Good afternoon. And welcome to Twilio's Second Quarter 2019 Earnings Conference Call. My name is Chantal, and I’ll be your conference operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Andrew Zilli, Vice President of Investor Relations. Mr. Zilli, you may begin.

Thanks. Good afternoon, everyone. My name is Andrew Zilli, and I’m the new Vice President of Investor Relations for Twilio. Thanks for joining us for our second quarter fiscal 2019 earnings conference call. Our results press release, SEC filings, and replay of today’s call can be found on our IR website at investors.twilio.com. Joining me 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. Reconciliation between our GAAP and non-GAAP Results and guidance can be found in our earnings press release. Additionally, some of our discussion and responses today may contain forward-looking statements, which are subject risks, uncertainties and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from those 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-Q filed, 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, and welcome to the team Zilli and thanks everyone for being on the call today. We celebrated an important milestone in Q2 crossing the $1 billion annualized revenue run rate with industry-leading growth at our size. I want to thank our customers who place their trust in us and helped us to reach this milestone. And thank you to Twilions around the world for relentlessly focusing on our customer’s success along the way. And while it’s a time to be excited about all the progress we’ve made and joining the exclusive range from cloud software companies that have reached this milestone, we see this as just the beginning. We have the opportunity to change communications and customer engagement for decades to come. This is day one, and we're just getting started. These results were driven by strength across our core platform. Our developer first approach continues to drive success as every company becomes a software company and looks for new ways to engage with customers across multiple channels. And we believe no one is as well-positioned as Twilio to support companies through this transition. The second quarter was also our first full quarter with Twilio SendGrid and we’re thrilled with the feedback we’ve heard from customers and the initial traction we are seeing. While it’s obviously still early in our journey together, a few customers are already seeing the value of combining email with SMS for their customer engagement. We couldn't be more excited about the combination of Twilio and SendGrid and the value we're creating for customers around the world. Just a couple of weeks ago, we introduced the new automation and email testing features within the Twilio SendGrid marketing campaigns product. These new features provide frustration free workflows and integrated tools to build emails across one-time campaigns and transactional emails. Congratulations to the Twilio SendGrid team on continuing to innovate on this product for our customers. The integration of SendGrid continues to progress well, as we combine our teams and drive to enhance our cross-selling opportunities. While this effort will continue through the remainder of this year, we’ve had some great cross-sell wins already, which George will talk about in a moment. The SendGrid acquisition has been a big event for Twilio, but let’s not forget the other big news story, which is Flex. Our approach is resonating with many types of customers even in these early days. As we expected, the first implementations of Flex are among digital native companies who are looking to build and more quickly, and we continue to make progress with these great early adopters. We’re also early in numerous sales cycles with larger enterprises that have large existing footprints to augment over price. This is a huge opportunity in a market that is ready for disruption, and Flex has shown tremendous potential as customers have told us that we’re on the right path. We’re very excited about what’s ahead and we continue to invest in new solutions because customer engagements that drives communications in an area customer’s have shown us is right for innovation. As this innovation is driving significant impact for organizations of all the types as they look to find new ways to engage their customers and improve their customer experience. I'm going to steal a bit of George's thunder here and talk about our relationship with the Veteran Affairs Medical Center, the VA, which we expanded in Q2. You may recall, we first discussed our work with the VA in Q1 of 2018 as we helped power their vet text platform that sends appointment reminders via SMS to patients. The ROI for the VA has been incredible, driving savings of more than $110 million from the ripple effect of reducing missed appointments such as lost facility time and doctor and nurse time. And because of this great success, the VA expanded its relationship with us in the second quarter with enablement of this new feature open slot management, which dynamically offers and reallocates cancelled and available appointment slots to Veteran patients waiting for an earlier appointment. This feature was tested at small number of occasions locations and is now being rolled out nationally to support veterans across the country. You know, I bring up this story, and stories like this because this is why we started Twilio by making communications more accessible for developers we are helping customers like the VA modernize, which in turn is saving the government and taxpayers money, while driving better healthcare experience for our veterans. And this is just one example of many, organizations of all sizes and in all industries need to harness the power of communications, and we continue to deliver new ways to bring these companies and their developers into our tent and make them successful on the Twilio platform. And we're constantly looking for new ways to expose this vast array of companies to our platform, and get them started on the path of innovation. In May, we announced TwilioQuest 3, the next incarnation of our interactive self-paced online learning game, which will be launched next-week at SIGNAL. Inspired by the classics of the 16-bit era, this role-playing game helps developers and non-developers alike, learn the power of code and how easy it is to build apps with Twilio. To date, more than 44,000 people have signed up for TwilioQuest. Nearly 70,000 objectives have been completed and more than 5 million experience points have been earned by developers who have used TwilioQuest to learn Twilio. We’ve also ramped up our enterprise hackathons, where we go on site at our customers offices to engage more employees and developers and help them build more solutions using the Twilio platform. In fact, in Q2, we held events that customers like U-Haul and a major airline and we’re already seeing the impact on activity of builders inside those companies and several others. And we’re offering Superclasses, a self-paced day of hands-on technical training where engineers from Twilio product teams come together to teach best practices to our customers. What started at SIGNAL is now part of our engage events around the world, including in Nashville, Chicago, Melbourne, London and more. In fact, in the second quarter, we hosted developers across nine events along with two online Superclasses bringing this experience to developers we otherwise wouldn’t meet in person. And then of course, we’ll be hosting another Superclasses this year at SIGNAL with coding exercises, presentations, office hours, and the ability to test brand new Twilio products before the release to the public. We’re continuing to expand our reach and bringing organizations of all sizes and all industries onto our platform because from what we can tell, every company can benefit from better communications, and better customer engagement. I also wanted to give a quick update on the effort to help stop robocalling. I touched a bit on the scourge of robocalling in the last earnings call and the efforts we've taken since inceptions to prevent this type of activity on our platform. Yet robocalling continues to be an issue for all of us. Since our last call the FCC, FTC and Congress have all taken additional steps to help stop unwanted robocalls from reaching consumers. And we’ve expanded our efforts as well, joining the alliance for telecommunications industry solutions or ATIS, and serving on its board of directors participating in its robocall working groups and supporting the technical solutions like stir shaking. And we'll continue to work with lawmakers’ policymakers and the broader ecosystem to find the right solutions. We’ll be talking more about this at signal. And speaking of signal it’s coming next week. Our developer and customer conference takes place August 6 and 7 at the Muskogee Center here in downtown San Francisco. We have some exciting announcements ahead. So, please join us for two days of learning, networking, and fun, I hope to see you there. Before I turn it over to George, I wanted to mention a couple of the highlights from the quarter. In June, we added Jeff Immelt, former Chairman and CEO of GE and current venture partner at New Enterprise Associates, to our board. Jeff brings nearly 20 years of executive and board room experience to Twilio, and will help guide us as we expand our enterprise and international business on our path to $2 billion and beyond. Also, in June, we received the great place to work certification with 94% of our employees saying Twilio is a great place to work, and 97% of employees are proud to say, they work here. Thank you to all Twilions for creating such an amazing culture. It’s an extremely important part of our company and I'm really proud of what we’ve created. And with that, I'll hand the call over to George.

Thanks Jeff. Our go to market efforts continues to drive the strong growth we saw in Q2 as we execute on our core platform strategy, as well as extending our reach to the enterprise and internationally. We remain focused on expanding Flex’s presence in the market, as well as cross-selling Twilio SendGrid. Jeff highlighted some of the great things our marketing and developer evangelism teams are doing, so let me focus on the success we saw from the sales side in Q2. One of our core themes has been expanding into the enterprise and our investments there continues to bear fruit. This quarter, we formed a new relationship with enterprise holding, the parent company of National, Alamo, and Enterprise Rent-A-Car, which has more than 10,000 neighborhood and airport locations to more than 2 million vehicles in its global fleet. Enterprise aiming to improve customer engagements by using new channels such as SMS, IVRs, and social to ensure customers have a seamless experience before, during, and after the car rental experience. We also entered into a new relationship with the Fortune 50 retailer that is embracing a build mentality to improve their customer engagements moving from buying 80% of their software to building 80% of their software. This is another great example of how every company is becoming a software company. The first used case will add SMS as a channel for order confirmation, tracking information, pickup and delivery alerts, and the like. We look forward to supporting them throughout their journey. Internationally, we expanded our relationship with the TransferWise, a money transfer company that moves more than £4 billion every month. They recently added their new borderless service, which allows customers to hold over 40 currencies at once along with a TransferWise debit MasterCard. With the new PSD2 regulations, which we added support for in our Authy product last quarter, TransferWise turned to Twilio for Q-factor authentication via Authy push, SMS, and voice. This is a great example of how Twilio continues to innovate and add value for our customers. We seem to make progress with Flex, signed a new deal with Trip Action, a technology-enabled corporate travel management platform with their tremendous 5x year-over-year growth Trip Action found that they needed a new solution to scale and fit the needs of the business. Trip Action is known for their customer centricity and proactive support and wants to deliver an excellent user experience starting with chat and voice. And they knew that they could accomplish that with a fully customizable contact center platform that Flex offers. On the partner front, we launched our Twilio Build program last year to support our strategic IFCs and SIs who are building on our platform. We're beginning to see a large amount of inbound interest from SI community in general, while particularly as it relates to Flex with some of the largest consulting firms being Flexed as a disruptor to the traditional call center market. We have also been investing in our IoT business and we’re seeing some really exciting used cases as cellular IoT continues to expand its reach. We started with traditional machine-to-machine used cases like fleet tracking, but we progressed into new markets like smart cities where we are now powering the disruptors. Whether it’s a micro mobility with Skip Scooters who we formed a new relationship within the quarter or smart weight management with Senfolio, a property management with Twilio. The adoption of our IoT connectivity products reminds us of how our programmable communications cloud product inspired developers’ enterprises to invent new used cases. In short, we are seeing increased traction and our focus on this offering is starting to pay off. As Jeff mentioned, this was our first full quarter with Twilio SendGrid and we are making great progress with our joint go-to-market efforts. In the quarter, we extended our relationship with Klaviyo, an automated marketing platform and a great SendGrid customer. After hearing and interest from their customer to engage the SMS, the added programmable messaging of SMS capability of product promotions, countrification’s and abandoned shopping cart used cases. While it’s still early, this is a trend that we continue to see in the market and we are well-positioned as the platform to support marketing campaigns across multiple channels. To close, we’re executing well on our growth investments as we expand our presence in the enterprise and in international markets, and continue to drive success for developers and companies of all sizes in multiple industries around the world. With that, let me pass the call over to Khozema to discuss our financial results.

Thank you, George, and good afternoon everyone. We delivered another strong quarter of growth in Q2 as customers continue to choose Twilio as their customer engagement platform, and we saw great performance with Twilio SendGrid in its first full quarter. Let me take you through some of the details from the quarter. Base revenue, including Twilio SendGrid grew 90% year-over-year to nearly $257 million in the second quarter. Twilio standalone organic-based revenue growth was 56%. Note that these results do not include any benefit from the A2P fees that we discussed in last quarter's call as there was a delay in the implementation timing which I’ll discuss later. Twilio SendGrid contributed approximately $46 million to base revenue growing 28% year-on-year on an organic basis, despite the difficult compare from the incremental GDPR related volume they saw in Q2 of last year. Our dollar-based net expansion rate was 140% in the second quarter, a strong sign of the value that we are delivering to our customers. This has been driven by our investment in our go to market teams, and our ability to drive success across our customer base with the expansion of current used cases or the delivery of new used cases. Also, recall that this metric will not be impacted by the SendGrid acquisition until Q1 of 2020. We ended the quarter with nearly 162,000 active customer accounts. Our top 10 active customer accounts contributed 13% of total revenue in Q2, compared to 14% last quarter and 17% in Q2 of 2018. Gross margin came in above 59% in the second quarter, up slightly from Q1. This was primarily driven by having three months of benefit from Twilio SendGrid in the quarter versus only two months in Q1. Additionally, with the delayed implementation of the A2P fees, we didn't experience the expected impact to gross margin in the quarter. These are great results, but is important to remember that expanding gross margins is not our strategy today. We remain focused on revenue growth in gaining market share as we have since going public. Historically, we said we expect gross margins in the mid-50s, but with the benefit from SendGrid, we expect to see our margins in the mid-to-high 50s for the foreseeable future. And keep in mind, there are other items that can cause fluctuations in our gross margins, including products, country, and customer mix, network service provider fees, FX, and more. Let me quickly touch on the new Verizon A2P channel, which I referenced a moment ago. The launch was delayed despite our earlier expectations of the mid-May timing. As we have discussed, we plan to pass this feature to customers, which will add the revenue with depressed gross margin rate, but we don't expect any impact to the gross profit for message. Accordingly, the guidance we provided in our first quarter call included revenue of $1.5 million for the expected impact over the second half of Q2 and $89 million for the full-year. However, due to the implementation delay, we didn’t recognize any A2P related revenue in Q2. The latest information we’ve received suggest the implementation is still delayed. But due to the uncertainty around the exact timing, we are adjusting our guidance to remove any expected revenue benefit for Q3 and the full-year. If and when these fields are implemented, we will provide the benefit to revenue on the respected quarter's earnings call. I would also reiterate my commentary from the last call, that we do believe it is likely that the other carriers will ultimately implement similar plans, but we do not have any updated information on the timing of such plans. Finally, consistent with the commentary on our last earnings call, we expect to generate a modest non-GAAP operating loss in Q3, due to SIGNAL, which takes place next week. Keep in mind that SIGNAL was held in Q4 last year, which will also impact the year-over-year compares for both quarters. Our strategy remains to reinvest in growth to take advantage of the opportunity ahead of us, while operating the company slightly above breakeven. With that in mind, we expect to return to a modest level of non-GAAP profitability in Q4. To close, we delivered a strong second quarter and our focus on growth investments is setting us up well for the second half of the year and beyond. And with that, we’ll open it up for questions. Operator?

[Operator Instructions] Your first question comes from Nikolay Beliov with Bank of America. Your line is open.

Hi. Thanks for taking my question. This is actually Jacqueline Cheong for Nikolay. Two questions for you. One why is the expansion rate down from 146% in Q1 to 140% in Q2? And the base revenue guide up was only slightly up on a larger Q2 beat, is that due to tough second half comps and Verizon, or is there some other reason in the business?

Yes. Let me take the second. This is Khozema. Thanks for the question. Let me take the second part first, and then I’ll get to the first part in a moment. So, in terms of the second part of your question in terms of the base raise and the overall raise, so the way to think about it is that in essence we kept the guidance effectively the same, the same time we took out about $9 million of Verizon revenue from the year. So, if you think about it on an apples-to-apples basis we’re effectively raising for the year with that out of the year, and so we feel pretty good about the input to the business, and how our growth is progressing, but that’s really the mathematical reason for that. In terms of the first part of your question, I mean, in terms of the expansion rate overall, I mean, we feel great about 140%. I mean, I think it’s a real strong testimony in terms of the way that our business model is progressing. BB&E is one of the metrics that has fluctuated a little bit up and down in the past, but I think it’s been reasonably consistent with prior periods. It is down a little bit relative to the prior quarter, but again I mean I think we feel really good about the inputs of the business. We’ve always said that the expansion rate will fade a little bit over time just given the fact that we’ve got all the cohorts that are starting to grow at a slower rate, but that’s pretty consistent with our prior commentary.

Got it. Thank you so much.

Your next question comes from the line of Bhavan Suri with William Blair. Your line is open.

Thank you. Hi, guys, thanks for taking my questions. I guess maybe I'll start of first with just Flex. I think George you touched a little bit here on Flex in the quarter. I guess, I like to understand what kind of demographics of the customers you're seeing as the only sort of Flex adopted, on the sort of patterns or trends, obviously you’ve talked about sort of Shopify and a few others like that. But those are very early sort of wide growth type of customers, of the people you're talking to [indiscernible] on in the pipeline, is there any sort of trend or pattern or [indiscernible] noncustomers size type of company things like that? I love to see little more color on what you're seeing there on sort of, I guess closely on the pipeline?

Yes. Great question. I think that’s a great question because certainly we are seeing right now the early wave of adopters and those companies tend to be digital disruptors, disrupted companies build our cultures, more nimble companies looking to explore new technologies and I think Trip Action is a great example of that. Also, we are also targeting enterprises, but as Jeff mentioned those are going to be longer sales cycles and we're having those conversations as well, but kind of the early wins are more of that digital or early disrupted company type builder culture.

Got it. That’s helpful. Thanks. And then I guess turning, just a follow-up to previous question there, maybe Khozema, not so much on sort of the – taking the Verizon piece out, but also think about it, the beat through last year, and I know you told us the beats can’t be the sort of the exception on the size we saw last year, but I was wondering as you told about guidance philosophy and you have been over a while now, has that changed at all in terms of how you're guiding or thinking about visibility given sort of, you know that even if we take that out, the level of the beats or the level [indiscernible] just maybe a marginally more muted in the world last year, so just wanted to – been a change of philosophy or how do you think about visibility or just a natural sort of long large numbers [indiscernible] now?

Hi, Bhavan and thanks for the questions. So, again I just emphasize again the lack of the Verizon element to the year that we took out that we previously had in. I would say, look overall, no real change in philosophy. I think the inputs to our business continues to remain really strong. I think one dynamic since last year is that our ability to forecast the impact of customer growth keeps improving. And so, I think you’re just not seeing the significance of the beats, maybe be the same as they were previously as we really started to grow out our sales machine. I think the other dynamic is that well, I talked about the Verizon piece already so, that’s really the gist of it.

Okay. Great. Thanks for taking my questions. Appreciate it.

Sure.

Your next question comes from Michael Turrin with Deutsche Bank. Your line is open.

Hi, there. Thanks. Wanted to spend a little bit more time on Flex and partners. With the implementations moving along and is there any more color you can add in terms of where we are in terms of engaging and expanding with the partner community and then secondarily how important are partners and how bring Flex to market, especially on the large enterprise side where it sounds like that’s kind of the next opportunity after this builder driven culture that is flowing if you were to start?

I think it’s a great question and part of it is critical to our Flex strategy that’s one of the reasons why we’ve been investing in our ecosystem. In fact, we just brought over a fantastic new VP of our SI community over from salesforce, so we're really excited about that. And I think, we’re expecting or we're seeing what we are expected to see, which is that our partners are getting up to speed. They are learning how to deploy the technology. They are doing it successfully and we have a lot of lighthouse accounts now being deployed by partners with multiple partners in our geos being developed right now so that we can have the coverage we need. And eventually, we would like to grow to even larger sizes of transactions and partner sizes. So, good progress, good moment and if you are coming to SIGNAL you can meet many of these partners, they’ll be there, great companies like Proficient and Presidio are continuing to grow and those early names throughout early are growing and developing. So, everything is on track. Thanks.

Thank you. Can you spend another minute on PSD 2 that’s the second quarter you’ve mentioned that? Any updates on time line or demand or vendors or where this is coming as this is similar to GDPR, are they also aware you can help them in meeting this directive?

Yes, it’s Jeff. I’ll answer. PSD 2 obviously presents us with an opportunity because you have got, you are essentially regulating the indication of transactions and we’ve got a great solution for our Authy product. And so of course our go to market teams are using that as a vector to what companies know that we have a solution in the market, transfer lives this quarter was the customer we mentioned on the call, who adopted us for PSD 2 and we think this presents a great opportunity for us, yet another vector for more customers to adopt Twilio.

Great, thanks. Looking forward to the SIGNAL show next week.

Thank you.

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

Great. Thank you very much. Jeff, I was wondering there is so much debate in the market going back and forth about robocalls and I know you’ve done blog posts and you’ve talked about it before, but can you just give us an update on the revenue exposure, just I think it would benefit a lot of people who are even listening in, and then I just have two follow-up questions on Flex, if you don't mind?

Yes. Absolutely so. Heather, [indiscernible] there is a debate going, I don't even like debate, I just [indiscernible] saying it is bad. As far as exposure to Twilio virtually nothing we’ve ran a platform for, since inception to not welcome those types of customers on real platform, and so the [indiscernible] platforms, I can't say that it’s absolutely zero, we’re vigilant about ensuring that people who do adopt Twilio, if they have the wrong motivations or as long that we don't want them to continue to operate as quickly as possible.

Can you just share with people how you're able to do that to get them off the platform, if you do find them, because that’s the other thing we hear a lot about, sorry, but sorry to ask for more elaboration there?

Yes. Sure. I mean, as far as the mechanics, we have a terms of service and acceptable use that allows to start-off with customers.

[It’s more you touched on.] Yes, exactly.

Yes. You couldn't look at the metrics, you see sort of things like answer rates and call durations and use some AI to look at those traffic patterns. We also have operations team that is obviously looking at these cases and I truly – matter of pattern matching for people or machines to see the patterns that exist in those behaviors and to read them out.

Okay. Very helpful. Thank you. And then on Flex, my questions were, one, I guess do you have any pipeline goals that you can share with us for the year? You’ve always said like 2019 would be the year of pipeline holding? And then I’m wondering if you can share with us kind of, how long the implementations are taking? And if you kind of think about the competition now that the product has been in the market for longer, are you seeing any change in who you are coming up against in RFPs?

This is George. So, we're not going to comment on our pipeline targets, but on the second part of your question, certainly we are seeing deployments that are coming in the kind of months category I would say because we have to remember that at the Flex application platform that developers are building on. It’s not a [SaaS] products, so we’re seeing timeframes in the months roughly. It depends obviously on the customer and in terms of the competitors we're seeing. I would say it’s not materially changed. I mean a lot of our customers are comparing us as legacy, some are comparing as SaaS product it really just depends, I wouldn’t say we’ve seen a meaningful shift there.

Okay. Thank you.

Your next question comes from Mark Murphy with J.P. Morgan. Your line is open.

Yes. Thank you very much, Jeff. If you look broadly across your base, about 160,000 customers, can you compare and contrast the taste of activity you’re seeing with SMS text notifications, versus in-apps types of notification? And I'm just curious if they are finding that in-app is not feasible to try to reach the broadest audience or are they somehow examining it?

Thanks, Mark. I mean, I think the SMS has been really powerful medium for companies to reach their customers for a very long time, because you don't require a user to download a mobile app. You don't require them to push okay, when you have the notifications alert. What you need is their phone number and their permission, and you're able to reach pretty much 100% of your customer base. And that's a really powerful medium to reach customers no matter what OS you're on, no matter what country you live in. And so, while it does depend a bit on the used case, what we saw, you when push notifications first came out in, what, 2010, I think there was this question of like, how well is that going to replace SMS. And I think time has proven out that people are declining push notifications. However, thoughtful, meaningful SMS embedded into business processes and into contact flows, especially two-way is a fantastic way for companies to engage with their customers. And that's been driving the tremendous growth that we've been seeing in SMS now for more than a decade.

Okay, great. And as a quick clarification, Khozema. If we were to adjust for your removal of the incremental A2P revenues for this fiscal year, it looks like you are actually raising revenue guidance for the year by almost $20 million. I just want to clarify, as that seems like an accurate way to think about it?

I think if you do the total, that sounds pretty close. I think if you look at base, it's probably closer to high single digits.

Understood. Okay. Thank you very much.

Thanks for the question, Mark.

Your next question comes from Brent Bracelin with KeyBanc. Your line is open.

Thanks, and good afternoon. I guess, the first one for Jeff or George, found it interesting that you landed a Fortune 50 retailer. My question here is, how prevalent is this concept of aggressively moving towards a build versus buy going from 80% to – 80% buying to 80% kind of building seems like a pretty big material move? Is this kind of an anomaly, or do you think there's more active discussions and dialogues that you're having with customers that this can be more the norm over the next couple of years? And then I have a quick follow-up for Khozema, if I could.

Yes. I would say that this particular customer is – the magnitude of this shift is the norm. But I do think that we've been saying for a long time now and I think it's really true, that every company is becoming a software company. And I do think there is an aggressive demand for, I see us globally for innovation through software. And we're riding this wave of customer engagement and digital transformation that by and large companies realize to differentiate themselves, they need to build software, they can't just use something off-the-shelf. And they also have very custom processes in their companies that – and legacy systems have to integrate with that required software development. Now, some of that's happening for SI, some of that's happening in-house. But I think companies are realizing that the promise of hey, let's just buy a cloud app deployed and it's going to give me a differentiated perfect solution is just not reality. So, I do think that is a trend that we are benefiting from. And I think one of the reasons we're so excited about our future is that this marriage of the customer engagement, demand, plus the energy around building differentiation, I think, we sit at the intersection of those two really important trends.

Helpful color there. And then I guess just a follow-up – yes, go ahead.

I was going to add to it. I mean, I think that's one of the core hypotheses that Twilio has operated under – since our inception is that, as we have an increasingly digital world, every company needs to become a software company. And we've seen that more now, if you look at the brands that are on our earnings calls that we're talking about, or brands, companies on our website, history of our customers. It is increasingly every kind of company and it's fascinating, because you see a born out of competitive dynamics, right? So, when one company takes this approach, and starts building and creating great customer experiences, then other competitors in the market will feel they need to actually have a great customer experience, too. And so, it is a matter of natural evolution, I think, of the market of every company needing to compete in a digital world and having to hire developers and to build their way into the future. And so, I think it's a really powerful trend. That's kind of what I want to put a little exclamation point on it, because it is certainly one that you see headlines on that. I haven't read the headline in 15 years of like such – and such companies outsourcing all of its IT, that's a headline from 2000 not from 2019.

Yes. And just to back of what Jeff just said, I think in this specific example, this new customers, number one competitor has been a TWILIO customer long time and also has been building solutions, I think it’s a not a coincidence that this customer now has seen that and was not a Twilio because they see some of this energy in the market.

Very helpful color, I think you both. I guess as a follow-up to condense this increasing kind of build versus buy decision Khozema. The base business did cross over $1 billion run rate for the first time and while I don’t know lot of $1 billion business growing at a 50% plus organic growth profile. I was just hoping you could walk us through the growth levers, how you’re thinking about just growing that base business given you’ve crossed over now that that $1 billion kind of run rate threshold and how should we think about your building in the leverage to sustain kind of high growth, maybe not 50% growth, but how do you sustain growth at that level? Thanks.

Thanks for the question Brent. Let me give you a few answers. I think the first thing is that, in general we feel great about the diversity of the customer base, so one of things that we pointed out in the discussion earlier is that, as we look at our top 10, I think that was a number that was more concentrated in the past and as the got to market machine which has really been unleashed, I think we’ve seen more and more used cases across a broader range of customers and just the diversity at that base and it has been really good for us. So, I think that’s one. Another is that, we have really good contribution across all the different product lines, and so I wouldn’t per se point to any one of them as being a particular outlier. I think we’ve seen great roads for example of course in messaging and voice, but at the same time I mean we’re really excited about some newer products and we’ve had a lot of discussions about Flex for example, but there is also wireless and obviously with the addition of SendGrid, we’re quite excited about the growth from that business as well. So, I think from our perspective whether or not we’re able to kind of sustain it of that high 50s growth rate, I think we feel really good about the inputs of the business in kind of their entirety and we feel great about crossing sort of the 1 billion run rate mark, but in general we feel like we’ re going to be able to continue to grow the business really across all fronts. There is a lot of more work that we can don on the product side internationally certainly is something I didn’t touch on, but I think we’re excited about too, but in general I think we feel great about where things have headed.

Thank you.

Your next question comes from Ittai Kidron with Oppenheimer. Your line is open.

Thanks, and good numbers guys. I guess Khozema I just want to go into the net expansion discussion, which we started the conversation with. I think you’ve made a comment that clearly it is very healthy, but you also expected not to decline materially going forward. You’re now going into the second half of the year where you have very tough year-over-year comps on the expansion rate. Help me understand how you can kind of keep it that level or you should see at least little bit more greater modulation and that figure just given the year-over-year comps here?

Yes, maybe just to comment on the first part of the question. I did not say that I expected to decline materially, so I just want to clean that piece of it up. In general, the way that we think about it is that the expansion rate overall it’s an industry reading rate at 140%, it’s down a little bit, no doubt about that, but I think at 140% we feel like it’s a really strong testament to our business model, and the fact that we are able to maintain it at that level at our size and scale is really profound. So, I think in general, I mean if you look at the expansion rate, historically, it’s fluctuated a little bit, it’s gone up and down, it’s been incredibly strong over recent periods. You know, year ago for example, it was 137%, so it’s up a bit from there. I think, in general our go-to-market model has been incredibly strong, we’re driving deep relationships with customers. The one thing that we’ve always said and maintained over the last several calls is that that expansion will fade over time. It is not that it’s going to be a precipitous drop, but it will fade over time and that is just the kind of long large numbers kicking into the way that the business is going to grow, but I wouldn’t take that as anything other than the business is just becoming a lot larger, but in general we feel great about our growth aspects.

Very good. Just a follow-up. I don’t know that you’ve mentioned in the call, maybe I missed it, but what was non-U.S. revenue in the quarter?

Non-U.S. revenue was 29%.

Thank you very much. Good luck.

Thanks.

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

Yes thanks. Just a couple of questions. First maybe just to circle back to SendGrid and the integration progress good to hear some examples of the cross-selling opportunity, but I wonder if you could just kind of qualitatively help us understand kind of what any ran in that cross-selling opportunities, you think about go-to-market from the legacy SendGrid team and developers and Twilio and enterprise side there. What percentage of those folks are actively selling either e-mail or SMS depending on the organization and kind of what’s the roadmap from here on that front?

This is George. We’ve made I think excellent progress in terms of integration. We’re on track with our plan when it comes to how we’ve been planning to integrate our go-to-market forces. We today have a sales force that is able to sell the full range of Twilio and Twilio SendGrid products to our customers, and we’ve also brought in the existing SendGrid go-to-market teams to create one unified customer experience. We’re not all the way there yet, but I think we’re certainly on track than what we planned and I think we’re seeing that in some of data points we’ve given you, and I’m very, very pleased with the team and what they’ve accomplished.

Okay, great. And maybe, George, actually just a follow-up to you on some of the earlier comments on IoT. I wonder if you could talk about how you are thinking about the size of that market opportunity, it sounds like we’re very early in and when can that become more substantial, and what does 5G potentially mean to that? Does that open up more conversations, are you starting to see that yet?

I think on a big picture level, obviously we’re excited about the opportunity. In programable wireless, we’re seeing many of these early adopters come and build on a platform. I think we are fulfilling on the promise that Twilio always stands for, which is opening up the innovation potential of a major communication space to all developers, not just the biggest companies in the world. So, we’re seeing companies of different sizes, but especially really innovative and newer companies building on the Twilio from choosing us and we are investing in the product and I think you’ve seen that a SIGNAL and we’ll talk about it more at SIGNAL, but we’re just on I think a very healthy trajectory. So, we’re excited to share some of those wins on this call. In choosing about the 5G, I mean obviously for the customers that we’re having these conversations with, we are talking to them about all the evolution we’re seeing in the market including 5G. We’ve launched some of our products that are taking advantage of some of the innovation to market like our narrow band IoT products. We talked about our SIGNAL, so it’s definitely an evolving market, but obviously some of these things like 5G are still early, and we’re not – we are not having conversations at this point. Certainly, a very exciting space and we’re fired about the opportunity.

Okay, great. Thanks.

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Great. Thanks. Just diving a little bit more into Flex. You mentioned augmenting kind of being a way and then entering the customers, I’m just wondering if there is any kind of easier used cases that you’ve found and kind of pitching into some newer customers, understanding it’s early days and then maybe second, just any customer interest or any impact to business from the rollout of RCS, chat? That’s it from me. Thanks.

I’ll talk of – this George. I will talk about Flex and I will touch on RCS a bit, although Jeff may want to expand on RCS some more. Certainly, look I think when you have an innovative product like Flex, there is this natural points that are easier for customer adoption, Green field used cases, used cases where companies are not actually outgrowing, their previous generation of technology. I think that is Trip Actions is a great example of the latter, and those are the ones you’re going to see faster traction on and I think those were some of the ones we talked about already. And over time, I would expect that we would see more replacing legacy used cases, but the early adopters are going to be ones in the mode of new deployment or outgrowing previous technology. In terms of RCS, we’re definitely having conversations, but I wouldn't say it's a big needle mover at this point. Jeff, do you want to add anything to that?

Yes. I mean, I think what you can think about with RCS is, it is a – the biggest change to SMS that's occurred in, what, 40 years, which is, it is essentially the same dynamics as SMS, but it adds a lot of new capabilities to the channel that enable you to do new things, such as transact on the channel with recommended actions, buy buttons, photo carousels. I mean, it really turns messaging into essentially an app replacement for a whole lot of use cases. And so, we think this is going to further accentuate the power of messaging for companies to engage with their customers. When you cannot only, for example, send notifications or do – to a chat with a customer, it actually presents them with the option to buy it now right here or to send them images and maps. And really, if you think about all the companies that have mobile apps that you don't download, but you would engage in a lightweight checklist, when you don't have to download anything to be able to accomplish many of the same goals, such as making purchases or engaging with supports, getting returns, getting information, whatever it is. That's the power of that RCS and some of these other new channels are going to bring to the world of messaging. And I think that there is something of a secular trend forming of messaging becoming a more and more important medium for companies to engage with their customers. And RCS will take some time to play out, because you have carriers have to roll it out, you have handsets that have to support it, you have either OS upgrades or handset replacements that consumers need to do to get full support. And so, it's going to be this very – somewhat messy matrix, actually, of carrier support, a handset support of who actually can benefit from it. And that's where a platform like Twilio comes in where you can – is a convenient solution for our customers, because it means that they can take their SMS that they're doing with us today. And as each individual user is capable of taking advantage of RCS, upgrade that conversation to the most feature capable – capabilities of that particular customer. And so, we can bridge customers in a very seamless way as the leader in the space with SMS and bridging our customers into the world of RCS and beyond. And so, it's a very – we're very optimistic that this is going to be a fantastic medium for our customers to further engage with their customers, because they can do more powerful things.

Got it. Thank you so much, guys.

Your next question comes from Rich Valera with Needham. Your line is open.

Thank you. Question on Flex. I know it's early days, but I'm wondering if you could characterize what a typical engagement process looks like for Flex? Any sense of the timing from sort of engagement to a sale? And then if you could give any color on whether customers are tending to prefer the usage-based model over the traditional sort of per user model? Thanks.

Good questions. So, obviously, we – since we GA’d the product in the fourth quarter of last year, any transactions that we're talking about in Q1, Q2 timeframe are going to have – sales cycles are typically in a couple of months range, typically, weeks to months, depending on the customer scenario. We are working on longer-term ones, obviously, those are not –anything longer sales cycle, we're not going to be able to talk about at this point in time. And can you remind me the second part of your question, again?

The use – the pricing models of customers are leaning towards the traditional or that the usage base?

We're seeing both actually. It's interesting. We're seeing truly like interest in both options, both are viable and important options in the marketplace. And we're getting an interesting level of traction, I would say, on the agent hour model, I think it's in-line with the kind of general brand and value prop, the Twilio has in the marketplace. So, we're excited to see that.

Great. Just a quick follow-up if I could on a modeling question. The bridge between the unchanged non-GAAP income from operations of $5 million to $8 million and the higher EPS, is that just interesting income? If you could just clarify what the bridge is there?

I didn't hear the last part of the question. I'm sorry.

The bridge – your non-GAAP income from operations, I think, is unchanged quarter-to-quarter for the year. It's sort of $5 million to $8 million, but the EPS went up and just try to understand the bridge there?

Yes, it's basically other income.

Got it. That's what I thought. Okay, thank you.

Your next question comes from Nandan Amladi with Guggenheim Partners. Your line is open.

Hi, good afternoon. Thanks for taking my question. So, this might be a question for Jeff or George, kind of a philosophical one. Historically, you've marketed to developers more of a grassroots kind of effort. Now, with these prepackaged products like Flex, you're not only selling to enterprises, but you're also engaging a system integrator community. So, how does your go-to-market motion? And as a result, your marketing – data marketing efforts changed?

Well, this is Jeff. I'll take the philosophical portions of it. And maybe I'll let George talk about the go-to-market implications, if there are any. But in essence, I don't see this as having changed. Our approach is still really to engage with developers first, and to get developers onboard with Twilio. And then they bring us into accounts of all sorts of different varieties, whether it's the tech disruptors that were many of our early customers or now even bigger enterprises who are building software and hiring the same developers. Developers are really where our go-to-market and our awareness often starts. And I think you see this borne out in most of these deals that we're talking about even when the Fortune 50 companies, the developers are often the ones who are saying, “Hey, Twilio is the answer to how we can solve this problem, let's get started.” And oftentimes, it starts by building that prototype with very little friction and that's how we get the momentum going in these accounts. Now, when you have a bigger customer, Fortune 50 customer, you're less likely that they're going to say, great, we just want to put in our credit card and go live. Usually, there's a sales process in contracts and MSA design and things like that, and of course, we're going to engage in those conversations. But often, it's the developer who first brings us in. Now, you asked about Flex as well. And I would just say that Flex is still a developer product. And while developer is not going to single handedly purchase the contact center, the developer again becomes a big influencer around the decision when you're looking at this world of, gosh, we've got to integrate all these systems together. We've got to create this great customer experience. We need developers. We need code to do that. And the developers can say, you know what, I've heard about this Flex thing, let me go give it a try. And again, they can provision a Flex instance very quickly, self-service, they can build a prototype with very little friction and show the business what's possible. And then that often begins the engagement, begins the conversation with the customer about how-to bring Flex into their environment and to roll it out in a bigger way, which again leads to a sales conversation. So that would be – my take is that, we've layered sales and a sales motion to a target the enterprise and to focus on customer success, but it comes on the back of the developer momentum that we've always had and we continue to have growth.

And this is George. I agree with Jeff. I also see us augmenting that with some new motions to reach developers that historically we haven't reached before. And I'll tell you a story. Yesterday, I got a friend of mine who texted me and said, “Hey, my company just asked me to spin up a Twilio app by end of day today.” And so like – and I just want to let you know that, because he knew I work at Twilio. And I kind of – I called him later that day, I was like, so tell me the story of what happened. And it turns out that this – what it happened was that, our sales team is [indiscernible] account. In fact, I met one of the executives of this customer at one of our New York customer dinners. And that – and there – that this is an example where it's kind of the opposite of our typical deployment mode, which Jeff talked about, which is that the developers inside this corporate IT department had not been exposed to Twilio interesting enough. And because we had worked with them at the enterprise level, there was kind of a buy in at the enterprise architecture level if they want to use Twilio and then the message is given to the developers and they were starting to use it. And we're seeing that motion also to augment this amazing bottoms-up motion that Jeff talked about. In fact, we've done some enterprise hackathons, which Jeff mentioned in some of our customers to kind of – to add to that kind of motion. So, I think that one of the exciting things, I think, there's a whole world of enterprise developers that we have not yet reached with our traditional motion, and I think it gives me optimism around more upside potential for the company. And I had kind of always been waiting to see when this friend of mine would start to use Twilio. And yesterday was the day. So, I think that this go-to-market motion that we're layering it is bearing fruit. And it's not only augmenting the bottoms-up motion, but also creating new motions inside the company for organizations where the developers are more kind of wanting to adhere to a corporate standard. So, I think it's a really exciting opportunity out of us.

Great salesman, George, like, wait for them to tell me that they have discovered Twilio.

Thank you, guys.

Our final question will come from Rishi Jaluria with D. A. Davidson. Your line is open.

Hi, guys. This is Hannah on for Rishi. Thank you for taking my questions. First, it is great to hear Flex is doing well so far, I was just wondering if there are any major lessons that you took away from your second quarter of having it generally available and if there is anything that surprised you there?

Yes. I think that we’re always learning about the product. I think that one big lesson was how to effectively sort of bring partners for one of the previous questions in to the motion of bringing them in earlier. I think that was a good lesson learned. I was trying to apply that in the second quarter. I also think that we’re getting, I think much better as understanding kind of the – how to make a customer successful frankly and we’ve started to build-up some of our own internal teams [indiscernible] architecture or Expert Services to help certain customers. So, I think we’re getting better with this success formula. I think we’re getting better in terms of our sales targeting and we’re finding the motion, but I think it all sits under the backdrop of, we think we’ve got a great value proposition in the market, and we’re excited about the interest we’re seeing.

Great. That’s really helpful. And then I just want to go back to international performance, which you briefly mentioned. Last quarter, you mentioned hiring new leaders in Latin America and Japan and I was wondering if you could comment on how those two regions are performing and then general international performance maybe strength in specific regions you are seeing?

Yes. I think that obviously we have hired and built – invest internationally is one of kind of the three kind of major distribution initiatives we talked about beyond our coverage strategy, which is enterprise international and partners. So, we’ve hired great leaders like David Parry-Jones for EMEA, got a great leader in Asia Pacific that is home grown and we hired another great leader for LatAm recently. So, I think we are starting to see that our investment in coverage and in leadership in those areas is working. Obviously, it is set against a backdrop of, you know like strong growth in North America as well. So, it’s nice to be in a business where we’re growing across multiple product lines, multiple geographies, but definitely we are investing in international and we're excited about the early results.

Great. Thank you, guys.

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