Twilio Inc (TWLO) 2020 Q3 法說會逐字稿

Good afternoon and welcome to Twilio's Third Quarter 2020 Earnings Conference Call. My name is Rob, and I will be your operator for today's call. (Operator Instructions)

I will now turn the call over to Andrew Zilli, Vice President of Investor Relations and Treasury. Mr. Zilli, you may begin.

Thanks. Good afternoon, everyone, and thank you for joining us for Twilio's Third Quarter 2020 Earnings Conference Call. Our earnings results press release, SEC filings and a replay of today's call can be found on our IR website at investors.twilio.com. Joining me virtually today are Jeff Lawson, Co-Founder and CEO, George Hu, COO; and Khozema Shipchandler, CFO.

As a reminder, some of our commentary today will be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release.

Additionally, some of our discussion and responses may contain forward-looking statements, which are subject to risks, uncertainties and assumptions. In particular, our plans and timing to close the Segment acquisition, including the expected business benefits and financial impacts from the acquisition, and our expectations around the impact of the COVID-19 pandemic on our business, results of operations and financial condition and that of our customers and partners is subject to change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements or ability to close the Segment acquisition in a timely fashion. A description of these risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-Q. 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 an anticipated events, except as required by law.

With that, I'll hand it over to you, Jeff.

Thanks, Zilli, and welcome, everyone, to this quarter's earnings call. Before turning to earnings, I want to encourage all who are listening, especially here in the United States, to please vote. Have a plan, find a way, make your voice heard. At the top of our earnings calls from time to time, I may briefly discuss some elements of social justice, policy or societal issues in the hope that it has some impact and to show that we at Twilio take these issues seriously. On our last call, I referenced the fact that Black lives matter. And I want to say it because it needs to be said, Black lives still matter. And Twilio will continue to advance the dialogue on this and other issues that we care about.

Now on to earnings. We delivered another quarter of outstanding results. I could not be prouder of what we've accomplished during these trying times. Our success is a testament to the value proposition that Twilio's platform offers businesses: digital engagement, software agility and cloud scale. Our goal is to build the world's leading customer engagement platform. We're going to achieve this vision by investing in our products, our platform and our people.

The demand and excitement for digital customer engagement was evident during our recent customer and developer conference, SIGNAL, where we had tens of thousands of people register for our first ever virtual conference. Embracing our builder mentality, SIGNAL was run on Twilio's platform, which our internal team developed in a matter of months to great success. Throughout SIGNAL, we heard from leading enterprises like Nike, Delta Airlines and Ernst & Young about how they are using Twilio's platform to create new ways to engage with their customers over digital channels. And to ensure we continue to meet the needs of our customers, we announced several new products and innovations to help the developers of the world continue to build solutions to solve today's challenges as they execute on their digital transformation initiatives.

We know our customers are looking to Twilio Flex to take on the largest and most complex contact center workloads out there, but they want to do that while continuing to use the best-of-breed solutions they've grown to love, such as their workforce management for their CRM. We announced the Twilio Flex ecosystem, enabling customers to access more than 30 validated solutions from partners including Google, Salesforce, Zendesk, and Collabria, all built to accelerate contact center projects.

Usage of Twilio Video has skyrocketed, and we want to get Video in the hands of as many developers as possible. So we announced a free version of Twilio Video for peer-to-peer use cases called Twilio Video WebRTC Go. Twilio Frontline is a mobile app that provides a direct messaging-based connection between customer-facing employees and consumers in a way that's safe, secure, private and compliant. As non-desk workers far outnumber desk workers, Frontline can help drive greater sales, higher customer satisfaction and lower costs through more efficient operations. And we announced Twilio Microvisor, a complete device connectivity platform that eliminates the complexity of building for IoT. Microvisor runs on the connected device and creates a secure managed runtime with intelligence to connect to different types of networks including WiFi and, of course, cellular via the Twilio Super SIM.

We also recently announced our intent to acquire Segment, the leading customer data platform. Segment enables developers and companies to unify customer data from every customer touch point and every system of record, empowering marketing, sales and service leaders with the insights they need to design and build relevant data-driven customer engagement. The combination of Segment and Twilio means that we will be able to help any business make their customer engagement across every channel more personalized, timely and impactful. This is an important step towards our vision of building the world's leading customer engagement platform.

We also wouldn't be able to execute on this vision without the strong culture and inclusive workforce our employees embrace every day, which is why I'm excited to welcome Lybra Clemons, Twilio's first Chief Diversity, Inclusion and Belonging Officer. Lybra is responsible for guiding and scaling Twilio's inclusion strategy and diversity initiatives across the company's global workforce. There has never been a more important time to bring in a head of diversity to the C suite of the company, and I'm excited for where she will lead us.

I again want to thank our employees for their continued dedication to our customers and for delivering these great results, and a special thanks to the SIGNAL team for delivering such an outstanding virtual event. I also want to thank all of those who are on the frontlines, those who are fighting the fires in California, those who continue to fight this pandemic and those who will be working in the election poll stations in just over a week. Thank you for everything you're doing for the rest of us. And please remember to get out and vote.

With that, I'll hand it over to George.

Thanks, Jeff. The team delivered another quarter of great results in Q3. Our focus on growing our enterprise presence, expanding internationally and growing our partner ecosystem continues to drive great outcomes as companies turn to Twilio's customer engagement platform, and our opportunity is expanding as a result. I'm extremely impressed with our marketing and events team who created an amazing virtual experience for SIGNAL.

In addition to all of the great individual sessions, we hosted our Creator Summit where we brought together more than 200 executives from customers and prospects to network, hear from inspirational speakers and learn about Twilio. We also had more than 800 developer attendees at our Superclass that delivered 40 hours of content on SIGNAL TV. And our brand experience team built our conference experience from the ground up, incorporating more than 10 Twilio products, including Flex, Video and SMS.

During the quarter, we also announced that Deloitte Digital will be joining the Twilio Build partner program as our first premier global systems integrator. Deloitte Digital's Twilio practice will offer the entire Twilio product suite, including Flex for contact centers as well as the full set of Twilio communications APIs and platform services to help clients reinvent their marketing, sales and service and radically transform the customer engagement experience. This is a great step forward in our partner program as it significantly expands our reach and ability to leverage Deloitte's expertise in our top industries, such as health care and financial services, where Twilio has helped institutions of all sizes dramatically transform the customer journey to adapt to these new circumstances.

In health care, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy and magnitude of that need. The team has been hard at work to make many of Twilio's most critical products hit the eligible, such as Twilio SMS, Chat, Conversations, Video, Voice and SIP and Runtime tools. As of today, Verify and Lookup are also HIPAA eligible for health care customers.

And this focus on health care is paying off as you can see with a couple of deals we signed this quarter. We expanded our relationship with Philips, a leading health technology company focused on improving people's lives and enabling better outcomes across the health continuum. In response to COVID, Philips built a virtual waiting room using Twilio SMS to replace the physical waiting space in just 6 weeks. Health systems like Yale New Haven Health and Boston Medical Center use solutions that curb viruses like COVID-19 and the flu. With this new solution, the patient texts the hospital when they arrive, and the hospital texts them back when a room is available so they can go straight to an exam room.

We entered it into a new relationship with Banner Health, one of the largest not-for-profit health care systems in the country. After investigating several vendors, Banner Health selected Twilio to power patient notifications across multiple channels, beginning with our voice API. They view Twilio as the leading engagement platform that can power a consistent digital patient experience across Banner Health.

In financial services, another highly regulated industry and a key focus area for Twilio, institutions have long had apps, chatbots and other customer service tools to help them connect with customers. But COVID was the first time that these capabilities were put to the test as the primary way for people to interact with their service providers. When the pandemic hit, consumer banks, wealth managers and insurance companies were flooded with inbound calls from customers while being tasked with developing a richer set of capabilities and tools to enable their employees to safely and effectively work from home.

Now as providers look to the future, they are implementing a range of new digital solutions that create a better user experience for customers at any time and on any channel. We saw this in the third quarter as we expanded our relationship with a Fortune 50 bank that was forced to close many branches in response to COVID. They were looking for a better way to engage with customers via digital channels. They selected Flex, integrating it with programmable messaging and Salesforce to power their new omni-channel digital customer engagement strategy to improve lead conversion and provide better customer service on-demand. We also signed a new Flex deal with Robinhood, a pioneer of commission-free trading. As the demand for their platform has accelerated as a result of COVID, Robinhood is continuing to adapt, scale and power elements of its customer support with Flex.

As we've discussed, we have a very broad customer base, and our platform is used by companies across more than just health care or financial services. Some other great deals from the quarter include an expanded relationship with Alaska Airlines, the fifth largest U.S. airline based on passenger traffic. In an effort to reduce direct interaction between employees and guests in response to COVID, Alaska is using our programmable SMS connected to their reservation system to allow agents to send a customer's boarding pass via SMS.

We entered a new relationship with Prometric, a global leader in technology-enabled testing and assessment solutions. With the acceleration of digital technology driving new consumer behaviors as well as an increasing need for remote test proctoring as a result of COVID, Prometric selected Twilio as the video management service for their application with Flex as the user interface between the proctors, security agents, readiness agents and test-takers.

Overall our team continues to execute on our strategy as our investments in enterprise go-to-market, international expansion and our partner ecosystem are paying off. We are extremely well positioned as we look to close out the year, and we're excited about the massive opportunity ahead of us in the next several years.

And with that, I'll hand it over to Khozema.

Thank you, George, and good afternoon, everyone. Total revenue for Q3 grew 52% year-over-year to $448 million, and dollar-based net expansion was 137% as we continued to see broad-based strength across the business. As we get closer to the election, political traffic is likely to pick up, and we saw that in the third quarter as political traffic contributed approximately $10 million or 2% to revenue. Excluding political traffic in Q3 2020, revenue grew 48%. Revenue from our top 10 active customer accounts represented 14% of revenue compared to 15% last quarter and 13% last year. International revenue was 27% of total revenue in Q3 compared to 27% last quarter and 28% in Q3 2019.

WhatsApp contributed approximately 6% of revenue, down from 7% last quarter. Starting in 2021, we will no longer break out WhatsApp as a percentage of revenue. We continue to have a great relationship with WhatsApp. However, as our business has scaled, coupled with the strong revenue diversification we discussed at our Investor Day, disclosing the contribution from a single customer is less meaningful.

Verizon's A2P fees contributed approximately $10 million to revenue. As a reminder, this fee is a direct pass-through to customers and does not impact gross profit dollars. I did want to note that we expect to stop breaking this out in 2021 as we lap the implementation of the Verizon fees. If and when we experience fees from other carriers, we do expect to provide that information if relevant.

Third quarter non-GAAP gross margin was approximately 55% and was negatively impacted by 130 basis points from A2P fees. As you'll recall from our recent Analyst Day, we discussed that gross margins would be negatively impacted in the short term as the growth of our messaging product has been reaccelerating, a trend that continued in Q3. To reiterate, this is a trade-off that we will gladly take as it adds gross profit dollars, which we can continue to reinvest, delivering elevated levels of growth. Gross margin was also negatively impacted by about 100 basis points from foreign exchange, primarily from the euro appreciating relative to the U.S. dollar.

Non-GAAP operating profit came in at approximately $7 million stronger than originally forecasted driven by higher-than-forecasted revenue and the timing of hiring within the quarter. While we were able to catch up on our hiring plans in the third quarter, the timing of some of the hires meant that we didn't fully recognize the expenses we had forecasted.

Moving to guidance. Please note that our guidance today does not include the impact of our announced acquisition of Segment. We expect the acquisition to close during the quarter, and we do expect a modest top and bottom line impact in the fourth quarter. As such, on a stand-alone basis, we expect Q4 revenue of $450 million to $455 million, including A2P fees, for year-over-year growth of 36% to 37%. And we expect a fourth quarter operating loss in the range of $10 million to $15 million.

While on the topic of guidance, I'd like to update you on our guidance philosophy. Going forward, we plan on only providing quarterly guidance. At our recent Investor Day, we provided medium-term guidance that we expect 30% organic annual revenue growth for the next 4 years. Also, our medium-term guidance does not incorporate the pending acquisition of Segment. This guidance was provided based on our forecast for Twilio's existing business. We are managing the business for the long term, making decisions that benefit all stakeholders, and our medium-term revenue guidance reflects this.

As we discussed at our Analyst Day, some of the investments we planned on making this year did not materialize as we had originally forecast due to COVID. While still finalizing our 2021 plan, we intend to continue with our investment plans into 2021, which we anticipate will drive operating losses into next year. Also, with our recent announcement to acquire Segment, there will be certain integration costs we'll incur to further enhance Twilio's customer engagement platform. Once the deal closes, we expect to provide more information on our Q4 call.

Lastly, I encourage those of you that may have missed our Investor Day held on October 1 as well as our announcement acquiring Segment to visit Twilio's Investor Relations website at investors.twilio.com to view the presentations and webcasts.

I wish everyone well and hope you are healthy and safe. Thank you for joining. Operator, please open the line for questions.

(Operator Instructions) First question comes from the line of Meta Marshall from Morgan Stanley.

Maybe first question just on SIGNAL, could you give some color commentary as to what were the most attended sessions or where you kind of saw most customer questions around? And was any of that surprising? And then maybe just Khozema, any bounce-back worth noting in key verticals like travel and hospitality? And that's it for me.

This is Jeff. Thank you for the question, Meta. So I think SIGNAL was a broad-based success across the board in terms of the sessions for both the technical track, so the developers and the audience, as well as for the executives with our Creator Summit. And so I think one of the key things about SIGNAL as we progressed and built on our engagement cloud strategy and started really building a dialogue with the technical folks but also now the executives, and that is increasing our strategic positioning and are allowing us to sell more broadly into organizations and actually unlock much bigger problem domains inside of those companies, such as the broad-based question of customer engagement as opposed to the more narrower view of the particular communications workloads.

And so that's fantastic. We're really pleased by the growth of SIGNAL at 10x the attendance of prior years. Well, obviously, a lot of that's driven by the virtual nature of it and as well the participation by leading enterprises. So this year, we have the CEOs of both Nike, Delta Airlines, talking about their digital transformations and the acceleration of those digital transformations have gone because of COVID. And so I think those are some of the key highlights of SIGNAL.

And I don't know if, Khozema, you have something you wanted to add.

I think the second part of the question was around travel and hospitality or the impacted industries. And Meta, we have seen some traffic in the more heavily impacted industries return, but they're still below pre-COVID levels. I would characterize it more as green shoots.

Your next question comes from the line of Nikolay from Bank of America.

It's a question for George. George, as you build out this comprehensive customer engagement platform, at what point do you start running into Salesforce, Oracle, Adobe, the legacy, if you will, customer engagement vendors? And at what point do you kind of step back and coexist and complement them? Just philosophically, just wondering your thinking around this topic, please.

Yes. I mean it's a great question. And we are very complementary. I would say that many of our customers today are customers of these other companies, and we're very complementary. We don't often, like, see them in the sense of we don't compete with them because we're coming at a different -- coming at the problem in a very different way. We're starting with developers and we're working with them on really the communications end of customer engagement, which is really our strong point obviously and not where we see a lot of other companies that you mentioned focus. So I would say overall, we're very, very complementary, and our customers view it that way, so I think that's going very well for us.

And George, as a follow-up around Flex, when do you think Flex will become a way to wholesale replace legacy call centers versus complementing them right now? Congratulations on the new wins around Flex. Some of them sound like complementing existing call center solutions versus wholesale replacements.

Yes. I think that it's a multiyear journey for us to mature the product. So we do have companies that do use us as the end-to-end contact center platform. We have many situations we're complementary. And I think it's just -- I view it as normal enterprise software maturity. So we continue to mature the product. We're very excited about the evolution of the product over time, and we're now several years in. And we're seeing that the market recognize that. So I think that you're just going to see normal evolution there, and we're going to be more and more able over time to take on larger and larger workloads on the platform but nothing -- I just think it's a normal evolution.

Your next question comes from the line of Michael Turrin from Wells Fargo.

I think the biggest takeaway was around the last point that Khozema laid out for many of us from the Investor Day, around the ambition of that 30% organic revenue growth target over the next 4 years. So maybe going back to that, can you expand on what it is you're seeing in the field today that gives you the confidence in your ability to execute on that multiyear vision as that would put you into admittedly rarefied air in software if you are able to sustain that pace?

Well, this is George, since you asked for the field perspective. I mean we're seeing digital acceleration. We're seeing that people are, especially in this environment, realizing that there's a greater push than ever to be able to engage consumers and customers on digital channels, in new ways and new modalities. And so our research shows that this digital transformation is being accelerated by 6 years. And in fact, that was just last week on a CxO conference where a CIO of a major retailer also said that they're seeing digital acceleration -- or the other 3 panelists that was with him all talking about digital acceleration.

So at every level, I think that this is not just a temporal thing but part of a new way that companies need to engage. And so I think it's that macro shift we're seeing in the market, this macro acceleration, that gives us confidence that we are where the market is and is going, that this is a huge need, a tremendous need in the marketplace, that this is a need that every company in the world has from small business all the way to the enterprise. And so I think that this just really speaks to this generational opportunity we have, which makes us believe that, a, we have the market size here to sustain that level of growth; and also that we have really the right platform, the right message at the right time with the right go-to-market approach and product approach to address that need.

And I think you see that in our numbers this quarter, and we're just also seeing that reflected in the conversations throughout the field. And even these 200-plus executives at our Creator Summit at Twilio, which is an awesome number for us, speaks to the fact that even not just developers now but more and more executives are starting to realize that this is a strategic area for them. And Twilio is a company that you think of in a very different way.

That's good color. Just maybe a quick follow-up. On the dollar-based net expansion metric that stepped back up to 137%, I think we've all been talking more about SendGrid impacts and normalization, but that's the highest organic level we've seen since mid last year. So anything else you can add around what's allowing you to sustain those levels as you move to even greater scale here?

Michael, this is Khozema here. I think what we're seeing across the board is, is that there's just broad-based strength across the entirety of the business. And so there's no one specific thing that I would highlight as a result of that. I think it's -- there's companies that are continuing to digitally transform, as we pointed out a few times. And I think we're seeing a lot of headwinds based on some of the things that George just described. And we're super happy with the 137%. And we do think that will normalize in, say, over time, but we're extremely really happy about what happened in the quarter.

Excellent results. Appreciate it.

Thanks.

Our next question comes from the line of Matt Stotler from William Blair.

I guess just to start on IoT, and obviously a very interesting opportunity for you guys here, especially with the launch of Microvisor, how significant do you see IoT in terms of use cases for Twilio's business today? And how do you think about over time what this could be for you? And kind of how long do you think it will take that business to become a more significant contributor to the overall business there?

Yes. Thanks, Matt. I will take it. This is Jeff. So IoT is a market that we are very excited about it. I think that of all the talk of IoT that's gone out through the last, say, 5, almost 10 years, this is a field that's really still on its infancy. And we're investing to capture a market that we feel is going to grow over the next decade or more. That said, it's a smaller investment and it's a smaller part of our business than the mainstay of our business, which is customer engagement. But the way I look at it, the great thing about having a developer platform is you can start at the -- sort of the broadest, most applicable building blocks there are, put them in the hands of developers and say we can't wait to see what you build. And as the market unfolds, developers show you where the big unsolved challenges are, and that allows us to make smarter investments over time.

So for example with IoT, we started with connectivity because that allowed us to leverage the skills that we had in taking very complex, telco-oriented relationships, in economics, in technology and package that up in an easy-to-use platform for developers that encourages innovation. And then based on that product, we were able to understand that another big unsolved problem for IoT developers was actually on the chip itself and how you actually deploy code to those devices and how you make that code updatable, secure, inspectable, et cetera. And that led us to invest in Microvisor.

And so we see the IoT road map as a long one, and it's a bet that we're making that the IoT market will be one where there is a tremendous amount of innovation in the years to come and not necessarily innovation in the places where we see it on a day-to-day basis. A lot of people think about IoT, and they think about their home and their thermostat or their watch or whatever. And actually I think there would be very big areas of growth when you start connecting just broad-based, like hundreds of millions, maybe billions of sensors out there in the fields where crops are grown or tractors or to cities and investing in smart cities. Those are the types of use cases that are really just at their infancy.

And I -- one of the things we talk about quite a bit internally is one of the drivers of IoT, one of the many drivers of IoT, is actually environment and how with better connecting this, better information about what's going on in our cities, we can direct resources better whether it's in our cities or in the fields or in freighting and things like that; two, in order to save energy and make our economy and the society more efficient. So there's a lot of drivers of IoT that are coming and there are technology solutions that are now arising such as narrowband 5G, smarter chips, things like that as well as the innovation that Twilio is bringing to the market are going to be significant drivers, we believe, over the coming decade and more.

Got it. Yes. It's very interesting. And I guess one more just for Khozema. The color around the political contributions is helpful or at least the political use cases and how they contributed to revenue. Maybe just any thoughts on what you've embedded in terms of guidance whether that's stable, up or down through Q4, and then any impact that, that had on the dollar-based net expansion in the quarter would be helpful.

Yes, it's pretty modest in terms of the Q4 impact. I would say it's kind of in the same range. If you recall, back to our Investor Day, we kind of called it around this, like, 1% range. We called it out as about 2% today. We would expect it to increase a little bit, but again I think it will be pretty modest. Not a hugely significant impact on dollar-based net expansion. Obviously, that's -- $1 million contribution will impact it a little bit. But the election's a week away, and so I don't think we expect a lot more to transpire after that.

Our next question comes from the line of Derrick Wood from Cowen and Company.

Congrats on a very good quarter. I wanted to ask first question on Frontline. It certainly seems to be an interesting opportunity to help further transform customer engagement initiatives. Two questions, first, do you think this could become a material revenue driver as you look over the next 1 to 2 years, especially considering you've already got some interesting referenceable customers? And then second, this really seems like a greenfield opportunity that doesn't exist in the market. I'm curious where you think an application like this, where budgets are likely to come from, whether it's on the customer service or marketing or even some other operational line.

Yes. Thanks, Derrick. This is Jeff. So first of all, Frontline, we see this as a really emerging workload. If you think about it, maybe 5 years ago, the need for these frontline workers, just the quantity of frontline workers, just a number of roles have changed, and not just as a result of COVID but as a result of the digitization of some of the industries. This role is essentially growing, and the role they play as being directly engaging with customers is a new role for a lot of these. And so I think this is an emerging workload that we're investing in.

And so we're excited because when we talk to customers, we see them using our platform for these types of workloads already organically, and we see Frontline as a way of declining their ability to find success in these use cases by instead of helping to go build themselves, the logic of being able to take something and get it in their hands so that they can build more quickly on top of us. And that allows them to use all these Frontline employees. Whether they are retail workers, whether they are delivery drivers, whether they are field service technicians, there's a lot of different types of workers we've spoken to, allow them to be great omni-channel communicators and great agents of engagement with the end customers of those businesses.

And so I think there was a -- was there a second part to your question?

Yes, where the budget would come from.

I think the other part of the question was in terms of revenue contribution. And I would just say that Frontline's still in beta. And so we're not really commenting on the contribution to revenue at this point in time. Obviously, over time, we would expect that it would contribute to revenue. But like a lot of our beta products, it will kind of bleed into our revenues over time.

Got it, okay. Maybe a follow-up, Khozema, regarding Q4 guidance, I think it's about flat to up 2% sequentially. And that's much lower than you've historically seen into Q4. Is there something to be aware of that may kind of generate the seasonal strength this year versus past years? Or is that mostly just keeping a good degree of conservatism? And maybe if you could just speak to how you feel about the pipeline coming into Q4?

Yes. I mean I think Derrick, we feel good about what we turned in, in Q3. And we continue to see broad-based strength across what we feel is like a really diversified business at this point. There's obviously persistent questions in kind of the macro environment, and we obviously are facing an election year in the next week or so. So we continue to see strength certainly in Q3. But that macro environment is a little bit uncertain, and so I think we're just being prudent. I think our Q4 guidance as published certainly shows continued strong growth. We remain cautiously optimistic about our performance in the near term. And then in the medium term, as you'll note, we provided guidance at the Investor Day of 30% over the next 4 years. So we certainly remain confident in our growth prospects in both the near and medium terms.

Your next question comes from the line of Alex Kurtz from KeyBanc.

Congrats on the quarter. When you think about the investments you're making for next fiscal year, is there any big changes versus what you're run-rating through with the end of the year here? Is there something that you're going to be layering on, whether it's Flex or the hypervisor product or a different -- or maybe just telemedicine? So any changes this year versus next year and where the bets are being made.

Yes. Not really, Alex. I would say it's a bit more steady as she goes. We've commented on investments that we were going to make at the start of the year. And we've kind of commented throughout the year how it's been a little bit harder to make those than we'd originally set out. And so just as kind of a refresher, we're continuing to make investments in go-to-market. We feel great about the traction that George is seeing, for example, in enterprise and Flex and international. We called out previously a number of investments that we wanted to make in R&D, in particular the center of excellence that we opened in India, that's off to a good start. We're going to continue investing there.

And then they are just kind of the basics of building and scaling the company. We've talked about some systems and processes that we think are important to us. We called those out again during the recent Investor Day. And I think at this point, we're just trying to set up the business to take advantage of our growth and the scale. And we think if we can do those things, then we set ourselves up nicely for the medium term.

Our next question comes from the line of Rishi Jaluria from D.A. Davidson & Co.

Nice to see some continued strong execution. I just wanted to go a little bit deeper into the international side of the business. Maybe can you give us a little bit of color in terms of, a, where you're seeing -- if there's any particular geographies worth calling out that you're seeing particular strength in? And alongside that, I mean going back to some of the helpful color you gave us at the Analyst Day, just how we should be thinking about the investments you're making internationally and the trajectory of getting gross margin expansion as you continue to grow internationally, both customers and TAM traffic-wise.

This is George. I think the overall story is balanced growth globally. I do think that if there were any areas that we're seeing some particular strength, it would be in the Americas, both North America as well as Latin America. We are seeing probably a little bit more strength there. But overall I would say, we're seeing balanced growth. I'll turn it over to Khozema for the question around margins.

Rishi, in terms of margins, really no change from the guidance that we provided at the Investor Day. In the short term, we're very focused on growing gross profits, and we see a lot of opportunity out there. And we talked about some of the dynamics with our accelerated messaging business, for example, we continue to see great paybacks in terms of enterprise reps and Flex. And we want to continue onboarding consultative selling experience, for example. But over time, we do anticipate that our gross margins are going to creep above that 60% range and no real change in terms of our philosophy there.

Our next question comes from the line of Ittai Kidron from Oppenheimer & Co.

It's Ittai. Guys, congrats on a good quarter. A couple of questions for me. First for you, Khozema, on the OpEx. Clearly, you're trying to hire a lot. It doesn't seem to be working, though, like, kind of falling short of plans for a few quarters in a row. What's changing internally that will enable you do that as you move into next year? Does it makes a lot of sense for you to hire a lot? It seems though more difficult than planned. So what's going to change over that? And I have a follow-up.

Yes. I think there's a couple of dynamics there, Ittai. So the first thing is, is that some of the profit that dropped through is just as a result of increased revenue, right? So there's a little bit of a dynamic there. I think the second thing is, is that in Q3, it was probably the first quarter in the last couple of quarters that we were able to catch up our hiring. So you're right, in terms of Q1 and Q2, we did have a little bit of difficulty just in terms of some COVID dynamics. But I think now we've certainly appropriately staffed our talent acquisition team. And so I think now we'll be in a position to be able to make investments on the pace that we would like to. And a lot of those investments end up being hiring, and I think we'll be in great shape over the next year or so.

That's great. And then a follow-up for you, George, on the Deloitte Digital deal. Can you give us a little bit more color on how the ramp is going to go? How do we think about the investment that Deloitte has committed to make on its end in order to drive to Twilio, how long before results start showing? And is there any exclusivity here? What are the odds that we see other Deloitte Digital deals out there?

Thanks. That's a great question. We're very excited about the Deloitte Digital partnership. And we think that overall, it really speaks to the progress that we're making in both the enterprise as well as with our broader platform story and also aligning to this broader story of digital acceleration that we've been talking about. For -- we just picked up the partnership. So right now, we are ramping them up. We're getting them trained. They're committing a certain number of consultants to basically get educated on the Twilio platform. We're also in progress right now with a couple of Lighthouse customers to jump-start the partnership. So for the first period of partnership, we're going to be focused on getting the Lighthouse customers successful and then ramping up after that.

And I think we mutually have, obviously, big vision of what we can do together. It's not an exclusive partnership, but it's an exciting partnership. And we think that this is just the beginning, hopefully, of how we continue to grow and expand our systems integrator program, especially at the GSI level.

Our next question comes from the line of Scott Wilson from RBC.

Guys, this is Alex Zukin. I guess, maybe Khozema, the first one for you. At a high level, if I think about the acceleration of the business trends that you're seeing, both at the new customer level, at the messaging level, at the existing customer level, how important is bidirectional messaging to the business today? What percentage of messages that you send are kind of going in both directions? And how should we think about that over the next 3 years? And then I've got a quick follow-up.

Yes. I mean we don't break it out at that level, Alex. We gave you a number of breakouts in terms of our product split at the Investor Day. And I think that's about the direction that we're planning to go down to in terms of disclosures. What I will say is that bidirectional is super important to us over the long term. As you know, just based on your own interactions as a consumer, the bidirectional nature of messaging is still in its relative infancy. And I think a number of the products that we have, in particular our Conversations product that we launched, I guess this last year, we feel great about the way that that's been adopted. Again, most businesses are still sending it one way, and so we think there's opportunity there over time.

Got it. And then maybe another kind of big picture one, which is if you think about -- you obviously have been executing quite well this year, but there's still likely some headwinds to your business that are going to potentially tailwinds next year, presuming the economy continues to recover. What are those? If you can remind us what those headwinds that could become tailwinds next year would be and how we should think about that as a growth driver.

Yes. I mean I think in terms of the way that we have guided, we basically said that over the next 4 or so years that we feel like we can continue delivering a 30% revenue growth annually. And I think what we've seen over the last year or so is that there's been pretty consistent and broad-based revenue strength across the entirety of the business. Now as we went into COVID, I think the one dynamic that we did see on sort of the negative side was that there were some heavily impacted industries like ride share, like travel, hospitality. And as we talked about earlier in this call, the traffic in those industries is still lower than pre-COVID volumes, and so we would expect some bounce back in that. Now we're not calling exactly when that is. Obviously, it's kind of hard to say.

The other thing I would just point out though is that some of the acceleration that we've seen, for example, in health care and education, e-commerce, we also think that those use cases are going to be pretty resilient, right? So I don't think they're going to be ephemeral at all. In fact, I think we see a lot more opportunity in some of those industries. And so I think that's going to provide ongoing tailwind over the medium term as well.

Got it. Khozema, if I could sneak one more in more in just about Segment. A question I've gotten continuously is what, roughly, percentage of the revenue stream there is usage-based versus subscription and how is that going to impact the deferred write-down.

Yes, Alex, we're just not in a position to be able to provide financial information on the Segment transaction right now. We're not closed yet. And I think once we get closed, as we disclose our Q4 results, we'll give you a lot more information there. But we're not going to provide accounting impacts on financials today.

Fair enough. Congrats again.

Thanks, Alex. Okay. Thank you.

Our next question comes from the line of Brent Bracelin from Piper Sandler.

I guess, Jeff, maybe I'll start with you. I know you don't provide a lot of financial detail around Segment, but I did see, in fact, Peter's keynote at the CDP event last week, came away even more impressed with the opportunity here. I guess my question here, could you share any feedback on Segment setout from a customer and partner perspective in the last week or so?

Well, I think what we've heard so far from customers and partners is a lot of excitement because we're going to be able to accelerate not only Segment's road map and their visions, but really it's what we can do together. And I think that's what a lot of customers are looking for in terms of a single customer engagement platform that can take them end-to-end because if you think about it, we started with communications, but that's really a means to an end. For B2C companies, engaging with your customer really starts with understanding your customer. And for B2C companies, that's really done with data. And all those data is residing in all those different systems and all have a piece of the picture for essentially how you -- what you know about the customer. And so once you're able to assemble or complete a picture of your customer, well, then you can engage with them really effectively. And that's communication.

So together, we can build with a single platform the power of end-to-end customer engagement. That's our goal: by bringing together the understanding of the customer, that's customer data, that's Segment, with actually engaging with them, touching those customers, getting them relevant, timely and impactful communications that actually be more loyal and happier customers. And so that's, generally speaking, the gist of how we framed it, and that is reflective of what customers have told us they want -- the problem that they want to solve. And that's why we're building a customer engagement platform in the way that we are.

Makes sense and helpful color. I guess, George, we've seen 2 full quarters of the digital acceleration in a post-COVID era. I was hoping you could talk about just the enterprise customer journey. Is it evolving? Are you landing with Flex and Messaging, but the discussions are much broader? Are the expanse accelerating? Just walk us through the -- how that enterprise customer journey is changing now that you have 2 full quarters behind it.

While, certainly, we've been in this pandemic for a couple of quarters now, I think that the digital transformation, of which digital acceleration is really a more recent phenomenon within that, that's been happening for a long time. And for us, some of the dynamics have stayed similar actually and I think will continue to be similar, which is that we are continuously being brought in by developers, that messaging is a fantastic product. We're landing. We've been in an account as a starting point, so very, I think, easy to understand and fantastic starting point really globally.

And then what has changed in the acceleration is that really, the speed of the exploration and adoption of new channels, more complex use cases. A great example would be a great example would be video. But there was a previous question on like SIGNAL, SIGNAL session attendance, and what was really interesting to me was that while I would have expected that messaging would have been, by far, the most attended breakout session, we had almost as many, if not more attendees for voice, very similar level with Flex. Even IoT had roughly half the attendees of the messaging section.

So we're now able to parlay that strength, that landing strength in messaging, to a much broader conversation. And you saw at SIGNAL that we had 2 fantastic CEOs from Delta and from Nike speaking. That certainly was not the case a year ago. So I think that there's a lot -- there's a confluence of a lot of things happening here, both the need for digital acceleration as well as our capability and our -- this investment that we've made both in our technology and our platform as well as our go-to-market team to be able to now be in the right place at the right time to capture on this, to have these level of discussions and to expand our presence within the company. So what becomes -- what starts with messaging eventually becomes contact center or programmabilities or all sorts of other interesting use cases that are coming out of that.

So yes, I think it's a really, really exciting time for us and one that, I think, validates a lot of the investments that we've made and has led to also the Segment announcement, which I think just falls right in line with the strategy that we've laid out.

Our next question comes from the line of Mark Murphy from JPMorgan.

Jeff, interested in how you're thinking about investing in the voice channel relative to the messaging channel. It feels like Voice is going to be pretty integral to the future of Flex. But I believe you had told us Voice has settled in around 17% of revenue, and Messaging has just exploded to about 45%. And if you have younger generations that are gravitating more toward Messaging, are you kind of seeing on the margin reasons to shift investments that much more aggressively into Messaging?

I do think the drivers between the different channels are different. If you think about like messaging, think about how many times you've actually had an engaging 2-way messaging conversation with a business, right? It's actually still relatively small, but it's growing. In fact, just a few years ago, it was novel when you got a text message from a business and like just probably your food is arriving or your flight is boarding or whatever, like that was novel. And so messaging is seeing a growth in the number of use cases and on how people are deploying messaging to help grow their businesses. Whereas voice has been around for a very long time, obviously. That's a 100-year-old technology. But how people use it is actually changing. And I think that the changing nature of how we use voice -- and look, there's no way around that. Like, people do use voice less than we did, say, 30 years ago. But how we use it is different as well as some of the technology work is different.

And so the virtualization of voice, moving it to the cloud, making it global by its very nature as well as embedding it into the many workflows that we have as opposed to it being a stand-alone, just like, here's your desk, go and have fun, now voice is becoming an embedded big part of many different software workflows, such as those in the contact center where voice is actually embedded in it or other workflows as well. And so I just think the drivers of adoption and the ways in which these channels get used are different. And therefore, we tailor -- our sales cycles, our pitch, everything like that, is tailored to the drivers of what is driving companies to adopt messaging, oftentimes for the first time, to build out new use cases versus what's causing them to potentially re-architect how they do voice and capture emerging opportunities because of the new, more flexible nature of wait in the world of software.

I'll give you an example there. Things like being able to understand sentiment or to transcribe voice calls and to use them -- to consider a voice call as data, those are sort of net new capabilities of the median that are driving new ways for a variety of workloads to be considered inside of an interface.

A very great answer, Jeff. Khozema, just as a quick follow-up, are you able to approximate the rough dollar amount of systems investments that you were unable to make this year that you think would flow into 2021?

Yes, we're just not going to provide guidance on that today, Mark. I mean I think we gave you some revenue guidance for the next several years. We're going to give profit guidance or loss guidance, if you will, over kind of on a quarter-by-quarter basis. I will say that there's a number of areas that we spelled out at the beginning of the year. It's kind of the same dynamic in terms of the areas of investment, but I'm just not going to give a number today.

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

Yes, I think a couple of questions for Khozema. Maybe just coming back to Q3, I think it may be the largest dollar beat in your history. And so I guess -- I'm sure the answer is partly broad-based, but anything in particular you'd call out in terms of sources of upside, whether SMS, video, anything else that really was an upside surprise driver. And then the second question, looking at the net expansion rate, I'm just trying to kind of dig into the key drivers of that. I mean how much of that is increased usage of existing products versus perhaps greater migration use of the engagement cloud products from existing customers? Any color you could provide on that front, too.

Yes, Will, it's a good question. You largely provided the answer in your question, but I'll give you maybe a few additional details. So you're right that it is kind of broad-based strength across the board. We just saw a great performance kind of all around in terms of a number of our customers, segments, geography, products, what have you. Two of the things that we have pointed out both at our Investor Day as well as today, we are continuing to see a reacceleration, if you will, in our Messaging business, and we feel great about the additional growth that we've been able to drive there. And then I think the other dynamic is that I think, at the Investor Day, we're probably about closer to 1% of revenue. In terms of political, we said today that we're closer to 2%, about $10 million in terms of what we saw in Q3.

And then I think the other dynamic is in terms of DBNE, that was the other part of your question, again we're seeing broad-based strength. We showed you kind of a graphic during the Investor Day in terms of how does usage on new products versus existing and engagement cloud and so forth affect the dynamic of DBNE. And I wouldn't really say anything has changed significantly since then, so kind of a continuation of trends that we're seeing. And we feel really good about both DBNE as well as our revenue growth in the quarter.

And your last question comes from the line of Siti Panigrahi from Mizuho.

George, just want to ask about the Flex adoption in the cloud contact center. So since you talked about recent partnership with SIs to build out-of-the-box solution, I'm wondering how should we think about that penetration now into the contact center going forward, having this out-of-the-box solution.

Well, I certainly think that we've always positioned Flex differentiation around its programmability. And we believe that the combination of that plus the cloud is a very, very compelling value proposition for the market. And I think that you've seen, during this particular situation we're in right now, that that's accelerated the overall movement of contact center to the cloud. And certainly, we are a beneficiary, and we hope also a leader in that movement as well. In terms of SI dynamic of that, the SI impact on that, certainly, there are a segment of companies in the market that want the value proposition of a -- the value of a programmable, highly customized solution but may not have the in-house development resources.

I think that's what makes SIs and our platform model such a fantastic natural fit. And I think that's one of the things that Deloitte and other SIs that are in our Build program are excited about and will allow us to meet the needs -- yes, allow us to meet the needs of a broader set of companies in the world now that can now tap into these SIs for their solutions versus having to build them in-house. So I do think it opens our market. I think we're still in the very beginning of that. We just announced the partnership. I think it remains to be seen how much of an impact that will have. But I think over time, it definitely will increase our addressable customer set. And for that, I think we're very excited.

And ladies and gentlemen, we have come to the end of our conference. Thank you for participating in today's conference. You may now disconnect.