Twilio Inc (TWLO) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to Twilio's Q2 2018 Earnings Conference Call.

My name is Christina, 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 Second 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 second quarter performance, in addition to our financial outlook for our 2018 third 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 most recent Form 10-Q filed with the SEC on May 10, 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 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 of these non-GAAP financial measures 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 income from operations and net income per share but not the comparable GAAP measures.

The earnings release is available on the Investor Relations page of our website and is part of our Form 8-K furnished to the SEC.

Finally, at times in our prepared comments or in responses 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.

Now I'll turn the call over to Jeff.

Thank you, Greg.

Welcome everybody to this quarter's call.

As you can imagine, we're pleased with this quarter's results.

The business, up and down the product stack, exhibited continued strength in the second quarter.

We believe this shows the power of our platform model which combines our platform product strategy, our developer-first approach and our usage-based pricing model.

When our customers succeed, we succeed, sometimes even more than we plan for because of the pure size of this market and our leadership position.

But we're not resting on our laurels.

We see a tremendous opportunity ahead.

As every company starts to become a software company, we continue to see our developer-first model working across companies of all shapes and sizes.

We will continue to invest deeply to innovate and build market share as this is just the earliest stage of our opportunity to fuel the future of communications.

The primary metric we focus on, base revenue, grew by 54% to $135 million in the second quarter.

This type of growth is in rarified air for companies of our size and a testament to the team of Twilions around the world and their execution for our customers.

Total revenue grew a similar amount to nearly $148 million.

Our ability to drive more business with existing customers continues to power our results as we produced a dollar-based net expansion rate of 137% in the quarter.

All of this was driven by our focus on innovation and customer success.

Our core voice and messaging product lines continue to drive the majority of growth in our business.

These segments remain the lion's share of our revenue and are exhibiting strong growth even as these businesses achieve greater and greater scale.

But they also provide the foundation of the growing success we're seeing with the Engagement Cloud, as each layer adds value to the layer above it.

As I first laid out on our Q4 call, the first of our 2 top level priorities for 2018 is furthering our push into a strategic software platform for customer engagement through our buildout of the Engagement Cloud.

In the second quarter, we did our second major deal for Twilio Flex, our recently announced cloud contact center application platform, even though the product is still in beta.

We also did several proxy deals.

We saw continued success with the Authy family of products.

We also recently announced the general availability of our drag-and-drop visual editor, Studio.

Our strategy with the Engagement Cloud is working as we look to unlock more and more of this market.

Now let's take a moment to reiterate the power of our platform business model and how it enables us to see the opportunity with things like Flex.

As a horizontal platform, developers can build just about anything with our Programmable Communications Cloud, and this is a different basis for innovation than companies that just build solutions.

See, when you build solutions, customers come to you when they have that specific problem and they need it solved, pretty straightforward.

But when companies have different problems that aren't solved by any of those solutions that are out there, most companies either try to cram their problem into the framework of that solution with varying degrees of success, or they just live on with their problems unsolved.

But with Twilio's platform, some of the most innovative companies start saying, "Hey, what if we can finally build a solution to our problems?" And as we see these companies start to build, we ask them questions about why they chose to build on top of Twilio instead of just buying some prebuilt solution, and they unveil to us the unsolved problems of the business world.

We start to see this heat map of where we should invest next to solve big, unsolved problems for our customers.

That's how the opportunity for Flex arose.

We have been helping customers both modernize and recreate their contact centers for years.

And Flex is the next step in this evolution, taking the knowledge we've accumulated over all that time expressed through a new application platform product.

Flex offers a powerful combination of cloud scale, along with complete customization at every layer that has never been done before.

In the case of the contact center, we found that enterprises were stuck on-prem despite the fact that we're 20 years into this whole cloud thing.

They're still on-prem not because they love it, trust me, they don't, but because the cloud hadn't offered anything with the flexibility you get from on-prem installations where you can deeply customize your own installation to meet the specific needs of your company.

They want the scalability, reliability and global reach of the cloud, but they can't give up those customizations.

That's why when you talk to industry experts, they estimate that 80% to 90% of the very large contact center market is still stuck on-prem.

So we intend to solve that problem and, in doing so, help migrate that 80% to 90% of the contact center market from their legacy on-prem and, finally, into the cloud.

Now I don't want to steal too much of George's thunder here, but Flex is off to a great start.

I think our platform approach has uncovered an unsolved problem that enterprises are facing in their contact centers.

We've recently expanded the beta program, and our development team is hard at work finalizing the last bits of the agent desktop as we prepare for the GA launch later this year.

So while it's certainly early in the life cycle here, and we have a lot of work left to do, we believe Flex will be an important product line for Twilio for many years to come.

Our second priority in 2018 is to expand our position as developers' first choice for communications.

Omnichannel communications remains an important goal for our customers, but one made more complex by the ever-changing field of channels and customer preferences.

Communicating through SMS is still a mystery for many companies, much less dealing with all the new channels like Facebook Messenger, Google RCS, WeChat, WhatsApp, Alexa and many more.

Our goal as a platform provider is to make this as seamless as possible for our customers by hiding the underlying complexity and making these channels available for a single, easy-to-use API.

And we've recently taken several important steps in fulfilling this mission.

Just last week, we were thrilled to join forces with WhatsApp with the launch of the Twilio API for WhatsApp.

WhatsApp is an incredibly important communications channel in many geographies around the world, serving more than 1.5 billion consumers worldwide.

Over the past year, we've been working with WhatsApp to allow enterprises to integrate WhatsApp messaging into their notifications and customer support work plugs.

This channel is now available in limited release with just a few lines of code on our platform.

We're helping customers like Deliveroo, Hays, PATH and others explore the possibilities opened by this new channel.

And we have developers starting to explore their new ideas with our Sandbox that's available today.

And along with the ability to access this channel and many others through a single API, customers can take advantage of the same scale and reliability inherent in our platform, as well as products like Studio and Flex, to also support WhatsApp.

For us, adding this important channel to our platform broadens our reach and opens up a whole new set of customers around the world who can take advantage of not only this product but the rest of our platform as well.

We are also investing in ways to leverage machine learning to help our customers build smarter communications.

For example, we believe the contact center will be transformed by AI in the coming years.

And Flex, as an application platform, is perfectly positioned to integrate with all the leading AI platforms and products out there.

And our Programmable Communications Cloud, similarly, enables customers to rapidly integrate AI solutions with their communications because it's all building blocks.

For example, this quarter, we expanded our relationship with Google as a launch partner for 2 of their new efforts, Dialogflow and their Contact Center AI.

At their Google Next events, we were able to demonstrate how one of our customers, Marks & Spencer, has integrated these Google services into their Twilio deployments to create better, more automated customer experiences.

We will continue to work with the leading vendors in the space like Google to offer choice to our customers as they strive to optimize their customer reach.

Before I turn the call over to George, I'd like to thank our customers for putting their trust in us to deliver for them, and I want to thank Twilions around the world for their hard work and their constant devotion to our customers' success.

The communications market is so vast, and the opportunities to help our customers use communications to engage with their customers through software are virtually endless.

We'll be debuting our latest set of innovations at our SIGNAL conference in San Francisco on October 17 and 18, so mark your calendars.

George, let me turn the call over to you for an update on our go-to-market efforts.

Thanks, Jeff.

Q2 was another strong quarter for go-to-market as we continue to execute our core strategy.

The investments we're making in our go-to-market engine are bearing fruit in the short term, bringing in amazing new logos while also, at the same time, deepening the relationships we have with existing customers.

And just as important, we're also laying the groundwork for further growth and scale in the future.

As a reminder, our priorities on the go-to-market side are focused around three core principles: one, winning the hearts and minds of developers wherever they are in the world; two, increasing our account coverage to better serve our customers and our opportunity; and three, building the foundation for future growth with partners, enterprise and international.

As always with Twilio, let's start with the developers.

Developer evangelism remains the core driver of our inbound funnel.

As we continue to execute our strategy of meeting developers in the field, we're supplementing this with our engaged roadshows that are bringing together developers and business decision-makers.

We've hit more than a dozen cities and interacted with well over 1,000 customers and prospects so far this year, driving both awareness and pipeline.

All of these efforts are now leading up to our SIGNAL conference in October where we get developers, customers and prospects together to explore the future of communication.

We're continuing to increase our coverage as well while maintaining strong productivity, which is driving a growing number of transactions.

We're also deepening our relationships with existing customers as evidenced by the expansion rate Jeff mentioned a moment ago.

137% is an amazing feat in the world of software, and we're achieving it at well over a $500 million annualized run rate.

One of the deals I'm most excited about for the last quarter was our second major Flex deal, this time with Shopify, a leading commerce platform company that I'm sure many of you know well.

The power of Flex as the first contact center application platform is truly redefining the contact center market.

For the first time, companies can build exactly what they need to support the specific requirements of their customer engagement while taking advantage of global cloud scale at the same time.

As a development-centric company that is growing quickly, Shopify needs both customization and scalability.

They chose Twilio Flex because they wanted a contact center that will fit their business instead of fitting their business to the software.

We're also expanding our coverage in the enterprise, so let's walk through a couple of the highlights from the past quarter.

One interesting enterprise deal from the past quarter was an expansion of our relationship with Bank of America.

This new project involves a voice application with the goal of increasing lead conversion time and creating new revenue opportunities.

Another great, expanded relationship was a multifaceted deal with U-Haul International.

You've heard Jeff discuss many times the growing role of software within companies of all shapes and sizes, and U-Haul is no different.

To drive innovation across their company, U-Haul tasked its engineers with improving their customer experience and creating new service offerings.

We've worked with their engineering teams to identify several use cases to further their mission.

U-Haul will be using a variety of our products from SMS, chat, proxy, wireless and video, and we've already identified many more use cases and look forward to deepening our relationship over time.

Overall, we're just scratching the surface in the traditional enterprise.

We have more than 10% of the Global 2000 as part of our active customer count, and we have a tremendous opportunity to grow that count and expand those relationships in the future.

And while I'm excited about the success we're having in the short term, we're also making important investments to help us scale to reach our full potential.

I mentioned back in the Q4 call the addition of Ron Huddleston as our Chief Partner Officer.

Ron has been hard at work since then building out his team as they work to create the foundations of our partner effort.

You saw a taste of this with the partner lineup we announced in the support of the Flex launch back in March.

And at the end of June, we launched our new partner program, Twilio Build.

A successful partner program can be a force multiplier for customer success, whether providing specialized expertise, accelerating implementations or expanding our reach.

Twilio Build is designed to help nurture consulting partners to help sell with us and solution partners that sell for us by embedding our technology in their products.

Twilio Build includes all the people and processes partners need to be successful like training, certifications, pricing models, channel managers, a brand new partner community and more.

I'm incredibly excited about what this program will add to our business over the coming years.

Overall, our momentum continues to grow as we execute our plan, I'm incredibly proud of our team and the results they delivered in Q2 and I couldn't be more excited about our long-term opportunity.

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

Thank you, George, and good afternoon everyone.

In Q2, we had continued strong revenue growth and achieved non-GAAP profitability 1 quarter ahead of plan.

Our product innovation, coupled with our powerful developer-first go-to-market model continues to deliver success for our customers and drive our growth.

Let me run through a few of the highlights.

Base revenue grew 54% year-over-year in Q2.

Excluding Uber, base revenue grew 64%.

These results were well ahead of our guidance.

And as much as I'm thrilled by the momentum and trajectory of our business, I would not expect this level of outperformance for our guidance every quarter.

As George and his team have transformed our go-to-market effort over the past year or so, we've also adjusted our forecasting process to better model the flow-through impact.

You can see the results of it in our guidance for the remainder of 2018.

Our dollar-based net expansion rate was strong once again at 137%, or 145% without Uber.

Our go-to-market efforts are creating deeper, more strategic relationships with our customers which fuels the growth engine for our business.

The top 10 active customer accounts contributed 17% of total revenue in Q2, down from 18% last quarter and 21% in Q2 of 2017.

Our top 2 customers contributed 7% and 4% of total revenue, similar to Q1 level.

We had fixed variable customer accounts once again in the second quarter.

Gross margins were similar to Q1, coming in at 55% in Q2.

While gross margins had been stable for the past 2 quarters, we remain focused on doing the right things to grow the business long term rather than maximizing gross margins in the near term.

You should expect continued fluctuations going forward.

For the balance of the year, gross margins should fall within the range of the last 4 quarters.

Though we're currently operating at the high end of the spectrum, we see things that could impact where we fall in that range by product, country and customer mix that will serve as provider fee, FX and more.

And to help with some of your models, we ended the quarter with 1,119 employees, and our international mix of revenue was 25%.

In terms of the bottom line, we did see strong leverage this quarter, producing a non-GAAP operating profit 1 quarter ahead of the time line we outlined last year.

This is driven largely by the revenue upside in the quarter.

As we have mentioned for some time, getting to breakeven has been an important milestone for the company.

Looking ahead, given our leadership position in this massive market, we should expect our priority to remain on reinvesting for growth rather than operating margin expansion.

One item of note, on the balance sheet, the convert we completed in May added about $479 million of cash net to our balance sheet in the quarter.

To wrap up, another quarter of strong execution from across the organization produced excellent financial results.

Investments we're making in both product and our go-to-market organization sets us up well for continued growth in the future.

Operator?

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

Congratulations on a strong set of results.

So Jeff, I wanted to ask you, when you try to envision the future state of Twilio, perhaps 5 or 10 years down the road, how much of the business do you think could be in the contact center, if that is a market that, I believe, is nearly $100 billion in size?

And just also, what do you think would be the ultimate mix of the business, which could be the higher margin variety or the -- I think what you referred to as the higher-level API, such as Engagement Cloud and Authy?

Thanks, Mark.

I mean, I think, obviously, we feel good about the contact center market as an area that's ripe for some better solutions, and we're happy to provide them and also have our partners provide them.

The overall market, you're right, is very large.

Depending on which analyst you talk to, it can be in the tens of billions up to greater than $100 billion because there's a lot of components of it, there's the software, there's the connectivity, there's services, all sorts of different aspects of it.

But it's a very large market.

The most important thing about that number is actually that multiple -- according to most analysts, about 90% of that market is still on-prem despite the fact that customers don't want to be on-prem.

And so we think it's an area with a very big opportunity and one that we're excited to address.

As far as how much our business is, I'm not sure I would speculate to answer exactly what I think it's going to be because there are a lot of use cases that, similarly, at Twilio, we see as areas that are ripe for disruption and new ways of going about as well as bringing those markets from legacy solutions into the cloud.

And so there's a lot of areas that Twilio's investing in, there are a lot of use cases that we feel very excited about, and the contact center is certainly one of those.

And I think there was a second part to your question, Mark?

Yes.

I was wondering, Jeff, in the very long run, what mix of your business do you think could be the higher gross margin variety, in other words, use cases or the higher-level APIs.

Yes.

Well, the Engagement Cloud strategy that we launched last year and then we reinforced with the launch of Flex earlier this year for the contact center, this strategy we feel is working, and we're very excited about it.

That said, our core business of programmable SMS and Programmable Voice, these are mature products that are at scale, and they continue to grow very quickly.

And you'll also notice that as we roll out the Engagement Cloud products like the contact center, it is going to pull through more revenue from the underlying platform of voice minutes and SMS.

And so we think that while the Engagement Cloud is going to grow rapidly, and we feel great about that product as well as the software nature of those products, it is also going to continue to help boost the growth rates of our Programmable Communications Cloud.

And so we feel really excited about both parts of those business.

And I wouldn't, I guess, speculate on exactly what the growth rates are going to be of either one other than the fact that we feel both of those strategies are working very nicely.

But the mix will grow over time, obviously, as we introduce new products in the Engagement Cloud.

And as a quick follow-up, Lee, I didn't quite catch your comment.

I believe you made some kind of comment about adjusting the modeling or adjusting the guidance methodology.

And if I heard that correctly, what exactly are you doing differently?

And maybe what is the magnitude of that change?

Yes.

A few things, Mark.

So I mean the main point we wanted to make is as much as -- we feel really great about the business, business inputs are strong, our outlook is great, not expect beat this large every quarter in terms of revenue.

And a little more subtle behind that comment was, as George has implemented go-to-market enhancements over the last year, we've gotten to better understand the impact of those enhancements, and we've incorporated those into our forecast.

And that's reflected in the guidance we gave for the second half of the year.

The actual methodology philosophy approach has not changed, however.

Your next question comes from Richard Davis from Canaccord.

Yes.

So I saw you guys introduce -- or announce, I guess, Twilio Sync for IoT and embedded devices.

And that space was like super hot, and it's actually probably calmed down to the point where it's actually a legitimately growing business.

I realize you have a lot of products in your portfolio, but at least broadly at least, I mean it seems like that would be an interesting vector for you guys.

How should we think about that?

Yes, sure.

Now Twilio Sync is a product that we launched a couple of years ago with the ability to synchronize application state across a wide variety of devices, whether it's mobile devices, browsers.

Now what we added to that is IoT devices.

And we feel that the IoT market is obviously one that is ripe for a huge amount of growth given the -- overall, given the -- if you listen to analysts, it's like we're going to connect every grain of sand on the beach to the Internet, and so the amount of growth here is tremendous.

And we like Sync as a connector for those devices.

We think that's a product that's needed by developers as a lightweight way of taking data that's coming off of those devices and moving that data into the cloud as well as moving application state from the cloud, maybe some Web application or mobile application and moving it back down to devices.

And I'd also say for the IoT market, probably our bigger play there is Twilio Wireless which, of course, is the wireless connectivity solution that we're primarily aiming at the IoT market to provide wireless connectivity over 4G, 3G networks to those devices.

And that's a product that we're particularly excited about.

Got it.

And you can answer this, I'm sure, with a one word answer, yes or no, but you guys, I think, cleared the GDPR stuff and data protection with flying colors, is that right?

Yes.

That (inaudible) was in May, and we put a very large list across Twilio to meet the compliance obligations of GDPR, and we were excited to say that we met the obligations.

And that's not just for our European customers, that is for all of Twilio's customers because we feel being a good steward of our customers' data and treating data with the respect it deserves is a core aspect of any platform and really any product company going forward.

And so we're excited to undertake the effort to prove to customers how we -- be transparent with customers, how we treat their data, and prove by meeting obligations of the law that we are actually treating their data as they want it to be treated.

And so we feel like that's a really good investment.

Your next question comes from Alex Zukin from Piper Jaffray.

So this looked a bit like an inflection quarter for you, with accelerating revenue growth both sequential and year-over-year, both base and total.

And somehow you managed to pair that with some of the best incremental operating leverage you've seen.

And given your customer count growth is roughly flat from a growth perspective with last quarter, can you maybe comment on some -- or shed some light on what is happening with either the use cases that you're seeing incrementally or is it some of the go-to-market synergies that you're finding?

And what type of dollar-based net expansion rate do you think we should think about as being more or less sustainable for the back half of the year?

And I've got a quick follow-up.

Alex, it's Lee, I'll take that.

So a few things behind there.

First of all, when we look at Q2, I don't necessarily see it as an inflection point, just a continuation of the business, very similar to what we saw in Q1 with strength across -- over the broad breadth of our customer base.

If you actually look at base revenue expansion, pulling Uber out, that was in the mid-60 range, and that number has been in the low and mid-60% range over the last 8 quarters.

So as we've scaled this business, we've maintained consistently high revenue growth.

In terms of the expansion rate, we expect to continue with a high and strong expansion rate.

That reflects the power of our platform model in the go-to-market efforts.

Over the long term, as the older cohorts become larger, the expansion rate will drop over time.

But again, we feel really good about the efforts we're doing to keep it steady.

You know what, Alex, maybe some other -- did you ask...

Yes, I was just going to ask about -- maybe for George, the hiring trends year-to-date, where we are with respect to doubling quota-carrying headcount within the sales organization and maybe how you see productivity ramping throughout the year.

So thanks for the question.

Look, we're not going to give out specifics on our quota-carrying headcount and where we are, but I will say I'm very pleased with the hiring.

We're on our plan.

And so I think you're seeing that in our numbers.

So we're excited about the momentum in go-to-market and just really, really happy about the progress.

Your next question comes from Heather Bellini from Goldman Sachs.

This is John on the call for Heather.

Just a question.

You guys posted a fairly strong beat and you just had some traction in your higher margin products with the Engagement Cloud Platform, but your gross margins were sort of flat sequentially.

And we know that you pass on a lot of these cost savings to your customers, but can you maybe talk about the pace of this gross margin expansion throughout the rest of the year and, I guess, over the course of next year or a couple of years or so?

Yes, John, some of that wasn't completely clear, but I think if I understand you, there was a talk about our gross margin rate.

So as we said since the IPO, our focus has been on driving top line revenue growth rather than maximizing gross margin in the near term.

So as we look out over the rest of the year, in terms of our guidance, we've talked about gross margin being in the range of what it's been over the last 4 quarters with puts and takes that could cause it to fluctuate a bit in either direction.

In the long term, we feel very comfortable with our long-term gross margin model of 60% to 65% as the Engagement Cloud application services become a greater part of total revenue.

And your next question comes from Nikolay Beliov from Bank of America Merrill Lynch.

This is actually Jacqueline on for Nikolay Beliov.

My first question is what's driving the increase in expansion rate to 137% this quarter?

And any color on what the expansion rate is without Uber?

Why don't we let George talk about go-to-market, the factors that are driving the expansion rate?

And Lee, maybe you can add...

Sure.

We -- there's a couple of things that are driving it.

One is we have more coverage, frankly, and more people working with our customers every day in the front line to help them find new use cases.

Also, we're seeing momentum with new products and things like Flex which we talked about.

So I would say those are kind of the 2 to 3 biggest things.

Then jumping in, this is Lee.

In terms of overall expansion rate going from 132% to 137%, the negative impact of Uber is less in this quarter.

If we pull Uber out, expansion rate was 145% [against Q1].

Got it.

And maybe one more question, an update on application services revenues.

What percent of the mix were they in this quarter?

And what was the growth rate?

And kind of what do you see in 3 to 5 years?

Like what percent do you think it could be of total revenue?

Yes, so that's a number that we talked -- we don't talk about on a regular basis but we'll give out periodically.

Last time we talked about it, it was 10% in Q4.

Application services revenue still continues to grow very fast, much faster than the corporate average.

And as a reminder, similar to what Jeff talked about in terms of the contact center Engagement Cloud revenue, application service revenue, even though it's growing very quickly, our Programmable Voice and Messaging revenue is growing quickly, and it also will pull through revenue -- the application service revenue will pull through our Programmable Voice and Messaging revenue.

So the mix will gradually increase over time.

We don't specifically guide to what that percentage will be, however.

Your next question comes from Heather Bellini from Goldman Sachs.

Yes.

Sorry for the miscommunication before.

I just had 2 questions for you guys.

Obviously, you posted a really strong beat, so congrats on that.

I wanted to follow up, I think, on the first question that Mark had, talking about some of the higher gross margin products like Flex.

You seem like you're having some good traction there.

Your gross margins were flat sequentially.

I'm just wondering if you could share with us how we should expect the pace of gross margin expansion to play out over the course of the next kind of 12 to 24 months as that product ramps.

And then the other question I had, just again another follow-up on Flex, is just when you are in the market with that product, what options are most often also being considered by customers?

Yes, Heather.

This is Lee.

I'll take the first part of the question.

So regarding -- there's also been a lot of excitement around Flex, however, the product goes GA later this year, so there's really not going to be a material impact on revenue in this calendar year, though we're very excited going forward.

And regarding overall gross margin forecast, I'll go back to what we talked about since the beginning of the IPO, we're really focused on driving high-revenue growth, and that's the main focus of the business rather than maximizing gross margin in the near term.

So we're still focusing on revenue growth.

The second part of your question, Heather, the #1 competitors we're seeing out there for Flex are really the on-premise companies.

Jeff talked about 90% of the world is still on-premise versus cloud.

We do occasionally see maybe a cloud SaaS provider.

But the #1 pain point we're seeing in the field is people wanting to move off of on-premise and into the cloud, and those are your usual suspects: Cisco, Genesys, Avaya, et cetera.

Yes.

And are those typically end of lifed at a certain point?

Like do you have experience knowing when those are kind of completely written off and when -- you mean some of those solutions you're mentioning are really, really old at this point, so how do we think about those kind of coming of age?

Well, those products are -- those products have typically very expansive footprints inside these companies.

And so what's nice about us, what we're doing is we're typically not ripping up the whole thing day 1, we're taking it out piece by piece.

I think honestly, some of these companies may have a piece of this infrastructure -- it's going to take them years to honestly rip the whole thing out.

So I think that's actually good opportunity for us over time.

I think that that means there's runway for us for many, many years to be replacing old legacy technology.

I think there's going to be no shortages of opportunity for us to do that for years to come.

Your next question comes from Bhavan Suri from William Blair & Company.

I wanted to touch on 2 pieces here.

One is, as I look at the platform today, you've got a couple of things that you sort of carved out from the call center stuff or sort of be in the insurance vertical.

You've got sort of engaged, you've got some of the IoT stuff.

But are you thinking about taking more pieces and applying them to very vertical specific things like a private wealth thing or something like that?

How do you guys think about sort of the idea sort of verticalization?

And again, as a platform it's very horizontal, but there are some really interesting spaces where some of your clients have done some interesting things and you could see repeatability there.

Just sort of as you think about strategic, I wonder how you think about vertical apps and verticalization or vertical frameworks for certain industries.

Thanks, Bhavan, this is Jeff.

So the way we generally think about it, we are a broad horizontal platform and even with our new application platforms, these are still designed to be very broad entrants into the market.

And that's one of the areas where we really excel is because all of our products are APIs, even our application platforms are designed from the ground up to be completely customized in every way you can imagine.

This creates a great opportunity for companies who are in vertical spaces to actually customize our solutions for those verticals.

And so historically, we've had partners take the products that Twilio builds and actually get them into verticals that I honestly never even knew existed.

We've got like customers who provide CRM for auto dealers, CRM for hair salons, CRM for yoga studios, right?

Like I didn't know those things existed, but God bless them, they do, and they use Twilio in order to get better communications into the hands of those companies.

And so I think this is, generally speaking, part of our strategy, to fuel the future of communications, which is that Twilio, we're not a solutions company going after one -- just one thing or just one view of what that solution is, we are trying to up-level the entire playing field and help every company improve how they communicate with their customers.

And oftentimes the verticalization of those products is ideal for companies that are really deep into those verticals and can add communications into their products and then bring them to market with their existing customer bases, and we really like that strategy.

Fair enough.

And then maybe one for George.

You touched on a sort of sales overlay in terms of the go-to-market.

One of the areas, I guess, we were talking about maybe a year ago, maybe a little longer, was the BPO market.

And so the opportunity to create solutions for BPO players that were much more flexible that could tie in to like work-from-home type of situation like JetBlue leverages, things like that.

Just wondering if that's still part of the go-to-market, that's sort of a small sort of back burner.

How should we think about that space?

Because it is, sort of on a unit and usage basis, a fairly significant market from a call volume perspective.

So just trying to think about any updated thoughts you guys have in that space.

Yes, I mean I think -- thanks for the question.

I wouldn't say it's a central part of the strategy, but it's certainly part of the vision of what we're working on, especially as we double down on the contact center space with Flex.

And I think that it's definitely in the purview of -- or in the scope of what we're looking at as part of the -- especially the Twilio Build program.

So I think that's probably the right way to characterize it, something -- a market we're interested in.

I think we have an opportunity there.

But I don't think it's front and center.

I wouldn't characterize it as front and center.

I think we just have such a big opportunity in the contact center space, and I think that's just part of it is for us.

Your next question comes from Catharine Trebnick from Dougherty.

Could you discuss a little bit of the competitive landscape and what you're seeing in the core SMS and voice piece of it?

Thanks, Catharine, this is George.

Honestly, we haven't seen any change.

Landscape, it's still very fragmented, and we did also see a big delta in this quarter.

Your next question comes from Pat Walravens from JMP Securities.

So I have 2. My first one, Jeff, I think is probably for you, which is, is e-mail something that you feel Twilio should offer natively at some point?

And how do you sort of think about that and the pros and cons?

And then I'll just throw the second question out now, any update on the CFO search?

Maybe we're just going to get to keep Lee, which should be great.

Absolutely.

On the first part of your question in terms of e-mail, we listen to our customers when we hear what they're asking for, and we've been very pleased with the channels and we've offered.

But we have heard customers at times, e-mail is a part of their strategy.

And that's why we announced a partnership a couple of years ago now, I believe, with SendGrid to actually make e-mail available in parts of Twilio's product.

And so, we're really excited about that.

And I think the second part of your question was regarding Lee?

Yes.

Yes.

So the CFO search?

Right, yes, the CFO search.

CFO search is going well.

We're meeting candidates.

We -- I'm very thankful to Lee for being here for an extended period for a smooth transition.

And so we've had the luxury of meeting a number of candidates and finding the right candidate for the role to take us to the next scale we're going to.

So I feel really good about the search, and I'm also very appreciative of Lee to give us the time to be able to do a really orderly search to find the next person for the job.

Your next question is from Mike Latimore from Northland Securities.

This is Bailey calling on for Mike.

What a quarter; congrats, guys.

A few questions.

I'm just wondering how many beta customers you have currently on Flex and if you can share what the average size of these are.

Mike (sic) [Bailey], this is George.

So we're not disclosing the number of participants in the beta program, but we certainly are oversubscribed, I'll say this, and we have recently opened up the program to take in more people because we've seen such demand for it.

In terms of the average size, we've said that we're focused on the enterprise space as kind of our initial starting point, and we definitely have seen the majority of the beta customers falling into that category of the enterprise seat level, 1,000-plus seats.

Got you, great.

And I guess, do you envision the pricing for Flex averaging less than a typical cloud contact center service would?

And I guess the next question would be, would it be transaction-based or more of a SaaS model?

Yes.

Well, we are still finalizing the pricing as we work with our customers.

The way we look at it, we are targeting some of the most demanding contact centers that are out there, some of the largest, with the most customization requirements of the contact center market that are out there.

And so as we work with customers, we're not trying to be the lowest cost contact center out there, we're trying to be a very sophisticated solution for some of the most demanding customers that are out there.

But we're going to finalize that pricing, and we'll be announcing it in the not too distant future.

The pricing for Flex will have 2 components to it.

There's a software component to it.

So all the things that make the contact center function in all the ways that you want a contact center to function, but there's also a component which is the connectivity.

So if you're doing a voice contact center that will also drive voice minutes on our platform.

If it's an SMS-based contact center, it'll drive SMS usage on our platform.

And so there's really 2 parts of those contact centers depending on what channels they deploy, there will be a more usage-based revenue-driven on the platform side, but there's always going to be software-driven.

And as far as the exact software model that we're planning to price it for, we're still finalizing that with customers.

But obviously, we want to make Twilio Flex something that is aligned with what customers want and gives them flexibility in how they adopt it.

And Twilio has always done well to try to lower barriers for companies to adopt Twilio.

And so I think we'll probably do something in Flex that also makes it easy for customers to get started.

Your next question comes from Will Power from Baird.

I echo congratulations on the numbers.

I guess a couple more questions to throw in.

I guess first, it'd be great if you could help us frame how to think about the WhatsApp API opportunity.

Is that something customers were asking for?

How do we think about the revenue opportunity over time?

And I guess I'd be curious if there are any learnings, parallels, with Facebook Messenger there?

And then my second question, you've got more cash on the books now.

How do we think about use of that, maybe any parameters around how you might think about any M&A interest with that?

Yes, thank you, Will.

Yes, thanks for the question about WhatsApp as well.

We're obviously excited to announce that last week.

As we noted on previous calls that with other channel launches like Facebook Messenger, we believe that the continued fragmentation of the communications landscape really presents a challenge as if -- how do I keep up and talk to my customers where they want to be reached, right?

So our customers' businesses have that challenge, and we see a great opportunity for Twilio to help them to navigate this complex and rapidly changing landscape.

WhatsApp is a bit different given its prevalence globally, there are parts of the world where WhatsApp dominates over means like SMS.

And that means that any users are really predisposed toward WhatsApp and against SMS of how they want to communicate, either cost or reliability in those regions of the world.

So I think that our ability to now service those regions of the world with their preferred means of communication will open up new opportunities for us in those markets.

And so really exciting -- we're really excited to help our customers serve their customers now even better in some of these regions of the world where WhatsApp is the dominant form of communications.

And I think there was a second part of your question?

Yes, just around use of cash.

Now that you've got more cash on the books, maybe any thoughts around M&A interest, how you might think about that?

Yes, this is Lee, I'll jump in.

So yes, we feel really good about the strength of our balance sheet, both our existing cash balance and adding the convertible.

And really, we look at that as ways to accelerate our road map.

So we're at the early stages of a big opportunity, and if there be some M&A opportunities down the road that could accelerate the road map or if there's a really strong team that could help move us forward, those are the type of things we'd be looking at going forward.

Your next question comes from Brent Bracelin from KeyBanc.

I guess, Jeff, for you, I was wondering if you could weigh in just on AI and machine learning.

We've obviously been talking about this as a new kind of differentiator for the last 1 year, 1.5 years.

What are you seeing from a customer interest standpoint, activity, new app development, leveraging some of your AI functionality?

Obviously, you have the Google Contact Center kind of AI functionality you're working with as well.

But what are you seeing, let's say, over the last 6 months versus kind of what you expected on the AI front?

Yes.

Thanks, Brent.

I mean, I think that AI will ultimately be seen as really the major driver of technological change for the next 10 years.

I think I look back to the mid-'80s, you kind of had a decade of the PC being the driver of technological progress.

But in the mid-'90s, it became the Internet and the Web.

We had 10 years of massive growth there.

In the mid-2000s, we had mobile being the major driver.

And now here we are in the mid-20-teens, I think that AI is going to be a major driver of business progress for the next 10 years.

And so we're really excited to be investing in AI quite a bit.

Obviously, we use AI a lot under the hood of Twilio, so how we build and operate the company, things that you don't necessarily see as products.

And then we have parts of our product that are actually powered by AI.

And so you look at Twilio Understand, for example, is a product that allows customers to build Natural Language Understanding that spans across many channels, whether it's a customer speaking to them in an IVR where -- we've had IVRs for 20 years, most customers don't love interacting with IVRs honestly because the accuracy rate was not where it needed to be, and that's why people have had, relatively speaking, a fairly bad experience with IVR historically.

But I actually believe that machine learning is changing that story quite a bit because the accuracy rates have gone up as well as the free-form cognition that's going on is much higher than it was 10 or 20 years ago.

And that is going to change, I think, the experiences that people have.

So we're excited to be investing in that.

But what's neat about Understand is it's not just an IVR solution which, obviously, there's demand for, but it also works across channels like text.

And so you can have SMS conversations or chat conversations with a bot, and we can also power those experiences across some of the newer channels such as Amazon Alexa and Google Home and Siri and things like that.

And so we think that the idea that there is one product where you train and build complex models that represent how people ask questions of your business and talk to your business, and then you can deploy those models against many different channels.

Those channels are constantly changing, so you want to build it once and deploy it everywhere, that's what Twilio Understand does.

Now this quarter, we also had the opportunity to partner with Google to bring Google's Dialogflow into Twilio as well.

And so Flex is -- Twilio Flex and the contact center, but Twilio's platform overall will now be able to easily integrate Google Dialogflow into services that customers are building on top of Twilio.

So we think that part of being a platform is giving customers choices, and so we're pleased to let customers choose the natural language processing engine and platform that they choose, whether it's Twilio Understand, we'd love for that to be the case, but we recognize that's still in beta.

Or Google Dialogflow or others, we see this as a platform play that letting customers pick the platform of their choice will ultimately get them successful on our platform, and that's what we intend to do.

There's a great customer story on the earnings call, in our prepared remarks earlier about Marks & Spencer, who's doing exactly that, right?

They have built an assistant called [Connie].

And here's a fun factoid.

Connie was the name of the first switchboard operator at Marks & Spencer, some 75 years ago.

And so they named their assistant after Connie and are now using that to power their new IVR experiences with their customers with Twilio and with Google together, right?

So we think that's a really powerful combination that is ultimately driving more use cases and a renewed interest, honestly, in this whole area.

Who would've thought a few years ago that you'd be naming your IVR, right, giving it a name and a personality and all that.

I think that's a testament to the belief that these engines are getting more and more powerful and more and more answer to offload some of the workloads in a way that customers actually like and provides great customer experiences unlike the IVRs of old.

And so we're very excited about what Natural Language Understanding can do and, in fact, driving new decisions, new purchase decisions and an upgrading of legacy technologies, we think that's a great potential boost for this business.

(Operator Instructions) Brian White from Monness, Crespi.

My question is on Twilio Build.

I'm wondering if you could give us some type of number around the companies participating.

And should we expect Build to have an impact in the second half of the year?

Or is this more a 2019 event?

Brian, thanks for the question.

I'm very excited about Twilio Build.

It is very early.

We just launched the program.

And so I would expect that, first of all, I don't -- I think it's a multiyear effort to build a meaningful, significant partner ecosystem, so we're taking a long view on it.

And that being said, I think we'll see more impact in 2019 than, obviously, the second half of this year.

And our near-term goal is to focus on -- we're seeing a lot of momentum around Flex, and we're seeing a lot of demand for Flex partnerships.

And so we are busy training and enabling people for that.

And I think that we're -- our goal is to get the partner support we need to make Flex successful, and I see good traction there and I'm excited about that.

So early days but promising signs, and I'm very excited about Ron's opportunity with the team.

And Jeff, just on the Twilio Programmable Wireless that became available, I guess, it was in April it went GA, what's the initial take so far?

Yes.

So if I heard the question right, I think you asked when my mom's birthday is.

And it's today, so I wanted to wish my mom a happy birthday.

And I think the [real] part of the question was about Twilio Wireless?

Yes.

Sorry, I had to fit that in.

So we're really excited, we got Twilio Wireless to GA this quarter, so we're very excited about that.

Wireless is a very exciting product because, as I mentioned earlier, there is so much opportunity in the Internet of Things.

And one of the things that really excites us that is around the corner for Twilio Wireless is the emergence of some new protocols in the 4.5 and 5G specifications that are specifically designed for the IoT opportunity.

And what that's going to do is bring down both the cost and also bring up the battery life of IoT connected devices who are connected to 4G and 5G networks.

And so NB-IoT is one of those protocols, Narrowband-IoT.

We think these are very exciting because they potentially present a great step change in how this technology is used, of using carrier provider networks as opposed to WiFi or Bluetooth to connect devices very easily, very reliably and now very cost-effectively and for long periods of time on one battery that will provide -- that can drive even more demand for Twilio Wireless.

And so we're very excited about that product.

It is -- just hit GA this quarter, so it's clearly also still in the early days of this product, but it's an exciting product for us in a big market.

Your next question comes from Jonathan Kees from Summit Insights.

I'll follow instructions and just limit myself to one question, even though I have several questions I would like to ask.

I guess the question I'd like to -- I want to ask is, just curious, for the 2 deal that you had, that you won with Flex, were there contact center cloud vendors that were also invited to the RFP process?

Or was it all premise?

And kudos for the quarter, by the way.

This is George.

So that particular transaction was against a cloud provider, and -- but most of the other ones we're seeing in the beta program are looking at moving from on-premise solutions.

There are no further questions at this time.

Thank you for participating in today's conference, you may now disconnect.