Greg Kleiner - VP of Investor Relations and Treasurer Jeff Lawson - Co-Founder and CEO George Hu - COO Lee Kirkpatrick - CFO

Mark Murphy - JPMorgan Richard Davis - Canaccord Alex Zukin - Piper Jaffray Heather Bellini - Goldman Sachs Bhavan Suri - William Blair Catharine Trebnick - Dougherty Pat Walravens - JMP Securities Mike Latimore - Northland Securities Will Power - Baird Brent Bracelin - KeyBanc Brian White - Monness Crespi Jonathan Kees - Summit Insights

Good afternoon and welcome to Twilio's Q2 2018 Earnings Conference Call. My name is Kristina, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. I will now turn the call over to Greg Kleiner, Vice President of Investor Relations and Treasurer. Mr. Kleiner, you may begin.

Thank you. Good afternoon everyone and welcome to Twilio's second quarter 2018 earnings conference call. Joining me today are Jeff Lawson, Co-Founder and CEO; George Hu, COO and Lee Kirkpatrick, CFO. The primary purpose of today's call is to provide you with information regarding our 2018 second quarter performance in addition to our financial outlook for our 2018 third quarter and full year. Some of our discussion and responses to your questions may contain forward-looking statements, including, but not limited to, statements regarding our future performance, including our financial outlook, impacts and expected results from changes in our relationship with our larger customers; our market opportunity and market trends; the growth of our customer base; customer adoption of our products; our momentum; the benefits of our business model; our delivery of new products or product features; and our ability to execute on our vision. These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should any of these assumptions as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual company results could differ materially from these forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our most recent Form 10-Q filed with the SEC on May 10, 2018, and our remarks during today's discussion should be considered to incorporate this information by reference. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law. Also during this call we may present both GAAP and non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago. We encourage you to read our earnings release as it contains important information about GAAP and non-GAAP results, as well as the reasons why we present guidance for non-GAAP financial measures of income from operations and net income per share, but not the comparable GAAP measures. The earnings release is available on the Investor Relations page of our website and as part of our Form 8-K furnished to the SEC. Finally, at times in our prepared comments or in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or quarterly or annual results. Please be advised that this additional detail may be one time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investors.twilio.com to access our earnings release, periodic SEC reports, webcast replay of today's call or to learn more about Twilio. I'll now turn the call over to Jeff.

Thank you, Greg. Welcome everybody to this quarter’s call. As you can imagine we’re pleased with this quarter’s results. The business up and down the product stack exhibited continued strength in the second quarter; we believe this shows the power of our platform model which combines our platform product strategy; our developer first approach and our usage based pricing model. When our customers succeed we succeed sometimes even more than we planned for, because of the pure size of this market and our leadership position. But we’re not resting on our laurels, we see a tremendous opportunity ahead, as every company starts to become a software company we continue to see our developer first model working across companies of all shapes and sizes. We will continue to invest deeply to innovate and build market share as this is just the earliest stage of our opportunity to fuel the future of communication. The primary metric we focus on base revenue grew by 54% to $135 million in the second quarter. This type of growth is in rarified air for companies of our size and a testament to a team of Twilion’s around the world and their execution for our customers. Total revenue grew a similar amount to nearly a $148 million. Our ability to drive more business with existing customers continues to power our results as we produced the dollar based net expansion rate of a 137% in the quarter. All of this was driven by our focus on innovation and customer success. Our core voice and messaging product lines continue to drive the majority of growth in our business, these segments remain the lion's share of our revenue and are exhibiting strong growth even as these businesses achieve greater and greater scale, but they also provide the foundation of the growing success we’re seeing with the Engagement Cloud as each layer adds value to the layer above it. As I first laid out on our Q4 call the first of our two top level priorities for 2018 is furthering our push into a strategic software platform for customers engagement, through our build out of the Engagement Cloud. In the second quarter we did our second major deal for Twilio Flex, our recently announced cloud contact center application platform, even though the product is still in beta, we also did several proxy deals. We saw continued success with the Ofti family of products. We also recently announced the general availability of our drag-and-drop visual editor studio. Our strategy with the Engagement Cloud is working, as we look to unlock more-and-more of this month. Now let me take a moment to reiterate the power of our platform business model and how it enables us to see the opportunity within Black Box. As a horizontal platform developers can build about anything with our programmable communications platform, and this is a different basis for innovation, companies that just own solutions. So when you build solutions customers come to you when they have that specific problem and they need it solved, pretty straight forward but when the company has different problems that aren’t solved by any of those solutions that are out there most companies either try to cram their problem into the framework of that solutions with varying degrees of success or they just live on with their problems on site. But with Twilio’s platform some of the most innovative companies start saying, hey what if we can finally build a solution to our problem, and as we see these companies start to build we had some questions about why have those chose to build on top of Twilio instead of just buying some prebuilt solutions and they unveiled us the unsolved problems of the business world. We start to see this heat map of where we should invest in that -- to solve big unsolved problems for our customers, that’s how the opportunity for Flex arose. We’ve been helping customers both modernize and recreate their contact centers for years; and Flex is the next step in this evolution, taking the knowledge we’ve accumulated over all that time expressed through a new application platform product. Flex offers a powerful combination of cloud scale along with complete customization at every rider that has never been done before. In the case of the contact center we found that enterprises were stuck on prem despite the fact that we are 20 years into the whole cloud bit. There is still on prem not because they love it trust me they don’t but because the cloud hadn’t offered anything with the flexibility you get from on prem installation where you can deeply customize your own installations to meet the specific needs of your company. They want the scalability reliability and global reach of the cloud but they can't give us those customization. That’s why we then talk to industry experts they estimate that 80% to 90% of the very large contacts in the market is still stuck on prem. So we intend to solve that problem and in doing so help migrate that 80% to 90% of the contact center market from the legacy on prem and finally into the cloud. Now I don’t want to steal too much of George's thunder here but Flex is off to a great start. I think our platform approach has uncovered an unsolved problem enterprises are facing in their contact centers. We have recently expanded the data program and our development team is hard at work finalizing the last fits of the Agent desktop as we prepare for the GA launch later this year. And while it's certainly early in the lifecycle here and we have a lot of work left to do. We believe Flex will be an important product line for Twilio for many years to come. Our second priority in 2018 is to expand our position as developers' first choice for communication. Omni channel communications remains an important goal for our customers but one made more complex by the ever changing field of channels and customer preferences. Communicating through SMS is still a mystery for many companies much less dealing with all the new channels like Facebook messenger, Google RCS, We-chat, Whatsapp, Alexa and many more, our goal as a platform providers to make this as seamless as possible for our customers by hiding the underlying complexity and making news channels that are mostly a single easy to use API. And we have recently taken several important steps in fulfilling this mission. Just last week we were clear with the joined forces with WhatsApp with a launch of the Twilio API for WhatsApp. WhatsApp is an incredibly important communications channel in many geographies around the world, using more than 1.5 billion consumers worldwide. Over the past year we have been working with WhatsApp to allow enterprises to integrate WhatsApp messaging into their notifications and customer support work clouds. This channel is now available in limited release. It's just a few lines of code on our platform. We are helping customers like Uber, Hayes, Path and others explore the possibilities opened by this new channel. And we have developers starting to explore their new ideas with our sandbox that's available today. And along with the ability to access this channel and many others through single API customers can take advantage of the same scale and reliability inherent in our platform as well as products like studio and flex to also support [indiscernible]. For us adding this important channel cloud platform broadens our reach and opens up a whole new set of customers around the world who can take advantage of not only this product but the best of our platform as well. We are also investing in ways to leverage machine learning to help our customers build smarter communication. For example we believe the contact center will be transformed by AI in the coming years and flex as an application platform is perfectly positioned to integrate with all of the leading AI platforms and products out there. And our programmable communications cloud similarly enables customers to rapidly integrate AI solutions with their communications because it's all building blocks. For example, this quarter we expanded our relationship with Google as a launch partner for two of their new efforts. …..the launch partner for two of their new efforts; Dialog Flow and their Contact Center AI, at their Google Next events we were able to demonstrate how one of our customers Marks & Spencer has integrated these Google services into their premier deployments to create better more automated customer history. We’ll continue to work with the leading vendors in this space, like Google to offer choice to our customers as they strive to optimize their customers. Before I turn the call over to George I’d like to thank our customers for putting their trust in us to deliver for them and I want to thank Twilions around the world for their hard work and their constant devotion to our customers success. The communications market is so vast and the opportunities to help our customers, use communication to engage with their customers through software are virtually endless. We’ll be debuting our latest set of innovations at our Signal Conference in San Francisco on October 17th and 18th so mark your calendars. George let me turn the call over to you for an update on a go to market address.

Thanks, Jeff. Q2 was another strong quarter for go to market as we continue to execute our core strategy, the investments we’re making in our go to market engines are bearing fruit in short-term bringing in amazing new logos, while also at the same time deepening the relationships we have with existing customers, and just as important we’re also laying the groundwork for further growth and scale in the future. As a reminder, our priorities in the go to market side are focused around three core principles, one, winning the hearts and minds of developers, wherever they are in the world, two, increasing our account coverage to better serve our customers and our opportunity, and three, building the foundation for future growth with partners, enterprises, and internationals. As always with Twilio let's start with its developers, developer evangelism remains the core driver of our inbound funnel. As we continue to execute our strategy of meeting developers in the field; we’re supplementing this with our engaged road shows that are bringing together developers and decision makers. We’ve hit more than a dozen cities and interacted with well over 1,000 customers and prospects so far this year driving both awareness and pipeline, all of these efforts are now leading up to our SIGNAL conference in October where we get developers, customers and prospects together to explore the future of communication. We’re continuing to increase our coverage as well while maintaining strong productivity which is driving a growing number of transactions, we’re also deepening our relationships with existing customers, as evidenced by the expansion rate Jeff mentioned a moment ago, 137% is an amazing feat in the world of software, and we’re achieving it at well over $500 million annualized run rate. One of the deals I am most excited over the last quarter was our second major Flex deal, this time with Shopify, a leading commerce company that I'm sure many of you know well, the power of Flex as the first contact at our application platform is truly redefining the contact center market, for the first time companies can build exactly what they need to support the specific requirements of their customer engagement, while taking advantage of global cloud scale at the same time. As a development centric company that is growing quickly Shopify needs both customization and scalability, they chose Twilio Flex because they wanted a contact center that would fit their business, instead of fitting their business to the software. We’re also expanding our coverage in the enterprise. So, let’s walk through a couple of the highlights in the past quarter. One interesting enterprise deal from the past quarter was an extension of our relationship with Bank of America. This new project involves a voice application with the goal of increasing lead conversion times and creating new revenue opportunities. Another great extended relationship was a multifaceted deal with U-Haul International, you’ve heard Jeff discuss many times the growing role of software within companies of all shapes and sizes and U-Haul is no different. To drive innovation across their company U-haul tasked its engineers with improving their customer experience and creating new service offerings. We work with their engineering teams to identify several used cases to further their mission. U-haul will be using a variety of our products and SMS chat Proxy wireless and video and we have already identified many more use cases and look forward to deepening our relationship over time. Overall we are just scratching the surface in the traditional enterprise. We have more than 10% of the global 2000 as part of our active customer account, and we have a tremendous opportunity to grow that count and expand those relationships in the future. And while I'm excited about the success we are having in the short-term we are also making important investments to help us scale to reach our full potential. I mentioned back in the Q4 call the addition of Ron Huddleston as our Chief Partner Officer, Rob has been hard at work since then building out his team as they work to create the foundations of our private effort. You saw a taste of this with the partner lineup we announced in the support of the flex launch back in March, and at the end of June we launched our new partner program Twilio Build, a successful partner program can be a force multiplier for customer success. Whether providing specialized expertise, accelerating implementations or expanding our reach Twilio built this design to help nurture consulting partners to help sell with us and solution partners to sell for us by embedding our technology in their products. Twilio Build includes all the people and processes partners need to be successful by training certifications pricing models, channel managers a brand new partner community and more. I’m incredibly excited about what this program will add to our business over the coming years. Overall our momentum continues to grow as we execute our plans I’m incredibly proud of our team and the results they have delivered in Q2 and I couldn’t be more excited about our long-term opportunity. Let me pass the mike to Lee to discuss our financial results.

Thank you George and good afternoon everyone. In Q2 we had continued strong revenue and achieved non-GAAP profitability one quarter ahead of plans. Our product innovation coupled with our powerful developer first go to market model continues to deliver success for our customers to drive our growth. Let me walk through a few of the highlights. Base revenue grew 54% year-over-year in Q2. Excluding Uber, base revenue grew 54%. This results were well ahead of our guidance. And much as I am thrilled by the momentum and trajectory of our business I would not expect this level of outperformance for our guidance every quarter. George and his team has transformed our go to market efforts over the past year or so we have also adjusted our forecasted process to better model the positive impacts. You can see the result of it in our guidance for the remainder of 2018. A dollar based net expansion rate was strong once again at 137% or 145% without Uber. Our go to market efforts are building deeper more strategic relationships with our customers but still a growth engine for our business. The top 10 active customer accounts featured 70% of total revenue in Q2 down from 18% last quarter and 21% in Q2 of 2017. Our top 10 customers contributed 7% and 4% of total revenue similar to Q1 levels. We have fixed variable customer accounts once again in the second quarter. Gross margins were similar to Q1 coming in at 55% in Q2. Our gross margins have been stable for the past two quarters we remained focused on doing the right things to grow the business long-term rather than maximizing gross margin in the near term. You should expect continued fluctuations going forward for the balance of the year gross margin should fall in the range of the last four quarters. So we are currently operating at the high end of the spectrum with key things that could impact when we follow that range, by product, country and customer mix, network service provider fees, FX and more. And help with growing their models we ended the quarter with 1,119 employees in our international mix of revenue was 25%. In terms of the bottom line, we hit the strong level this quarter, producing a non-GAAP operating profit one quarter ahead of the timeline we outlined last year. This was driven largely by the revenue upside in the quarter. As we’ve mentioned for some time getting to breakeven has been an important milestone for the company; looking ahead given our leadership position in this macro market you should expect our parties to remain on reinvestment for growth rather than operating margin expansion. One admin note on the balance sheet the conversion we completed in May averaged about $479 million of cash net to our balance sheet in the quarter. To wrap up another quarter of strong execution from the faster organization produced excellent financial results. Investments we’re making in both product and our go to market organization sets us up well for continued growth in the future. Operator?

[Operator Instructions] Your first question comes from Mark Murphy from JPMorgan.

So, Jeff I wanted to ask you when you try to envision the future state of Twilio, perhaps five or 10 years down the road how much of the business do you think could be in the contact center, if that is a market that I believe is nearly $100 billion in size and just also what do you think would be the ultimate mix of the business which could be the higher-margin variety, or the -- I think what you refer to as the higher level APIs such as Engagement Cloud and Authy?

I mean I think obviously we feel good about the contact center market, is an area that’s ripe for some better solutions and we’re happy to provide them and also have our partners provide them. The overall market you’re right is very large depending on which analyst you talk to can be in the tens of billions up to greater than $100 billion, because of a lot of components of it, there's the software, there’s the connectivity, the services, all sort of different aspects of it, but there’s a very large market and the most important thing about that number is actually that most of putting the most analysts about 90% of that market is still on prem despite the fact that customers don’t want to be on prem and so we sneak into an area with a very big opportunity and one that we’re excited to address; as far as how much far business is, I am not sure I would speculate to answer exactly what I think it’s going to be, because there’re lot of use cases that similarly are truly as we see are areas that are rife for disruption and new ways of going about as well as bringing those markets from legacy solutions into the cloud. And so there’s a lot of areas which Twilio is investing, and there’re a lot of use cases that we feel very excited about and the contact center is certainly one of those. And I think there was a second part to your question Mark?

I was wondering Jeff in the very long run what mix of your business do you think could be a higher gross margin variety, in other words, use cases or the higher level API?

Well the Engagement Cloud strategy that we launched last year and then we reinforced with the launch of Flex, earlier this year for the contact center this strategy we feel is working and we’re very excited about it. That said our core business, programmable SMS and programmable voice, these are mature products that are at scale and they continue to grow very quickly and you also notice that as we roll out the Engagement Cloud products like the contact center it is going to pull through more revenue from the underlying platform of voice minutes and SMS and so we think that the Engagement cloud is going to grow rapidly and we feel great about that product as well as the software nature of the products. It is also going to continue to help boost the growth rates of our programmable communications cloud. So we feel really excited about both parts of those business and I wouldn’t I guess speculate on exactly what the growth rates are going to be of either one other than the past that we feel both of those strategies are working very nicely. But the mix real growth overtime obviously as we introduce new products in the engagement cloud.

Thank you very much. And as a quick follow-up Lee, I didn’t quite catch your comment. I believe you made some kind of a comment about adjusting the modeling or adjusting the guidance methodology. And if I heard that correctly what exactly are you doing differently and maybe what is the magnitude of that change?

A few things Mark. The main point we wanted to make it here as much as that we feel really great about the business, business inputs are strong, our outlook is great, do not expect this large every quarter in terms of revenue. Am a little more settled behind that comment was as George has implemented a go to market enhancement over the last year we have gotten this better understand the impact of those enhancements and we have incorporated those into our forecast and that’s reflected in the guidance we gave for the second half of the year. The actual methodology philosophy or approach has not changed however.

Your next question comes from Richard Davis from Canaccord. Your line is open.

I saw you guys introduced or announced I guess Twilio Sync for IoT in embedded devices and you know that space is like super hot and its actually probably come down to the point where it's actually a legitimately growing business. I realize you have a lot of products in your portfolio, but at least broadly at least I mean things like that would be an interesting vector for you guys. How should we think about that?

Sure, Twilio Sync is a product that we launched couple of years ago with the ability to synchronize application state across a wide variety of devices whether it's mobile devices, browsers now we have added that is IoT devices. And we feel that the IoT market is obviously one of the -- that is right for huge amount of growth given the overall given the -- if you listen to analysts it's like we are going to connect every grain of sand on the beach to the internet and so the amount of growth here is tremendous. We like to think as a connector for those devices we think that’s a product that needed by developers as a light weight way of taking data that’s coming offline devices and moving that data into the cloud as well as moving application state from the cloud maybe some web adaptation or mobile adaptation and moving it back down to devices. And I’d also say for the IoT market probably our bigger play there is Twilio Wireless which of course is the wireless connectivity solution that we are primarily aiming at the IoT market to provide a wireless conductivity over 4G 3G networks to those devices. And that’s a product that we are particularly excited about.

And you can answer this I’m sure in a one word answer yes or no. but you guys I think cleared the GDPR staff and data protection with flying colors. Is that right?

Yes, that deadline was in May and we put a very large list across Twilio to meet the compliance obligations of GDPR and we were excited to say that we met the obligations and that's not just for our European customers that is for all of Twilio's customers because we feel being a good steward of our customers data and treating data with the respect it deserves is a core aspect of any platform and really any product company going forward. And so we are excited to undertake the effort to prove to customers how we -- be transparent with customers, how we treat their data, improve with -- by meeting the obligations of the law that we are actually treating their data as they want it to be treated. And so we feel like that’s a really good investment.

Your next question comes from Alex Zukin from Piper Jaffray. Your line is open.

So this looked a bit -- like an inflection quarter for you with accelerating revenue growth both sequential and year-over-year both base and total and somehow you managed to pair that with some of the best incremental operating leverage you've seen and given your customer account growth is roughly flat from a growth perspective with last quarter, can you maybe comment on some -- or shed some light on what is happening with the use cases that you're seeing incrementally or is it some of the go to market synergies that you're finding and what type of dollar base net expansion rate you think we should think about as being more or less sustainable for the back half of the year? And I’ve got a follow-up.

Hi Alex, it's Lee, I'll take that, so as we think behind there, first of all if you look at Q2 I don’t necessarily treat as an inflection point just a continuation of the business, and very similar to what we saw in Q1 was strength across over the broad breadth of our customer base, if you actually look at base revenue expansion pulling Uber out, that was in the mid 60 range and that number has been in the low and mid 60% range over the last eight quarters, so as we scale this business we maintain consistently high revenue growth. In terms of the expansion rate, we expect to continue with the high and strong expansion rate, that reflects the power of our platform model and the go to market efforts, over the long term as the older cohorts become larger the expansion rate will drop over time but again we feel really good about the efforts we’re doing to keep it steady.

I was just going to ask about maybe for George the hiring trends year-to-date, where we are with respect to doubling quarter carrying headcount within the sales organization and maybe how you see productivity ramping throughout the year?

Look we’re not going to give out specifics on our quarter carrying headcount and where we are, but I will say I am very pleased with the hiring we’re on our plan and so I think you’re seeing that in our numbers, so we’re excited about the momentum and go to market and just really, really happy about the progress.

Your next question comes from Heather Bellini from Goldman Sachs. Your line is open.

Hey this is John on the call for Heather. Just a question, you guys hit and you've had some traction in your high margin products, with an Engagement product platform, but your gross margins were sort of flat sequentially, we know that you’ve passed on a lot of these cost savings to your customers but can you maybe talk about the pace of this gross margin financial for the rest of the year and I guess over the course of next couple of years or so?

Some of that wasn't completely clear but I think if I understand I talked about our gross margin rates, so as we’ve said since the IPO our focus has been on driving topline revenue growth rather than maximizing gross margin in the near term. So as we look out over the rest of the year in terms of our guidance we have talked about gross margin being in the range of what it's been over the last four quarters with puts and takes that could cause it to fluctuate a bit in that either direction. In the long-term we feel very comfortable with our long-term gross margin model with 60% 65% as the engagement cloud application services become a greater part of total revenue.

Your next question comes from Nikolay Beliov with Bank of America Merrill Lynch. Your line is open.

This is actually Jasmine on for Nikolay Beliov. My first question is what's driving the increase in expansion rates to 137% this quarter? And any color on what the expansion rate is without Uber?

Why don't we let George talk about the go to market factors that are driving the expansion rate and then Lee you can come with the….

Sure, there is a couple of things that are driving it. One is we have more coverage frankly, and more people working with our customers every day in the front lines to help them find the use cases. Also we are seeing momentum with new products and things like flex as we talked about. So I would say those are kind of the two to three biggest things.

Then jumping in, this is Lee. The overall expansion rate going from 132% to 137% the negative impact of Uber is less in this quarter, we pull Uber out expansion rate was 145%.

Got it, thank you. And maybe one more question on an update on application services revenues. What percent of the mix were they in this quarter? And what was the growth rate? And what do you see in three to five years like what percent you think it could be of total revenue?

So that’s a number that we don’t talk about on a regular basis but we will give periodically. Last time we talked about it was 10% in Q4, application services revenue still continue to grow very fast much faster than the corporate average. And as a reminder similar to what Jeff talked about in terms of the contact center engagement product revenue application services revenue even though it's growing very quickly our programmable voice and messaging revenue is growing quickly and it also will pull through revenue, the application services revenue will pull through our programmable voice and messaging revenue. So the mix will gradually increase overtime. We don’t specifically guide to what that percentage will be however.

Your next question comes from Heather Bellini from Goldman Sachs. Your line is open.

Yes, sorry for the miscommunication before. I just had two questions for you guys. Obviously first is a really strong beat so congrats on that. I wanted to follow up I think on the first question that Mark had talking about some of the higher gross margin products like flex. You seem like you are having some good traction there. Your growth margins were flat sequentially. I’m just wondering if you could share with us how we should expect the pace of gross margin expansion the play over the course of the next 12 to 24 months as that product ramps? And then the other question I had just again another follow up on flex. So when you are in the market with that product what options are most often also being considered by customers?

Heather this is Lee, I’ll take the first part of the question. So, regarding -- there’s also been a lot of excitement around Flex, however the product, goes GA later this year, so there’s really not going to be a material impact on revenue, in this calendar year that we’re very excited going forward. And regarding overall gross margin forecast, again I will go back to what we talked about from the beginning of the IPO we’re really focused on driving high revenue growth and that’s to me across the business rather than maximizing gross margin in the near term. So we’re still focusing on revenue growth.

The second part of your question Heather, the number one competitors we’re seeing out there for Flex are really the on premise companies, Jeff talked about 90% of the world is still on premise versus cloud, we do occasionally see maybe a cloud top provider but the number one pain point we’re seeing in the field is people wanting to move off of on premise and into the cloud and those are usual suspects, Cisco, Genisys, Avaya, etc.

And are those typically end of life at a certain point like do you have experience knowing when those are kind of completely written off and when -- I mean some of those solutions you’re mentioning are really-really old at this point so how do we think about those kind of coming of age?

Well those products are -- those products have typically very expensive footprints inside these companies and so what’s nice about us what we’re doing is we’re typically not ripping up the whole thing day one, we’re taking out piece by piece and I think honestly some of these companies may have piece of this infrastructure -- it’s going to take them years, to honestly rip the whole thing out. So, I think that's actually good opportunity for us over time. I think that that means there's run way for us for many-many years to be replacing old legacy technology, I think there is going to be no shortage of opportunity for us to do that for years to come.

Your next question comes from Bhavan Suri from William Blair and Company. Your line is open.

I wanted to touch on two pieces here, one is as I look at your platform space, you’ve got a couple of things that you sort of carved out in the call center stuff, which should be in the insurance vertical, you got sort of engaged, you got some of the IoT stuff, are you thinking about taking more pieces and applying them to very vertical specific things like a private wealth thing, or something like that, how do you guys think about sort of the idea sort of verticalization and again as a platform that’s very horizontal but there’s some really instantative for some of your clients that done some material things and you could see repeatability there just sort of -- and you think about strategic, I wonder how you think about the vertical apps, verticalization or vertical frameworks for some industries?

Thanks Bhavan, this is Jeff. So the way we generally think about it we’re a broad horizontal platform and we’re doing with our new application platforms these are still designed to be very broad entrants into the market, and that’s one of the areas where we really excel because all our products are APIs, even our application platforms are designed from the ground up to the completely customized and everywhere you can imagine, this creates a great opportunity for companies like the end of the vertical spaces to actually customize our solutions for those verticals, and so historically we’ve partners take the products that’s really build and actually get them in the verticals that I am assuming never existed. We’ve got like customers who provide CRM for auto dealers, CRM for hair salons, CRM for yoga studios, right by -- I didn’t know those things existed, but God bless them, they do and they use Twilio in order to get that into the hands of those companies and so I think this is generally speaking part of our strategy to fuel the future of communication which is that Twilio we're not a solutions company going after just one thing or just one view of what that solution is. We are trying to up level the entire playing field and help every company improve how they communicate with their customers. And often times the verticalization of those products is ideal for companies that are very deep into those verticals and can add communications into their products and then bring them into the market with their existing customer base, and we really like that strategy.

And then maybe one for George, you touched on sort of sales overlay touched to go to market. One of the areas I guess we were talking about maybe a year ago and longer was a BPO market? So the opportunity to creates solutions for BPO players that were much more flexible that to tie in to like you know work from home type of situations like JetBlue leverages, things like that. Just wondering if that’s still part of the go to market? Or is that sort of a small batch? How should we think about that? It is on a unit and usage base is a fairly significant market from a call volume perspective. So just trying to think about any updated thought you guys have in that space.

I wouldn’t say it’s a central part of the strategy but it's certainly part of the vision of what we are working on, especially as we double down on the contact center space with flex. And I think that it's definitely in the purview of or in the scope of what we're looking at as part of the especially Twilio Build program. So I think that’s probably the right way to characterize it from being a market we are interested in, I think we have an opportunity there but I don’t think it's front and center I wouldn’t characterize as front and center. I think we just have such a big opportunity in the contact center space and I think that’s just part of it for us.

Your next question comes from Catharine Trebnick from Dougherty. Your line is open.

Could you discuss a little bit of the competitive landscape and what you are seeing in the core SMS and voice piece of it?

This is George. Honestly we haven’t seen any change in those landscapes. Its still very fragmented. And we did obviously a big delta in this quarter.

Your next question comes from Pat Walravens from JMP Securities. Your line is open.

So I have two. My first one Jeff I think it's probably for you which is, is email something that you feel Twilio should offer natively at some point? And how do you think about that in the pros and cons? And I’ll just throw the second question out now. Any update on the CFO search and maybe we are just going to get to keep Lee which will be great?

Actually first part of your question in terms of email, yes, we see our customers we hear what they're asking for. And we have been very pleased with the channels we have offered to them. We have heard customers at times say email was the part of their strategy and that’s why we announced the partnership couple of years ago now I believe with SendGrid actually to make email available in part of Twilios profit and so we are really excited about that. And I think the second part of your question was regarding -- Lee…

Yes.

Yes, so the CFO search.

Right, yes, the CFO is…

The CFO search is going well, we are meeting candidates, we -- are very thankful to Lee for being here for an extended period for a smooth transition and so we’ve the luxury of meeting a number of candidates and finding the right candidate for the role to take us to the next scale where we’re going to, so I feel really good about the search and I am also very appreciative of Lee to give us the time to get really order the search to find the next person for that job.

Your next question is from Mike Latimore from Northland Securities. Your line is open.

Hey guys this is Bailey calling in for Mike. What a quarter, congrats guys. Two questions I am just wondering how many beta customers you have currently on Flex and if you can share whar the average size of these are?

Hi, Mike this is George. So we’re not disclosing the number of participants in the beta program but we certainly are oversubscribed I’ll say this and we have recently opened up the program to take in more people because we’ve seen such demand for it, in terms of the average size we said that we’re focused on the enterprise space, it’s kind of our initial starting point and we definitely have seen the majority of the beta customers falling into that category of the enterprise level, 1,000 plus.

Got you, great. And I guess do you envision the pricing for Flex averaging less than the typical cloud contact center service would and I guess next question really would it be a transaction base or more of a SaaS model?

We’re still finalizing the pricing as we work for the customers; the way we’ve looked at it, we’re targeting some of the most demanding contact centers that are out there, some of the largest with the most customer issue requirements of the contact center market that are out there, and so as we work with customers we’re not trying to be the lowest cost transaction out there, we’re trying to be a very sophisticated solutions for some of the most demanding customers that are out there. But we’re going to finalize that pricing and we’ll be announcing that in the future. The pricing for Flex, well there’re two components to it, there’s a software component to it, so all the things that make the contact center function in all the ways that you want the contact center function but there’s also a component which is the connectivity so if you do a voice contact center that will also drive voice minutes on our platform, it’s an SMS stage contact center, it'll drive SMS usage on our platform, as there’s really two parts of those contact centers, depending on what channels, they deploy, there’ll be a more usage based revenue driven on the platform side but there’s always going to be software driven. And as far as the exact software model that we’re trying to price it for, we’re still finalizing that with customers, but obviously we want to make Twilio Flex something that is aligned with what customers want and gives them flexibility and how they adopt it and Twilio has always done well to try to lower barriers, the companies to adopt Twilio and so I think we’ll probably do something in Flex that also make easy for customers to get started.

Your next question comes from Will Power from Baird. Your line is open.

I guess a couple more questions to throw. I guess first to be clear I think you can help us frame, how to think about WhatsApp API opportunities is that something customers were asking for, how do we think about the revenue opportunity over time and I guess I’d be curious if there’re learning’s parallels with Facebook Messenger there? And then my second question you have more cash on the books now how do we think about use of that maybe any parameters around how you might think about any M&A interest with that?

We are obviously excited to announce that last week as we noted on previous calls that with other channel launches like Facebook messenger, we believe that the continued fragmentation of the communications landscape I think presents a challenge how will I keep up and talk to my customers where they want to be reached so our customers' businesses have that challenge and we see a great opportunity for Twilio at them now because it is complex and rapidly changing landscape. WhatsApp is a bit different given it's prevalence globally they're across the world where Whatsapp dominates over means like SMS and that means that end users are really pre-disposed toward Whatsapp and against SMS so they probably want to communicate through the cost or through reliability in those regions to the world so I think that our ability to now service those regions of the world with their preferred means of communication will open up new opportunities for us in those markets and we are really exciting we're really excited to help our customers serve their customers now even better in some of these regions of the world where Whatsapp is the dominant form of communication. And I think there was a second part to your question.

Just around use of cash not that you've got more cash on the books maybe any thoughts around M&A interest how you might think about that?

This is Lee, I'll jump in. So we feel really good about the strength of our balance sheet both our existing cash balance and adding the convertible really we look at that as ways to accelerate our roadmap so what the early stages of the big opportunity and as there would be some M&A opportunity down the road that could accelerate the road map or if there is really strong team that could help move us forward those are the type of things we would be looking at going forward.

Your next question comes from Brent Bracelin from KeyBanc.

I guess Jeff for you I was wondering if you can weigh in just on AI and machine learning, we've obviously been talking about this as a new kind of differentiator for the last year - year and a half what are you seeing from a customer interest standpoint activity new app development, leveraging some of your AI functionality obviously you have the Google contact center kind of AI function now you work with us well but what are you seeing let's say over the last six months versus kind of what you expected on the AI front?

I would think that AI will ultimately be seen as really the major driver of technological change for the next 10 years I think I look back to the mid-80s you kind of had a decade of the PC being the driver of technological progress but in the mid-90s it became the internet and web we have 10 years of massive growth there in the mid-2000s we have mobile being the major driver and now you have in mid-20 teens I think the AI is going to be a major driver of business progress in the next 10 years and so we are really excited to be investing in AI quite a bit. Obviously we use AI a lot under the hood of Twilio and how we build and operate the company things that you don’t necessarily see as products and then we have our product that actually followed by AI. And so you look at make sure you understand for example there's a product that allows customers to build Natural Language Understanding that spans across many channels whether it's a customer speaking to them in an IVR where we've had IVRs for 20 years most customers don’t want to reckon with IVRs honestly because the accuracy rate was not where it needed to be, and that’s why people had relatively speaking to be fair with that experience with IVR historically but I actually believe that machine learning is changing our story quite a bit because the accuracy rates have gone as up well as the pre formed cognition is going on, is much higher than it was 10 or 20 years ago and that is going to change I think the experiences that people have, so we’re excited to be investing in that. But what’s needed to understand that it’s not just an IVR solution which obviously there’s demand for it but it also works across channels like text and so you can have SMS conversations or chat conversations with the bot. And we can also power those experiences across some of the newer channels such as Amazon Alexa, and Google Home and Serie and things like that and so we think that the idea that there’s one product where you train and built complex models that represent how people ask questions of your business and talk to your business and then you can deploy those models against many different channels, those channels are constantly changing so you want to build at once and deploy it everywhere, that’s what Twilio Understand does. Now this quarter, we also have the opportunity with Google, to bring Google’s dialogue flow into Twilio as well; and so Flex is -- Twilio Flex in the contact center, but Twilio is platform of all will now be able to easily integrate Google dialogue flow in their services, their customers are building it up at Twilio. So we think that part of being a platform is giving customers choices and so we’re pleased to let customers choose the natural language processing engine and platform they choose by the way it’s clearly understand that’s not actually the case, although we recognize that’s still in beta, so Google dialogue flow, or others, we see this as a platform for letting customers take the platform of their choice while ultimately get them successful on their platform and that’s what we intend to do, there’s a great customer story, in our earnings call in our prepared remarks earlier about Marks & Spencer was doing exactly that, they have built a system called Connie and here's a fun factoid Connie was the name of the first switch board operator at Marks & Spencer, some 75 years ago, that's why they named their systems after Connie and are now using that to power the new IVR experiences with their customers with Twilio and with Google together. We think it’s really a powerful combination that is ultimately driving more of the use cases and the renewed interest honestly in this whole area, who would have thought a few years ago that you’d be naming your IVR like giving the name and the personality all that I think that’s a testament to the belief that these engines are getting more and more powerful and more and more answer to offload some of workloads in a way that customers actually like and provides great customer experiences unlike the IVR’s of old, and so we’re very excited about what natural language understanding can do and in fact driving new decisions, new purchase decisions and upgrading of legacy technology, we think that’s a great job of potential boost for the business.

And in the interest of time please limit yourselves to one question. Thank you. Brian White from Monness Crespi. Your line is open.

My question is on Twilio build I am wondering if you could give us some type of number around the companies participating and should we expect build to have an impact in second half of the year or is this more a 2019?

I am very excited about Twilio build, it is very early, we just launched the program and so I would expect that first of all I don’t -- I think it’s a multi-year effort to build meaningful, significant, part of ecosystem. So we’re -- look, we’re taking a long view on it, and that being said I think we’ll see more impact in 2019 than obviously second half of this year. and you know our near term goal is to focus on -- we are seeing a lot momentum around flex and we are seeing a lot of demand for flex partnerships and so we are busy training and enabling people for that and I think that we are-- our goal is to get on the partners probably we need to make flex successful. And I see the traction there and I’m excited about that. So early days but promising signs and I’m very excited about Ron's opportunity with the team.

And Jeff just on the Twilio programmable wireless that became available I guess it was in April launch. What's the initial take so far?

Yes, if I heard the question right I think you asked when my mom's birthday is and that is today, so I wanted to wish my mom a happy birthday.

Happy birthday.

I think the correct question was about wireless.

Yes.

So I had to put that in. so we are really excited we have got Twilio wireless to GA this quarter so we are excited about that. Wireless is a very exciting product because as I mentioned earlier there is so much opportunity in the internet of things. One of the things that really excites us that is around the corner portfolio of wireless has been looking for some new protocols in the 4.5G and 5G specifications that are specifically designed for the IoT opportunities. And what that’s going do, is bring down both the cost and also bring up the battery life of IoT connected devices or connected to 4G and 5G networks. So NV IoT is one of those protocols narrow band IoT. We think these are very exciting because they potentially presents a great step change in how this technology is used of using carrier provider network as opposed to Wi-Fi or Bluetooth to connect devices very easy very reliably and now very cost effectively and for one through the time on one battery that will provide that can drive even more demand for Twilio wireless. So we are very excited about that product. It is just new GA this quarter so its clearly still the early days of this product but it's an exciting time for us in a big market.

Your next question comes from Jonathan Kees from Summit Insights. Your line is open.

I guess the question I’d like to ask is just curious for the two deals that you had that you won with flex. Were there contact center cloud vendors were also invited to the RFP process? Or was that all premise?

This is George. So that particular transaction was against a cloud provider but you know most of the other ones are seeing in the beta program are looking and moving some on premise issues.

There are no further questions at this time. Thank you for participating in today's conference. You may now disconnect.