Twilio Inc (TWLO) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to Twilio's Q1 2019 Earnings Conference Call.

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

(Operator Instructions)

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

Mr. Kleiner, you may begin.

Thank you.

Good afternoon, everyone, and welcome to Twilio's First Quarter 2019 Earnings Conference Call.

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

The primary purpose of today's call is to provide you with information regarding our 2019 first quarter performance, in addition to our financial outlook for 2019 second quarter and full year.

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, the potential benefits of our acquisition of SendGrid; impacts and expected results from changes in our relationship with our larger customers and vendors; 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-K filed with the SEC on March 1, 2019, 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 as part of our Form 8-K furnished to the SEC.

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

Please be advised that this additional detail may be onetime in nature, and we may or may not provide an update in the future on these metrics.

I encourage you to visit our Investor Relations website at investors.twilio.com to access our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about Twilio.

With that, I will now turn the call over to Jeff.

Thank you, Greg.

Welcome everybody to this quarter's call.

The core components of our platform -- voice, messaging, and now e-mail -- drove another quarter of strong performance in Q1.

We continue to invest in innovation at all levels of our platform, empowering developers to help their companies better engage with their customers.

And as George will outline in a moment, our go-to-market efforts are performing very well.

Q1 was the first full quarter of general availability for Flex.

The feedback from our early customers has been great.

As a developer myself, I know that when introducing a new product, the most important thing is getting the underlying architecture right, and our early customers are telling us that our application platform architecture is right.

And we're listening to those customers and building out our road map for additional features and functionality based on their feedback.

This is also the first quarter that includes results, albeit only 2 months, from our new Twilio SendGrid division.

The early reaction from customers is validating our strategy of powering the future of customer engagement all on one platform.

We believe we can create the unquestioned platform of choice for developers and businesses looking to transform their customer engagement, now covering all of their most vital communication channels, including e-mail.

From an operational standpoint, our integration plans are on track.

The Twilio SendGrid folks have been great, and both teams are eager to learn from each other as we integrate our cultures and build our future together.

The go-to-market teams are engaged, and we're seeing signs of early traction in our cross-selling motion.

One of the many reasons we were attracted to SendGrid was the similarities in our go-to-market models, as the developer has always been the focus of both companies' approach.

Together, in Q1 we hit an important milestone, 5 million registered developer accounts.

The product teams continue to innovate as well, having launched several new service and support offerings as well as announcing support for AMP for Email, a new technology being implemented by Google to bring a dynamic and interactive experience to Gmail.

And we're hard at work integrating our back-end systems to create an even better customer experience.

We also launched Twilio for Salesforce, another prime example of how we're working to make it even easier for our customers to engage with their customers.

Twilio for Salesforce allows businesses to easily add out-of-the-box SMS capabilities, covering everything from one-to-one personalized interaction, alerts and notification, campaigns and more, to their existing workflows in Salesforce CRM.

Interestingly this product was originally conceived of by twilio.org, the division of Twilio focused on social impact in serving social impact organizations.

They saw the opportunity to innovate for the more than 30,000 nonprofits that use Salesforce to manage their relationships, with constituents, donors and volunteers.

We're proud that every part of Twilio, including twilio.org, is focused on innovating for our customers.

And when we do, the whole company can benefit.

We quickly noticed that traditional businesses were utilizing the product as well during the beta program.

So we were excited to launch the product on the Salesforce AppExchange, to get it in the hands of an even larger audience of potential customers.

We also continued to invest in trust throughout the product stack in this quarter as well.

As you've heard me say many times, trust is the #1 thing we sell.

In Q1, our efforts on this front are evident at every layer of the platform.

At the Engagement Cloud layer, we launched PSD2 support in our Authy 2-factor authentication product; the second, Payment Services Directive, or PSD2, is a new banking regulation within Europe that requires time-based, one-time passcodes for all online and over the phone payments above EUR 30.

The PSD2 requirement will be a big shift for businesses conducting commerce in Europe, and we stand ready to help them with this transition.

At the programmable communications cloud layer, we continue to support efforts in the industry to combat the scourge of robocalling.

If you're like me, I'm sure you get a continual stream of calls from unknown numbers, with prerecorded messages promising a wide variety of wonderful things.

It's gotten so bad that if you're anything like me, you don't answer the phone if you don't recognize the number.

Even John Oliver dedicated an entire segment of his show to this subject.

So in case there's any doubt, we designed our platform from the beginning to prevent this type of activity.

We do not want this business, and we never have.

We continue to work actively to deter bad actors from our platform, starting with our terms of service that expressly prohibit this type of activity, to platform-level (indiscernible) [items] like rate limiting, verifications, artificial intelligence, and more.

We believe transparency is also important.

So we launched a free service to allow consumers to look up any number to see where a call is coming from, and help report suspected robocalling.

Looking into the future, we believe that the next step is to put the consumer back in control of their phone, through tools to allow consumers to receive only wanted communications from trusted parties.

We see a world where every time your phone rings, you can see who's calling, not just the phone number, but the name of the person or business and trust in the accuracy of that information.

And then you, or a software running on your behalf, can decide what to do with the call or text.

In this vision, everyone receives the communications they want and none of the ones they don't.

It's your phone and your call.

We want to help everyone take back their phone.

More to come on this for sure, but we're continuing to innovate on behalf of our customers to help bring about this future.

And our efforts to earn trust also extend to the Super Network as well.

Phone numbers are a key component for many of our customers as they expand around the world.

But the regulations governing the use of phone numbers often differ by country, by number type, and by how they're used.

In many cases, these regulations were written well before companies like Twilio or even the Internet itself existed.

In order to help our customers adhere to this myriad of regulations around the world, we are working with regulators and national carriers as we build phone number compliance functionality into our platform as an automated service.

We are partnering closely with our customers to support their applications and innovative use cases at global scale, while minimizing the regulatory overhead they have to manage.

We believe that by innovating on the regulatory front for our customers, we can allow them to continue to grow rapidly in markets around the world, and this presents yet another opportunity for Twilio to differentiate our product in the eyes of our customers.

So before I hand the call over to George, I wanted to acknowledge the consistent efforts of Twilions around the world to make our customers successful.

We have a once-in-a-generation opportunity ahead of us to revolutionize one of the largest markets in all of IT -- communications -- by moving it from its legacy and hardware, to its future in software.

It's still Day 1 of this journey, and I couldn't be more proud of our team and excited about the road ahead.

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

Thanks, Jeff.

The go-to-market team performed very well again in the first quarter, driving another quarter of strong growth.

Our focus remains on adding more coverage and executing on our plan to increase our presence within the enterprise, with partners and internationally.

We continue to see success with our Engage Roadshow program, bringing developers and businesses together, and we currently plan to more than double the number of events in 2019.

On the international front, we took our first steps to enter Latin America and Japan by hiring new leaders in each geography.

We also began to execute on the cross-sell opportunity for Twilio SendGrid in the quarter, certifying reps, building pipeline, and closing some early deals across the combined customer bases.

Overall, the initial results are encouraging, but we're still very early in this opportunity.

Let me also touch on a few of our wins from the past quarter.

We signed a significant expansion with Just Eat in the quarter.

Just Eat is a leading global hybrid marketplace for online food delivery, connecting more than 26 million active consumers and restaurants across 13 countries.

This new deal will expand their usage of our voice and messaging products across several new countries, and positions us to support their continued success around the world.

A leading insurance and support company with more than 100 million customers around the world, signed a new deal to modernize their IVR to provide a more conversational customer experience.

This company will be using a variety of our products across voice, messaging, task router, autopilot, chat and video to get customers' answers faster and through the channel that they prefer.

We also signed a new deal with Beat, part of the FREE NOW group, the ride-hailing joint venture of BMW and Daimler.

In addition to being available in Greece, Beat is the fastest-growing ride-hailing app in Latin America, currently available in Peru, Chile, Colombia and Mexico, with more launches to come this year.

They'll be using our voice and messaging products to communicate with drivers and passengers alike.

We added one of the big 5 banks in Canada as well.

With millions of personal banking, business, public sector and institutional clients, this bank will be using a combination of our Authy and messaging products to provide an improved authentication experience to our customers using their online banking platform.

Last but not least, we continue to make progress with Flex, signing a number of deals including a new relationship with Green Dot.

Green Dot is a financial technology leader and bank holding company with more than 50 million customers across their various products and business lines.

Green Dot is looking to reinvent their contact center and create a world-class mobile customer experience.

They will be using Flex and Autopilot to create a more intelligent and automated way to communicate with their customers.

Overall we continue to see strong results from our go-to-market investments, and we will execute on our strategy to reach more developers and businesses both here and abroad.

With that, let me pass the call over to Khozema to discuss our financial results.

Thank you, George, and good afternoon, everyone.

The business showed continued strong growth in the quarter, which at our scale is indicative of the successful driving for a growing set of customers.

Obviously, the acquisition of SendGrid impacts some of our metrics this quarter so let me walk through some of the detail for a moment.

As a reminder, the acquisition closed in February 1, so we have 2 months of contribution in Q1.

Base revenue was $220.9 million in Q1.

It's also worth noting that all the acquired Twilio SendGrid revenue falls into this category.

While we won't be reporting the precise Twilio SendGrid contribution on a go-forward basis, their results were consistent with the guidance laid out on the last call.

Breaking those 2 components apart, the organic growth for Twilio's base revenue was above 60% year-over-year, and Twilio SendGrid's organic growth for the stub period was 30% year-over-year.

Our dollar-based net expansion rate was 146% in Q1.

These results are a testament to not only the success we're driving for our customers, but the performance of George's team driving deeper, more strategic relationships with our existing customers.

Please keep in mind that this metric will not be impacted by the acquisition of SendGrid until we lap the close in Q1 of 2020.

We ended the quarter with 154,797 active customer accounts, with Twilio SendGrid contributing more than 84,000 to the count.

Our top 10 active customer accounts contributed 14% of total revenue in Q1 compared to 20% in Q4 of 2018, and 18% in Q1 of 2018.

Gross margins came in a little bit above 58% in Q1 compared to 54% in Q4 of last year.

The largest contributor by far was folding in the higher margin revenue from Twilio SendGrid, which drove a positive uplift of about 300 basis points.

On an organic basis, gross margins also increased a bit sequentially as the base variable mix improved in Q1 and the large international customer that contributed materially to the Q4 results returned to a more normal spending pattern in Q1.

On a go-forward basis, the story remains largely the same.

You should continue to expect some fluctuations in our underlying gross margins.

Our priorities remain the same: we are focused on growing the business around the world rather than maximizing gross margins in the near term.

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

And on that note, we recently got some clarity on the Verizon A2P or application-to-person, offering we outlined a few quarters ago.

As a reminder, Verizon is establishing a new A2P channel for long-code SMS messages that will add $0.0025 fee per message to all businesses with A2P SMS messaging use cases.

Verizon will be implementing this new offering in mid-May, and we will be moving customers over to the new service accordingly.

We will be passing this fee through to our customers, and we do not expect this to impact the gross profit dollars received per message, but it will impact the gross margin percentage.

So for Q2, you should expect about a 50 basis point drag given the mid-quarter change and roughly a 100 basis point drag to our overall gross margin percentage on a go-forward basis.

This should also add about $3 million to $4 million in revenue per quarter on a go-forward basis.

This is incorporated into the guidance provided today and added about $8 million to $9 million to our 2019 revenue forecast in total.

In addition, while we don't have any information to share about potential actions by the other U.S. mobile carriers at this point, I think it's reasonable to assume that the others will implement similar offerings over the course of time.

As an example, we saw similar progression in the short-code segment over the past several years.

Given that Verizon has approximately 1/3 of U.S. mobile subscribers, a similar move by all of the remaining U.S. mobile carriers would result in an additional 200 basis point drag to gross margins in total, if and when this scenario plays out.

However, we have not assumed anything on this front, and the guidance provided in the earnings release today given the speculative nature of this commentary.

Finally, I wanted to provide some additional color about the quarterly progression of operating income inherent in the guidance we provided today so you can set your models appropriately.

On the non-GAAP operating line, we currently anticipate being slightly profitable in Q2, modestly in the red for Q3 due to our big customer event, SIGNAL, falling in August this year, and then back in the black for Q4.

Overall, with the strong results we are seeing, we plan to continue to invest in the growth of our business given the tremendous opportunity ahead of us.

Thank you, everyone.

Operator?

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

Congratulations.

If you can put an end to robocalling, I think that you deserve a Nobel Peace Prize, so it's great to hear about that.

I wanted to start by asking you, it looks like Twilio is going to exceed a $1 billion revenue run rate during Q2.

And obviously, we understand the law of large numbers is going to start to apply.

But does the pipeline currently give you decent line of sight to eventually reaching $2 billion in revenue?

Or do you think that these abnormal growth rates can continue all the way to that $2 billion level over time?

Mark, it's Khozema.

Thanks for the question.

I mean, obviously, we're not going to guide beyond '19.

What I would say is, is that, as you pointed out, we do see the $1 billion run rate, certainly, in the year, and we feel really good about the result and the momentum of the business right now.

I think those numbers do get larger over time, and so I think the growth rates will probably fade a little bit as we get larger and larger.

But we continue to make investments in the growth of the business because we feel like we've got pretty good and elevated multiyear growth outcomes.

Your next question comes from Ittai Kidron with Oppenheimer.

Congrats on a good quarter.

A couple of questions from me.

Jeff, on SendGrid, it's great to hear that the integration is moving smoothly.

Maybe you can talk about today versus 3 months ago.

How do you feel about the potential realization of the synergies between the 2 businesses?

And then, Khozema, maybe you could talk about application services.

Any color there on the growth rate and the contribution of those products to revenue?

Yes.

Thanks for the question, Ittai, this is Jeff.

So first of all, we're very happy with the progress so far in the integration, despite only being a few months post close.

The first thing we're focusing on is getting -- onboarding the 500 SendGrid employees, making sure they feel at home at Twilio.

Then, on the go-to-market front, we have started to execute the cross-sell motion that we talked about in the past of selling SMS and a broader messaging product to the e-mail customer base.

And even though we're just starting that cross sell and it's going to take some time to manifest, I think our hypotheses there are pretty good.

And I think that the idea that customers want one platform strategy and one product that can solve many messaging needs that they have is a good one.

Ittai, it's Khozema.

Just on the app services, that's not one that we're going to break out every quarter and disclose.

I think what we do see is really strong traction there, it's that category is still growing faster than the overall business, and I think what we'll do is probably provide an update in the future here when we cross another one of our interim milestones.

Your next question comes from Heather Bellini with Goldman Sachs.

I wanted to spend a little bit of time on Flex.

Jeff, you said a few months ago that this is a year of pipeline build for the most part, that's what we should be expecting.

But I was wondering if you could share with us, given your comments on it on the call, how is it going versus your expectations?

And where you did win in the quarter, you mentioned one deal in particular, but what are the other solutions they were looking at?

And what were the reasons that Twilio won?

Yes.

Thank you, Heather.

I think the key thing for Flex, which is as a B1 product, is to get the architecture right.

You get the core differences between the usual monolithic app that people bought in the past versus our application platform approach.

And the idea that companies and their developers want to take a contact center that's in the cloud and fully customize it to meet their workflows and to get the efficiencies by making the contact center work exactly the way they want it to, that core of the product is correct, and that's what the market is telling us based on the excited response that we're getting.

And so as we hear from customers, if you think about the first customers we have, the thing that I'm looking at is those customers are happy and use the product, and it's the platform approach that they want.

And so as far as like other products they're looking at, I mean some of them are coming from an on-prem legacy world.

Other companies are -- have been trying to move to the cloud.

Sometimes, you get net new used cases that are just spinning off like a new channel, like chat is the impetus for them to bring in a new platform to be the basis for their growth.

So there's no one story, but broadly speaking, it's customers coming from the legacy world, generally on-prem approach, that's where most of the market spend here is and that's where the most complex requirements are that really require all that customization.

And if you listen to the analysts out there, they say 85% to 90% of the market is still on-prem in that legacy world.

And that's the part of the spend that we're going after.

Your next question comes from Brent Bracelin with KeyBanc Capital.

I wanted to follow up, possibly with George or Jeff, around just the SendGrid opportunity, and specifically, the cross-selling and where we're at.

Obviously, SendGrid brings a pretty large installed base, over 80,000 customers.

Again, I know it's very early, but where is the low-hanging fruit?

What parts of the overall kind of SendGrid base are you targeting?

And what's been, again, very early feedback?

This is George.

So I think we're on track in terms of our pipeline building for the cross sell.

Obviously, we just got started.

I think the thing that honestly we're excited about is using the data that we have around what the SendGrid customers are doing, the use cases they're doing to intelligently focus our go-to-market efforts around obvious opportunities to expand the portfolios.

For example, if we see people doing very time-sensitive account notifications, let's say on e-mail, that's a great opportunity for us to go in and talk to them about SMS as a better alternative, for example.

And also vice versa, cross-selling e-mail to the Twilio bass.

So for both directions, we have -- we're on track, is what I would say, in terms of our pipe building or circles.

And so, yes, I think that's -- it's looking good for us right now versus the plan we set out at the beginning.

Helpful there.

And any idea on the sales cycle for cross-selling at this point?

Or again, it's just too early to tell.

I think you're going to see it -- we're seeing it's very -- we are seeing some quick wins, more actually on the e-mail side, but also some of these are going to be just more of our typical sales cycle line.

So I think it's going to be varied, just like for our core business, the sales cycle lengths are varied.

Your next question comes from Michael Turrin with Deutsche Bank.

I know you've been busy investing, continuing to build out the Twilio go-to-market engine.

Last year, you called out some go-to-market enhancements, which drove some more pronounced upside on some of the quarterly results.

And I'm just wondering if there's anything there which we should be cognizant of as we're lapping some of those efforts as we move forward throughout the year this year.

I think in terms of the go-to-market investments of -- I think that you, as I said in my prepared remarks, we're continuing to execute the plan.

We're -- we've laid out a vision of how we're going to invest in coverage, especially in -- around enterprise partners and international and all that is continuing to move forward with good performance and strong growth.

So I think continued strong growth is the message there.

In terms of performance versus expectations, I think we've talked about in the past, that we're -- I think we're just getting better about understanding the impacts of our go-to-market investments.

And I think that's making us, generally speaking, better, around forecast and impact of it over time.

Helpful color, George.

And then, on gross margin, you provided some useful color there in the prepared remarks, it came in above our expectations for the quarter.

Can you talk more about the drivers specific to the quarter?

And then, to recap some of the impacts coming on throughout the year, it sounds like a 100 basis points of headwind from the Verizon A2P fee for the year.

Is that right?

Yes.

Michael, this is Khozema.

Thanks for the question.

So SendGrid is really the large driver in there.

It's about a 300 basis point lift in terms of gross margins.

I think the other one that we called out is, is that there's that large international customer that we specifically identified in the fourth quarter that went into kind of a more normalized mode, if you will, in the first quarter.

And so we got a little bit of a lift there.

And then, just, I think, the strength of the base in general provided some additional juice.

In terms of the balance of the year, I mean, I think the way that we see it playing out right now, based on what we know is that based on Verizon, we see about a 50 basis point drag here in the coming quarter.

Beyond that, just really in the interests of transparency, we were trying to provide some additional color around what other carriers may or may not do through the balance of the year, and we'll just have to see how that plays out, but that's not really factored into our guidance for now.

Thanks; congrats on the strong results to start off the year, guys.

Your next question comes from Nikolay Beliov with Bank of America.

One part of the business we have not discussed in a while is the ISV business, the independent software vendor business, which I believe a couple of years ago was 20% of revenues growing in line with the overall growth rate.

Can you please give us an update here to the extent that you can?

And as you guys move up the application stack, how do you handle potential conflict with your own ISV customers?

Yes.

This is George.

So we continue to work very well with the ISV/solution partners.

And part of our broad-based coverage strategy, I've talked about enterprise partners in international, we view ISV squarely in the partner realm.

And so we're growing our team there.

That's working with all flavors of ISVs, from small start-ups, all the way through strategic ISVs.

And I would say that the continued strong growth we see across the board also applies to ISVs as well.

In terms of the specific question -- the second part of your question, I think there is no change in what we've stated in the past, which is that Flex is -- applies for customers that builds mindsets.

And for customers that want to buy an off-the-shelf solution, we work really well with our solution partners that have built Twilio components into their contact center solutions.

I think one thing that is upon this sign is we are seeing -- we are getting inquiries from more and more ISVs that are asking about potentially leveraging Flex components into their solutions.

I think we're early days.

Those are going to be long conversations, but these are, obviously, big, strategic decisions for these companies.

But I'm excited to see at least that level of inquiry from ISVs around Flex.

Your next question comes from Alex Zukin with Piper Jaffray.

Congrats on a great quarter.

Maybe a first one for Jeff.

Just, as you continue to integrate SendGrid, can you talk about whether, kind of where the synergies are from SendGrid's product road map towards your application services category?

And then, I have just a quick follow-up on dollar-based net expansion for Khozema.

Absolutely, Alex.

First of all, on the app services as a technical concept, app services is parts of our product that have a pure software component, i.e., no carrier component.

And so, technically, SendGrid would fall into the app services category.

But technical definition aside, as we defined it once in the Analyst Day a few years ago, as a broader strategy, you've got e-mail delivery as an API that slots in really nicely with our programmable communications cloud, where we have a voice API, SMS API, chat API, a video API, and now e-mail API.

So as all the different channels layer in, including things like Facebook Messenger and WhatsApp, e-mail as a critical part of that story is -- makes a ton of sense.

The developers need API for e-mail just like they need APIs as well as other things.

Then, at the layer above, at the Engagement Cloud, that's where we see this opportunity to bring application platforms.

You take the major application use cases that every company uses to run their business, the front of house of their business, and provide them a way to use our APIs, but accelerate their ability to deploy it.

So that's where Flex comes in for the contact center side of things.

And SendGrid has a product called Marketing Campaigns that actually works for the marketer in a similar way.

And so over time, I think what you'll see is the Marketing Campaign's product that SendGrid already has will become more and more API-centric and will be able to have some of the capabilities like you see in a Flex as part of being more of an application platform.

They originally built it as more of an application itself and we'll turn it into more of an application platform for our developers to use it as well.

And so it fits in really nicely with the strategy of the Engagement Cloud to be the single system that a company can use for all -- to manage all of its customer touch points along that customer journey, whether it's when you're selling to that customer, marketing to them, servicing them out in the field, servicing them with customer support, there's always different touch points companies have that we see companies leveraging Twilio to improve with better communications.

And in every one of those categories, the possibility of an application platform to accelerate and bring more customers on more platform exists.

That said, our biggest priority in the Engagement Cloud is making Flex a success.

And Marketing Campaigns is already a product that's in the market, and we feel strongly that's a great product.

But for the perspective of the application platform, our major focus is on Flex as opposed to a major move in the Marketing Campaigns product in the short term.

Got it.

That's super helpful.

And then, Khozema, just on dollar-based net extension, the 146% was again very strong in the quarter particularly versus the year ago period, but on a sequential basis, it was roughly flat, down maybe 1%.

Have we reached kind of a sort of new peak in this metric?

And kind of how should we expect that to trend through the year, at least until we start getting into the SendGrid compares a year from now?

Yes.

Thanks, Alex, for the question.

I think, over time, we do expect it to trend down a little bit.

It's not something that we guide to per se.

I mean obviously, at 146%, we feel pretty good about the -- where the figure landed and feel like it's a good testament to the business model.

And it had been in the 140s for some time.

But I think, over time, you are going to see that it does decline a little bit over time just given that these older cohorts in particular are going to become really, really large as a part of the mix.

Your next question comes from Bhavan Suri with William Blair.

Congratulations, guys.

I guess just to touch on the first one which is as you think about the Engagement Cloud, and you think about now having e-mail, text and Flex, which are different ways to reach customers and engage with them, how do you think about sort of layering on 2 pieces: a workflow engine obviously, and an orchestration layer?

Workflow from the perspective of, there are certain things that have been -- best done through text, some through e-mail.

Certainly, if it's a complex process, I want offload that to an IVR, then call center at some point.

And then, sort of orchestrating that workflow so that customers deploy that.

How is that sort of -- how are you thinking about sort of the deployment of that or the road map for that into the product?

And is that something customers are asking could stay?

Thanks, Bhavan.

This is Jeff.

So as far as like the orchestration layer goes, you kind of see that with Studio as a product that companies and our customers can use to build those sort of orchestrations out, as far as IVRs or bots or even just logical flows of how the communications work.

And as a general story, I guess, around those types of features, we listen to customers and we hear what customers need us to do, whether they need us to take the platform, to make it easier for them to build the kind of customer engagement they want.

And so, as for the road map of orchestration or workflows, if that's what customers are telling us, their biggest pain points are those are the things that we'd consider, but generally speaking, our road map is defined by customer need.

Got it.

Got it.

And then, one more sort of tactical question, maybe for George here.

You've touched on partners and ISVs, but I actually want to touch on the VAR channel a little bit, which has been really strong for the traditional legacy contact center guys, the VAR channel for Cisco, Avaya, et cetera.

Have you seen any of them -- and my assumption is yes, but sort of some color in terms of how many of them, any large [resellers] working with Flex or servicing any we can do more complex and interesting things with Flex in the kind of legacy solutions?

How is that traction with the VAR channel of the legacy guys going?

I'd love to get some color there.

It's a great question.

We definitely are seeing interest from VARs for Flex.

Obviously, as I said, we're just generally early days in the overall Flex effort.

But we're seeing enough interest right now that we are making some infrastructure plans to enable ourselves to better support this new channel for ourselves.

So it's going to take some work on our side to be able to do all the things we'd expect, billing, et cetera, to support these guys.

But we're seeing enough interest that we're evaluating all that right now.

So that's [part I'd say to you].

Your next question comes from Meta Marshall with Morgan Stanley.

Understanding it's kind of a building year on Flex but maybe just on a go-forward basis, would you intend to kind of offer details around trials going on or hours of free time that are being used?

I guess, just what metrics do you kind of intend to give, to give a sense of what pipeline is building on Flex?

Yes.

I think in general -- I mean, I think it's not something that we're going to provide a lot of forward guidance on or metrics really until it becomes a more meaningful part of the business.

I mean, obviously, we're really excited about the progress in terms of the product and the traction with some early customers.

But I think for now, it's just not going to be part of our underlying disclosures in terms of product detail.

Your next question comes from Rishi Jaluria with D.A. Davidson.

Going back earlier to SendGrid, just wanted to understand, I mean they had a growing business on the e-mail marketing side, and I know there was a little bit of discussion about this before and especially how it can integrate with Flex.

But is there a potential to bring that technology on to the core text and voice side and kind of create the text and voice marketing API?

Yes.

Thanks, Rishi.

This is Jeff.

I think what you see is our customers want to have one platform and one messaging strategy.

And so one of the hypotheses for the acquisition of SendGrid is to be able to take the higher-level products we have, things like Flex or Marketing Campaigns, and have them span multiple channels.

And you see this is a major value proposition already in Flex, where Flex isn't just a voice product, but it also includes things like chat, and SMS, and video, and sort of all the channels that we have, including WhatsApp and Facebook even.

And so at the Engagement Cloud layer, one of the key things that customers want is an omnichannel strategy, I think for every one of these customer touch points.

And I think marketing would be no different.

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

Great.

I'm just curious, out of the new features that you released last quarter, the one with Salesforce seems like it'll be the most likely to move the needle, and correct me if I'm wrong there.

I'm just curious, in terms of how are you going to approach this here, in terms of sales, are you just going to go your traditional method of working with developers or are you going to work with the Salesforce sales teams in terms of going to the current customers and getting them to sell this feature, going outside of the traditional developers' channel?

This is George.

I think from my time at Salesforce, my experience is that you have to push these mostly yourself, but their sales force is inundated with -- they have thousands and thousands of office solutions that they're being asked to push every day.

So the reality is that most of the interest in this is the activity that's going to come from our developers who want to connect Twilio to Salesforce, and also through our own kind of go-to-market channels.

I think the good news is that, obviously, many of the customers we deal with are Salesforce customers, and I think that this connector will have, we hope, significant usage and opportunity in the fields.

So we're very positive on that.

But it will come mostly through our distribution channels, not theirs.

And if I could just follow up real quick.

This product is driven more by your customers, right?

Not so much by Salesforce, your small investor -- the small investment that they have in you guys?

I'm sorry, could you just repeat the question, I didn't hear it very clearly.

I apologize.

Sure.

This product was more developed based on feedback from your customers, but like any input from Salesforce?

Well, absolutely.

This came from our customers.

It had nothing to do with any investment from them.

Yes.

Jonathan, this is Patrick.

One of the things I really like about the Twilio or Salesforce product is that it came actually out of twilio.org, and so if you think about it, every part of Twilio is in customers and innovating, so it's another great example of that.

Your next question comes from Catharine Trebnick with Dougherty.

Quickly, you just launched at Twilio SendGrid the Expert Services this quarter.

Any plans?

It looks like there is deep expertise to help out your customer base.

Any plans maybe to train those individuals to help with the cross-selling of the Twilio products into that customer base?

Well, we already have worked very closely with the existing SendGrid customer-facing teams to train them on identifying cross-sell opportunities.

This will be a part of this.

But probably the main driver will be the existing people in place, not the new people we're bringing on to focus on just this part of Expert Services.

So that's where we are right now.

Your next question comes from Dmitry Netis with Stephens Inc.

A couple of questions.

One on -- a lot of the cross-sell questions for SendGrid Twilio -- core Twilio has been asked, but I'm just curious to see, and I could appreciate the holistic sort of approach for one collaboration cloud where you have multiple channels.

But are there any customers moving to SMS faster than -- moving to SMS versus e-mail or vice versa in those cross-sell opportunities that you're chasing?

Is there -- can you delineate that at all?

Or is it about equal impact from one set of customers moving to e-mail from SMS, and then vice versa from SMS?

I think it's too early to draw too many conclusions from the data we have.

But I would say we see interest in both directions.

I think that the dollar value of -- the ASPs that we see for the Twilio products are greater than the e-mail products.

So our belief is that in the long term, there will probably be a greater revenue opportunity in that direction.

But we're seeing interest in both directions.

Okay.

And then, secondly, I wanted to follow up on this A2P Verizon disclosure you guys put out, that it affects your margin as well as revenue.

And I appreciate being transparent about it and sort of giving us a framework of how to think about it.

What I wanted to sort of double click on is actually the revenue impact.

If I heard you correctly, you said that this will be a positive impact, right, to revenue in 2019, of about $8 million to $9 million, while a negative impact to margin.

So how does that -- what gives you confidence there's the positive impact to revenue?

And how do you sort of come up with that?

Are you assuming any price erosion, price discounts with that or not?

If you could sort of double-click on that and explain your thinking there, that would be super helpful.

Sure, Dmitry.

It's Khozema.

It's actually much simpler than that.

It's literally a pass-through fee to our customers, and so it carries 0 margin.

And so just think about it as we're adding the same number to the numerator and the denominator, and so that's just a margin rate drag.

It has no impact whatsoever on gross profit.

But wouldn't you expect, Khozema, that if there is a carrier tax that you're passing through to your customers, the customers, particularly the high-volume ones, might come back to you and ask for a discount?

It's not what we've seen.

And I think, again, we don't have a lot of experience with it because we haven't gone through the process yet.

But that's not what our anticipation of how it will play out is.

Your next question comes from Will Power with Baird.

This is actually Charlie Erlikh on for Will.

I was hoping you could talk a little bit about the customer adoption you're seeing in Europe or EMEA, especially since hiring a head of the EMEA business a little while back.

Have sales meaningfully picked up in that region since then?

Or is it still a little bit too early to tell?

Charlie, this is George.

I think we're very pleased with the growth and attraction we're seeing in EMEA since David has taken over.

Just Eat is a great example of that.

And I think the best data point I can give you is that we'll continue to add capacity and coverage in EMEA and adding it more aggressively than before David joined.

So I think that's a sign of our belief in the opportunity and the momentum in the market.

Your next question comes from Nandan Amladi with Guggenheim Partners.

You talked a little bit about SendGrid, but I have a sort of platform-level question.

Given that product has a structurally higher gross margin, presumably because you don't have termination fees associated with it, is there any benefit to physically integrating SendGrid with the rest of Twilio?

Are there any plans to do that?

And will the -- how closely will the road maps of those 2 sets of products be aligned?

This is Jeff, I'll answer the question.

If I understand the question correct -- actually, I'm not sure I understand the question correctly.

Can you repeat it?

Oh, sure.

No, I was simply asking, will -- are there plans to integrate the SendGrid code base with the traditional Twilio platform?

Is there any real benefit to doing that?

And if so, how closely will the feature road maps be aligned?

Well, I think, in general, we want the product experience of a customer of either Twilio or SendGrid's, we want the customer to have a unified and great customer experience.

And so, in the fullness of time, we want customers to have one account, to have one bill and be able to use any of our individual APIs as easily as you might use video, or voice, or SMS, you can use e-mail, as well as be able to use any of the channels in any of the products that we build above the API layer.

So in the Engagement Cloud layer, you should be able to use any of these products seamlessly with one customer account, one bill and one great customer experience.

And that's what we're working towards.

Your next question comes from Mike Latimore with Northland Capital.

Great quarter.

As your volumes grow and new verticals open, are you seeing the influence of the CIO on deals increase or does it really kind of still remain heavily developer-led here?

I think that what we're seeing as we move in -- up stack with Flex and other Engagement Cloud solutions, is more engagement with higher-level decision makers, not just like the CIO, is what I would say.

I had significant prospects in our office, last week they flew here from Atlanta.

They had both their CTO as well as their head of -- there are actually 2 heads of products, so both heads of product in the room, and then one developer, of course, in the room too.

So I think that, that kind of continues to speak to our, I think, the uniqueness of our model, we continue to bring the developer along, and that's a unique asset for us in the sales motion, but the people in the room are continually up-leveling, and I think we saw that with our attendance and our -- at SIGNAL, our VP -- our VIP track last year, and we're seeing that play out in more and more of the types of people we're able to engage.

But I wouldn't focus it exclusively on the CIO.

And how about the Twilio wireless product?

I mean, you didn't mention that.

But I mean, how does the pipeline look there?

Honestly, I think that we continue to have good momentum for the products.

And I'm glad you asked about it.

There's a product which you're going to be excited about.

And yes, we just continue to build pipeline.

That product is on track.

So excited about it.

There are no further questions at this time.

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