and normalize in the next quarter.

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

I want to drill down into a couple different areas, maybe starting with Jeff or George, around the base new customer adds.

5,000 new adds this quarter, I think that's double the number of net adds last quarter, kind of record numbers there.

What drove that expansion in the quarter?

Is it triggered by rolling out the new Programmable Wireless API?

Is it better sales productivity?

Help us understand the base customer adds there.

What drove that in the quarter?

Yes.

This is George.

Typically, Q1 is seasonally a strong quarter for us for customer adds.

I think it's generally a reflection of the fact that we are engaging more of our customers and developers that signed up, and I think we're seeing that show up in the numbers.

So it's overall, I think, a reflection of our go-to-market investments, plus the investment we're making in developer acquisition and evangelism, but I think some of it is also driven by seasonal strength.

Got it.

So seasonality sounds like it played a big factor there.

And then if I look at the net dollar expansion rate, that has been kind of declining for, I think, the last 6, 7 quarters.

You've got a nice reversal.

That accelerated this quarter.

On one hand, you had WhatsApp that certainly helped.

On the other hand, you had Uber that kind of washes that out.

So what drove the net dollar improvement this quarter?

The magnitude of that looks pretty impressive.

Was it broad-based expansion at existing customers?

Was it just a handful of larger customers that flowed into the mix?

Help me understand what were the contributing factors there on the net dollar expansion number.

Brent, this is Lee.

Just for clarification, we measure that on base revenue only, so WhatsApp is not part of the calculation.

And if we look at that expansion rate ex Uber, it has been very consistent over the last 5 quarters.

So some of that drop was just us lapping the impact of Uber.

The second part of your question, we saw strength across the overall customer base from the long tail that we have to our large customers.

And that overall strength resulted in the increase in the expansion rate.

Great.

Last question for me is -- I'm a stick one in here for George.

On the top U.S. cable provider, can't let you off without asking a question on that.

What was the bundle again as you think about that?

And how fast was the turnaround there?

You talked about that Engage relationship in New York and then striking that relationship.

How long that deal take to close?

And remind us the bundle.

And did you say a dollar size for that deal?

We did not give a dollar size for the deal.

We had our New York Engage, I believe, in early December of last year.

So that gives you a sense of probably the timing.

And obviously, we closed the transaction in Q1, so we're talking several months engagement cycle.

In terms of the bundle, it's an enterprise agreement for us, so it includes access to a broad portfolio of our software technologies, focused really around voice technologies, including TaskRouter, Programmable Chat, Studio, Functions, Enterprise Plan.

And these are all things that are part of our -- very related to the strength and this opportunity we see in contact center.

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

So George, when I saw you in -- at our conference in February, you were talking about how your #1 priority was doubling down on the quota-carrying resources, and the productivity numbers looked fantastic.

So I'd just love to sort of get an update for how you feel about those.

I think that our strategy is -- we're still on track with that strategy, so we're still hiring people.

The productivity is strong, and I think that we're seeing that strength in the numbers.

And are there any particular places where you see it more than elsewhere?

Honestly, we're growing across multiple segments and geographies.

So we're growing both in our commercial segment and our enterprise segment.

We're growing in both the U.S. and international.

And we're also seeing strength across all the segments.

Your next question comes from the line of Brian White from Monness, Crespi.

I'm wondering if you could talk a little bit about how big you see the TAM for Flex and specifically when it's going to go GA.

Sure.

This is Jeff.

The TAM for the contact center, it's interesting, you see numbers that do have a wide spectrum, generally in the tens of billions of dollars from the low to mid and sometimes from mid to high.

I believe the reason why you see a spectrum in there is because sometimes they include just the software or just the hardware or just the connectivity components of that spend.

What you're seeing about Twilio is that we really bring all -- every component used to that contact center.

And so you get the voice or the SMS or the chat and the software and the management.

This is sort of all in one from the benefits of the cloud.

And so we think this is a sizable TAM.

Although when you do research, there are a variety of answers you get, which can be a little confusing.

The -- as far as -- what was the second part of your question?

What was it?

When is it going to go GA?

Yes.

We're expecting to bring it to GA this year.

I'll remind you that a bunch of the aspects of Flex are actually already mature parts of Twilio stack, including our voice product, our TaskRouter, our interconnect.

A lot of the pieces that you need for a call center are parts of the Twilio and are already GA.

And then the parts that were newly introduced, for the most part, is the agent desktop and the supervisor desktop.

And those are the parts that we're busy right now bringing to maturity as well as bringing the whole bundle together for our customers.

And we're working with a number of customers already.

We've gotten great feedback, and we look forward to just continuing to get that product out to more and more customers throughout the year.

And Jeff, you have a lot of new products ramping this year.

If you can just narrow down maybe to 2 or 3 new products that will have the more meaningful impact on Twilio this year.

Well, I think we're excited about many of our new products.

I think Flex, certainly, we're very excited about having gotten out of the door and in the announcement back in Q1.

The response we've gotten from customers and from partners and from the market overall, analysts has just been really fantastic.

I think we have really understood a customer pain point from our perspective as a platform that the market has not yet seen.

And so we're very excited about Flex.

Although, I'd say, obviously, we need to get the product into customers' hands.

We just announced it.

And so will it have a huge impact on our numbers this year?

Probably not.

But we're very optimistic about the power that, that product can bring to the table.

Other products we're excited about, obviously, Twilio Wireless, we're excited to get that into GA in Q1.

And again, this is a huge market and a very large opportunity with IoT.

And I feel like we're just tip of the iceberg now with the opportunity that IoT represents, both globally as well as with Wireless itself having gotten to GA and getting in the hands of an increasingly large set of customers.

Your next question comes from the line of Will Power with Baird.

Maybe just coming back quickly to the first quarter upside, obviously strong numbers.

It sounds like it was broad based.

But I wondered if there's any more color on kind of sources of upside relative to expectations, whether it's application services versus SMS or voice.

And then a second somewhat related question, I wonder if we could get an update on kind of the international, domestic split, I guess, companies based on where they're domiciled and what those kind of respective growth rates look like.

This is Lee.

So as I said earlier, we saw strength across a broad breadth of our customers.

I mean, one of the beauties of our model is we work very hard, invest a lot of money and sales effort to make our customers successful.

And then when they're successful and grow, we share their success.

And we saw that in the first quarter.

In terms of your second question, our international split of business for companies headquartered outside the U.S. was 24%.

Okay.

Any updates on just what the growth trajectory look like for those companies versus domestic companies?

Yes.

I mean, international growth rate is faster than our U.S. growth rate.

Your next question is from the line of Stephen Bersey with MUFG Securities.

Just wondering for Flex, sounds very interesting.

I'm just wondering how that might impact gross margin going forward.

Will that require a bunch of new gear?

Or will Flex simply leverage your existing infrastructure?

Yes.

This is Lee.

So there's 2 components to Flex.

So there's a pure software component.

That will be a higher gross margin profile.

And then also, there'll be a significant pull-through of our programmable services, [which is] our current gross margin profile.

So in the long run, we do see that as a positive uptick on the gross margin.

Great.

And then, I guess, regarding Flex and the beta program, can you comment around maybe the number of beta participants in that?

This is George.

So given our focus, as we've talked about on enterprise customers who have 1,000 seats and above, we're going to have, I think, a relatively focused beta program.

We're talking double digits, not like thousands of people on the beta program.

This is going to be focused on higher-end customers, larger customers.

And therefore, the beta program will have smaller numbers in it.

Your next question comes from the line of Catharine Trebnick with Dougherty.

Any particular color you can put around what's your average -- each customer, what's the average sales into that customer, particularly interested in between this quarter and last quarter, if you could categorize that for us.

Yes.

What we will look at is our ARPU.

So our ARPU for our base customers was $9,100 on the quarter.

That is up -- it was actually $8,800 over the prior quarter, and we've seen that ARPU growth rate grow consistently.

If I go back to Q1 of 2015, it was $5,700.

So that is an important driver of growth as we scale our business.

With our high expansion rate of bringing on new products, we do see that ARPU growth rate expand.

Your next question comes from the line of Jonathan Kees with Summit Insights Group.

My questions are on LINE.

That's great news, [of course, LINE] connecting with LINE, and you have access now to the users in Asia.

Just curious, how much of a revenue driver would that be?

I know that you also have that with Facebook Messenger, but maybe taking a step back and looking at the messaging apps in general.

And then second, I have a question about...

Jonathan, could you repeat your question, please?

Oh, sure.

Sorry.

I wanted to know how much of a revenue driver, if any, Flex -- excuse me, LINE will be.

I know you all -- or maybe the team just take a step back, looking at the messaging app because I also know that you have support for Facebook Messenger in connection with Facebook Messenger, if that's that -- those -- that type of connection, that even moves the needle in revenue.

And then I have a second question about Flex.

Yes, absolutely.

This is Jeff.

I'll answer the question.

So this is still the early days of the adoption of a lot of these new channels.

We're very excited about the opportunity these channels presents as we see our customers struggling to figure out which channels they should invest their development energy in, which one's their customers are ultimately going to end up wanting.

And we see this as a big opportunity to help them to adopt those channels and to [write] against one set of APIs and have them work everywhere.

As far as the revenue, to date, while these have been in beta periods, we've not been charging customers, really learning about the use cases and understanding what customers want out of the product as well as what challenges arise when you're adopting these new channels.

But if you look at the revenue opportunities, I think that it all depend on the channels and depend on the use cases.

If you look at Flex, for example, omnichannel capabilities are one of the key selling points of Flex.

And in fact, when we're able to show customers that when you install Flex it'll actually work over chat, SMS, Facebook Messenger and LINE seamlessly, well, that's a big selling point.

But you end up monetizing Flex as opposed to the channel itself.

And so we think that based on the use case and based on the channel, there will be different monetization strategies.

But it is the early days of the world figuring out how these new channels will play out.

And so we've just been in the mode of listening to customers and working closely with customers to understand how they intend to use these channels and how their end users want to use these channels.

Okay.

Great.

That makes sense.

My second question is on Flex.

I know you're still in beta with that.

You're talking about getting some partners, working with some of [that large] -- or the premise guys.

Just curious as you've talked about -- or you thought about reaching out to the UCaaS guys, having them as partners, I mean, a lot the UCaaS guys have already partnered with a contact center provider.

Have you thought about using them as an SI in terms of reaching the enterprise customers -- the developers of enterprise companies?

I wouldn't rule it out.

We see a wide variety of partnership opportunities with Flex given how programmable and flexible and extensible it is.

That's one possibility as a partner?

Anything is possible.

There are no further questions at this time.

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