Twilio Inc. (TWLO) Earnings Call Transcript

Great. Thanks, everybody, for joining today. We are pleased to have Andrew Zilli from Twilio, who's VP of Investor Relations and Treasury. I'm going to start with a short disclosure, and then we will jump into questions. So please note this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. The webcast is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosures website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Andrew, thanks for joining us so much today. The last time we hosted you guys at an investor event was right at the start of the COVID pandemic and back in March. So maybe we can just start off with some of the incremental use cases you've seen as a result of telehealth and just how that kind of evolves as we move past COVID.

Yes, thanks, Meta, and thanks, everybody, for joining. Yes, it feels like a lifetime ago that we were at your conference in person when that was still allowed. Yes. I mean, obviously, it's been a pretty crazy year for us. I think there have been a lot of new use cases discovered with Twilio that companies have found. Some of the main highlights that we've talked about have been areas of telehealth, mass notifications, distance learning, areas like that. And importantly, I think a lot of these areas are things that even -- despite what the last couple of days of the market would tell you in -- that a vaccine is apparently bad for cloud companies. We feel like a lot of these use cases are going to be here to stay for the long run. Something like the telehealth solutions. We're seeing a lot of use cases there, and that's pretty early days for us, right? We haven't had a huge presence in health care previously. We announced HIPAA compliance with very lucky timing in February for most of our core products, and we have continued to expand that over the last 6 or 7 months. So if you look at our website now, you'll see a longer list of HIPAA eligible products these days. And so I think some areas in health care are a big opportunity. There's a reason that we hired a woman to run our global health care team. She was really our -- kind of our first true vertical hire and I think that really -- we were focused on it previously, and I think COVID has just really accelerated that focus on what we think we can do in the health care space in general. And I think, overall, just a lot of the new experience that we've all had as consumers. So when you think about the curbside pickup at retailers. That is likely not something that is going to go away, even once things return to whatever normal looks like again. I think we -- now that we've all experienced how easy it is to place an order online and go pick it up and be in and out in a few minutes. That feels to us like something that is going to continue on. And so some of those use cases that were sort of borne out of necessity have now become the sort of standard practice and expected by consumers. And so I think a lot of those things are likely here to stay. And so as you look forward for us, well, we have all of these new use cases that have come on board, we continue to have all the existing use cases that underpinned our success for the first 11 years as a company. And you'll start -- hopefully, in time, you'll see a rebound in some of those travel and hospitality and rideshare customers. And so we think we're on a great trajectory looking out over the next few years.

Got it. You guys published a survey amidst all of this that said that you were seeing or kind of the survey respondents were seeing a pull forward in digital transformation initiatives by upwards of 6 years. How does that translate to opportunity for Twilio? How does that change the discussion that you're having with customers?

Yes. I think that was a bit of a surprise to most people internally and externally that it was such a drastic pull forward and I think there was some misunderstanding that, that suddenly meant that in the next quarter, we were going to see some massive influx of contact center deals or something like that. But I think in reality, what we've seen happened is companies that had projects in mind for 2022, 2023, suddenly, we're talking about those projects halfway through this year. And I think that, again, sort of borne out of the necessity of COVID, and what that has meant for their business and for their customers. And so for us, we looked at that and said, this is a great trend. We think we can really take advantage of this and be a meaningful player in the digital transformation efforts. And something like the contact center world just doesn't move that quickly though, right? It might be that they had that on their project. And even though they've started talking about that now, it doesn't mean that 10 days later, they're signing a big contact center deal. Those deal still takes some time to work through, but it's -- it was very clear to us that the discussions were -- this is a here and now problem, and we need to start talking about this right now because we know that this is going to take some time, especially in the larger contact centers. So I think we've started -- this really started with George Hu over the last couple of years, we had really worked on elevating the conversation that we were having with customers to be more of a solution approach already. And I think the feedback from that survey just furthered that approach for us, where we don't want to go talk to a CEO about an API. That is not an exciting conversation for that CEO to have. But they do want to talk about engagement. They do want to talk about how they're communicating with customers and providing another level of customer service and leveraging the data from that survey and just the kind of broader economy and impact from COVID. I think we've been able to really position ourselves for a lot of these companies as that solution as a company that can help them manage through this difficult time with a highly customized product that we can tailor for by channel and use cases and things like that. And obviously, now with Segment on top all of that, which I'm sure we'll talk about, that just sort of furthers the value of the platform overall for us. But it was really something that a lot of customers were turning to us to say, hey, help us. We don't know what to do about this. We've had a -- we've only had a voice line. We've only used e-mail. What are some other options? And we I think we really became kind of a trusted adviser to a lot of these companies to help them through this time that nobody had really ever seen, and we were -- we talked a lot about these on various calls and conferences that in a lot of situations, we were able to get these solutions up and running in a matter of days and weeks. And that really goes a long way to building customer trust. And that's a really important thing for us. So when you -- when I look out over the next few years, I look at the 30,000 or so customers we've added through Q3 this year, not all of those were COVID use cases. But obviously, a lot of them were related to COVID. And I see the opportunity for us to continue to sell into those customers going forward because we've built such a good relationship with them. And I think it all kind of came back to just the agility that our platform offers.

Got it. And I mean, maybe that jumps into the question of how do you judge what use cases were permanent? How do you judge which are more -- or more temporary? Or -- and maybe a customer that might have been using you for contact tracing but now realizes kind of the other services that you could offer? Like how do you evolve some of those temporary use cases into more permanent ones?

Yes. I think we've been able to already do that. We've seen some good expansions with customers that signed with us earlier in this year that have already taken on kind of different use cases and products this year as well. Overall, I would say that we -- again, most of those use cases are here to stay. I think there's probably some seasonality in a few of them, right? We think about distance learning that's obviously -- when you hit the summer months, it's probably going to be a little bit slower. When you get to the holidays, it might be a little bit slower here and there. But even if schools opened back up again over time, there's probably going to be some element of remote learning enablement at these schools. And so we saw kind of to start, there were some deals where it was just, hey, we've got to be able to communicate with parents and teachers and make it easy, right? And that was sort of the baseline. Then we started to like broaden that reach a little bit more, and we got into test proctoring services, which I don't know about anybody else on the webcast was not something I'd even really thought about as a need. But it makes a lot of sense that when you're having people take test at home, you need to figure out a way to proctor those exams. And so that was sort of a whole new world for us. And we -- one of the deals we talked about in this last call was a test proctoring deal, but they also started leveraging Flex actually as the interface between their agents and their end users. And so we started to see kind of an interesting blend of some of these solutions come together. And I think we obviously have a really strong playbook from the last several years of talking to customers about some of the more basic solutions that we provide, 2-factor authentication, onetime passwords, delivery notifications. And for companies that came on for things like contact tracing. If you think about some of the universities that we are working with, we got our foot in the door because they needed to figure out a way to do contact tracing for their students. But that now opens the door for us to do -- maybe it's mass alerts for those students. Maybe kind of messaging between professors and students about certain topics. Maybe it's replacing their e-mails provider to be able to send e-mails out. So I think we look at this as kind of a foot in the door in a lot of situations for us to now go back and talk to them about kind of more standard use cases because we were able to help them through such a tumultuous time.

Got it. And a similar concept but on the opposite end. There's obviously areas around travel and hospitality, where you saw a downdraft. How -- like how important are these customers coming back to some of your growth objectives? Just how are you seeing their needs kind of evolve as their usage picks back up?

Yes. And obviously, over a longer period of time, it's going to have some benefit to us, certainly. Those customers represented less than 10% of revenue as we disclosed in Q1, and we showed a little bit more on that on the Analyst Day as well. But we're not banking on a sharp return for them. I think we're expecting some level of a slow rebound, obviously, now with Europe shutting down, maybe that changes some of the ridesharing aspect of things, but then you have things like Uber Eats where maybe the Uber ridesharing is down but Uber Eats usage goes up because everybody is ordering food again. So I think we're -- we have enough diversification across the rest of the business that we're not reliant on those industries to bounce back soon to hit our targets. That's something that we've been really focused on is how do we diversify this customer base across industries, across customer sizes. And so being able to weather the storm a little bit for those industries that have been really impacted has enabled us to continue to invest, to be able to take advantage of this market going forward. So areas like health care, financial services, obviously, tech companies, in general, haven't really had the same level of impact. And so we've had more than enough offsets to weather that. And I think, hopefully, over the next year or so, those industries start to rebound. It seems like flights are starting to pick up a little bit more. People are kind of willing to take that opportunity. And so I think we're starting to see some of that slowly come back. They're still certainly below their pre-COVID levels. But that will sort of act more of just a little bit of a tailwind for us over the next year or so.

Got it. And so taking a step back, I think what's differentiated about your platform and being able to capitalize on the moment was just kind of developer reach focus. Can you lay out for investors, maybe what helped during COVID as far as having a developer focus and platform approach and how that can continue to differentiate you guys going forward?

Yes. I think this has been one of the things that I think George has done a remarkably good job of as COO over his tenure here. He's been threading that needle of staying very focused on the developer ecosystem, while also elevating the company to be an enterprise company, right? Those are 2 sort of very different groups of [indiscernible], and I think George has done a very good job from the go-to-market aspect of managing different expectations there. We are to the core a developer company. I'm sure people have heard Jeff speak, and it pretty much always ends everything with we can't wait to see what you build, right? That is the mentality of Twilio is let's build, let's help the builders of the world with these things. And so obviously, for those that attended SIGNAL this year, it's a very different conference than a lot of other tech conferences, right? We [indiscernible] for our keynotes where developers could like get into the coding and see what was going on. And I don't know any companies that do that, but that's who we are. And so I think we've done a great job of building up a developer base that I don't use this word lightly, I think really loves Twilio. Because they know that we're a company that was founded by developers that put the developers at the heart of everything we do and really listen to what they need from us. And I will never forget, personally, my first SIGNAL last year. The biggest cheer at SIGNAL was when Jeff announced the command line interface. And he's announcing conversations and we've got Netflix up there and all the stuff is happening. And the command line interface got the loudest cheer. And as a nondeveloper, I didn't really understand that. I was like -- I remember writing in the DOS prompt when I was younger, but that didn't really excite me that much. And talking to the developers at the conference, they all said, we live in the command prompt, we live in a terminal like that. And so being able to access Twilio API is something we wanted to do for a while, and this just made our job so much easier and that is why we love Twilio because they actually listen to our feedback. And so having that sort of groundswell of support inside of almost every company really helped us immensely, as we're talking to the CEOs and CIOs of the company is because they're not going to go against what their developers want to do, right? The developers are the ones that actually have to create these solutions. And so as we talk to CEOs and say, hey, here's -- we're going to paint this vision for you of what customer engagement could look like for you and your company, it's going to trickle its way down to the developers, they're the ones that actually have to do that. So keeping that focus has been really important. And in a lot of situations, the Epic deal that we talked about a couple of quarters ago for the telehealth solution that started because of a developer internally at Epic. That was not a go-to-market approach from our side to go reach out and try to do this, a developer internally at Epic was the one who said we need to rebuild this. We need to do something different. And I'm going to go sign up for Twilio and start building with their video API to build the telehealth solution. And that was how we actually got our foot in the door at Epic. So that ecosystem is incredibly important and having more than 10 million developer accounts on the platform is a great way for us to get into a lot of companies where we might not have the go-to-market presence quite yet. But that we can see them sign up, and we can reach out and have that conversation and that oftentimes really ends up driving a lot of the deals for us.

Got it. And I'll break up my questions a little bit. We've got an audience question, but just as you talk about kind of the developer base of just opportunities within the gaming universe. And clearly, that's another group of developers. But it's just that been a network where you've seen any ability to penetrate, if we're either providing voice or video into that market or just other kind of interactive opportunities within that?