All right, perfect. Welcome everybody. While everybody kind of clears away, I'll read the disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. No better way to quiet a crowd than reading some disclosures. All right, I'm Meta Marshall. I Head of the Communication Software Team here at Morgan Stanley. We are delighted to have Jeff Lawson, Co-Founder and CEO of Twilio, with us here today.
Thank you, Meta. Great to be here.
Before we step into the changes that the company has made over the last 12 months, I just want to see how you think the value proposition of Twilio has evolved as you've moved beyond just channels to engagement tools. How can Twilio help customers transform their B2C communication and better monetize their own data and relationships? How does this value prop continue to evolve over time?
Yeah. Thanks, Meta. You know, I think the, you know, essentially, the story of a company is informed by its customers, right? The needs of customers continually evolve, and even more importantly, your understanding of those needs evolves once you get into market. We started Twilio with communications. We said companies need to communicate with their customers better. In doing so, what we learned was that the most valuable communications that they have actually are infused with an understanding of that customer. Because we kept asking, "How can we add more value to these communications?" The answer was always, well, the better we knew the end user, you know, we could actually make smarter communications.
That led us to taking communications, which is where we started, focusing more on engagement communications, i.e., the communications that actually help a company to build a relationship with its customer across its sales, its marketing, service, support, in product, et cetera. What that led us to is saying, okay, well, if customer data is the key to actually having those communications work, having a contact center interaction that has a bunch of context about who the customer is, about actually making the product itself personalized for every customer. If customer data is core to that, we kinda looked around into our customers and said, "Okay, great. How do we get access to that data?
Like, what API might we build that will let you bring that data to us?" They said, "We don't actually have that data either. You know, Facebook has that data. We've got pockets of that data sitting all over the enterprise, but it's like nowhere where we could actually easily, like, feed it into a system that would help us build something that was smarter." We said, "Oh, that's interesting. That sounds like a big, hairy problem to go solve." At company after company, we found that they did not have a handle on who their customers were, let alone how they were gonna go build a digital relationship with those customers. Meanwhile, you go look at Amazon or Google or Facebook or any of these companies, and you're like, "Well, they seem to have it solved," right?
They just, you know, put a bug on the website of every company in the world and gather all this data and build profiles about all of us, and then can do a really good job targeting ads at us. Every other company, you know, they're kind of at square zero of really understanding their customers, and that is one of the biggest business impediments they have. We look over, and you see Segment who solved this, so we acquired Segment. Said, "Okay, great. We're bringing together these two worlds." How do you communicate with your customers? How do you understand your customers?
Bring them together so that you start with a solid understanding of who your customer is, which is a story told by all these volumes of real-time data that are coming in about how customers use your product, how they browse your website, what they buy, what they scroll past, what they don't buy. All that stuff is signal. Then use those profiles about your customers to actually engage with them better. That's the missing bit. If you think about financials of a company, there's a CFO. The CFO puts in a financial system. Everything in the company integrates with it so that you can produce financial reports on a daily, weekly, monthly, quarterly, annual basis. No one has a choice about whether or not they're gonna integrate those financial systems.
When you look at the front office of a company, all of its customer-facing systems, it's the Wild West. Companies are a cobbled-together collection of a bunch of different products that all see a little piece of the customer life cycle, a little piece of the customer data and behaviors, together make no sense. They don't talk to each other. They don't work together. This is why you have the worst experiences with a lot of companies when you try to do business with them. We realized we can solve this problem. We can build that cohesive structure, kind of like the CFO has for the back office, well, we can build it for the front office.
By the way, the benefit of doing that is so core to our customers' businesses because customer engagement, having this system work well of the customer journey, is the core of how do you acquire customers, how do you service your customers profitably, then how do you scale and grow those customers. It's essentially the customer acquisition cost and the lifetime value, that's the fundamental value proposition of every digital company. Acquiring customers efficiently, servicing them and growing them, and building your lifetime value with those customers because they're loyal, repeat, happy customers. We can do that in a way that no one else has solved. That's when our mission turned from communications, which it was for about the first five to 10 years of the company.
It evolved into customer engagement because we said, "This is a much bigger, more important, more strategic problem that, oh, by the way, uses a bunch of communications that drives the usage of our core products as we evolve in this direction." That's the journey that we're on.
Got it. I mean, when you went into the communications business, you really created a market where there wasn't one before. As we look at the engagement market, you know, there's multiple participants in that market. Is it the ability to fuse all of that data together? Like, where does the unique value proposition come from there?
Yeah. Well, you know, it's interesting. You're right, Meta. Like, when we started in 2008, there were no companies that did communications.
Right.
You know, there were no carriers in the world.
Yeah.
There were no equipment manufacturers. There were no. Cisco didn't exist yet.
Yeah.
No, obviously, it was a very crowded market.
Right
That everybody said was a, you know, was a difficult market to operate in. We had a fundamentally different value proposition than anyone else out there. You know, we were turning it into software. We were making it available as APIs, allowing innovators to go take those APIs and go build things that never existed before, and in doing so, unlocked tremendous value that nobody had seen as an opportunity before we came along. I think there's a similar story unfolding in this world of customer engagement. As you said, there's a lot of companies in the customer engagement space, no doubt, some of them very large. Most of those companies, their roots are just like the carriers. You know, their roots are in copper wires and fiber optics, not in like, you know, developers and innovation and stuff like that.
Well, the same thing is happening in customer engagement, where the companies that are in that market today, their basis is in B2B, right? Think about large CRM companies whose symbols might be CRM, right? Their heritage is in sales automation for B2B, which in that world, everything you know about a customer is what a salesperson has typed into, like, the notes field. That's the sum of a B2B company's understanding of its customer base. You know, where's the deal cycle? I don't know. Let's go check the notes. In B2C, you know, when I go to amazon.com, do you think like there's a sales rep who creates an opportunity that Jeff might buy a spatula today? No, of course not.
The story of me, their customer, is a story told through volumes and volumes of real-time data and the machine learning systems that act on it, recommendation systems that put better products in front of me, et cetera, et cetera. It's a completely different problem domain. Despite the fact that companies have tried to like, you know, kind of bundle them together, it has not worked. Nobody has solved this problem. That's why when I talk to customers, all of them say, like, "Yeah, we don't have this, the system that you speak of, we don't have and we want," right? "Because we can't make sense of our customer.
Our data is in all these silos of all these SaaS applications and in-house applications that can't talk to each other. This is the opportunity that we're going after, which is really focused on the B2C market in companies that have millions and millions of customers, not like thousands or tens of thousands. The story of those customers is told with real-time data and volumes and volumes of it, as opposed to like, you know, handwritten notes about a relationship. It's a very different problem domain, and I think it's a wide-open market.
Do you think macro accelerates that need because your customers realize they need to make these transformations and they can't wait? Or it almost kind of freezes them in place?
You know, we've pivoted our messaging quite a bit in the last year because of the, of the macro environment. Segment is our core customer data platform. It was an acquisition we did in 2020. It's the leading customer data platform in the market. The problem they solve is they can take data out of all these different systems. They have 400 different integrations out of the box that work. Putting it all together, build one customer profile, and do all that in real time. It's amazing technology. We've been named the leader in this space multiple years running by IDC. Like, we're used by Fox Sports during the Super Bowl.
During the Super Bowl, they're ingesting 1 million events a second across all their digital channels to understand who all their viewers are. Segment is able to make sense of that for them. These are amazing, you know, amazing technology. We, you know, in the past, we talked about it like, well, once you understand your customer, you can engage with them better, and that's true. That's kind of this hand-wavy, Engage, innovate all the things story that works well in a high-growth period like, you know, the last decade. We have these amazing stories about how customers have taken Segment and, by understanding their customers better, building out these, essentially segments of customers, no pun intended, and then using those to go get more efficient in their ad buying and acquiring customers more efficiently.
When you double-click on the details, you learn about these customer stories like Domino's Pizza in Mexico. They put in Segment, and because they understood their customers better, they saw a 700% return on ad investment because they put in Segment. Allergan, the drug maker who sells BOTOX, who's built a direct-to-consumer play to go build relationships with the users of BOTOX to drive repeat usage. They put in Segment to understand their customers better, to target their customers better in advertising, and saw a 42% decrease in their customer acquisition costs. 42% decrease in customer acquisition costs. I mean, marketing teams kill for a 3% decrease in customer acquisition costs. A 42% decrease is, like, unheard of. These are amazing case studies.
We've completely pivoted our messaging around this to saying not just like, you know, happy customers are a nice thing to have, which of course they are, but pivoted to the reason why happy customers are better is because you can acquire customers more cost-effectively and then keep them and have them spend more over time as a result of it. All of our messaging has turned into CAC and LTV stories about how do you get more efficient in your customer acquisition and then unlock more revenue and more profit from those customers, which is the message that customers now wanna hear.
Got it. maybe moving on to kind of this efficient-
By the way, how many of you flew in and drove up the 101 and our billboard for the last 10 years on the 101, it said, "Ask your developer"? Anyone know what it said today? Save 40 or save 62% on your customer acquisition costs. Okay, like that's not an accident. Like that's responding to the 2023 economic environment that we have changed our messaging in order to appeal to the thing that our buyers now want to, you know, now are motivated by.
Got it. I mean, speaking about efficiency, how has the last year and just kind of the investor focus on profitability changed how you realize that value proposition of Twilio, and has it made you more focused on milestones than you were before? You know, what would you say to investors' criticisms at times that it took too long to get here?
Yeah, well, look, you know, every Silicon Valley or technology company, like you start off, you've got this big, you know, the Internet's your market, so you have this huge market opportunity, and, you know, you raise venture capital in order to go capture that opportunity faster than you could just on an organic basis. Pretty much every technology company that you've ever invested in started out as an unprofitable company for some amount of time. At some point, they make the transition from unprofitable to profitable. The only question is when. When do they do it? This is what I have always thought of for Twilio.
You know, we had some folks that when we were, say, $100 million of revenue, said, "You should be profitable." A company like almost philosophically, like a company at $100 million of revenue should be profitable. Is that right? I don't know. I didn't agree with that. I thought that we have a very large market to go tackle. We've got a lot of work ahead of us. We have a tiny share of a huge market. This isn't the time to be throwing off profit. This is the time to be investing and growing and look, we did. Over the past several years, we've grown from, you know, a $100 million company that we were, give or take, in 2015 to a $4 billion revenue company that we are today. I think that's the right decision to make.
Now as I sit here today, and I say at $4 billion of revenue, is now the right time to become profitable? You can ask the question again. It seems a lot more plausible that you'd say a company at $100 million. The point I'm trying to make is it's somewhat arbitrary where you say the time is to make that transition. The thing that I look at that tells me that this is the right time, aside obviously from investor sentiment, because the nature of the market and the macro factors make profitability so much more important in this environment, is the fact that I see there's a lot of opportunities for us to be more efficient inside the company. We've grown incredibly fast.
We've been 15 years in a hyper-growth mode. With that, we've captured markets. We have grown to nearly 300,000 active customers, $4 billion in revenue. There's a cost to it. You know, there's waste inside the company. Now, is it the right time to go in and say, "Okay, where can we be better? Where can we be more efficient?
Where can we actually serve our customers better because we actually streamline ourselves and take out some silos and some bloat and some layers and things like that?" You're like, "Yeah, actually, this is the right thing to do." You know, I sort of tell that story so you can get into my head just a little bit as a CEO, thinking about how do you grow, capture a market, maximize the company's long-term potential to go win in a very large market, but also pick the right time and ways to instill greater and greater discipline in terms of spend, in terms of ROI and things like that. That's the transition that every technology company goes through at some point. The only question is when. Sometimes it's as a private company, sometimes it's as a public company.
Sometimes it's in a bull market, sometimes it's in a bear market. I bet if you look at it more than happened during the bear markets than during the bull markets. The important thing, though, for I think you all to think about is, as a company, can we be as successful in the new market realities as we were in the old market realities? you know, as I told the company when we did our second round of layoffs, I said, "Look, Twilio is a company that in the last game, that was a bull market with a low cost of capital, a lot of expansion going on in the global economy. We made great use of that environment and that set of conditions to go win. I think we did.
Now we're gonna use the new market conditions, the new game that has emerged and the rules of that and the constraints of that, and we're gonna go now win in this environment. We've got the scale, we've got the customer base, we've got the products, we've got leadership in multiple product categories that we're in. That's the point of the bull market days, is to go achieve that position so that when the music stops, you are in the best position to survive and thrive in the next era. Here we are. That's what we're going to go do.
Got it.
By the way, I think our actions hopefully, I mean, you all judge for yourselves, but our actions show that we're taking that transition very seriously. You know, a month ago, we announced several substantive actions that we're taking. We did a layoff that combined with the layoff we did last fall, was a 25% reduction in force. We have formed two business units to execute better on efficiency and growth in the two sides of our business. We have instituted a large stock buyback. I personally bought in the market and, you know, a number of other things we've done, like cutting back on perks and all this kind of stuff, as you can imagine, to really get the company into fighting shape for the new environment.
I think those are the substantive actions that our investors have told us we should be taking. When I look at what we've done, we've done a lot. We are still in the mode of like, of implementing a lot of that stuff and rolling it out. These are big changes. When you think about a company, you know, it takes some time to roll those things out. These are big, substantive things. But they come about because of the, you know, very frank conversations we have with investors.
Even before you made some of those changes, I think you had identified that maybe some of the software sales were not growing or software sales were not kind of as effective as you wanted them to be, and so you were making changes within that organization. You know, is some of that as simple as changing the messaging more to the ROI like you did on the 101? What changes have you made and what kind of traction are you seeing with those changes?
Well, yeah. You can look at some of the changes we made, like, you know, last month in our earnings or on our earnings call, we made a bunch of those changes I just mentioned, but that was not the beginning of it, right? We did a reduction in force back in September. Midpoint last year, we divided our sales teams to better execute on our software opportunity. You all know, there's, like, two sides to Twilio now, communications and data and applications. The data and application side of our business all drive communications when those things win in the market. There's some differences to the go-to-market approach for a software business versus a usage-based API business.
Mixing that stuff all together in the same bag of the sales rep and in the same go-to-market motion was not favoring the sales of software. Realizing that, we divided it out to have separate sales forces so that we could dedicate capacity and focus to the success of Flex, our contact center product, and Segment and Engage, which is our data and our marketing automation product. That's really like a continuation of the changes that we've been making as a result of the learning from our execution.
Got it.
If that makes sense?
That makes sense. How did you view kind of a company management changes that were made, and just where is your time spent most effectively today?
You know, there's really two things I'm primarily focused on, now. One is since we have made a shift to business units... I'm a big believer in, like, layered, management is the best way, is the most effective way for people to actually run the company together. What I mean by that is if you've got, like, a leader with one skill set, their direct report should have complementary skill sets. Then you go a layer below them, they should actually be, you know, the complementary skill set to that, which is the same as the one above.
When you layer the skill sets of teams, I think you end up with really good ideas, you end up with more rigor, you know, less, you know, everyone agrees with each other, but also you kind of fill out the skills that are needed to accomplish things. You know, I kind of observed that in my prior structure for the company when I have functional leaders, you know, I had a head of go-to-market, a head of R&D, a head of finance, a head of HR. You know, my skills are focused quite a bit on product and engineering.
When I hired a Chief Product Officer, which we'd had for the last several years, you know, my job was to hire a great person and then kind of get out of their way, so I'd end up with a great head of product, and I'd be more arm's length from it all. Now that we have organized into business units, I have a head of communications, and I have a head of data and apps. Those are financial business leaders. With myself as a product leader, I can actually go in, work with them and their reports on the product strategy and the delivery of that, which is something where I add a lot of value. I'm getting a lot more involved in product, which I think is a good thing. The other thing I'm spending a lot of time on is selling Segment.
The world needs CDP. You know, at a major bank that isn't Morgan Stanley, we announced on our earnings call last time, last month, has put in Segment across the entire bank. When a bank of that size. You can Google it. When a bank of that size standardizes on your product, that's a sign to the world. Like, there is something happening here. We are providing tremendous value. We are still in the very early days of this market for customer data platforms. I am spending quite a bit of time going out working with customers to help bring awareness of the CDP into the C-suite, as well as getting deals closed, which is what our, you know, what we need to do in terms of pulling through software.
We have a $3.5 billion communications business that needs to get more efficient. That's where our communications group is focused on, driving profit out of the $3.5 Billion communications business, and give or take, a $400 million software business that needs to be growing faster. My business unit over there, they're all focused on growing the software business as quickly as they can. I'm, you know, doing a bit of both. I'm helping on the product side of communications to build, you know, make sure our teams are building the software that'll allow us to get more efficient, building automation, more product-led growth.
Actually, the roots of Twilio are in product-led growth, helping us return to those roots so that we spend less on distribution to get a, the growth that we've seen in the communications business at its scale. While on the software side, focusing quite a bit of my energy on just getting in front of customers, selling it.
Got it. Another topic of this conference has been AI. I know in the past we've kind of talked it around it about the Flex portfolio. There's obviously a lot of ways to bring it within the entire Twilio portfolio. You're obviously always kind of at innovation's edge. Where do you see opportunities to bring AI into the Twilio portfolio?
Yeah, it's a great question. AI has been a topic for obviously a number of years.
Yeah.
We are at a point of inflection right now. Doesn't it feel like that, right? With the large language models. Like there's a point of inflection of what these models can do, but also what they can't do. It's a very exciting time to be building here. I think it's still early for enterprises, to be frank. When you look at the landscape of things, these large language models are able to make incredible predictions of language and to accomplish tasks that humans can do in terms of language. It's obvious to look at, oh, well, could these have contact center conversations? Can they have sales conversations with my customers? Can they do support? Can they write marketing copy? Can they even generate the marketing images? Like, all these types of things they can do.
I think a lot of those things will come to fruition in the coming years. What's most interesting to me is when you think about, like, if every company is gonna have access to large language models, because OpenAI and, you know, any number of entities are gonna open up these APIs. Those language models will basically consist of three layers of knowledge. There's the knowledge about the English language and the world, and you get that by, you know, training these models on the internet and Wikipedia and everything else, and, like, that's what OpenAI has. The next layer is details about the company that AI is representing, and that's where you feed it the websites and the facts and the knowledge bases and all that kind of stuff.
That'll be that'll be easy, there's gonna be every company will go solve that. Like, there'll be a lot of ways to solve that, but it won't be super hard. Then the third layer on top of that is the, like, okay, the world, the company, the customer. You're gonna have to tell the model, "Who am I talking to? Meta. Here's how you pronounce it. Here's what she's bought." Right? "She's a new customer. No, she's a lifelong customer. She's a high-value customer. Oh, no, she's about to churn. Here's her purchase history. Here's the prior interactions we've had with her." All that context for who Meta is, the bot's gonna need to know, otherwise it can have a great conversation with you about Wikipedia, but won't actually have any business value. That's the data that Segment has.
That's our customer data platform. We're the leader in this market. The opportunity for us is to win in the CDP and then apply everything a company knows about its customer to go build the language model addition, augmentation, that allows it to actually be useful when it's talking to a customer. We are super in the early days of this. I was actually with a team just the other day. They were testing out the ability for it to build a model. The use case they picked was, you know, can it give me a price for a flight?
They were feeding it a bunch of data, like, pretending like you were interacting with an airline and saying, "Could you book a flight with a large language model?" They were trying to convince it that when you don't know the price of a flight, call this API to go get that knowledge. Instead, the large language model insisted on making up a flight and its price. Like, yeah, it's $450 to fly on flight 482. You're like, "Wait, that's just bullshit. Where'd you get that?
Right.
That's what large language models are doing today. Like, look, that'll get solved. They're called hallucinations. That'll get solved in the coming years as these models get more sophisticated. I think that the key thing, as it is doing that, we will be building the like, here's how you bring together everything you know about your company and your customer on top of that large language model as the foundation of then how it becomes useful to an enterprise.
Got it.
For that whole category of customer-facing interaction.
Got it. Are there any questions from the audience? All right, perfect. Maybe as a last question, just where does Engage kind of fit onto this? You know, we spent a lot of time talking about all of the data and building out kind of the leading CDP platform that you have, but where does it go from there to kind of developing the campaigns on top of that?
You know, the original hypothesis of why we acquired Segment was the fact that, like, you bring together your knowledge about the customer and the communication with the customer. You bring those two together. The hypothesis went to my conversations I had with the CEO of Segment. He said, "Look, our customers who put in Segment pull all these data sources, pull them together, do all this work to build this profile about their customers, and then they say, 'Now what? Like, what do I do with that data? Like, it's only valuable if I do something differently because I understand my customer.'" The answer of what customers were asking from him is, "Build the customer journey on top of this. Tell me everything I know about this customer puts them here in this journey. They are just about to adopt this product.
They've been successful with that product, therefore we should say this. Do something that activates that understanding of my customer to push them, propel them through the journey. That thing that you tell, the action you take is almost always an ad, it is an email, it is a text message, it is a some form of communication to that customer. That's why I need you, Twilio. Engage is our first product that brings together, here's the customer, and what are you gonna do when you know this stuff about them? You're gonna trigger a campaign to go send them that text message, that email, that phone call. You're gonna do something differently because you now understand the customer better, and that reaching out and touching the customer is what Twilio does.
It's the first product that really brings together the best of Segment and the best of Twilio into one pane of glass for, primarily for marketers. That's just the first of many such things that we're doing. I think what we've seen so far is a really good ability to take a customer who's using our CDP, and we've talked about, we have tens of thousands of customers in our data and apps business, and then say, "Oh, by the way, what do you wanna do with that data?" sell them Engage. The product's only been in GA for four months, but we announced on our earnings call said large bank had already adopted it among many other customers, right? We're off to an early start.
The product's in market for four months, but we're already seeing that cross-sell from, like, the CDP customer who's built those profiles to now activate the data that's in those profiles to use the rest of Twilio's channels is starting to come together really nicely. Really excited about that.
Great. Well, Jeff, thank you so much for being here today.
Thank you, Meta. Thank you.