Twilio Inc (TWLO) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to Twilio's Q3 2018 Earnings Conference Call.

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

(Operator Instructions)

I would 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 Third Quarter 2018 Earnings Conference Call.

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

The primary purpose of today's call is to provide you with information regarding our 2018 third quarter performance in addition to our financial outlook for our 2018 fourth quarter and full year.

Please note that we will not be discussing the pending merger of Twilio and SendGrid as we will soon be in the SEC review process of the joint proxy statement prospectus related to the pending transaction.

Q&A at the end of the call will be limited to matters related to our third quarter earnings.

Some of our discussions and responses to your questions may contain forward-looking statements including, but not limited to, statements regarding our future performance, including our financial outlook, our pending acquisition of SendGrid; impacts or -- 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.

Discussion of the risks and uncertainties related to our business is contained in our most recent Form 10-Q filed with the SEC on August 8, 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.

I would 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 our 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 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.

I'll now turn the call over to Jeff.

Thank you, Greg.

Welcome, everybody, to this quarter's call.

Now before I begin, life handed me the microphone on this election day, so I feel it's my responsibility to remind everybody listening to please take the time to vote.

Thank you.

Now on with the call.

In Q3, we drove success for our customers once again, which translated into another strong set of financial results.

Our relentless focus on innovation and empowering developers continues to resonate in the market, powering our platform business model.

And as George will talk to in a moment, we're adding important new logos and driving deeper relationships with existing customers as well.

The investments we are making in innovation and go to market are clearly working.

Base revenue, the primary metric we focus on, grew by 68% in the third quarter to more than $154 million.

Total revenue grew a similar amount to nearly $169 million.

Core voice and messaging, our largest businesses, continue to fuel our results.

The relationships our go-to-market team are building with our customers drove our dollar-based net expansion rate to 145% in the quarter as we continue to unlock more and more use cases within our customer base with a growing set of products.

As I've been discussing throughout the year, our top 2 priorities for 2018 are to further our push into a strategic software platform for customer engagement through our buildout of the Engagement Cloud and to expand our position as developers' first choice for communications.

And coming off our annual SIGNAL conference last month, we made several advancements in both categories.

At the Engagement Cloud layer, we announced the general availability of our contact center application platform, Flex.

Flex was the result of many years of helping customers build out new contact centers on Twilio, listening to them and learning about the complexities of what they were tackling.

An important part of Flex is the workforce optimization, or WFO, product that we added through the acquisition of Ytica in the third quarter.

We've been working with Ytica for a long time and they have become an integral part of the Flex buildout and the success we saw with early customers.

Reporting and analytics are key components of any enterprise-grade contact center, and we're thrilled to be able to offer this product as a core component of Flex.

At SIGNAL, we had Shopify on stage describing how they built and launched Flex for more than 1,000 agents in the course of about 5 months with 3 developers and 2 interns, mind you.

We had several more customers commit to Flex pre-launch in the third quarter, and we have many more customers in our pipeline.

Of course, we have a lot of work to do to make our early customers successful, but I really think we've hit an important market need with a pretty unique offering.

For the first time, customers can now have their cake and eat it, too.

Flex combines the scalability and reliability of our cloud platform with the ability to programmatically customize every element of the contact center experience.

This is a powerful combination, and we believe we have created a fundamentally new way of delivering software value to customers, which will serve us well as we continue to build out the engagement cloud over time.

And as we look to grow Flex, particularly in the enterprise, helping our customers process payments in a compliant way is very important to unlocking the full opportunity.

How many times has everyone listening today read their credit card number to a contact center operator?

More times than I'm sure anyone of us want to count.

But to help support this vision for our customers, we had 2 key announcements at SIGNAL: the launch of Twilio (Pay) and our PCI certification.

Accepting credit card payments over the phone has long been a complex and expensive process, but no more.

Twilio (Pay) allows developers to add 1 line of code to their application to process payments while using our Programmable Voice products, all in a compliant way.

Our launch partner for (Pay) is Stripe, one of the pioneers in empowering developers around the world to more seamlessly embed payments into their software.

The credit card information captured securely through (Pay) will be processed on their platform.

And we couldn't have launched (Pay) without our voice platform being PCI-certified.

For those familiar with the payments industry, PCI, or payment card industry, certification is a must for any companies processing, transmitting or storing consumers' credit card information.

Until now, companies had to face the complexity of becoming PCI-compliant themselves or use a hardware-based payment processing tool with limited customizability.

Our Programmable Voice product has been granted Payment Card Industry Data Security Standard, that's PCI DSS, Level 1 certification, meaning that customers can now use our platform to process payments securely without having to do the development or complete the annual audits themselves.

All of that is taken care of by our platform.

Flex and (Pay) together make a great experience for customers.

Another subject on the mind of nearly every enterprise and developer in 2018 is artificial intelligence, AI, and how to harness this technology to create great experiences.

To date, AI and bots have largely been in a lot of hype leading to lots of unfulfilled promises and poor experiences for many customers.

At SIGNAL last year, we announced Understand, our first foray into the machine learning natural language-understanding space to begin our work with customers to unlock this opportunity.

And at SIGNAL this year, we launched Autopilot, the next evolution of this product with a Natural Language Understanding engine, a conversational application platform and an omnichannel hub.

What that means is Autopilot is a fully programmable conversational AI platform for building custom bots, IVRs and even home assistant apps.

With Autopilot, we're empowering developers to build bots in real life at scale and with the user experience in mind.

This requires conversational logic to enable natural interactions, the ability for developers to use their own data to train their bots to get smarter over time and the intelligence to hand off the conversation to an agent if needed without losing any of the context.

Oh, and by the way, this needs to happen across all channels: voice, messaging, personal assistants, a difficult task but a common theme across many of our product efforts.

Really nailing an individual channel is powerful for companies, but the number of channels is growing more complex by the day, and enabling developers to build once and deploy across multiple channels is incredibly powerful.

We also had 2 Programmable Wireless announcements at SIGNAL.

First, the Twilio Super-SIM expands our efforts to provide global connectivity for our growing list of IoT customers through a single API.

We are, in essence, duplicating the approach we took with the Super Network and the buildout of our voice and messaging footprint.

We added relationships with The Three Group, Singtel and Telefonica, increasing our network reach significantly across Europe, Asia and Latin America.

And we plan to add more over time.

Developers can now, through our software, use 1 API to optimize the connectivity to local carriers around the world for their devices containing our SIM card.

As with voice and messaging before it, this allows our customers to focus on product innovation rather than mobile infrastructure or network access.

We also took an exciting step towards the future of wireless connectivity by launching the nation's first developer platform for the emerging narrowband connectivity market, or NB-IoT, in partnership with T-Mobile.

You've heard me mention in the past what we see coming with NB-IoT and how it has the potential to increase the addressable market for devices exponentially.

See, most of the IoT use cases we've seen to date have been focused on high-value items like cars, scooters or freight connected by expensive modems.

This market is still emerging and has a ton of exciting development going on.

However, NB-IoT is designed for devices consuming smaller data payloads.

Think timestamps or GPS coordinates, status updates and the like.

Because the data consumption is lower, the modems can be cheaper and the power requirements can be substantially lower.

This opens up the potential for a whole new class of devices that, for example, could run for years on a single AA battery and have the lifetime bandwidth consumption easily included in the price of the device.

This technology is really going to open up some interesting possibilities for developers of the world, and we can't wait to see what they build.

We also celebrated a milestone at SIGNAL, the 5-year anniversary of Twilio.org.

When we started Twilio.org, we set out an ambitious goal of sending 1 billion messages for good over a 10-year time frame.

And through a lot of hard work and the power of our platform, we accomplished that in just 5 years.

So our new 10-year goal is to have social impact organizations worldwide use the platform to help 1 billion people every single year.

I'm incredibly proud of the work the team has done to date and the impact we're having on people's lives around the world.

And as investors, I hope you are as well.

Beyond the great work Twilio.org is doing, their customers are currently driving more than 1% of Twilio's overall revenue.

And this segment is growing even faster than the overall business, so we believe that doing good is also good for business.

Overall, SIGNAL was an amazing event once again this year.

I always come out of SIGNAL super energized by all of the customer interactions we have, the new faces we get to meet and the opportunities we discover by bringing everyone together.

There are 2 other things I wanted to touch on briefly, management additions and our new headquarters, both important steps we have taken to prepare us for the future.

We announced a couple weeks ago that after a long and thorough search, Khozema Shipchandler will be joining Twilio as our new CFO.

As I've discussed with many of you, the primary attribute we've been looking for was someone with a track record of operational excellence at scale to take us through the next phase of our growth.

Khozema has spent more than 20 years at GE in a number of financial leadership roles across several multibillion-dollar businesses.

Most recently, Khozema was GE's Digital Chief Commercial Officer (sic) [GE Digital's Chief Commercial Officer].

Prior to that, he was the CFO and EVP of corp dev for GE Digital, the VP of Corporate Audit Staff at GE as well as the CFO of several other GE divisions.

We're thrilled to have him on board.

Also, earlier in the quarter, we added Nils Puhlmann as our Chief Trust and Security Officer.

Nils is a 20-year veteran of the security industry having served as the Chief Technology Officer of Endgame and Chief Security Officer at Zynga, Qualys and Electronic Arts.

He also co-founded the Cloud Security Alliance non-profit organization, which promotes the use of best practices for security assurance within cloud computing.

You've heard me say many times that trust is the #1 thing we sell, and Nils is a great addition to help shape our efforts here going forward.

In terms of our new headquarters, we've already outgrown our current facilities in San Francisco, and we'll be moving into a new building in 2019, actually, the old Salesforce building in Rincon Plaza (sic) [Rincon Center].

We've acquired roughly 2.5x the square footage we currently have in San Francisco, which will be brought online in phases over the next couple of years to support our growth.

There's a lot of great history in that building, and I look forward to adding to it.

And while we always have an eye towards the future, we continue to focus on what matters most, making our customers successful.

You can see that in our results as well as in the investments we're making in the future.

We're operating in an enormous market, communications, at a tipping point in its transformation into software and a market where customers have been mis-served by the incumbents.

As I noted at SIGNAL, we're in the early stages of a great communications renaissance.

We are investing in this future, and we believe customers will continue to award us for these efforts.

Now before I hand this call over to George, I did want to acknowledge Lee's many contributions to Twilio.

Lee, you've been instrumental in making Twilio what it is today, and it's been a pleasure working with you for the last 6.5 years.

Thank you for everything you've done for the company over the years, including giving us the time to find such an amazing successor to the legacy you're leaving here at Twilio.

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

Thanks, Jeff.

I'd like to start by also thanking Lee for his tremendous contributions to Twilio.

It's been my real pleasure to work with him over the last 18 months, and we will all miss him.

And we wish him the absolute best for his future.

Now on to Q3.

The go-to-market team did a great job once again, executing against Twilio's massive opportunity.

Our core motion of bringing new customers on to the platform and making existing customers even more successful continues to work quite well.

We remain focused on our 3 core priorities: winning the hearts and minds of developers, increasing our account coverage, and building the foundation for future growth.

Coming off my second SIGNAL at Twilio, we saw incredible momentum from developers, customers, executives and partners.

We moved to a larger venue to accommodate our growing community this year, and our team put on a spectacular event.

The reaction from developers to the new product announcements was amazing.

We also had our largest-ever Superclass, a full-day developer hands-on training session.

In addition to a strong developer turnout, we also had enterprise speakers from companies like FedEx, Domino's, 1-800 Flowers, Shopify and more on the main stage talking about why and what they've built with Twilio.

We also held our first-ever creator's track, a VIP track to serve our growing community of business executives.

At Twilio, we believe executives are doers, too.

They're helping to bring the communications renaissance Jeff discussed earlier to their companies.

We had more than 100 registrants to this track, who, I believe, walked away seeing Twilio in a more strategic light.

Another new component of SIGNAL this year was our partner summit.

As I've been discussing throughout the year, we are in the midst of building out our partner program, which I believe, will be an important driver of our growth in the future.

We had several hundred people registered for the partner summit, and our main session was standing room only.

We are seeing many companies coming from the legacy communications world who want to learn how to transition to the new world of the cloud, and they're making substantial commitments to build this future with us.

Turning back to Q3, we had a number of exciting new deals in the past quarter.

As Jeff alluded to, we signed a number of Flex deals in the third quarter, so let's start there.

Lyft is a long-time customer of Twilio, and were thrilled to expand that relationship in the past quarter by adding them to the growing list of companies using Flex to reinvent their customer support experience.

Lyft aims to deliver a caring experience to all of their constituents, whether it be riders, drivers or applicants, and to do so at scale.

They have thousands of contact center agents dealing with these 3 groups of users, all with very different needs like lost and found, billing, safety and more.

In many cases, they have different systems and sources of data for each of these users across a number of disparate channels and interaction points, requiring their agents to look in multiple places to surface the necessary information in order to provide a resolution.

Lyft chose Flex to support their rapidly growing business because it gave them the freedom to build a truly differentiated and customized omnichannel experience to provide better outcomes faster.

Flex can not only bring all of their different channels under 1 roof, but also becomes the abstraction layer to all of the underlying systems.

This enables a more contextual and personalized resolution process for all involved while also giving Lyft the ability to not only respond to but anticipate and resolve future problems before they surface.

We also signed a large deal with Medallia in the last quarter.

Many of you may know Medallia.

They are a rapidly growing cloud software company focused on helping companies build better customer and employee experiences.

And we're going to power the SMS channel of their new Medallia Conversations product, which helps companies gather feedback and interact with customers in real-time to improve their experience as it's unfolding.

Our global footprint and highly reliable platform were keys to this win.

On the enterprise side, we had a great win at a Fortune 500 financial services firm in the past quarter.

You may remember our deal with Morgan Stanley last year.

We landed a similar opportunity with another bank who was looking to empower better and regulatory-compliant communications between their many thousands of financial advisers and their clients.

Using Twilio, banks can now enable advisers to use their personal phones to text with their clients while maintaining compliance.

We also signed a new deal with a Fortune 500 medical testing company in Q3.

This company was looking to improve their CRM system.

And as part of this effort, will be using our messaging platform to send SMS notifications for lab work, medication reminders, appointment reminders and more.

So overall, I'm thrilled with the continued momentum the team has been able to deliver, not only with short-term success but also laying the groundwork for further success over the long term.

Before I pass the mic over to Lee, I did want to acknowledge the passing of a great friend and long-time colleague of mine, Ron Huddleston, our Chief Partner Officer.

For those of you who never had the privilege to know Ron, he was a one-of-a-kind partner leader and one of the most positive, energetic executives I have ever known.

Even though Ron was only at Twilio a short time, he made a tremendous impact by launching our Twilio Build program and hiring an amazing partner team that will continue to carry out his vision.

We will all miss him tremendously.

With that, let me pass the mic to Lee to discuss our financial results.

Thank you, George, and good afternoon, everyone.

The business continued to perform well in the third quarter as more and more companies are turning to Twilio to help transform the way they engage with their customers.

Revenue growth was strong once again with base revenue growing at 68% year-over-year.

Excluding Uber, growth was 70%.

The power of our business model was evident in our dollar-based net expansion rate coming in at 145% or 147% without Uber.

Please note that after the fourth quarter, we will be moving away from the ex-Uber metrics.

Overall, our growing list of product innovations, coupled with an expanded presence in the field, continues to drive success with customers.

The top 10 active customer accounts contributed 18% of total revenue in Q3 compared to 17% last quarter and 17% in Q3 of 2017.

Our top 2 customers, WhatsApp and Uber, contributed 6% and 4% of total revenue, respectively.

We had 6 variable customer accounts in the third quarter.

Gross margins came in about 55% in the third quarter, a bit higher than the range we've seen in the past 4 quarters.

I would remind everyone of the same strategy we've been discussing since the IPO.

We remain focused on doing the right things to grow the business long term rather than maximizing gross margin in the near term.

Put simply, we're not a gross margin expansion story in the near term so expect fluctuations in our gross margin.

We continue to see things that can impact our gross margins like product, country and customer mix, network service provider fees, FX and more.

An example of this is an expected change in Q1 2019 in our SMS messaging business through Verizon in the U.S. Previously, Verizon had treated all P2P, or person-to-person, and A2P, or application-to-person messaging, the same.

Starting in February, Verizon is planning on creating a new service offering which will add $0.0025 fee per message to all businesses with A2P SMS messaging use cases.

This type of thing has happened before that carriers added a similar fee to short-code messages a while back.

Our short code business continues to grow rapidly and we expect the same in SMS as well given its effectiveness as a channel.

Operationally, as with the short-code fees in the past, we'll be passing the surcharge on to our customers.

So while it will not impact the gross profit dollars we receive when customers send SMS messages to Verizon subscribers, mathematically, it will impact our gross margin.

We estimate approximately 100 basis point drag on a quarterly basis to our corporate gross margin when this goes into effect in February of next year.

Something like this that impacts the objects of our gross margins but not the reality of our business on a gross profit basis, is a great example of why we have not been focused on maximizing gross margin percentage in the near term.

For your models, we ended the quarter with 1,274 employees, with 24 added through acquisition.

Our international mix of revenue was 26%.

You will also notice in the statement of cash flows about $30 million spend on acquisitions in the third quarter.

The majority of this was for the Ytica acquisition Jeff mentioned earlier.

We also purchased a small company to support our growing Programmable Wireless efforts.

These acquisitions had a material impact to our top or bottom line results in the third quarter, and expect that to be the case again in the fourth quarter.

Looking forward to the next year, we're in the midst of our annual planning process, so we won't be providing detailed 2019 guidance at this time.

However, I do want to provide some color on a few items.

As Jeff mentioned earlier, we will be moving into new headquarters starting in the first quarter of 2019.

Financially, this will have a couple of impacts.

In CapEx, you should expect about $40 million of buildout costs split mostly across the next 3 quarters.

At the operating line, the fact that we'll be paying double rent will likely push us close to breakeven on the operating line for Q1.

Like most other businesses, we face seasonal costs from payroll taxes, 401(k) match payments and the like in the first quarter of the year.

And the actual rent situation will put incremental pressure on operating expenses in Q1.

As this is my last conference call as CFO of Twilio, I want to thank all the customers, employees and investors that I've had the pleasure of working with along the way.

Twilio is a special place.

And Jeff, it's been an honor to work closely with you and the leadership team over the years.

I'm incredibly proud to leave the company in such great shape and hand the reins over to Khozema for the next stage of Twilio's journey.

It's still Day 1. Thank you, everyone.

Operator?

(Operator Instructions) The first question comes from the line of Ittai Kidron of Oppenheimer.

Again, you leave us speechless with the great results.

So congrats, guys.

And Lee, thank you to you, and Khozema, good luck to you in your new role.

Although it doesn't seem like you need to do much there.

Business is doing very good.

A couple things.

Jeff, maybe you can talk about the diversity of the business activity.

I mean, clearly, your guys are executing very well.

But help us think about the breadth of your product adoption within customers.

How much of that is a driver versus your core voice and messaging?

And then, Lee, on your commentary on 1Q on the gross margin, the Verizon impact, can you help us maybe translate the 1% -- I think $0.0025, I think, you mentioned.

Can you mention that in percent terms?

What per price increase is it from a percent standpoint?

And if you're passing it to customers, why would there be still a gross margin impact?

Ittai, this is Jeff.

I'll start the answer, then I'll hand it over to Lee.

So you'd asked about the diversity, and it really is strength across the board, both in the customers, the customer segments, the customer sizes as well as in the products.

Now across the customers, we're seeing great use cases of companies big and small, new and old.

From all our customers' standpoint, you see a very strong dollar-based net expansion rate, 145% this quarter.

But we're also doing, I think, an excellent job bringing on new customers as well, but obviously they're earlier in their journey with Twilio.

As far as products go, you just see most of the growth is provided by our core products, voice and messaging.

Those are our largest revenue items.

But we are very excited about products like Flex coming on board, and we think in the future will be meaningful drivers of revenue as well.

But today, it's still largely our core products, voice and messaging, that are driving most of our performance.

And Lee?

Yes, Ittai.

So in terms of pricing, it's $0.0025 fee on top of our $0.0075 list price.

Again, no impact on gross profit.

But since we're passing it through it impacts both the numerator and denominator so the gross margin will decrease.

Your next question is from Nikolay Beliov of Bank of America.

Congratulations on an impressive performance.

Another quarter here of good performance.

I just wanted to dig a little bit deeper into the expansion rate, and maybe if you can just discuss the continuous momentum and increase here in maybe 3 buckets.

What you are seeing in terms of consumption by large, medium and small enterprises?

The second bucket would be the impact from the newer channels.

At SIGNAL, WhatsApp seems to be doing well, whether WhatsApp and video are contributing to the increase in the expansion rate here.

And lastly, is there more like customer pull beginning to happen versus you guys pushing and giving ideas to customers in terms of like additional use cases you can drive?

This is George.

Let me tackle those.

Thank you.

Thanks for the question.

Let me tackle each of those.

In terms of the net expansion rate, we see that across the board.

Honestly, it's not concentrated in small, medium or large customers.

We're very excited to see it strong across the board.

In terms of the new channels, we definitely see a lot of, I would say, developer interest in new channels, and some of them are early for us, like WhatsApp.

But as Jeff said, the most important driver of our net expansion and growth is the core -- or are the core products.

And then in terms of customer pull versus push, I would say that we consistently have had a lot of customer pull.

I don't think that's a new thing for us.

And if you think about our core kind of strategy, which is to win the hearts and minds of developers, first, those are the ones that are bringing us into customers.

They're also the ones that are often dreaming up or tasked with coming up with new ideas and use cases.

And so I think that's what helps drive the efficiency of our go-to-market model is to have that developer-led customer pull, to use your language.

Got it.

And then I have a quick question for Lee, if you don't mind.

Lee, Flex -- just doing the math, 2/3 of the Flex price is software, 1/3 is usage.

If I assume 80% gross margin for software and 55% for usage, Flex should be around 70% gross margin.

I was just wondering whether that makes sense.

Or in general if you can comment whether Flex will be gross margin accretive.

Absolutely.

So you're thinking about it the right way and your numbers are definitely in the range.

Flex, it will be accretive on a gross margin basis.

Just keep in mind it just went GA this quarter, so it will take time to roll out and have an overall impact.

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

I'll add my congrats, and welcome to Khozema.

But I wanted to start for a question with Lee.

You've been trying to factor in the pipeline, I think, a little more fully into guidance.

And of course, the magnitude of upside might be a touch less than it was in Q2, but it's still a lot of upside.

I guess I'm curious, did something in particular surprise to the upside, any particular product, any particular customer segment or usage scenario?

And did George Hu's initiatives maybe continue to outperform even as you tried to factor them in more fully?

Yes, Mark.

I mean we're absolutely thrilled by the performance on the quarter.

Again, it's the strength of the platform model and the go-to-market efforts that George has been leading.

The strength was just broad-based across the customer base, and as Jeff and George talked about earlier, we're still working on improving the forecasting of this go-to-market motion that's new.

But again, we're just pleased with the results and pleased with the future outlook.

Okay.

And then Jeff, I wanted to ask you just regarding the Twilio Super Network.

At SIGNAL, there were a bunch of announcements.

I think you had announced it now serves more than 90% of the world's GDP.

There was a comment that it can detect 97% of the network incidents in real time.

It's GDPR-compliant.

I'm just curious, do you see much more work to be done to advance the Super Network?

Or is that at a point where it's so unique that you can sort of shift your engineering efforts a little more rapidly into some of the newer vectors like payments and AI and bots and so on and so forth?

Please limit your questions to 1 per person.

Mark, I will answer your extra question.

The work of the Super Network is truly never done.

I mean the communications, the global telecommunications network is a very, very complex thing.

And if you think about it reaching the world's population reliably in a cost-effective way is a huge challenge.

And so we continue to invest in that for SMS, for voice, for phone numbers, and now, also on the Programmable Wireless side as well with our new Super-SIM.

And so we believe that there's always a great amount of work that we can do to better serve our customers when listening to the things they need from us that we can invest and build a better Super Network all the time.

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

Khozema, my friend, welcome, and it will be good to work together again.

This question is for, I guess, all of you.

But I'd just love to understand, it's obviously early days for some of the more recent products.

But any early lead -- early read, sorry, on the level of interest you're seeing on (Pay), the integration with Stripe there?

And Autopilot, any growth there?

And then any new IoT use cases?

Absolutely, Bhavan.

I think as all of those, (Pay) and Autopilot, I mean these are our brand-new products we just introduced about 2.5 weeks ago.

So -- and obviously, still in beta.

We just brought them to the market, so it's too early to say.

Obviously, they're not producing revenue yet as beta products.

But on the beta stage, what we do is we work with customers, we see the use cases they're building.

We understand the things we got right, the things that will become the roadmap, the things we want to add to it or change as everything goes on.

So far, I would say, for both these products, we've had fantastic feedback from early customers.

At SIGNAL, both of them had a lot of working sessions with customers where they could meet the products, get their hands on, start using them.

So far, feedback has been great, but obviously, there's only a couple weeks of that feedback to date.

And it takes time for customers to build on them, deploy them, use them and give us even more feedback as we continue to scale.

As you asked about IoT, wireless as a product is doing really well.

We're very excited.

We think that has an enormous opportunity.

It is a small part of our revenue today, but obviously, the IoT market is a very big one.

And we think this is the early stages of the very large opportunity which is the whole IoT market.

We're particularly excited to launch the NB-IoT product that we brought to market with T-Mobile at SIGNAL that we announced a couple of weeks ago because, as I've mentioned before, on earnings calls, the new protocols that are coming online to power even more IoT use cases are very power efficient and very cost efficient.

And if you can bring the cost down for IoT connectivity to connect to the cellular networks, you're always connected, you're not beholden to working Wi-Fi and passwords or Bluetooth pairing and all this sort of stuff, it's just connected to the network.

You don't have to think about it.

And if that is extremely cost-efficient and you can purchase the lifetime connectivity when you buy the device, there's no subscription plans or anything like that, that's going to increase the number of types of devices that can be built as well as battery life.

And as I mentioned, if you can get the battery life down to something that's always connected to the network and powered on a single AA battery for 5 years, we think that, too, will change the nature of the kinds of devices that can be brought to market.

So with prices of connectivity coming down, battery life coming down -- or battery life going up, this is going to rapidly expand the number of things that can be built into the IoT world.

So we're very excited about Twilio Wireless.

And Bhavan, this is George.

I want to add on a little bit to that from my perspective.

Obviously, as Jeff said, these products are new, some of them.

But I think it's very interesting to see that, for example, the reaction kind of apples-to-apples over the same time period versus Understand last year for Autopilot, for example, I think is much stronger.

And I think it really speaks to the power of our -- one of the things I get excited about in this business is the power of our business model and our product model and customer engagement model that if you look at the energy around Flex, that was really based on our learnings from TaskRouter which is a smaller API.

And then it really evolved into something that we're really, really excited about, in the same way, I think, Understand evolved into Autopilot.

And we'll see where (Pay) and other things evolve over time, but I think the power of an API platform model to identify huge ideas with relatively small investments is something that I think is really unique to our model.

And I think that the evolution you're seeing in the AI front, even as Jeff said, evolution in the wireless front with some of these new announcements, I think is one of the reasons I'm so optimistic about the potential of this company.

Congrats.

Your next question comes from the line of Alex Zukin of Piper Jaffray.

Congratulations again on another quarter of meaningfully accelerating growth across every metric.

I guess I wanted to ask about how we should think about that dollar-based net expansion metric given its expansion here over the last couple of quarters.

And what type of rates do you guys think are sustainable over maybe the intermediate term or the short term?

And when will Flex become a meaningful contributor to that metric?

Yes, Alex, this is Lee.

So again, that expansion rate is being driven by driving deeper relationships with our customers and product velocity, releasing new products.

So nothing -- I wouldn't say it's really an inflection point.

It's just our business as usual and the power of the platform model.

Going forward, longer term, right, it's extremely high expansion rate.

In the long term, the older cohorts will become larger, and they do grow at a less rate than the new cohorts.

So over time that will decrease, but we still think it's going to be meaningfully important going forward.

Your next question comes from the line of Michael Turrin of Deutsche Bank.

Conversations around Flex coming out of SIGNAL have been notably positive, especially around some implementation times and the pricing model you're providing there.

I just was hoping you could provide us with an update around what you're seeing in that market today, some more around the vision where you're headed and where we are in partner involvement there as well.

Well, thanks for the question, Michael.

This is George.

Yes, I think we're -- I think Flex is very, very exciting.

We've gotten really, really strong feedback from the customers in the beta programs, and you've seen that with Shopify and with Lyft now.

So I think that's the most important thing.

I think that we believe we have a hit product on our hands.

And what we're doing is we're building the capacity with the -- with things like our partner ecosystem to support the successful deployment of the product over time.

And certainly, while we're early days in that, I think we're growing the number of certified consultants on the Flex platform.

We're making investments there.

So I think that you're feeling and you're hearing from the customers and from us the momentum behind this product.

And we're kind of putting every -- we're putting our wood behind this arrow to make it successful.

So we're going to do everything we can to do that.

And I think that we're still early, but early signs are very, very promising.

Congrats on the strong results.

Nice time to drop the mic, Lee.

Your next question comes from the line of Heather Bellini of Goldman Sachs.

I just wanted to follow up a little bit about Flex adoption, and I was trying to think through -- I mean, obviously, you've had a phenomenal developer-led model.

I'm just wondering how do you see Flex adoption kind of taking hold if you look out ahead?

What's the mix do you think look like between developer-led versus partner-led momentum?

I think that right now -- this is George again.

Right now, the primary driver is developer led.

And I think it's interesting that even after our GA announcement, we had a meaningful inflow of new developer sign-ups for Flex.

So -- and the product has been announced in the market for a while even though it was pre GA.

So I still think there is a lot of room to run in terms of developer momentum.

90% of the world's contact center infrastructure is still on-premise, and I think there's a lot of developers that want to move to the cloud.

So I think for -- we're still in the early innings of that.

But I think the partner momentum will grow over time.

I was very impressed with the turnout in the partner summit at SIGNAL.

And I think one of the reasons it was -- or probably -- actually, I'm very convinced the reason it was overflowing was because of Flex that there's a lot of partners and resellers that I spoke to that are still serving the legacy world that want to move to the cloud.

And they see Flex as a very, not only a great technology fit for what the market needs, but also a very partner-friendly model in terms of the build mentality that's required for the product.

So I think you'll see both grow over time.

Which one will overtake which one over time, I think it's hard to say because we're just so early.

I mean the product just GA-ed 2.5 weeks ago.

But it's -- I think there's opportunity in both.

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

This is Clarke Jeffries on for Brent.

Coming out of SIGNAL, we've been receiving inbounds from investors trying to understand the IoT opportunity.

But I kind of wanted to dig in in terms of how Flex plays into that.

It seems to me that there's a subtle but distinct advantage in terms of IoT support granted by the programmability.

So I was just wondering, are you already planning for how Flex may be used for internal use cases in terms of supporting organizations with a lot of internal IoT footprint?

Yes, thanks, Clarke.

This is Jeff.

So it's interesting, when we launched Flex back in Q1, actually, one of the demos that we gave was an IoT integration because something we are hearing from customers who are deploying IoT use cases is that when they need support having diagnostics and having data about those devices available to agents is critical.

And also having alerts -- basically, trigger contact center actions coming from those devices is an emerging use case in contact centers.

And ones that -- the fixed feature monolithic applications are just not going to be well suited to solve because they lack the flexibility.

And so this is one of the use cases we thought about when we built Flex.

And one of the beautiful things about Flex is that, as its name implies, it is completely flexible.

And so emerging workloads around IoT or things that are specific to the workflows of a company who is deploying IoT and wants to integrate those data payloads or alerts and things like that, that are triggering communications with customers, they can build those integrations into Flex pretty easily.

In fact, the work type that occurs inside of Flex, if you think of calls and chats, these are typical interactions you think of in a call center, but Flex has a very flexible notion of what's the type of work in which people need to do.

And one of the types that we envisioned here was IoT-generated work items.

And it actually was one of the demos we used when we launched Flex on stage earlier this year.

So I think there is something there, but it's obviously early both in IoT as well as in Flex.

But I think that will be an area that can be interesting as time goes on.

Your next question comes from the line of Rishi Jaluria of D.A. Davidson.

Just really quickly, I think one of the exciting things out of SIGNAL, out of many announcements, was just seeing the kind of launch of Twilio (Pay) and talking to the people from Stripe who were kind of excited to have this joint sort of product, so to speak.

Just going back to talking about the partner ecosystem, is that something that you'd think you might be able to see with more -- other software vendors down the line where there's kind of this joint effort in kind of product development and product launch?

Yes, I think that's a great question.

And certainly, we partner with other companies to deliver parts of our solution in the past.

For example, we partnered with Google for speech recognition as a good example of that.

I think that with some of our newer technologies, I think that it's really opening doors that we hadn't had before.

I think I mentioned Flex already as one of them, but even wireless, for example.

We've announced partnerships with Singtel and others that were just not companies that we were working with in the past in this kind of way.

So I think that as the footprint, the product footprint broadens, I think it opens many more degrees of freedom in terms of partners for interesting opportunities like Stripe and so on and so forth, which is why I think we've -- and one of the reasons -- not the primary reason, but one of the reasons why we've continued to invest in the partner program in a big way starting this year.

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

Great to see the broad-based strength again.

I wonder if you can give us any breakdown between U.S.-based companies and companies based outside the U.S.?

Are you seeing similar growth rates across both regions?

And any difference in the types of products where you're seeing this type of growth across different regions?

Yes, hi.

This is Lee.

So companies headquartered outside of the U.S. was 26% of the total revenue, and the international is growing a bit faster than the U.S. And we're seeing a usage and strength of all products in both geographies.

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

More on the partner program.

Could you -- how many partners do you have and how many -- what's your pace for adding on in a particular quarter?

And on to that, how long does it really get them to train them up on all the various products?

And is 1 product more popular than the other?

So I guess that was more than 1 question, but I'm just looking for more color around your partner program and the time from when you engage them to revenue.

So I think that's -- the partner program -- our partner program has multiple building blocks, if you will, or aspects to it.

So I think the answer is dependent on which you're talking about.

Obviously, for our solution partners, companies like Zendesk and others, that's been a business that has been there for a while now and is an important part of our customer base and partner base.

And I think that already is, I think, in a good state and we'll continue to grow that.

For some of our newer motions, 2 that are newer.

One is our SIs.

And for there, the big driver of that is Flex, as I talked about.

We're looking to build an ecosystem.

Without giving exact numbers, we want to have a healthy mid- to high double-digit number of partners in the ecosystem in a reasonable amount of time and with a multiple of that as our certified ecosystem of consultants.

And that's just early days.

I mean, obviously, as Twilio continues to grow and Flex continues to grow, those numbers will multiply over time.

But I think that's kind of where we're trying to get to in the near term to kind of, I think, support what we see around -- or the opportunity around Flex.

And then we are just beginning to lay the foundation today for resellers, which we have really had in very de minimis fashion to this point.

And so I think that's another relatively unexplored opportunity, honestly, in partners.

So I think it's a really exciting time for partners all around.

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

Congratulations.

So George, in your years at Salesforce, you saw economic cycles sort of come and go, right, I'm just wondering how you would characterize the macroeconomic and spending environment that you're seeing today?

Well, even though I had an Economics degree, macro is my worst subject, so I'm probably not the best prognosticator of all those kind of things.

I will say this which is that, obviously, given the nature of our business that as companies and as consumers and the general economy is healthy, of course, it's going to be a tailwind for our business.

And so we will continue to focus on our core strategy, which is focus on customer engagement because I think that whether it's up-cycles or down-cycles, one of the things I saw at Salesforce was that you always had to come back to your customer.

If times were good, you had to invest more.

If times were tough, you had to be even more focused on your customer to be competitive.

So I think that really is something -- I think it's good to have a business model that your -- what you do is relevant in all cycles.

And I think that is true in my old company and true here as well.

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

Great results.

Great way to end on a high note, Lee.

Good luck to you there.

And happy election day, to you, Jeff.

I agree with you in terms of taking us down on hate speech as a non-partisan issue.

My question is on I guess this partnership with T-Mobile.

I guess I want to understand it better here.

In terms of -- is this something that just limits the developers to the narrowband network with T-Mobile?

I mean, I guess I haven't seen too many of these partnerships more with the carriers.

You seem to just aggregate all under the Super Network.

There you have -- if anything, is you have a bunch of carriers there and you talk about them en masse.

And this is kind of unique in terms of just singling one out and then developing a partnership on their network.

Just wondering, are you looking to add to that partnership?

How does this limit in terms of the developers and what they can do with it?

Generally speaking, our voice product, our SMS product, and now, wireless, the playbook has been we've started in the United States and then expanded over time.

And so I think that's pretty similar here.

It's actually also a unique period of time for NB-IoT because these protocols are just being rolled out now.

And so T-Mobile is -- has just lit up their NB-IoT network here in the United States, and we expect other carriers are in the process of doing that or going to be doing that in the coming year around the world.

And as they do, it makes sense for us to have a product that allows the developer to build something that works everywhere in the world.

But on Day 1 of a product, we've announced it in the United States.

And similar to what we did with our Super-SIM on the not narrowband side, the broadband side of wireless.

We started in the United States with T-Mobile, now we've created the Super-SIM.

And we work with other partners around the world.

I can imagine the same thing could happen with NB-IoT.

But these networks are brand-new.

Your last question comes from the line of Mike Latimore of Northland Securities.

Congrats on a great quarter.

My question is what percent of your Flex deals are replacing the underlying contract centers (sic) [contact centers] infrastructure versus adding enhancements to it?

And then what's the process for selling Flex?

Is it through the traditional channels like master ones?

Sorry, can you repeat the second part of your question again?

Basically, will you sell Flex through traditional channels like you have in the past?

So in terms of the first question, we do see a little bit of both.

We do see replacement as well as augmentation.

Our larger transactions tend to be replacing some incumbent legacy solution.

In terms of the channels, we're selling Flex the same way today that we're selling our other products, which is a little bit self-service, a little bit through our direct sales team.

And then I think what is different about Flex is I think there'll be more a partner opportunity for that going forward.

And we're definitely seeing a lot of partner demand to do services around Flex and also people that want to resell the product.

So I think there's an opportunity there over time, but that would require us building an infrastructure to support that, which we would be in the early days of doing right now.

There are no further questions at this time.

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