Twilio Inc (TWLO) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to Twilio's Q2 2020 Earnings Conference Call. My name is David, 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. Mr. Zilli, you may begin.

Thanks. Good afternoon, everyone, and thank you for joining us for Twilio's Second Quarter 2020 Earnings Conference Call. We are once again conducting our earnings call from separate locations. So we appreciate your understanding if we run into any technical glitches. 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 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. 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 unanticipated events, except as required by law.

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

Thank you, Zilli, and good afternoon, everyone. Thank you for joining. Before we begin, I'd like to take a knee, so to speak. As you all know, the last several months have been very difficult. It started with COVID and the impact that this has had on the world, and then we saw the much-needed broader social movement around Black Lives Matter. This year has shown more than ever the important role corporations play in the lives of our employees, our customers and society at large, and we take that role seriously. Racial justice is an area where companies, Twilio included, can step up and help drive improvements in multiple areas. It starts by introspecting. Personally, as leaders and people in a position of power and as a company and how we can use our power to instigate change, it begins inside our walls. One of our core values of Twilio Magic is be inclusive. And we have a body of work to do in order to truly build the company that's representative of the world around us where every person knows they belong.

So we are committed to that work and make small strides of progress each day, but we also know the power of coming together as a company to fight systemic injustice as we commit as a company to the principles of antiracism. And as I've talked with Twilions around the world in the past couple of months, I found that we have a company full of people who support this cause. Both the issue of racial injustice facing Black Americans and other groups like Latinx and indigenous Americans or similar issues that face communities around the world in EMEA, APJ, Latin Am, I found similar desires to engage, to do the work and to fight in each one of our communities for the issues of diversity, inclusion and belonging that face every community. I'm humbled and inspired by all of you, especially in a year where people could say, "Look, we have enough other problems right now." So thank you, Twilions, for engaging and committing to doing this work. We know our work as individuals, as leaders, as a company is just getting started, and we stand in solidarity with the black community and believe unequivocally that black lives matter. Consider this my taking a knee to begin this earnings call.

Now on to Q2 results. We saw continued broad-based strength in our business in the second quarter as our customers leveraged Twilio to build the future of customer engagement. Over the last several years, we have built a well-diversified customer base across industries, regions and company size that has driven our great results. And now we're seeing the strength of that diversification really play out during COVID as we've seen new industries, new use cases offset some of the more negatively impacted areas.

Companies are adapting quickly to this changing environment. Over the last few months, we've seen years-long digital transformation road maps compressed into days and weeks in order to adapt to the new normal as a result of COVID-19. Our customers in nearly every industry has had to identify new ways to communicate with their customers and stakeholders, from patients to students, to shoppers and even employees essentially overnight. In fact, in a recent Twilio global survey of more than 2,500 enterprise decision-makers, 97% believe COVID-19 has accelerated their company's digital transformation efforts. We also found that companies' digital communication strategies were accelerated by an average of 6 years. Barriers like lack of clear strategy or getting executive approval or reluctance to replace legacy software and lack of time have broken down, and budgets are increasing as companies are seeing new ways of engaging customers.

As we remarked on the last call, Twilio was built for this. The things we've always brought to our customers, digital engagement, software agility and cloud scale, are enabling organizations to innovate now even faster than ever. Messaging, e-mail, voice and video are allowing companies to engage with their customers safely while reimagining their digital engagement strategies in ways that will be resilient for years to come. This effort is the focus of every executive team at nearly every company. Not only are we helping companies figure this out now, but we are an engagement platform that was built for the future. And we believe the solutions being built today will be the standard for digital engagement going forward.

In addition to the traditional use cases we've always powered, we continue to see additional traction in health care, education, financial services, retail, contactless delivery and e-commerce. In fact, I was recently speaking with the CIO of a major retailer who said they saw their e-commerce adoption experienced 5 years of growth in the second quarter alone. The need to scale every part of the business to meet that demand is substantial. And in order to service those customers and meet that surge in demand, they turned to Twilio.

We're also seeing companies face the same challenge when it comes to their workforces, how do we adapt to this new dynamic of work, where work and homes are blended and we don't go into the office every day. While it would be nice if we could pull up a switch and return to normalcy, I think that the coming years will present a more fluid version of work. Companies who adapt now and prepare to serve the needs of a more agile workforce will be the ones who thrive. For example, companies must prepare for customer service agents to work from home rather than a crowded call center. Retailers who rely on the expertise of their in-store sales associates will need to create workflows where those employees can still advise customers digitally. Banks will need to replace their traditional in-person branch processes to online services. And the tools and services that keep these agile workforces up and running, like Twilio, will continue to see demand increase.

We are just scratching the surface of this huge opportunity as companies around the world reimagine their customer engagement in a digital world. This is what Twilio has always been focused on, and now this opportunity has been supercharged as customers continue to use our customer engagement platform for new use cases brought about by the current environment. While there's a lot of uncertainty in the macro environment, we remain cautiously optimistic about our opportunity for the remainder of this year, and we're even more excited about what we can do in the long run.

Before I hand it over to George, I want to highlight a couple of other items. I want to welcome Michelle Grover as Twilio's new Chief Information Officer. Michelle joins us from SAP Concur and will be responsible for the technology systems and processes that drive innovation and growth at Twilio, ultimately empowering the company to better serve customers. We're thrilled to welcome her to the team.

I also want to remind everyone that SIGNAL, our customer and developer conference, is coming soon. From expert speaker sessions, product deep dives, speaker panels and more, SIGNAL delivers powerful and practical sessions to build legendary customer relationships with Twilio. You'll learn how to unlock the power of a single communications platform to engage with your customers anywhere on any channel. It will be a virtual event on September 30 to October 1, and you can register today at twilio.com/signal.

Finally, I want to thank our employees for their dedication to our customers during this unprecedented time and for delivering these great results. I also want to thank all of those who are on the front lines of this pandemic and continue to fight to keep us healthy and safe, our food supplies continuing and our stores stocked. Thank you for everything you're doing for the rest of us.

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

Thanks, Jeff. Against the backdrop of a very difficult macro environment in the first full quarter of remote work, our team pulled together to deliver great results in the second quarter. Our investments in the enterprise, expanding internationally and growing our partner ecosystem continue to drive great outcomes as we are helping companies across industries and around the world with their digital acceleration efforts. Our marketing team transitioned several events from in-person to virtual, hosting multiple Engage Everywhere events, including industry-specific events focused on health care and retail. Our developer relations team drove great results with more than 1 million unique visitors to our blog during the quarter. And we were able to shift our customer hackathon to virtual experiences for multiple companies. And hackathons help companies reimagine their customer engagement strategy using the Twilio platform, and we continue to see digital transformation projects accelerating at companies and organizations of all sizes and across industries.

As Jeff mentioned, COVID is accelerating the digital transformation efforts of companies and organizations everywhere because there is no such thing as routine customer engagement anymore. And our opportunity has been supercharged in light of this, driving some great new deals in response to COVID. Few companies have seen as explosive growth as Zoom as a result of COVID. And with that growth, they needed an e-mail platform that would scale to match their needs. Already a Twilio customer, Zoom added e-mail, knowing we offered a platform that would consistently deliver e-mail in a timely fashion at scale for the deliverability and speed to support their customers during this massive growth phase.

We expanded our relationship with Peloton, the largest interactive fitness platform in the world with more than 2.6 million members. They needed an e-mail infrastructure that would grow with them. Peloton selected Twilio's e-mail platform for all of their marketing e-mails to optimize deliverability, allow them to iterate quickly and provide the scale they need for the future.

There's also never been a better time to be in the contact center space, and we are happy with the momentum we've seen for Flex to date. The flexibility of the platform allows for many different use cases outside of traditional customer service. One area we've seen great traction in is contact tracing, where we've worked with several universities and city and state government to help them prepare to reopen safely and efficiently. In Q2, we signed more than 25 transactions with these organizations, including New York City and New Mexico. Flex also allowed companies to cut costs by moving from expensive on-premises implementations to the cloud.

Red Ventures, a portfolio of digital companies, is looking for ways to cut costs while continuing to provide great service. Having used a legacy on-premises vendor for more than 10 years, Red Ventures chose Twilio Flex to provide a cloud-based solution to drive cost savings while delivering a highly customized sales experience.

We also entered into a new relationship with BGL Group, a leading digital distributor of insurance and household financial services to over 10 million customers. BGL's existing legacy solution did not allow for large-scale remote working and requiring staff to stay in the contact center was not acceptable. BGL turned a Twilio Flex to deploy a remote contact center, enabling several hundred agents to be up and running in 2 weeks and, according to BGL team, drove a straightforward decision to change.

Our results also show the power of our diversified go-to-market supporting companies of all sizes across multiple industries and geographies. In the enterprise, we expanded our relationship with a Fortune 50 company serving millions of customers a week. They are seeing a spike in usage of their "buy online, pick up in-store" option, and they needed a solution to verify the customer phone number at checkout or at pickup. This company is shifting, combining 80% of their software to building 80% of their software, and selected Twilio to build a solution using Twilio Verify, Lookup, SMS, voice and e-mail.

We entered into a new relationship with a Fortune 50 multinational company that needed a more efficient and effective way to issue escalation alerts and notifications from their ServiceNow command center. They will be implementing ServiceNow Notify powered by Twilio SMS and Voice to seamlessly deliver these critical communications to global employees and executives to ensure fast response times for their customers.

We entered into a new relationship with CBRE Spain, a division of the world's largest commercial real estate services firm. Like many companies, CBRE Spain was trying to imagine what a return to the office would look like. Their head of digital and technology stepped up and built a solution in less than 24 hours using Twilio Studio. With Twilio Voice, IVR, SMS and e-mail, employees can now book a desk over the phone, receive an SMS to confirm more information about the reservation and finally receive a personalized e-mail with authorization to return to the office.

Globally, we've also had tremendous success. We entered a new relationship with Tokopedia, an Indonesian technology company with a mission to democratize commerce through technology. With the exponential increase in traffic due to COVID, Tokopedia needed to secure a reliable solution to support their growth and selected Twilio for SMS notifications.

We entered a new relationship with E.ONnext, a company that provides electricity and gas to more than 5 million people in the U.K. E.ONnext is delivering and developing a new customer engagement platform in an effort to become the leading residential energy provider. They're leveraging Twilio voice, messaging and e-mail to build this new engagement platform, and we are excited to support them in their efforts to deliver the best customer experience in the industry.

We expanded our relationship with Car Finance 247, U.K.'s #1 car finance broker, guiding their customers from initial loan application to car purchase. They have been a great customer of ours for years and this quarter added Twilio Flex for their customer support and sales contact center based on the flexibility and scalability of the Flex platform. We're excited to continue to build on this great relationship.

Overall, I'm very proud of the entire team for their performance through the first half of this year. Our investments in enterprise, go-to-market, international expansion and our partner ecosystem are paying off and are setting us up for long-term success. We remain focused on supporting our customers through the current environment and helping them build customer engagement solutions for the future. And finally, to echo Jeff, I'd encourage everyone to register for SIGNAL to hear all about how you can leverage Twilio for your own customer engagement needs.

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

Thank you, George, and good afternoon, everyone. Total revenue for Q2 grew 46% year-over-year to $401 million, and dollar-based net expansion was 132%. As a reminder, this is the first quarter we fully lapped the SendGrid acquisition so our reported numbers do not require an organic adjustment. Recall that Q1 organic revenue growth and dollar-based net expansion were 48% and 135%, respectively, after adjusting for the 1-month stub period.

During the second quarter, we continued to see a net positive increase in usage during COVID-19 relative to our expectations. While some of the more negatively impacted verticals showed a slight comeback, they are still below their pre-COVID levels. However, use cases within health care, education, e-commerce and others continued to offset the headwinds. Reemphasizing Jeff's comments earlier, we have a well-diversified and resilient business model. Twilio is built for this, and we remain cautiously optimistic about the remainder of the year and is enthusiastic as ever about the long term.

Revenue from our top 10 active customer accounts represented 15% of revenue, which was flat sequentially and up from 13% last year. International revenue was 27% of total revenue in Q2 compared to 28% last quarter and 29% in Q2 2019. WhatsApp contributed approximately 7% of revenue, which was flat sequentially. Verizon's A2P or application-to-person messaging fee contributed approximately $7 million to revenue. As a reminder, this fee is a direct pass-through to customers and does not impact gross profit dollars.

Second quarter non-GAAP gross margin was 56% and was negatively impacted by 100 basis points from A2P fees. Non-GAAP operating profit came in at $10 million, stronger than originally forecasted. There were 2 primary drivers for this outperformance: one, higher revenue than forecasted, which was the largest contributor; and two, COVID-related items, including hiring, travel and office expenses, among others.

Moving to guidance. We continue to watch the same economic indicators as all of you, and it is clear that the macroeconomic environment remains uncertain. In context, we are only providing Q3 guidance and we expect revenue of $401 million to $406 million, including A2P fees, for year-over-year growth of 36% to 38%. We expect a third quarter operating loss in the range of $10 million to $15 million. Our focus for investment remains the same: continuing to build out an R&D center of excellence in India, hiring in go-to-market and systems infrastructure. Given the inherent difficulties of hiring and infrastructure building while we are all working from home, we do expect some of these investments to continue next year. We are highly confident in the ROI these investments will produce over the long term and are making them with a strong balance sheet.

One other important note to mention with regards to operating expenses is SIGNAL, our customer and developer conference. SIGNAL will take place virtually September 30 to October 1, incurring expenses in both Q3 and Q4. We originally forecasted SIGNAL expenses to be about $10 million before moving to a virtual event, and any cost savings from hosting SIGNAL virtually will be reallocated to other marketing areas. We are still planning to host a virtual Investor Day on October 1 to coincide with SIGNAL. We are finalizing the logistics, and we'll provide more specifics in the coming weeks.

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

(Operator Instructions) Your first question comes from the line of Meta Marshall with Morgan Stanley.

Maybe a first question just on -- how has COVID informed where you -- or how you continue to evolve the platform. Are there areas where it's been highlighted by customers that they would like more investment or more capabilities? And then second, just how has it changed how the ISV or SI community has -- their interest level in working with you guys and level of engagement with those communities?

Thank you, Meta. This is Jeff. I'll take the first part of the question, and then maybe I'll have George answer the second part. Well, with regard to how we're evolving the platform, I think there's 2 parts to that answer. First is one of the neat things about being a platform and being APIs that can be used to build so many different things is that we don't necessarily have to, like, rebuild our product for new scenarios or new use cases that arise because of COVID. In many ways, our platform approach allows us to be adapted very well to changing circumstances. And so that really makes our product very perfectly oriented towards uncertain times like this. I've talked about how the need for software agility is one of the key things that the world has needed during this time to respond to unprecedented events. And so I think our platform is nicely oriented towards helping our customers solve problems that maybe didn't even really exist in the world 6 months ago.

But as far as how we are adjusting our road maps, there are adjustments that have been made. For example, we are investing quite a bit in our video product to respond to new demand and new use cases that are rising or are accelerating in their demand because of COVID. And so that's an area where we're focusing our energy as well as many of the new use cases that are emerging because of it, because of things like contactless delivery or telehealth or distance learning, right? These bring about new use cases or growth of existing use cases that may have existed before but are achieving new levels of interest and scale. And then those things will then help us to adjust the road map. But like I said, as a platform, I think we're really well positioned already to be able to capture new workloads as they emerge. It's not like we have to go reinvent our product or build a brand-new product for these emerging use cases, and that's a pretty good attribute of a platform business like ours. With that, let me hand over to George to talk about the ecosystem.

Thanks, Jeff. I think what we're seeing in the ecosystem mirrors a lot of what you said. Certainly, on the ISV side, we've seen traction with a company that are developing new and disruptive business models to try and address COVID scenarios. So we've seen growth in ISVs that are focused on changing education through a remote proctoring. We've talked about our relationship with Epic. And we're definitely seeing more companies in the telehealth space. ISVs want to work with Twilio. And then on the SI side, it's also been a catalyst for us to build relationships with SIs. I think a good example of that would be what we're seeing on the contact tracing side. A lot of these contact tracing use cases with state and local government, they're bringing SIs to help them on fieldwork. And these SIs are being introduced to Twilio and, in some cases, deepening their relationship with Twilio because of this. And as they learn more about it and see what's going on with our technology, they're more and more excited about it because it's such a great fit for this time and place. So overall, I would say we've definitely seen it as a catalyst for improved growth and relationships in some of these specific areas.

Your next question comes from the line of Alex Zukin with RBC Capital Markets.

Congrats on a great quarter. Just 2 for me. The first, maybe just help us understand a little bit around the magnitude of the headwinds and how much they've improved and whether you're seeing some of these new tailwinds as a structural change to the way that your product is even perceived in the marketplace.

And then as a follow-up, just to maybe comment on dollar-based net expansion expectations for 3Q and anything we should keep in mind that -- as we model that metric for the rest of the year.

Yes. Alex, this is Khozema. Thanks for the question. Around dollar-based net expansion, I mean that's not a metric that we guide to. So I would say we feel good about the broad-based strength of the business generally. We feel great about the 132% that we put up in the quarter. And we do -- and we've said this for a long time, we anticipate that, that metric, over some period of time, will fade out. I mean it's just law of large numbers at some point, but we feel great about kind of where we're headed right now and the performance of our customers.

In terms of some of the impacted industries, I think that was the first part of the question. The impacted industries that we called out, they're still a little bit down. I will say that we are starting to see some green shoots. We particularly called out in the past rideshare, hospitality, travel, and we are starting to see a modest rebound. I wouldn't say that they're anywhere near the levels that they've been at historically, but we are starting to see a little bit there. And then I think on the plus side, some of the other areas that Jeff had called out previously around education, health care, e-commerce, even philanthropy, I think these are now becoming kind of secular tailwinds for us. And so I think we're starting to see structural changes in consumer behavior, which are going to drive some ongoing and long-term strengths in those industries for us.

Perfect. And maybe just if I could sneak one more in. Anything you guys can talk about with respect to election-related spend and kind of where you've seen that trend either in the first half and what's the right way to think about that in the next quarter?

Yes. We're not really breaking it out, Alex, in terms of the revenue impacts of that traffic. What I will say is that in Q2, we did see a healthy amount of political use cases in the quarter. And I think as you can probably imagine that with a lot of the events and rallies being canceled, staying in touch with constituents via the products that we offer, e-mail, messaging, voice becomes really important. But we haven't really changed our assumptions around political traffic for the remainder of the year, but we are starting to see some activity there.

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

Congrats, fantastic quarter. I guess I wanted to have a couple of questions. First, for George, on the international front, you've highlighted a few activities there. But it seems like the growth over there on a year-over-year basis decelerated quite substantially. So help me understand how much of that was business activity. Or is there anything unique to -- in the international markets? Or maybe because there -- maybe there's even FX impact here. I would love to get an insight on that.

And then, Khozema, I just want to make sure I understand your comments on the OpEx side. I certainly understand the higher revenue as a driver for higher operating margins. But last quarter, you've kind of detailed the plan to aggressively hire this year and pull hires from next year into this year. Are you basically saying you're not able to run at the pace that you are planning to do here?

Why don't I start and then Khozema can go into the hiring piece. This is George. So in terms of the international mix, certainly, it's changed marginally, as Khozema talked about in the numbers in terms of our percent of revenue from international. Largely, we attribute that to relative COVID impacts, honestly, so expecting a slight difference there in terms of what we're seeing in other markets relative to North America. North America, we've definitely seen -- I would say mainly globally, there's been similar impact in certain industries, but we've definitely seen some of the counterbalancing forces, and certain industries that have picked up to be a little bit more active in North America. And that's a by-product and also a little bit about the fact that our distribution is a little bit more mature in North America. But it's nothing like -- they are small deltas. So we're not -- I'm not concerned about it. It's just something that we think is largely temporal as we all go through this pandemic impact together. I'll turn it over to Khozema on the hiring front.

Great. Ittai, part of your question to George was also around FX. I wouldn't say that FX was a material impact for us in Q2. Obviously, rates have moved a little bit around, and we'll watch that for future quarters.

In terms of your question around operating expense, yes, you're right that in part, slower hiring was part of the goodness that we saw in Q2. I would say the preponderance of it, honestly, was driven by our revenue beat. So I just want to kind of put those in proportion to one another. But what we saw in Q2 and is a little bit of a continuation of what we saw in Q1 is that we continue hiring, we continue making investments in infrastructure. We called out a few of the specifics around the R&D center of excellence, our investments in go-to-market systems and infrastructure. The reality is it's just harder to do these things at the rate that we anticipated when we started the year, and we keep updating that as we go through the year. We're hoping to catch up some of that in Q3, but I think there's going to be a little bit more spend associated with that as we go.

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

Thank you so much to the team for making it easier for all of us to dial into this call. And I was just curious, is that a Twilio interface you're using for the first time this quarter?

I have no...

If we had changed...

It is not. It is not a Twilio interface for this quarter.

Okay. I look forward to the new interface in the future. My question is around the Flex, clearly, great traction, consistent with our field check. And one thing that we heard from your Flex partners, which tend to, of course, sell, but the smaller Flex deals is that well, Flex is more of a framework rather than an actual product. It takes, on average, 1, 3 months to install Flex. And you guys, in your prepared remarks, you were talking about a 2-week, like, implementation cycle, which is amazing. So there still seems to be some lingering perception that Flex is more of a framework rather than an extra product. Is that an issue in your sales cycles? And how are you guys are addressing that if that's the case?

Well, this is George. I mean certainly, like the value proposition of Flex is around the word flexibility, right? The product can be highly tailored to the needs of a customer, which is one of the great selling proposition of a product. Obviously, to do that tailoring, that customization requires some amount of time. And it really depends on the complexity of the use case. So we definitely can get customers up and running for -- to get started, we've got a couple of weeks and get a lot of value out of it. Then usually, those customers, over time, want to do more and more. So it really, I think, depends on the nature of the use case. Just moving agents home or setting up an IVR to be relatively quick to do a full rip and replace of a complex contact center is realistically not going to happen in 2 weeks. I don't care what product in the world you're looking at. But Flex definitely is a fantastic product. You're right. It is getting traction in the marketplace. The value proposition is resonating. And I think those field checks you're doing are on in terms of the demand. And I think as people get more educated about the platform and the value proposition, I think people are starting to realize that this model is actually the future. So we're excited about it. We're seeing excitement in our partner community as well.

And a quick follow-up to Khozema. Khozema, what was the linearity in the quarter, April versus May versus June? And what trends are you seeing in the month of July?

Yes. I'm not going to comment on the current quarter. I would say, I mean it's been pretty steady. I mean we don't typically break out linearity in terms of our performance, but we're seeing pretty consistent results through the balance of the quarter.

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

Okay. Great. Yes, a couple of questions. I guess probably first for Khozema. As we think about Q3 guidance, the revenue is up a bit sequentially but not to the degree that we've seen in past years. I guess -- I just wonder if you can comment on the broader trends you're seeing in the business. Are you seeing any kind of meaningful slowdown in traffic? And to what degree perhaps was conservatism part of that just given some of the ongoing uncertainties.

And then I wanted to come back to Jeff, some of the comments on new use cases. I wondered if you could expand upon perhaps what will be some of the more innovative use cases. And how are you thinking about the staying power of some of those use cases as we kind of move past this pandemic at some point?

Yes. Will, this is Khozema. I'll go first and then I'll turn it over to Jeff. I wouldn't call out anything specific in terms of our Q3 guidance. I mean we've delivered great results in Q2 and we continue to see broad-based strength across a very diversified business. As I mentioned on the call, we continue to see all the same economic indicators that you do, and I think there are still some questions around the macro environment. So we're definitely cautiously optimistic about Q3 and the second half of the year more broadly. We're extremely optimistic about the longer term, but we're having kind of a hard time predicting the future in the very near term. And so I think our Q3 guidance, putting aside in sequential, certainly shows continued strong growth on a year-on-year basis, and we're very comfortable with the range we provided today. With that, maybe I'll give it over to Jeff.

Great. Thanks, Will, for the question. Yes. So I think we've seen so much innovation go on in the last, say, 6 months in -- related to COVID. And I look at this as an acceleration. And I think that's how our customers do, too. We mentioned about the survey that we did, which -- essentially, COVID is accelerating plans, and things they might have dabbled in or maybe taken their time with have been really accelerated because of the necessity of COVID. And so I look at some of these really innovative use cases.

One of them that I love is the curbside pickup, and like I've been a customer of these curbside pickup workflows at retail businesses, where you order online and then basically, you drive by and it's a very streamlined workflow where they basically throw your bag into the back of your car and you keep driving. And it's like if you're going to the store to pick up, I don't know, like a bag of marshmallows and, like, do you want to walk into the store and have to go, find the right aisle? Or do you want to, like, use a great, convenient interface on your phone and then basically drive off, text something like, "I'm here," and have them put it in your car. And I think that even after COVID is over, these workflows are going to be a really powerful way for bricks-and-mortar retailers to provide a great customer experience, leveraging their online presence as well as they're off-line bricks-and-mortar presence.

One of the -- some of the other use cases that I think are great, I think telemedicine, again, is a fantastic set of use cases. I'm very happy that we invested in HIPAA compliance across many of our products early, starting, like, 18 months ago, so that we could deliver that functionality earlier this year to our customers because you think about the convenience of a telemedicine visit. For a lot of visits, I think doctors are finding that the convenience level for a patient to not have to take half a day off of work and drive sometimes to another city to get to the medical center, where they got the specialist with the expertise, but rather just fire up your camera and almost like just a meeting that you might have in your calendar for half an hour, be able to see a doctor and get the same level of care. For a substantial number of the medical visits that go on in our country, that's pretty game-changing for people's ability to get care. And so I think organizations that do a really good job of delivering video care are going to essentially have an advantage in the market with patients.

Another particularly innovative use case that we've seen, with bank branches, many of them closed, being able to open accounts, all done via video. That's an emerging use case to replace that in-person having to fulfill on -- know your customer, be able to have to go into a bank branch to open an account. That can now be done virtually.

And then I thought the customer we talked about on the call actually, CBRE in Spain. If you think about that solution, like they need people to go back to work. But work is -- going forward is not going to be like work used to be. Like I think a lot of companies are not just going to have, like, one desk per person and the big conference rooms that we used to have. Like the nature of what office environments are going to be like is going to change. And CBRE, in the real estate space, is kind of ahead of the game there, if you will, in that they are deploying these workflows for, like, do you want to go in. Basically essentially submit your desire here. You get notified. If you're allowed to go in, you get assigned a desk. You get everything digitally reassigned here, your phone for that day. Like those are the types of new workflows emerging that will enable offices to be open, safely, conveniently and using all this digital technology to manage a workflow that basically didn't exist 6 months ago. Organizations like CBRE are really on the leading edge. And I think that's -- and again, I think a lot of those office environments are going to be changed permanently, not just temporarily because of hoteling and people working more remotely. That will probably go on long into the future.

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

Two questions for me, I'll ask both upfront. Net customer adds, the pace there continues to impress. You're now at 200,000 active customers. Is there anything happening there more recently with some of the new use cases that is pulling some potential new customers forward? Or can that trend persist? Maybe not at the pace we've seen but given where penetrations are versus the total opportunity, I just would be curious to hear your view there.

And then, George, I know it's relatively still early in the go-to-market evolution for Twilio. But is there anything you're seeing that could lead to more verticalization of the sales force and a few focus industries like health care, financial services or education?

This is George. Thanks for the question. I'll take a crack at both of those. And then certainly, anyone else can chime in. In terms of the net customer adds, I mean definitely, what we've seen consistently across our funnel is a lot more experimentation happening as people are trying to figure out how to adapt to changing circumstances. I think that's all part of this digital acceleration trend that Jeff's talking about, if not certainly confined to one use case or one specific subject matter. And what's interesting is as we look at our numbers, we kind of document across the line all of our inbounds by use case as they come in. And it's not like they're all focused on one thing. Or even as certain early COVID use cases have come back a little bit, they worked these other things. So I think it's a very diversified interest in digital acceleration across different industries and geographies. So I think that's what's fueling that.

In terms of the verticalization, we -- I do think there is an opportunity for the -- for us to do more of that in the future. We have some great specialist resources right now already in areas like health care and financial services as well as in the -- we're seeing opportunities in local -- state and local government, for example, with contact tracing. So we're certainly today still mostly a geo- and segment-based distribution organization. But I do see an opportunity for us as kind of a normal course and speed of things over time to do more vertical things. And we're really excited about some of the things we're seeing in health care, for example, after our HIPAA capability announcement earlier this year. It really, I think, opened the door for us to be able to have more and more of these conversations, which is really, really exciting for us.

Your next question comes from the line of Derrick Wood with Cowen.

Congrats on a great quarter. Jeff, your survey was pretty astonishing, particularly around finding that the average enterprise is pulling forward their communication engagement strategy by 6 years. And I'm just wondering if you could give us a flavor of how the scope of engagement is changing for you guys, particularly with larger enterprises. And I guess I'm looking at -- are companies looking to do bigger overhaul of their communication technologies at once or take on bigger pieces? Are you seeing kind of an acceleration of replacing legacy or seeing more executive-level involvement? Just it would be great to hear how you're seeing the engagements evolve.

Yes, absolutely, Derrick. So I think what we're seeing is like a broad set of use cases, a broad set of companies. And so it's differing a bit by company. Obviously, many companies are focused on short-term needs first, right? When you had to send all of your workforce home and they weren't able to do their jobs anymore, well, that's the top priority for a company. And that's kind of what we're looking at early in COVID and -- but as like -- if I can call COVID response version 1, which was like scramble to get stuff done basically over the course of, like, a weekend or a few days, as that stabilized, a lot of organizations, a lot of industries, I think, have started to think about, okay, what does version 2 of this look like? What do we really want? And I think that's where you're starting to see, like with our deal with Epic in the health care space, which is hospitals wanting to put in a vertically specific solution for health care that will serve them long into the future as opposed to a more horizontal solution that was maybe version 1 of that solution.

And so I think that's sort of the trend that you're seeing play out, which is like -- first is the kind of initial response and then playing out where people are building more integrated, more use case or vertically specific answers to how they are building. And I think the other thing is given the urgency of these use cases, the importance of solving these digital transformation problems quickly during COVID, well, that is accelerating many of the introductions to new businesses that we're seeing. And I'm sure George has examples of that as well as just the strategic importance of the work that companies are doing with Twilio. We -- our importance as a strategic partner to companies has grown quite a bit this year because in many cases, the use cases and the workloads that we're seeing have direct line of sight to CEO visibility and C-suite importance, where maybe before COVID, they weren't quite there yet, and now they are definitely in line of sight for key decisions and key strategic initiatives that bring out these companies. I don't know, George, is there anything you would add?

I think that's spot on. And I think we've already talked about in our kind of core script some of the logos that we've been able to bring in, some new, some existing. But I think the common thread is that if you look at all of these customers we talked about, we're talking to -- and we're selling to a higher level than before. The decision is moving quicker. And oftentimes, what we're seeing is that these projects are either a Phase 1 to something bigger. So there's more on the plate, whereas before, maybe it was just an isolated transaction and/or these are expansions of existing relationships, which shows that we're continuing to grow in our depth and quality of relationship with customers. And I'm very excited about SIGNAL. I think we're going to have our best showing yet, for example, for our Creator Summit, which we've already got on track. I think every year, we see the titles get a little bit higher, the conversations a little bit more strategic, and I certainly anticipate this year at SIGNAL, we'll have more of that even as a virtual event.

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

Can you guys hear me okay?

Yes.

Yes, we can.

Great. Just back to Flex, now that you have more time looking at deals in the pipeline and seeing now customers are interacting with the platform, how would you say it's materializing as far as deal size now that you've gotten a couple more quarters? Is this staying roughly the same kind of landing size and the first couple of iterations of how people are using it? Then I guess the sales cycles, it's a little bit different than the core platform and how it's deployed. So I just -- maybe a little bit more context as you guys have taken a little bit more time to look at the pipeline and how it's progressed so far.

I think it's hard to generalize it because if you just look at like the raw average dollar value per opportunity, I think, can be misleading in the sense that we are seeing some large transactions in the pipeline that we're working on. But a lot of these -- like what COVID has done, it's really triggered a lot of these shorter-term -- I shouldn't say shorter term but like initial deployments that people are in a kind of, as Jeff called it, Phase 1 COVID, getting people, getting something you had to get it done. And contact tracing is a great example where even if eventually they want to get to thousands of contact tracers, the starting point typically is a much smaller number than that. So if you look at the initial size of that, I think it's kind of misleading. What we are seeing is faster engagement for certain projects that are more time-sensitive and also the beginning of what we hope to be larger and larger projects, some of the examples I mentioned, plus -- BGL is a good example where we think there's an opportunity to do even more with them over time. So I think some of these initial deal sizes are a precursor to bigger opportunities for us down the line. And I think that's what we're excited about. It's the planting a lot of seeds during this period. And we're getting the word out about Flex and people are really liking what they're seeing, which is really great.

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

Most of mine have been answered, but I just had 2 quick ones. Khozema, just on the A2P for the third quarter, is it -- should we be assuming, just as a baseline, roughly the same as the $7 million you got in this past quarter?

And then I had a question, Jeff. Just if you go back to January 1, pre-COVID being on anyone's mind, can you kind of think about what your 3-year outlook was for Flex and adoption and you compare it to how you feel now? How would you characterize the difference in how you're feeling about just kind of the trajectory of that business? And that's it.

Heather, this is Khozema. I'll take it first and then turn it over to Jeff. In terms of A2P, I would say roughly, order of magnitude, the same. It's obviously going to vary a little bit with volume but you're in the ballpark, for sure. Jeff?

Heather, this is Jeff. So as far as Flex goes, I mean I think that the Flex is already off to a fantastic start as a product. I think it's an extraordinarily compelling value proposition for customers to be able to finally move these workloads into the cloud, right? And as we talked about in the past, it's -- when we talked to analysts, it was something like 85% of contact center was still on-prem despite the fact that customers wanted to move these workloads into the cloud. And Flex was a product that was allowing them to do that. And I think COVID has only accelerated the adoption of that idea. We talked to customers. There's a lot of customers who had plans to move their contact centers into the cloud, and these were multiyear road maps and those road maps have just been getting compressed.

Now we've talked about some of the more extreme examples of like, "Oh, we've got it done in a weekend." And those are great examples to talk about, but I think the reality is that the majority of these ones, they're not going to get done in a weekend, obviously, but those road maps have been compressed from years, probably down to quarters. And I'm really excited about the conversations that we're having with a wide range of companies about the long-term plans for the contact centers and how COVID, in some ways, has been an accelerant to make decisions, to invest the resources and to really modernize how they engage with customers using these digital channels. And part of the driver of that, as we've talked about in the past, is work-from-home agents, the flexibility that the cloud enables for those employees to work from anywhere, which I think is really important given the agile workforce that everybody is planning for now, not knowing exactly where those employees are going to reside when they do their work, but also because new channels are enabling new ways to flexibly and at scale, be able to communicate with customers, things like messaging.

And one of the things we hear pretty consistently from customers on Flex is that messaging, so SMS or WhatsApp or Facebook Messenger, using these messaging channels to get to engage with customers in many ways is game changing. And I think Flex is the best messenger going into a contact center out there. And so I think that's another driver that was existing before COVID. And now because scaling up these digital channels is getting even more important, Flex has an even more valuable -- value proposition for customers because of it. So I think there's multiple reasons why Flex is a great product for the market before COVID, and now because of COVID, that's even accelerated.

Your next question comes from the line of Mark Murphy with JPMorgan.

I'll add my congrats. So Jeff, we've heard some commentary from your peer group that the increased usage that was driven by COVID-19 peaked back in April, and then it has dissipated month-over-month but it's remained at an elevated level. Some of that might have related a little more to the video conferencing scenarios. I'm just curious, did you sense that to any extent? Or are your use cases broader to such an extent that it doesn't apply or that it's kind of getting counteracted by the other scenarios that are newly emerging?

Well, given that we have an almost entirely usage-based revenue model by the magnitude of our performance, our beat this quarter, I think you would say that usage continued to grow. And when you look at factors, as Khozema talked about in -- earlier in the prepared remarks, there are some headwinds to certain industries. And we spoke with those customers. We're helping them to build through the crisis, that they have seen decreases in usage for certain of those key travel, hospitality-type industries. But that's been more than offset by increases across the board in a number of other industries as so many different kinds of companies in so many different verticals have had to invest in digital, accelerate those digital plans and really build great digital customer engagement to be able to serve their customers during this time and long beyond because this is clearly the trend that the world's been on. And so those plans that have been accelerated for our survey, companies took their plans and accelerated them by an average of 6 years, and that's a pretty powerful tailwind for us.

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

First one, just another question on Flex, there's been some positive headlines around Flex adoption, a lot of interesting use cases in ways that's being leveraged in this current environment. We'd love to touch base on where we are in terms of future functionality. I know this is the year that you guys have positioned as kind of reaching that critical feature functionality for broader adoption. We'd love to get an update there. Any compelling opportunity that you see to add further capabilities from here?

This is George. I'll comment from a deal perspective, and then maybe Jeff wants to comment from a product perspective. Certainly, we are executing our plan. So we're definitely seeing the product velocity be on pace. And so we are delivering more and more capabilities, as you would expect. So -- and we're seeing that play out in terms of our success in the field. So overall, I think we feel good about our product velocity. Always more to do, it's just the nature of software. And this is a critical year for us, but overall, we're happy with the progress. I don't know, Jeff, if you want to add more color.

Yes, absolutely. There's always more features and functionality to add based on customer need. I think that the key thing that we have done with Flex is get the sort of the bones of the product right, the architecture, the core value proposition, the programmability model that allows customers to go build on top of it. Those are things the industry hadn't seen before and that we introduced in a way that enables companies to move really sophisticated workloads to the cloud in a pretty unprecedented way. And so while there is the feature road map that we're always investing in, I think the hard things to get done really, that architecture, that core foundation to build upon is so good. As it relates to the sort of foundational features that we keep building, absolutely, we've been knocking those out. Probably the biggest requested one was up on dialing. We knocked that one out in Q1. And yes, we continue going down the list to finer and finer grain kind of foundational features for our customers. We have reprioritized some of those in favor of COVID-related features and functionality that customers have needed to scale those COVID-related workloads in this year, but we feel great about the progress we're making around those features and the customer adoption and customer feedback that we're getting as it relates to both the kind of foundational elements, the architecture and the core value proposition as well as the road map for building out those features to help customers along.

Right. Got it. That's super helpful. And then just one quick follow-up. As someone mentioned before, I mean the pace of customer adoption has really picked up in the 3 of the last 4 quarters, 10,000-plus net adds but obviously still a lot of revenue coming from existing customers and net dollar retention rate is very positive. So what does the land-and-expand motion looks like? It's been a big part of your business historically. What does that look like in this COVID environment? And are you seeing any trends towards larger initial contracts or initial usage?

I would say we haven't seen dramatic trends in that. I would say, as I've said before, we're seeing a lot of interest in terms of sign-ups, experimentation. So again, I think if you just look at raw count dollars per new sign-up or things like that, I don't think that's the story here. I think the story is we are seeing just more interest top of funnel and that we are seeing some of the use cases drive significant growth for us even as other industries are being impacted. So I think that's been consistent. We are doing very well with our top customers, as you alluded to. And definitely, what we're seeing in the world in general is that this pandemic is creating -- certain companies are -- it's a headwind for some. It's a tailwind for others. And for the ones who it's a tailwind for, we're definitely growing along with them and doing very well. So I think that's kind of behind some of the numbers and trends we're seeing.

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

Nice to see continued strong results in this environment. Just 2 questions for me. First, in the discussion on these new verticals and new use cases, I understand you're a platform. People are going to always find new ways to use the Twilio platform and I'd say, I think, a really exciting part of the story. Is there a potential that one of these kind of newer verticals or newer use cases can be smart productized in the same way that you're doing with Flex in the contact center?

And then I wanted to ask Khozema about gross margin. Even if we control for A2P, right, it looks like gross margin declined about 70 basis points sequentially, 260 basis points year-over-year. Just any color you can provide on this because I know there are a ton of moving pieces in what drives gross margins.

This is Jeff. I'll answer the first part of the question, and then I'll hand it over to Khozema. So as far as the, like, new use cases that are emerging because of COVID, I think that one of the things I talked about in the past is the great things about being a platform is that we deliver these building blocks to the developers of the world and to all of our customers and they build solutions to the big problems that they have in their business. And by the very fact that customers are taking our building blocks and are building solutions to big, unsolved problems, like the fact that they're taking their time, their precious developer resources to go build on our platform, indicates that there is probably an opportunity. And when we see areas where many customers are going and essentially inventing the same thing, we see that as an opportunity to go and essentially assess whether this is a big, broad need by the market. And whether by us building product there, we can accelerate all of our customers' ability to adopt that kind of use case. And that's exactly what led us to the opportunity with Flex. And I think we do continue to see opportunities that arise that have been -- maybe not created because of COVID but accelerated, like greater macro trends that have been accelerated because of COVID, that are opportunities for us to go address with future products. With that, I'll hand it over to Khozema.

Thanks, Jeff. Rishi, there's nothing really specific that I would call out around gross margins. We pointed to the A2P fee impact. And as we've said in the past, gross margins can bounce around a little bit due to a variety of factors. We've, in the past, talked about customer mix or geographic mix, products, FX, what have you. There's really no change to our model. We still see gross margins in the mid- to high 50s for the foreseeable future, so no real thing to call out there.

There are no further questions at this time. Thank you for participating. You may now disconnect.