Hello, and welcome to the Twilio First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. [Operator Instructions] I will now turn the conference over to Bryan Vaniman, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Sara. Good afternoon, everyone, and thank you for joining us for Twilio's First Quarter 2023 Earnings Conference Call. Our prepared remarks, earnings press release, investor presentation, SEC filings and a replay of today's call can be found on our IR website at investors.twilio.com. Joining me today for Q&A are Jeff Lawson, Co-Founder and CEO; Elena Donio, President, Twilio Data Applications; Khozema Shipchandler, President, Twilio Communications; and Aidan Viggiano, Chief Financial Officer. As a reminder, some of our commentary today will include non-GAAP financial measures and key metrics. Reconciliations between our GAAP and non-GAAP results and further information related to guidance, definitions and key metrics can be found in our earnings press release and the appendix of our prepared remarks, both of which can be found on our IR website. The information provided and discussed today also include forward-looking statements, including statements about our future outlook and goals. These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that are described in more detail in our most recent periodic reports filed with the SEC, including our most recent annual report on Form 10-K and our forthcoming quarterly report on Form 10-Q, which are available on our website and at sec.gov. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly and we expressly assume no obligation to update any forward-looking statement, except as required by law. With that, I'll hand it over to Jeff for some opening remarks, and then we'll open the call for Q&A.

Thanks, Bryan. Before we hop into the call, I wanted to really take note of three things today. First, I wanted to note that the substantial actions that we took in Q1 are working, as you can see from our strong non-GAAP operating profit results. One quarter in, we're really starting to show the profit potential of this business. We're also one quarter in to our new structure. And as you can see from our Q2 guide, we're looking into continued headwinds as we built the sales capacity of our data and apps business and doing that in a very tough macro environment as well. But the good news is, I see our leadership role continuing and even expanding in this environment, and I don't see things like changes in our churn or losing share in the market. I see moderation in our consumer-facing usage patterns as well as us lapping our peak crypto usage from last year. And these are some of the headwinds that we'll talk about. But through all of this, what I really want to do is to thank the Twilio team. We've been navigating a lot of change over the last quarter. And I see Twilions every day navigating these changes with grace, with energy and understanding of the job that has to be done here, and it's truly energizing for me and for the rest of the leaders in the organization. That's really truly the Twilio magic in action. So thank you. Second, I'm sure this is on people's minds. The AI platform shift is upon us. Like the PC to web transition, the web to mobile, this is the next major technology shift in our society. Working with customers, we see many ways to activate customer data in segment across the whole customer life cycle using artificial intelligence. Now we'll have more to say about this during the course of this quarter and of course, at SIGNAL in August in terms of products, in terms of partnerships and in terms of customer use cases really looking forward to that. And the third thing I wanted to mention today lastly is go down. Now, onto your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Mark Murphy with JPMorgan. Please go ahead.

Thank you, very much. So, a question for Elena. You mentioned being in a strong position to actually reaccelerate bookings later this year. And Khozema, in their prepared remarks, you're mentioning optimism in being able to reaccelerate growth as the year progresses. I'm wondering, if you can just shed a little light on what is underpinning that positive thought process? And could it mean that Q2 might mark a bottom actually for the revenue growth rate or a local bottom for the revenue growth rate?

Hey Mark, it's Elena here. I'll start, and then I'll pass it over to Khozema for some commentary on the communications business. First, let me just kind of walk you through the path to here to provide some context and groundwork for what's to come. First of all, I joined the company a year ago, exactly this week. And at the time, Jeff asked me to sort of rearchitect and rebuild our go-to-market muscle and motion. And what that meant was two things. One, more substantively impact the communications; and one, on the data and application space. So, we realigned, rearchitected our sort of resource map and went through some of the big cost-cutting initiatives that you've seen and you're starting to see the results of that. And that was primarily around our go-to-market muscle in the comm space. At the same time, we were sort of reinvesting in the data and application space. And the job there has been to rebuild and grow our talent base there. So, we had some -- early in 2022, we had some turnover, some attrition, some changes in how we set up the sales team, which we then unwound and began to rebuild from there. And so that rebuilding effort has taken us the last few quarters. We're now fully hired for the most part, but we're not fully ramped. So, we're all over that over the next couple of quarters is getting that field organization, both at the AE level and the manager level, fully ramped. So right now, our big focus is on enablement. It's on getting those reps from kind of their first deal to their test deal and really showing -- we're really showing sort of what that team is capable of. I'm just back -- several investors just back from our delayed sales kickoff, where it was very much a training-focused event and enablement-focused event. And having spent a bunch of time with our people across the last few weeks, I feel really comfortable about the team that we have in place. That's a big reason for optimism as you've asked. I think, we're also doing all of this work during a pretty tough macro time, as we've also talked about. We're seeing evidence of that in a couple of areas. So, we've talked in the past about things like cycle lengths, average selling prices, conversion rates across the funnel and a little bit of contraction. We're definitely seeing all of that, at the same time that we're rebuilding, reengaging, reenergizing a field organization. So with all that said, I just want to close out with the things that give us real optimism. Number one, that Jeff talked about in this kickoff, we're seeing sort of great customer wins amidst all of this. I had a couple in my prepared remarks, Cricket Wireless. He was current Twilio customer, became a segment engaged customer; Web Health, a large BPO becoming a sizable Flex customer. We've had a couple of other really key wins in the financial services space across this quarter and last. And so we're seeing great strides there as well as great strides in our innovation agenda. Our product teams are really taking down a lot of the road map, delivering a lot of new capabilities from Segment Unify to Flex Unify, which ties together Flex and Segment with some customer wins across each of those as well. So team just our enablement journey is in full swing. Our product delivery is in full swing and bringing down some pretty exciting customer wins. Those are the things that give me faith that we'll begin to see ourselves climbing out of the trough that I think was in part self-inflicted, as we talked about throughout last year and in part driven by the headwinds in the economy. I'll let Khozema talk about the corollary on the comp side. A – Khozema Shipchandler: Hey, Mark, what I would say is, first of all, I totally echo Elena's enthusiasm about the path ahead here. I think there's a lot to be excited about. Our sales kickoff was at the same time. We kind of did them together. And so there's a lot of energy among the sales rep force. So just to maybe go to that first. First of all, sales rep productivity remains quite high. As Elena mentioned, we did a lot of work on cost structure. But even in spite of that, I think we feel very, very good about rep productivity. Second thing is that we are maintaining share and what is -- continues to be a tough kind of macro environment. And we feel good about like a lot of our most recent customer wins. We talked about two deals in the script specifically where they were our largest ever on e-mail and selling network authentication. So I think those are indicators that customers are continuing to -- we're continuing to win with our customers. They're continuing to grow with us, albeit at slower rates than where they were. And third, and perhaps most importantly, especially as you look at our financials is we have a really tough comp relative to last year. Crypto was really outsized in the way that that part of the impact in our business grew, and we're kind of hitting the peak points in -- as we're lapping that. So I think just naturally, as we come out of the next couple of quarters, you're going to see just some natural acceleration in the growth rate as a result of that. I would hesitate to call it bottom. I mean, it's very dynamic, obviously. And so I don't think we're necessarily prepared to say that, but I think we're very, very excited about the setup for the back half of the year and especially with our energy with customers.

Wonderful. Thank you so much. A – Khozema Shipchandler: Thanks, Mark.

Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead. Q – Meta Marshall: Great. Thanks. I appreciate it. I just wanted to -- you mentioned kind of anniversarying peak crypto. But if you could just give a sense of what verticals you're seeing the most headwinds? And then just on the Communications side, like what does reduced marketing budgets mean is that we cut certain use cases? Do we just kind of send fewer e-mails, or is it just simply from a reduction in transactions? I think just as we try to kind of think about how to model a recovery, just trying to get a sense of how use cases or the bounce back would evolve? Thanks. A – Aidan Viggiano: Hi, Meta, this is Aidan. I'll start, and I'll hand it over to Khozema. So just to talk about some of the industry headwinds. We've called some of them out in the past, and we continue to see headwinds persist on the social side, consumer on-demand, e-commerce and in particular, crypto. So those continued in the quarter. And as it relates to crypto, again, as Khozema said, we saw volume peak on our platform kind of in the Q2, Q3-ish time frame last year, and that's creating a few hundred basis point headwind year-over-year on the growth. Khozema, I'll hand it over to you.

Yes. I mean I would largely echo what Aidan said. I mean, I think as she mentioned, crypto was pretty significant last year. And so as we lap that, I think we feel pretty good about our ability to come out of that. I think the marketing spend that we referred to was much more on kind of the customer side, if you will, not necessarily on our side. And so obviously, some of our products end up serving used cases that are marketing related. And so as customer marketing volumes have come down a little bit, frankly, that impacts both sides of our business to a degree. But it honestly impacts probably the communications business a bit more significantly upfront. We talked about the dynamics, and Meta, you know the company really well. And on the way up, like we react very, very quickly; and on the way down, unfortunately, we react very, very quickly. And so, as things kind of moderate, I'm really optimistic that we'll be able to come out of it pretty fast. And otherwise, it's kind of business as usual. I mean Aidan called out some of the industries, but otherwise, we continue winning, we continue expanding and we continue to maintain our share. And we're not seeing really any pricing pressure out there either. So, feel pretty good otherwise.

Great. Thanks.

Your next question comes from the line of Michael Turrin with Wells Fargo Securities. Please go ahead.

Hey great, thanks. Appreciate you taking the question. Just on guidance and what's assumed, given there are a number of moving pieces, you mentioned in the prepared remarks. Can you just maybe walk through, what you're assuming in terms of the macro and what you're seeing in expansion rates? Is this a consistent environment that's assumed? And then, just also thinking through the progression of some of the go-to-market improvements that you're making, is there a way for us just to think about the time line and progression of where expected benefits from those might start to play through? Thanks, very much.

Yes, I'll start with a bit on the second quarter and then -- this is Aidan, by the way, and then go a little bit into some of the traction for the year. So, it's largely macro as we think about the second quarter. So the market continues to be pretty dynamic, and we're feeling the impacts of a broader slowdown. And so you see that reflected in our guide. I think the other thing that's important to remember is that, the majority of our revenue comes from our communications business, about 85% of our revenue. As Khozema just said, that's a consumption model tied to consumer activity. So in that business, we are dealing with a combination of macro, as well as the tough comparisons that we just talked about on crypto. And so again, that's creating a headwind year-over-year as it relates to the second quarter growth rate. On the data and application side, Elena has talked about it as well, but we are rebuilding -- Elena talked about our efforts there to ramp up the sales force and really enabled the team further. And we're also doing that in a tougher macro cycle. So, I'd say on the communications side, it's a combination of macro, some tough comparisons on the software side, it's a mix of our efforts to rebuild plus the macro, and we factored all of this into our guide. So, I'd say some choppiness on growth in the short term, but despite that, we're focused on what we can control, which is delivering profit in any environment. As we think about the rest of the year, we're not going to guide quarter -- we're going to continue to guide quarter-to-quarter. We're not going to guide beyond the second quarter at this point. Again, given the fact that most of our revenue is communications and usage based makes it a little bit tougher to call. Like in light of that, we'll continue to plan conservatively guide quarter-to-quarter. I think, the other thing to consider is, as the macro recovers and the consumption-based model comes back, our growth will improve, our DD&E will improve alongside it, and we'll be well positioned on the other side with a much more efficient cost structure.

Appreciate the detail answer. Thank you.

Your next question comes from the line of Ryan MacWilliams with Barclays. Please go ahead. Q – Ryan MacWilliams: Thanks for taking the question. Just one housekeeping piece. How much essentially is the potential sale of your IoT business potentially taking out the second quarter guide? And are there any products or geographies where you're currently deemphasizing revenue as part of these go-to-market changes? Thanks. A – Aidan Viggiano: So as it relates to -- this is Aidan, Ryan. Thanks for the question. So as it relates to the sale of our IoT business. It's a relatively small contributor on revenue in kind of the mid to high single-digit millions. We'll provide some more of that as we go forward. It will be adjusted out of our organic calculations going forward as well. So you'll get an apples-to-apples comparison on revenue growth, but a relatively small contributor overall. As it relates to any specific regions, no plans to deemphasize revenue in certain geos.

Your next question comes from the line of Ittai Kidron with Oppenheimer & Company. Please go ahead. Q – Ittai Kidron: Thanks. My question is for Elena. I was wondering if you can kind of double-click on the data and application business. And more specifically, when you look at the growth of the unit in the quarter, help us understand what products are growing faster versus below this average segment Engage Flex marketing. Which ones are growing faster than the 19% you delivered versus lower? And then since we don't have the historical data on this, maybe you could talk about what deteriorated the most over the last two, three, quarters? And what part perhaps you expect to recover the fastest over the next two, three quarters? Thank you. A – Elena Donio: Sure. So we don't break out product by product. And just I'll remind you a couple of things. One, a number of these products are new. So the Unify product, Engage, like a lot of those things have only been in market for -- from months to a handful of quarters. And so we're excited about the momentum and the progress, but we're -- we shouldn't expect to see those meaningfully impact the Twilio data and applications business units revenue in the very near term. Again, we don't -- we won't be breaking that out product by product. I would just say and reiterate something I said earlier that the real path out of -- the real path to reacceleration, the real path out of this deceleration comes down to two things. Number one is making sure that our team is in seat and enabled. We're putting a lot of emphasis on that. And then number two is just playing through the tough macro environment and really making sure that we're setting ourselves apart from what's happening in the competitive landscape and ensuring customers that even in a time of belt tightening, this is a really good investment, and it makes each of your marketing dollars work harder, to Meta's question earlier. That's really what we're playing for right now. But at the end of the day, like I would say a lot of the themes are hitting both our Flex and Segment products largely, and we're working on ramping and building the team to work through that. Q – Ittai Kidron: When you look into the next quarter guide, is there another significant step-down assumed in this business from a year-over-year growth standpoint? This business was not impacted by crypto. So I'm just trying to understand the drag on the next quarter. How much of that is the communication business versus the data and applications business?

Hi Ittai, this is Aidan. I'll take that. So, we don't provide guidance by business unit on revenue. But as you think about the second quarter, you can generally assume that the slower growth is attributable to both businesses. Though I would say, given the much larger size of communications, it obviously has a bigger impact on our consolidated growth.

Thank you.

Your next question comes from the line of Taylor McGinnis with UBS. Please go ahead.

Yes, hi. Thanks for taking my question. Just looking at the 1Q rev, the 1Q rev declined sequentially and the 2Q guide, I think even if you strip out IoT, assumes something similar. I know you mentioned that there hasn't been much change in churn. So, can you just provide more color on the drivers there? It seems like it might be some seasonality. But if that's the case, as we look throughout the rest of the year, any other seasonal patterns to keep in mind?

I'll start here and then if Elena and Khozema want to add, they can. You're right, churn overall has been relatively consistent. Where we are seeing some impact is, we are seeing a bit higher contraction again, really, we think, due to just lower spending on the part of our customers, and we attribute that to the macro. On the expansion side, we are seeing that at a bit lower rates than where we've been historically. And again, we think that's customers being budget conscious, scrutinizing their spend, and that's really a function of the macros -- the macro. The one area where we are seeing a little bit of an impact on new business, Elena has already talked about it, but is on data and application side. And as she has mentioned, we expect to gain traction there over the year as we ramp our sales force, and we expect bookings to reaccelerate towards the end of the year. So that just gives you a little bit of color in terms of how to think about revenue for the rest of the year, we're going to continue to guide quarter-to-quarter just given how dynamic the macro is. The only other thing I'll call out, which we have already is that, we do have some tough comparisons here in the second quarter.

I would just a little bit more color on contraction for Twilio data and applications. I think the good news there is that, when we see contraction, it is not that we're seeing competitive loss or competitive takeouts and things like that. It's really just customers belt tightening, their marketing spend going down, or their transaction usage, for example, on segment or utilization on segment, just going down because they are contracting. And so, we take heart in the fact that, the product is extremely valuable, extremely usable, but they, as customers, are going through tough times on their own. We see that show up in some of the contraction numbers that we're seeing. So, feel good competitively, but we've got obviously a contraction happening that is a newer dynamic over the past few quarters.

Appreciate the extra color. Thanks.

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

Great. Thanks. This is for Khozema. One of the questions we had was whether growth in consumption from the base would be impacted by the sales restructuring since you were taking so many reps out of that business. With -- given the net revenue retention rate down at 106, how much of that pressure is coming from the macro versus how much is kind of the pullback in your own growth investments? And as you look at a few months into your new low-touch structure, what's -- what do you feel like is working well? What do you feel like you'd like to see some improvements on? A – Khozema Shipchandler: Yeah, that's a good question, Derrick. I would say, in general, I would attribute it almost all to macro. I think the reduction in investments that we made on the sales and marketing side, I think that they were difficult decisions, obviously, that we went through. And obviously, there was impact to employees, and we feel bad about that. But I do think that with the -- going into it and now with the benefit of hindsight, that it was absolutely the right thing to do, and that we're seeing the benefits of the efficiency. You can see those fall through to the bottom line. And I think in terms of any impact in DB&E and/or overall growth, like we're just not seeing it right now. So what I would say is working is that kind of in this BU structure, I think having reps aligned to a certain set of products that are very tightly aligned to an economic buyer on the other side that matches the product set. I think that has been hugely impactful for our business. I know Elena would say the exact same thing about her business as well. And so I think adopting this BU structure in that way is proving to be very, very useful. I think the two other things that I would call out specific to communications is as a result of those reductions, we tilted much more towards a self-service, product-led, growth-oriented go-to-market motion. And I think we're definitely seeing a lot of early successes there. There are various aspects of the experience, like onboarding, like compliance, like cross-selling, like getting additional products into the bundle that we're just working on making a lot easier for customers so that they can adopt Twilio really at a speed that they want to be able to operate at versus us having to gate any of that. So I think that's been quite good. I'd say we probably tilted a little bit more towards marketing dollars versus kind of rep-oriented dollars. And so I think that's worked pretty well, too. It's obviously all a work in progress still. But I feel really good about where things are headed and cautiously optimistic about where things are going for the back half of the year.

Got it. Thanks for the color. A – Khozema Shipchandler: Thanks.

Your next question comes from the line of Nick Altmann with Scotiabank. Please go ahead. Q – Nick Altmann: Yeah. Thanks, guys. Just building on Derrick's question, it sounds like you guys haven't seen much pressure on the growth side of the equation from the communication side from the headcount reduction and some of the go-to-market changes. And so I'm just wondering, can you maybe parse out for us like how significant those changes were on the communication side? I mean, I know you guys have talked about sort of this reversion to low-touch model. But is there any way to sort of give more granularity around what's the split of quota-carrying reps focusing on data apps versus communications? And then just as that sort of progresses throughout 2023, how do you guys sort of measure that impact and make changes, so to speak, Like if the communication side sort of sees further growth decel, will you start to sort of allocate more reps to that side of the business? Just any more granularity around that would be super helpful. Thanks. A – Khozema Shipchandler: Sure. So this is Khozema. I can start the answer, and then if Elena wants to add some additional color, she will. But I think what's important to remember, as we went through the restructuring that we did over the last six to eight months, is that they were almost entirely impacting the communications business. There were impacts to other G&A categories. But otherwise, they were almost entirely impacting the communications business. And so as you think about the costs that came out of the business, it was really largely out of communications. In fact, to say it a little bit differently, in the data and applications business, as Elena mentioned in some of her remarks earlier, in fact, what we're trying to do is make good investments right now, because we see a really big opportunity going forward. And we think it would be remiss, quite frankly, if we weren't investing through the cycle. And so, in a way, like we're trying to optimize for profit on the communications side, while continuing to optimize for growth on the data application side. We haven't historically given a split of rep count or anything like that like between businesses or how that splits necessarily between products. What I would say about that, though, is we did definitely make reductions in rep count as it related to our communications business. I mean that was part of kind of getting ourselves much more towards a self-serve oriented motion. We retained reps on strategic accounts, obviously, those that are kind of larger spenders, more enterprise-like, and then we continue to grow our rep count in the data and applications business. So, hopefully, that provides you with some additional color. I can't go exactly there in terms of the rep split.

Well, I would just add because we -- Khozema and I, partnered on this together, and we started orchestrating this move when I was still in the -- had a go-to-market role. Like I would say, we looked at what is the ROI of each cohort of sellers and supporting roles within the go-to-market organization and really took a close look at where our rep in was yielding discontinuous growth and where it was and we cut that out, and we made a concerted effort to make sure that sort of everywhere we are at injecting human capital, we're seeing a return for it. And so that's how I think about the fitness level that we've created across go-to-market now in both communications and data and applications.

Yes. And I guess just the last thing I would add, Nick, is that in spite of all these changes that we've kind of undergone in communications business, we've maintained share, customers sustained on the platform, we haven't seen any elevated churn, and we continue winning with some really material accounts. So, that to me is a significant number of proof points that things are moving in the right direction. There's obviously more work to do. But starting off the year with strong profitability, which is kind of where we were oriented, was really important for us. And now the rest of it is execution.

Great. Thank you.

Your next question comes from the line of Samad Samana with Jefferies. Please go ahead.

Hi, good evening. Thanks for taking my questions. So I wanted to ask maybe on the software side of the business, and I was a little bit late, so I apologize if this has already been asked. But just as you think about the -- I know you're investing for rep, but if you think about the bookings trends even as maybe customers spend on marketing is a little bit less, just how should we think about the changes and how that's driving maybe leads into the pipeline, the type of conversation that you're having? Is it changing the nature of where customers are viewing you, versus just maybe the near-term financial results, which have been impacted by changes? And then I have a follow-up.

Great. I'll take that. It's Elena here. So we don't disclose our booking metrics, but we did say in prepared remarks and probably throughout the first question, that we are seeing headwinds of a couple of different flavors. I think the first thing for you to take away is that, of the sort of work we're doing to rebuild, reorient and specialize the organization, like that work's still in progress. And so while we're making great strides there, we've hired the team. We've got dedicated sellers in place for both Segments and Flex, and that's what makes up the Twilio data and applications business or software business, as you called it. The heads are in seat, but they're not fully ramped. And that's what we're working on over the next couple of quarters is making sure that these reps are ramped and fully productive and have what they need to be successful. So we're working through that. We expect to hit that stride over the next couple of quarters, but that we're also doing that during a tough macro time period. You mentioned marketing spend and things like that. And that is exactly the sort of customer messaging breakthrough that we're seeking to have and making sure that customers continue to allocate budget to these kinds of things because we think that they're particularly helpful in this kind of a time where we're producing things like a return on ad spend, it's higher than it would be without Segment. And so that messaging is really important right now, but at the same time, we do see substantive -- like we do see headwinds from a macro perspective. So customers adding people to the sales cycle, adding approval levels, which will elongate sales cycles, we see a little -- a small decrement in average selling price and things like that. And so we're playing through that period of time, but we feel good about the wins that we're seeing and the innovation that we're laying down in order to, number one, play through this time; but number two, prepare ourselves really well for as spend comes back online, we think we're first in line to take it. Q – Samad Samana: Great. And then maybe just a follow-up. There's been some scuttlebutt Google recently was talking about rolling out something called Passkeys, which is meant to kind of limit the amount of 2FA that you need and/or changing just the nature of passwords in general and maybe accessing different apps and websites. I'm curious if you guys have any thoughts on maybe what the opportunity is for Twilio. I know 2FA has been a revenue driver in the past and just how you guys are thinking about that and maybe what you're doing as how we get authenticated evolves over time? And if you have any doubts on that, that would be great. A – Jeff Lawson: Yeah. Absolutely, Samad. This is Jeff. I'll answer that one. So the way I think about authentication these days is basically there's typically multiple forms. There's something you know, there's something you have, et cetera. And that's what we've come to understand as best practices for how to authenticate yourself. And Passkeys are really evolving the evolution of passwords, right? And they're easier to use, they're more secure, you can't reuse them. There's a lot of advantages to using this for -- instead of a password. But the -- it's like almost like as if the computer is generating the password for you as opposed to you having to typing it in and remember it, is a way to simplify the notion there. But what it doesn't do is provide you any information about who is this customer, to identify with. How do I know who they are? And that's things where like an e-mail address or a phone number, actually provide a notion of a person and their identity as opposed to just a way to have a share and secret for some way to reauthenticate yourself. And so these things typically work together. And if you think about our Verify product, Twilio Verify, is actually, it does the identity verification of saying you are or proving you are who you say you are, but it also does the work of saying, and this customer has this phone number. And therefore, like I know who that is. I can talk to them at that phone number. When they come back to me, I know who they are. And so I think FIDO and WebAuthn, which Passkey is basically for all times purpose is the same thing. It's a way of essentially presenting a password that is more secure, but it doesn't provide a sense of identity. Who is this person? Here's an e-mail address, a phone number. Something you can use to actually contact them and uniquely identify them in the world. That's what we offer. So these things actually work well together, and we've been evolving our offering in terms of things like Verify that offer side with network authentication as well as other forms of identity verification like WhatsApp, all wrapped up into one really nice product. And that product is selling really well. If you'll see, we had a very large Fortune 100 entertainment company, that we sold the largest Verify deal to as well as a very large AI company that we sold Verify to in this past quarter. And so the product is selling very nicely, even in an environment where FIDO and WebAuthn have been getting a lot more traction for a number of years.

Great Jeff. That's very helpful. Thank you so much.

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

Hey, guys, this is Alex [ph] on for Matt. Thanks for taking my question. I just wanted to speak about the partner channel. If you could talk to any updates you might have there, especially with the GSIs and regional Sis. How are you enabling those partners? Do you have any thoughts on expanding the partner contribution going forward? Thanks.

I will take that one. It's Elana here on the data and application side. We see a big role for partners, both today going forward. We've got a fiber and ecosystem of partners and particularly partners on the SI side, not just global SIs, but regional as well. And so, I'd say that the SI community is performing well in the big ecosystem as well as black, so those tend to be different partners. We also have a couple of others that I wouldn't necessarily put in the SI bucket, but are, I think, pretty interesting for us today, segment, the top partners within the AWS IV Accelerate program, which connects AWS sellers and our sales process. We're seeing some good deals from that. And then on the flex side, we've got several partners that sort of span just the SI world, but also build product side by side with flex as well. And so, I'd say that we are -- I said over the past couple of calls, actually that this is an area of focus and investment for us. I think we're seeing some good green shoots there, lots, lots more to do. I don't know if statement has anything to add on the comp side.

Thanks.

Your next question comes from the line of Fred Havemeyer with Macquarie Capital. Please go ahead.

Hi. Thank you. I wanted to ask about some of the segment wins that you were talking about there. I think the selection of customers was actually quite interesting. You have a health care company. You have a database company. You have a wireless company that has a more expansive relationship with Twilio. So, could you talk about perhaps some of the use cases that these companies are using segment for? And where those companies are finding value right now with segment?

Segments super interesting. We talk a lot about B2C, and there's definitely fantastic brands that are direct to consumer or have a big consumer element to what they do that are really out there working to find, identify, engage, acquire and just better nurture. Those kinds of relationships in a way that is cost effective, really fast and petty and gives them the ability to do things that they can't do with their traditional kind of cobbled together CRM infrastructure. That said, we do have a percentage of our segment customer population, that's also B2B. And so people that play in both B2B and B2C that are finding ways to sort of cross-pollinate their own channels and their own customer identity is using the power of segment. And so, we see customers do everything from sort of the core sort of data platform use cases and really using us for things that are quite simple, but hard to pull off. And then we have customers that are growing set of customers that are adding on capabilities, so Engage, for example, and our new Unify capability that we talked about in our prepared remarks. So those are a couple of things that we're doing. I think long game, we expect the customer data platform to sort of be at the center for there to be a lot that we do with that. And so from Engage, for example, actually engaging your customers getting out via our different communications channels to utilizing segment information, to have better experiences with Flex in the call center or in a digital sort of in-app communication mechanism that a customer might be using with Flex. So we see a ton of extension capability here with that CDP as the center.

Thank you. And I think as a follow-up question. I was noticing the top 10 customer accounts are now down to about 10% of total revenue. I wanted to ask, is that a function of just diversification of Twilio's revenue base, or is there anything to read in there in terms of how your top customers are also trending their own usage of Twilio? A – Aidan Viggiano: This is Aidan. I'll take that. Yeah, it's largely a function of continued diversification. We are well diversified across industries, across customers and so that continued. I'd say in terms of lower usage, we have seen that generally across the communications and the D&A business, and that's again largely a function of the macro, but as it relates to the top tenants, its continued diversification.

Thank you. A – Jeff Lawson: So Fred, this is Jeff. You asked about some of the use cases for segment and I might expand because I think there's a few that are interesting that I thought would be worth sharing because one of the really cool things about segment and having this customer data is like a great platform. Once a customer puts it in, I think they find that there are multiple like many benefits of having the customer data in a spot, having it clean, having it good governance over it and then ways in which you can activate it across many different parts of the customer life cycle. And so I was talking to a global Fortune 100 this morning about a segment opportunity. they rattled off like five different use cases from CRM to personalization across properties to tracking their customers across multiple acquisitions they had done. And knowing if a customer in one customer base was the same as a customer in other part of customer base, so they could do more effective cross-selling and more effective retention of those customers. And so I think in M&A cases, for example, there are great opportunities because you have different identifiers for customers. There's one customer that I think is a great neat use case that I really like, which is they brought in the segment so that they could personalize their IDRs. And the idea was the thing they had seen was, if you are trying to log in, say through the website or a mobile app and you consistently can't log in, like your passport is not working. They can see that in a real-time using segment and flag your profile of someone who is likely having a password problem. And when you call in, which probably at the scale of this customer, happens, I don't know, 100,000 tonnes a day or whatever, they will put the first thing in ideas, having issues logging in and press one. It was ordinarily you have to go like 10 menus deep to get to that look probably. But for you, because they saw your behavior on the website, is clearly even trouble logging in, they dynamically program that. I mean like these are the kinds of use cases we see customers building across many different parts of their customer life cycle, marketing, sales, product, service support, that allow customers to serve their customers better. And that's why I think data as a platform in segment is such a great product.

Thank you.

Your next question comes from the line of Alex Zukin with Wolfe Research. Please go ahead.

Hey, guys, thanks for taking the question. I guess maybe just the first question is, the gross margins in the quarter were actually better, I think, than we anticipated. I think that was the best performance in the last -- since Q1 of last year, is international didn't go down as a percentage of the total revenue. Was there something else that you're maybe walking away from business more that had a lower gross margin in the quarter? I know that we're not guiding to it, but at least from a trend lining perspective, how should we think about that? And then I've got a quick follow-up for Jeff.

Hi Alex, this is Aidan. Yes. So it was 52.3% in the quarter and that was up sequentially about 170 basis points. So that was positive. Although, I would say we'll continue to see variability on this line. And so it's largely a function of the mix of products and also within the messaging business, the mix of geography where the traffic terminates, which is a little bit different than the international percent of revenue that you're looking at, which is based on customer headquarters. And what we saw this quarter relative to last quarter, there was a different mix in terms of where traffic was terminating and that drove the better gross margin overall. As we think about going forward and how to think about this, we're really orienting the business more to gross profit dollars and the gross margin rates, given the strong unit economics, in particular in the messaging business. And so that will continue to be our focus as we move forward is really orienting the team to gross profit dollar generation. And as long as we can do that with the right cost structure, we think that's a good business to keep doing.

Got it. And then maybe, Jeff, one for you. You talked about AI and generative AI with respect to segment and CDP. I guess, one common question we get is the notion of bidirectional messaging, conversational messaging seems like that trend is having a massive moment right now in the marketplace. Can you maybe talk about the puts and takes and the potential tailwinds to the communications side of the business from generative AI, what you're seeing in customer conversations that you're having existing or new around that?

Yes. So just to give you a quick backdrop, I mentioned at the beginning of the call that generative AI is the next platform shift in technology. A matter it's in technology, it's actually in society. And if you think about the -- when these ships occur, like the PC or the arrival of the PC and the PC to the web, and the web to mobile, right, you can see the kind of disruption that occurs in market after market when these transformations happen. In fact, it's interesting, there was a Wall Street Journal headline today that says, is this the iPhone moment. And I think, absolutely, I would answer yes. Yes, it is. Now there's an interesting question though, if you remember in the early days of, say, the web, where companies were trying to figure out what do we do? Do we give a brochure on the site? Remember when companies used to say, like we're not allowed to like off of our site because there's a legal problem of that? Everyone’s like, what? So people have to figure out how to use these new technologies in the corporate setting. And I think that's what the conversations I’m having with customers now are exactly that, right? Is this ready for an enterprise use case or is a bot that I put in front of my customer is going to start like talking saying stuff that I don't want to say, right? Is it going to start having a dialogue with my customers about God knows what -- or are they going to stay on topic and can talk about my products, my services and all that kind of stuff. And so I think that's where a lot of the work is going right now. And I think there's really good questions that are getting answered every day that work we are doing, work others are doing in terms of like how to keep these large language models on topic and provide boundaries for them so that they are useful in a corporate context. And that stuff is getting resolved, I think, pretty quickly. And so the converse -- I'll put you into a conversation now with the customer recently which I think is indicative of what I think is going to happen. It was I was talking to a customer, a very large financial services company. And they were telling me how they had spent the last seven years building out all of the intent to have a bot for their service use cases that could contain customer culture containment as the -- didn't have to reach a person. And they said, well, this containment was after seven years of work or whatever, it's about 40% and so 60% of the call is made through that. And I asked -- and we're talking about large language models, and I said, do you think you're going to keep that investment or do you think you're going to start from scratch in the large language model world. And the customers say now, I will keep that investment, but hopefully, large language models will help us move it forward from 40% up from there. And through the course of the conversation, we talked a lot about what's possible in the architecture of these new language models and how they can work with segment customer data and things like this. And at the end of the conversation they asked again, do you think you're going to keep that 40% -- the investment you made over the last seven years that got you to 40% containment? And the customer said, no its going in the garbage can, right? Like every decision we've made for the last seven years about what's possible is now like a relic of the past and we are up for relitigation and potentially new approaches, new vendors, new ways of implementing it because large language model world just upends what is possible. And I think that is why it is a gift in terms of creating new opportunities for companies like Twilio who is helping our customers to activate their customer data across the customer life cycle, take CRM, which has historically business like kind of a sleepy area of like just a database, not activated, making useful across many different touch points. Large language models are an absolute gift, and I'm very happy that we bought segment when we did because the data that is in segment enables a company to customize these interactions based on who they're talking to. The end user, the customer of our customer, and that is very powerful. So anyway, this is day zero of large language models, and you'll be hearing more from us in the course of this quarter. Obviously, we have signaled in August and I would not be a responsible technology leader. If AI wasn't prominently a part of what we're talking about at Signal, so we'll have more coming, and I hope everybody joins us in Signal in August.

Perfect. Thank you guys.

Your next question comes from the line of Siti Panigrahi with Mizuho. Please go ahead.

Hey, guys, it's Phil on for Siti. Thanks for taking my question. In your prepared remarks, you guys noted a flex win with a major financial services company. Would we love to learn a bit more about this win, as it sourced through an SI partner. And how well is flex position to compete with the other CCaaS vendors?

So a couple of things. We -- I don't believe that one was partner sourced. But it's a deal we've been working on for a few quarters. They are -- it is a legacy takeout, and it is sort of a contact center specific use case. But I would say, because you asked about Flex, that's really not our only use case. We're starting to see sort of a cold lessing around three or four key things that we see really playing well in the market. So, first is sort of this in-app digital communication and that digital concierge kind of capability, and we see a lot of great direct-to-consumer brands utilizing flex in that way. Secondly is sort of a high-touch contextual sales kind of moment, and we see certain large retailers and some other financial institutions playing in that area. And then lastly is sort of our core contact center use cases in the service and support area. And this example that you mentioned happens to live a rate in that area, and that's the one that was in our prepared remarks today.

Okay. Thanks.

Your final question comes from the line of Michael Funk with Bank of America. Please go ahead.

Yeah, thanks for squeezing me. Two, if I could, quickly. So Aidan, one for you if I could. The operating margin guidance for 2Q, I saw you called out a number of factors pressuring that sequentially. However, I would have thought the full quarter of the head count reduction, potentially positive mix shift would have offset the reversal for example, you called out other things. Are there other factors going into that?

Thanks for the question, Michael. So, we try to be pretty transparent about this in the prepared remarks, because we are expecting profit to be down quarter-over-quarter. So you gave a lot of information there, and I recognize it's a little bit counterintuitive given the timing of the restructuring in the first quarter. So let me just like to walk through some of the pieces and I'll talk about what will continue beyond the second quarter as well. So, first, the first quarter benefited from a $12 million onetime accrual reversal related to the sunsetting of our employee sabbatical program. That will repeat in the second quarter or beyond. We guided to lower quarter-over-quarter revenues, which directly impacts our gross profit as well as our operating profit. And then we expect a number of different cost items to be ahead with quarter-over-quarter. First, merit goes into effect in the second quarter as it does every year. And so that will obviously go into effect Q2 and for the rest of the year. We're moving some employees who talked about this in the prior earnings call. We're moving some employees to cash bonuses from equity-based awards. This is for a subset of our employee base, but it will help moderate stock-based compensation expense growth going forward. And but that in the period presents an OpEx headwind. We've also made some changes to our incentive compensation structure to the communications sales team to better align to Twilio’s financial goals. And while that doesn't result in any difference in cash being paid to a specific sales executive, there's a bit of a difference in accounting in terms of what is incurred in period versus what is deferred over time. And so that creates a little bit of a headwind. And then lastly, we do expect more normalized levels of marketing and travel spend in the second quarter. I'd say we're pretty light in the first quarter, just post the reorganization as teams are settling into the new structures. We just didn't spend as much as we had planned we would. And so all of those items more than offset the full quarter benefit of the restructuring actions that we announced in February, but we're still guiding to $65 million to $75 million we raised the low end of our guide for the year to $2.75 to $3.50, and we're tracking really well to date.

That’s very helpful color. I appreciate it. Thank you.

This concludes the conference call. Thank you for participating. You may now disconnect your lines.