Good afternoon, and welcome to Twilio's Q1 2019 Earnings Conference Call. My name is Chantal, and I will be your 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 Greg Kleiner, Vice President of Investor Relations and Treasurer.
Mr. Kleiner, you may begin.
Thank you. Good afternoon, everyone, and welcome to
Twilio's Q1 2019 earnings conference call. Joining me today are Jeff Lawson, our Co Founder and CEO George Hu, our COO and Khozema Shipchandler, our CFO. The primary purpose of today's call is to provide you with information regarding our 2019 Q1 performance in addition to our financial outlook for our 2019 Q2 and full year. Some of our discussion and responses to your questions may contain forward looking statements, including, but not limited to, statements regarding our future performance, including our financial outlook the potential benefits of our acquisition of SendGrid impacts and expected results from changes in our relationship with our larger customers and vendors, our market opportunity and market trends, the growth of our customer base, customer adoption of our products, our momentum, the benefits of our business model, our delivery of new products and product features and our ability to execute on our vision. These statements are subject to risks, uncertainties and assumptions.
Should any of these risks or uncertainties materialize or should any of our assumptions as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual company results could differ materially from these forward looking statements. Discussion of the risks and uncertainties related to our business is contained in our most recent Form 10 ks filed with the SEC on March 1, 2019, 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 dates that statements are made. We undertake no obligation to update any forward looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. Also during this call, we may present both GAAP and non GAAP financial measures.
Reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago. We encourage you to read our earnings release as it contains important information about GAAP and non GAAP results as well as the region's widely present guidance for non GAAP financial measures of income from operations and net income per share, but not the comparable GAAP measures. The earnings release is available on the Investor Relations page of our website and is part of our Form 8 ks furnished to the SEC. Finally, at times in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly or annual results. Please
be advised that
this additional detail may be one time in nature, and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investors. Twilio.com to access our earnings release, periodic SEC reports, a webcast or replay of today's call or to learn more about Twilio. With that, I'll now turn the call over to Jeff.
Thank you, Greg. Welcome everybody to this quarter's call. The core components of our platform, voice, messaging and now email, drove another quarter of strong performance in Q1. We continue to invest in innovation at all levels of our platform, empowering developers to help their companies better engage with their customers. And as George will outline in a moment, our go to market efforts are performing very well.
Q1 was the 1st full quarter of general availability for Flex. The feedback from our full year customers has been great. As a developer myself, I know that when introducing a new product, the most important thing is getting the underlying architecture right. And our early customers are telling us that our application platform architecture is right. And we're listening to our customers and building out our roadmap for additional features and functionality based on their feedback.
This is also the Q1 that includes results albeit only 2 months from our new Twilio SendGrid division. The early reaction from customers is validating our strategy of powering the future of customer engagement all on one platform. We believe we can create the unquestioned platform of choice for developers and businesses looking to transform their customer engagement, now covering all of their most vital communication channels, including email. From an operational standpoint, our integration plans are on track. The Twilio SendGrid Pulse has been great and both teams are eager to learn from each other as we innovate our cultures and build our future together.
The go to market teams are engaged and we're seeing signs of early traction in our cross selling motion. One of the many reasons we were attracted to SendGrid was the similarities in our go to market model as the developer has always been the focus of both companies approach. Together, in Q1, we hit an important milestone, 5,000,000 registered developer accounts. The product teams continue to innovate as well, having launched several new service and support offerings as well as announcing support for AMP for email, a new technology being implemented by Google to bring a dynamic and interactive experience to Gmail. And we're hard at work integrating our back end systems to create an even better customer experience.
We also launched Twilio for Salesforce, another prime example of how we're working to make it even easier for our customers to engage with their customers. Twilio for Salesforce allows visitors to easily add out of the box SMS capabilities, covering everything from 1 to 1 personalized interaction, alerts and notification, campaigns and more to their existing workflows in Salesforce CRM. Interestingly, this product was originally conceived of by Twilio dotorg, the division of Twilio focused on social impact and serving social impact organizations. They saw the opportunity to innovate to the more than 30,000 nonprofits that use Salesforce to manage their relationships with constituents, donors and volunteers. We're proud that every part of Twilio, including toyo.org, is focused on innovating for our customers.
And when we do, the whole company can benefit. We quickly noticed that traditional businesses were utilizing the product as well during the beta program. So we were excited to launch the product on the Salesforce AppExchange to get it in the hands of an even larger audience of potential customers. We also continue to invest in trust throughout the product stack in this quarter's end. As you've heard me say many times, trust is the number one thing we sell.
In Q1, our efforts on this front are evident in every layer of the platform. At the engagement cloud layer, we launched PSC2 support in our Authy 2 factor authentication product. The 2nd payment services directive or PSD2 is a new banking regulation within Europe that requires time based one time passcodes for all online and over the phone payments above €30 The PSV2 requirement will be a field shift for businesses conducting commerce in Europe, and we stand ready to help them with this transition. At the Programmable Communications Cloud player, we continue to support efforts in the industry to combat the scourge of mobile calling. If you're like me, I'm sure you get a continual stream of calls from unknown numbers with prerecorded messages promising a wide variety of wonderful things.
It's gotten so bad that if you're anything like me, you don't answer the phone if you don't recognize the number. Even John Oliver dedicated an entire segment of this show to this subject. So in case there's any doubt, we designed our platform from the beginning to prevent this type of activity. We do not want this business and we never have. We continue to work actively to deter bad actors from our platform, starting with our terms of service that expressly prohibit this type of activity to platform level takeout such as rate limiting, verifications, artificial intelligence and more.
We believe transparency is also important. So we launched a free service to allow consumers to look up any number to see where a call is coming from and help report suspected global comments. Looking into the future, we believe that the next step is to put the consumer back in control of their phone through tools to allow consumers to receive only wanted communications from trusted partners. We see a world where every time your phone rings, you can see who is calling, not just the phone number, but the name of the person of business and trust in the accuracy of that information. And then you or software running on your behalf can decide what to do with the call or text.
In this vision, everyone receives the communications they want and none of the ones they don't. It's your phone and your call. We want to help everyone take back their phone. More to come on this for sure, but we're continuing to innovate on behalf of our customers to help bring about this future. And our efforts to earn trust also extend to the super network as well.
Phone numbers are a key component for many of our customers as they expand around the world. But the regulations governing the use of phone numbers often differ by country, by number type and by how they're used. In many cases, these regulations were written well before companies like Twilio or even Internet itself existed. In order to help our customers adhere to this million of regulations around the world, we are working with regulators and national carriers as we build phone number compliance functionality into our platform as an automated service. We are partnering closely with our customers to support their applications and innovative use cases at global scale, while minimizing the regulatory overhead they have to manage.
We believe that by innovating on the regulatory front for our customers, we can allow them to continue to grow rapidly in markets around the world, and this presents yet another opportunity for Twilio to differentiate our product in the eyes of our customers. So before I hand the call over to George, I wanted to acknowledge the consistent efforts of Twilions around the world to make our customers successful. We have a once in a generation opportunity ahead of us to revolutionize 1 of the largest markets in all of IT, communications, by moving it from its legacy and hardware to its future in software. It's still day 1 of this journey, and I couldn't be more proud of our team and excited about the road ahead. George, let me turn the call over to you for an update on our go to market efforts.
Thanks, Jeff.
The go to market team performed very well again in the first quarter, driving another quarter of strong growth. Our focus remains on adding more coverage and executing on our plans to increase our presence within the enterprise, with partners and internationally. We continue to see success with our Engage roadshow program, bringing developers and businesses together. We currently plan to more than double the number of events in 2019. On the international front, we took our first steps to enter Latin America and Japan by hiring new leaders in each geography.
We also began to execute on the cross sell opportunity for Twilio SendGrid in the quarter, certifying reps, building pipeline and closing some early deals across the combined customer bases. Overall, the initial results are encouraging, but we're still very early in this opportunity.
Let me also touch on
a few of our wins from the past quarter. We signed a significant expansion with Just Eat in
the quarter. Just Eat is
a leading global hybrid marketplace for online food delivery, connecting
more than 26,000,000 active consumers and restaurants across 13 countries. This new deal will expand their usage of our voice and messaging products across several new countries and positions us to support their continued success around the world.
A leading insurance and support company with more than 100,000,000 customers around the world signed a new deal to modernize their IVR to provide a more conversational customer experience. This company will be using a variety of our products across voice, messaging, task router, autopilot, chat and video to get customers' answers faster and through the channel that they prefer. We also signed a new deal with Beats, part of the Free Now Group, the ride hailing joint venture of BMW and Daimler. In addition to being available in Greece, Beat is the fastest growing ride hailing app in Latin America, currently available in Peru, Chile, Colombia and Mexico with more launches to come this year. They will be using our voice investing products to communicate with drivers and passengers alike.
We added 1 of the big 5 banks in Canada as well with millions of personal banking, business, public sector and institutional clients. This bank will be using a combination of our off the end messaging products to provide an improved authentication experience for customers using their online banking platform. Last but not least, we continue to make progress with Flex, signing a number of deals, including a new relationship with Green Dot. Green Dot is a financial technology leader and bank holding company with more than 50,000,000 customers across their various products and business lines. Green Dot is looking to reinvent their contact center and create a world class mobile customer experience.
They will be using Flex and Autopilot to create a more intelligent and automated way to communicate with their customers. Overall, we continue to see strong results from our go to market investments, and we will execute on our strategy to reach more developers and businesses, both here and abroad. With that, let me pass the call over
to Khozema to discuss our financial results. Thank you, George, and good afternoon, everyone. The business showed continued strong growth in the quarter, which at our scale is indicative of the success we're driving for a growing set of customers. Obviously, the acquisition of SendGrid impacts some of our metrics this quarter.
So let me walk through some
of the detail for a moment. As a reminder, the acquisition closed on February 1, so we got 2 months of contribution in Q1. Base revenue was $220,900,000 in Q1. It's also worth noting that all of the acquired Twilio SendGrid revenue falls into this category. While we won't be reporting the precise Twilio SendGrid contribution on a go forward basis, the results were consistent with the guidance laid out on the last call.
Breaking those two components apart, the organic growth for Twilio's base revenue was above 60% year over year, and Twilio SendGrid's organic growth for the stub period was 30% year over year. Our dollar based net expansion rate was 146% in Q1. These results are a testament to not only the success we're driving for our customers, but the performance of George's team driving deeper, more strategic relationships with our existing customers. Please keep in mind that this metric will not be impacted by the acquisition of SendGrid until we lap the close in Q1 of 2020. We ended the quarter with 154,797 active customer accounts, with Twilio SendGrid contributing more than 84,000 to the count.
Our top 10 active customer accounts contributed 14% of total revenue in Q1 compared to 20% in Q4 of 2018 and 18% in Q1 of 2018. Gross margins came in a little bit above 58% in Q1 compared to 54% in Q4 of last year. The largest contributor by far was folding in the higher margin revenue from Twilio SendGrid, which drove a positive uplift of about 300 basis points. On an organic basis, gross margins also increased a bit sequentially as the base variable mix improved in Q1 and the large international customer that contributed materially to the Q4 results returned to a more normal spending pattern in Q1. On a go forward basis, the story remains largely the same.
You should continue to expect some fluctuations in our underlying gross margins. Our priorities remain the same. We are focused on growing the business around the world rather than maximizing gross margins in the near term. We continue to see things that could impact our gross margins like product, country and customer mix, network service provider fees, FX and more. On that note, we recently got some clarity on the Verizon A2P or application to person offering we outlined a few quarters ago.
As a reminder, Verizon is establishing a new A2P channel for long code SMS messages
that will add a $0.25 fee
per message to all businesses with A2P SMS messaging use cases. Verizon will be implementing this new offering in mid May, and we will be moving customers over to the new service accordingly. We will be passing this fee through to our customers, and we do not expect this to impact the gross profit dollars received per message, but it will impact the gross margin percentage. So for Q2, you should expect about a 50 basis point drag given the mid quarter change and roughly a 100 basis point drag to our overall gross margin percentage on a go forward basis.
This should
also add about $3,000,000 to $4,000,000 in revenue per quarter on a go forward basis. This is incorporated into the guidance provided today and added about $8,000,000 to $9,000,000 to our 2019 revenue forecast in total. In addition, while we don't have any information to share about potential actions by the other U. S. Mobile carriers at this point, I think it's reasonable to assume that the others will implement similar offerings over the course of time.
As an example, we saw similar progression in the Shortcode segment over the past several years. Given that Verizon has approximately onethree of U. S. Mobile subscribers, a similar move by all of the remaining U. S.
Mobile carriers would result in an additional 200 basis point drag to gross margins in total, if and when this scenario plays out. However, we have not assumed anything on this front in the guidance provided in the earnings release today given the speculative nature of this commentary. Finally, I wanted to provide some additional color about the quarterly progression of operating income inherent in the guidance we provided today, so you can set your models appropriately. On the non GAAP operating line, we currently anticipate being slightly Overall, with the strong results we are seeing, we plan to continue to invest in the growth of our business given the tremendous opportunity ahead of us. Thank you, everyone.
Operator?
Your first question comes from Mark Murphy with JPMorgan. Your line is open.
Thank you very much and congratulations. If you can put an end to robocalling, I think that you deserve a Nobel Peace Prize. So it's great to hear about that. I wanted to start by asking you, it looks like Twilio is going to exceed a $1,000,000,000 revenue run rate during Q2. And obviously, we understand the law of large numbers is going to start to apply.
But does the pipeline currently give you decent line of sight to eventually reaching $2,000,000,000 in revenue? Or do you think that these abnormal growth rates can continue all the way to that $2,000,000,000 level over time?
Mark, it's Tazeenah. Thanks for the question.
I mean, obviously, we're not going
to guide beyond 'nineteen. What I would say is that, I mean, as you pointed out, we do see the $1,000,000,000 run rate certainly in the year, and we feel really good about the results and the momentum of the business right now. I think those numbers do get larger over time. And so I think the growth rates will probably fade a little bit as we get larger and larger, but we continue to make investments in
the growth of the business because we
feel like we've got pretty good and elevated multiyear growth outcomes.
Thank you.
Your next question comes from Ittai Kidron with Oppenheimer. Your line is open.
Thanks guys and congrats on a
good quarter. A couple of
questions from me. Jeff, on SendGrid, it's great to hear that the integration is moving smoothly. Maybe you can talk about today versus 3 months ago, how do you feel about the potential realization of the synergies between the two businesses? And then Khozema, maybe you talk about Application Services. Any color there on the growth rates and the contribution of those products to revenue?
Thanks for the question, Itay. This is Jack. So first of all, we're very happy with the progress so far in the integration. Despite home being a few months post close. The first thing we're focusing on is getting onboarding the 500 SendGrid employees, making sure they feel at home at Twilio.
Then on the go to market front, we've started to execute the cross sell motion that we've talked about in the past of selling SMS and a broader messaging product to the email customer base. And even though we're just starting that cross sell and it's going to take some time to manifest, I think our hypotheses there are pretty good. And I think that the idea that customers want one platform strategy and one product that can solve many messaging needs that they have is a good one.
Hey, Sai, it's Khozema. Just on the answer
to that's not one that we're going to break out every quarter or disclose. I think what we do see is really strong traction there. It's that category has been growing faster than the overall business. And I think what we'll do is probably provide an update in the future here when we cross another one of our interim milestones.
All right. Good luck, guys.
Thanks. Thank you.
Your next question comes from Heather Bellini with Goldman Sachs. Your line is open.
Great. Thank you. I wanted to spend a little bit of time on Flex. Jeff, you said a few months ago that this is a year of pipeline build for the most part. That's what we should be expecting.
But I was wondering if you could share with us, given your comments on it on the call, how is it going versus your expectations? And where you did win in the quarter? You mentioned one deal in particular, but what are the other solutions they were looking at? And what were the reasons that Twilio won? Thank you.
Yes. Thank you, Heather. Yes, I think the key thing for Flex, which is as a V1 product, is to get architecture rate, you get the core differences between the usual monolithic app that people bought in the past versus our application platform approach. And the idea that companies and the developers want to take a contact center that's in the cloud and fully customize it to meet better workflows and to get the efficiencies by making the contact center work exactly as we want it to. That core of the product is correct, and that's what the market is telling us based on the excited response that we're
getting. And so as we hear from customers, if you
think about the first customers we have, the thing that I'm looking at is those customers are happy and use the product and it's the platform approach that they want. And so as far as like other products they're looking at, I mean, some of them are coming from an on prem legacy world. Other companies are been trying to move to the cloud and sometimes you get net new use cases that they're spinning up like a new channel like chat is the impetus for them to bring in a new platform to be the basis for their growth. So it's not one story, but broadly speaking, it's customers coming from the legacy world generally on prem approach. That's where most of the market spend here is, and that's where the most complex requirements are that really require all that customization.
And if you would think of the analysts out there, they say 85% to 90% of the market is still on prem in that legacy world, and that's the public spend that we're doing.
Great. Thank you.
Your next question comes from Brent Bracelin with KeyBanc Capital. Your line is open.
Thank you for taking the question. I wanted to follow-up possibly with George or Jeff around just the SendGrid opportunity and specifically the cross selling and where we're at. Obviously SendGrid brings a pretty large installed base over 80,000 customers. Again, I know it's very early, but where is the low hanging fruit? What parts of the overall kind of SendGrid base are you targeting?
And what's been, again, very early feedback?
This is George. So I think we're
on track in terms of our pipeline building for the cost out. Obviously, we just got started. I think the thing that honestly we're excited about is using the data that we have around what the SendGrid customers are doing, the use cases they're doing to intelligently focus our go to market efforts around obvious opportunities to expand portfolios. For example, if we see people doing very time sensitive account notification, let's say, like email, that's a great opportunity for us to go in and talk to them about SMS as a federal alternative, for example, but also vice versa, cross selling e mail to the Twilio base. So for both directions, we have we're on track is what I would say in terms of our pipe building or circles.
And so, yes, I think that's it's looking good for us right now versus the plan to set up again.
Helpful there. And any idea on the sales cycle for cross selling at this point? Or again, it's just too early to tell?
I think you're going to see it. We're seeing it's varied. We are seeing some quick wins more actually on the email side, but also some of these are going to be just more of our typical sales cycle line. So I think it's going to be very just like for our core business, the sales cycle lines are varied.
Great. Makes sense. Thanks for the additional color.
Your next question comes from Michael Turrin with Deutsche Bank. Your line is open.
Great. Thanks. Good afternoon. I know you've been busy investing, continuing to build out the Twilio go to market engine. Last year, you called out some go to market enhancements, which drove some more pronounced upside on some of the quarterly results.
And just wondering if there's anything there which we should be cognizant of as we're lapping some of those efforts as we move forward throughout the year this year.
I think in terms of the go to market investment, so I think that you as I said in my prepared remarks, we're continuing to execute the plan. We're we laid out a vision of how we're going to invest in coverage, especially in our enterprise partners and international and all that is continuing to move forward with good performance and strong growth. So I think continued strong growth is the message there. In terms of performance versus expectations, I think we've talked about in the past that we're I think we're just getting better about understanding the impact of our go to market investments. And I think that's making us, generally speaking, better around forecasted impact of it over time.
Thanks. Helpful color, George. And then on gross margin, you provided some useful color there in the prepared remarks. It came in above our expectations for the quarter. Can you talk more about the drivers specific to the quarter?
And then to recap some
of the impacts coming on throughout
the year, it sounds like basis points of headwind from the Verizon A2P for the year. Is that right?
Yes, Michael. Hi, this is Khozema. Thanks for the question.
So SendGrid is really the large driver in there. It's about a 300 basis point lift in terms of gross margins. And the other one that we called out is that there's that large international customer that we specifically identified in the 4th quarter that went into kind of a more normalized mode, if you will, in the Q1. And so we got a little bit of a lift there. And then just
I think the strength of base in general provided some additional juice. In terms of the balance of
the year, I mean, I think the way that we see it playing out right now based on what we know is that based on Verizon, we see about a 50 basis point drag here in the coming quarter. Beyond that, just really in the interest of transparency, we were trying to provide some additional color around what other carriers may or may not do through the balance of the year, and we'll just have
to see how that plays out, but that's not really affecting our guidance for now.
Got it. Congrats on the strong results for the start up of the year, guys.
Thanks, Michael.
Your next question comes from Nikolay Beliov with Bank of America. Your line is open.
Hi. Thanks for taking my question. One part of the business we have not discussed in a while is the ISV business, the independent software vendor business, which I believe a couple of years ago was 20% of revenues growing in line with the overall growth rate. Can you please give us an update here to the extent that you can? And as you guys move up the application stack, how do you handle potential conflict with your own ISV customers?
Yes, this is George. So we continue to work very well with ISVsolution partners. And part of our broad based coverage strategy, I talked about enterprise, partners and international, We view ISVs squarely in the partner realm. And so we're growing our team there that's working with all various ISVs from small startups all the way through strategic ISVs. And I would say that
it's a continued strong growth
we see across the board also applies to ISVs as well. In terms of the specific question, the second part of your question, I think there's no change in what we've stated in the past, which is that Flex is applies for customer to the build mindset. And for customers that want to buy an off shelf solution, we work really well with our solution partners that have built Twilio components into their contact center solutions. I think one thing that is a positive sign is we are seeing we are getting inquiries from more and more ITs that are asking about potentially leveraging flex components into their solutions. I think we're early days.
Those are going to be long conversations because these are obviously big strategic decisions for these companies. But I'm excited to see at least that level of inquiry from ISVs around Flex. Thank you.
You're welcome.
Your next question comes from Alex Zukin with Piper Jaffray. Your line is open.
Hey, guys. Congrats on a great quarter. Maybe the first one for Jeff. Just as you continue to integrate SendGrid, can you talk about whether kind of where the synergies are from SendGrid's product roadmap towards your application services category? And then I have just a quick follow-up on dollar based net expansion for Khozema.
Absolutely, Alex. First of all, the app services, as a technical concept, app services is parts of our product that has a pure software component, I. E. No carrier component. And so technically, it's integrated into the App Services category.
But technical definition of science, we find it once in Analyst Day
a few years ago.
As a broader strategy, you've got email delivery as an API that's locked in really nicely with our programmable communications cloud, where we have a voice API, SMS API, chat API, video API and our email API. So as all different channels layer in, including things like Facebook Messenger and WhatsApp, Email is a critical part of that story that makes a ton of sense. The developers need API for email just like they need API as well as other things. Then at the layer above, at the engagement cloud, that's where we see this opportunity to bring application platforms. You take the major application use cases that every company uses to run their business, the front of house of their business and provide them a way to use our APIs but accelerate their to deploy it.
So that's where NeoPlex comes in for the contact center side of things. And SendGrid has a product called marketing campaigns that actually works for the market in a similar way. And so over time, I think what you'll see is the marketing campaigns product that SendGrid already has will become more and more API centric and will be able to have some of the capabilities like you see in a Flex as far as being more of an application platform. The original built it as more of an application itself and will turn it into more of an application platform for our developers to use it as well. And so it fits in really nicely with the strategy of the engagement cloud to be the single system that a company can use for all to manage all of its customer touch points along that customer journey, whether it's sending or selling to that customer, marketing to them, servicing them on the field, servicing them with customer support.
There's all these different touch points companies have that we see companies leveraging portfolio to improve with better communications. And in every one of those categories, the possibility of an application platform to accelerate and bring more customers on what platform exists. That said, our biggest priority in the engagement pod is making Flex success. And marketing campaign is already a product that's in the market and we feel stronger that's a great product. But for the perspective of the application platform, our major focus is on Flex as opposed to a major move in the marketing campaigns product in the short term.
Got it. That's super helpful. Thank you, Jeff. And then, Khozema, just on dollar based net expansion, the 146% was again very strong in the quarter, particularly versus the year ago period. But on a sequential basis, it was roughly flat, down maybe 1%.
Have we reached kind of a sort of a new peak in this metric? And kind of how should we expect that to trend through the year, at least until we start getting into the SendGrid compares a year from now? Yes. Thanks, Alex, for the question.
I think over time, we do expect it to trend down a little bit. It's not something that we guide to per se. I mean, obviously, at $146,000,000 we feel pretty good about where the figure landed and feel like it's
a good testament to the business model. And it has been in the 140s for some time.
But I think over time, you are going to see that it does decline
a little bit over time just given that these older cohorts in particular are going to become really, really large as a part of the mix. Got it. Perfect. Thank you. Thanks.
Your next question comes from Bhavan Suri with William Blair. Your line is open.
Great. Congratulations guys and thanks for taking my question. I guess just to touch on the first one, which is as you think about the engagement cloud, you think about now having e mail, text and Flex, which are different ways to reach customers and engage with them. How do you think about sort of layering on 2 pieces, a workflow engine obviously and an orchestration layer workflow from the perspective of there's certain things that are best done through text, some through email. Certainly, if it's a complex process, I want to offload that to a IVR and then call center at some point.
And then sort of orchestrating that workflow so the customers deploy that, how is that sort of how are you thinking about sort of the deployment of that or the road map for that into the product? And is that something customers ask me a good state? Thanks, Bhavan. This is Jeff. So as far as like the orchestration there goes, you kind of see that with Studio as a product that companies or customers can use to build those sort of orchestrations out, as far as IVRs or bots even just logical flows of how
the communications work. And as a general story, I guess, around those types of features, it leads to customers. And we hear what customers need
us to do, what it needs to take the platform to make it easier for them to build the kind of customer engagement they want. And so for the roadmap of orchestration and workflows, like if that's what customers are telling us, their biggest pain points are, those are things that we consider. But generally speaking, our roadmap is defined by customer need. Got it. Got it.
And then one more sort of tactical question maybe for George here. You touched on partners and ISVs, but I actually want to touch on the VAR channel a little bit, which has been really strong for the traditional legacy contact center guys, the VAR channel, Francisco, VAR, etcetera. Have you seen any of them? And my assumption is yes, but sort of some color on sort of how many of them any larger sort of working with Flex or ServiceNow, we can do more complex and interesting things with Flex and account of legacy solutions. How is that traction with the broad channel of the legacy guys going?
Love to get some color there. Thank you.
It's a great question. We definitely are seeing interest from ours for Flex. Obviously, as I said, we're just generally early in the overall Flex effort. But we're seeing enough interest right now that we are making some infrastructure plans to enable ourselves to better support this new channel for ourselves. So it's going to take some work on our side to be able to do all the things we'd expect, billing, etcetera, to support these guys.
But we're seeing enough interest that we're evaluating all that right now. So that's the part to say that we need.
Of the union.
Your next question comes from Meta Marshall with Morgan Stanley.
Great. Thanks. Understanding it's kind of a building year on Flex, but maybe just on a go forward basis, would you intend to kind of offer details around trials going on or hours of free time that are being used? I guess just what metrics do you kind of intend to give to give a sense of what pipeline is building on Flex?
Yes. I think in general,
I mean, I think it's not something that we're going to provide a lot of forward guidance on or metrics really until it becomes a more meaningful part of the business. I mean, obviously, we're really excited about the progress in terms of the product and the traction with some early customers. But I think for now, it's just not going to be part of our
underlying disclosures in terms of product detail.
Got it. Thanks.
Your next question comes from Rishi Jaluria with D. A. Davidson. Your line is open.
Hey, guys. Thanks for taking my questions. Going back to SendGrid, just wanted to a is there potential to bring that technology onto the core text and voice side and kind of create text and voice marketing API? Thanks.
Yes. Thanks, Rishi. This is Jeff. I think what you see is customers want to have one platform and one messaging strategy. And so one of the hypotheses for the acquisition of SendGrid is to be able to take the higher level products we have inside Flex or marketing campaigns and have them expand multiple channels.
And you see this is a major value proposition already in Flex, where Flex isn't just a voice product, but it also includes things like chat and SMS and video and sort of all the channels that we have, including WhatsApp and Facebook even. And so at the Engagement Cloud Layer, one of the key things that customers want is an omnichannel strategy, I think, for every one of these customer touch points. And I think marketing could be no different. Got it. Thank you.
Your next question comes from Jonathan Kees with Summit Insight Group. Your line is open.
Great. Thanks for taking my question. I'm just curious, out of the new features that you released last quarter, the one with Salesforce seems like
it will be the most likely to needle and
correct me if I'm wrong there. I'm just curious in terms of how you're going to approach this here in terms of sales.
Are you just going to do your traditional method of working with the developers? Are you
going to work with Salesforce sales teams in terms of going into the current customers and getting them to sell this feature, going outside of the traditional developers channel? Thanks.
This is George. I think from my time at Salesforce, my experience is that you have to push leads mostly yourself, but their Salesforce is integrated. They have thousands and thousands of solutions that they're being asked to push every day. So the reality is that most of the interest in this, activity is going to come from our developers who want to connect Twilio to Salesforce and also through our own kind of go to market channels. I think the good news is that, obviously, many of the customers we deal with are Salesforce customers.
And I think that this connector will have, we hope, significant usage and opportunity in the field. So we're very positive on that. But it
will come mostly through our distribution channels and doctors.
And if I could just follow-up real quick. This product is served more by your customers, right, not so much by Salesforce, your small investment that they have in
you guys?
I'm sorry, could you repeat the question? I didn't hear
it very clearly. I apologize.
Sure. No. This product was more developed based on feedback from your customers, like an input from Salesforce. Okay.
Well, absolutely. This came from our customers. Nothing to do with any investment from them, yes.
Jonathan, this is Patrick. One of the things that I one thing that I really like about the Twilio or Salesforce product is that it came actually out of Twilio.org. And so if you think about every part of Twilio and seeing customers innovating, some other great example of that.
It sounds like it. Super. Thanks a lot guys.
Your next question comes from Catharine Trebnick with Dougherty. Your line is open. Thanks for taking my question. Quickly, you just launched at Twilio SendGrid, the expert service this quarter. Any plans that looks like there's deep expertise to help out your customer base?
Any plans maybe to train those individuals to help with the cross selling of the Twilio products into that customer base? Thank you.
Well, we already have worked very closely with the existing SendGrid customer facing teams to train them on identifying cross sell opportunities. This will be a part of it, but probably the main driver will be the existing people in place, not the new people
we're bringing on to focus on just as
part of export services. So that's where we are right now.
All right. Thank you. Your next question comes from Dmitry Nikas with Stephens Inc. Your line is open.
Hey, thanks guys. Thanks for squeezing me in here. A couple of questions. One on a lot of the cross sell questions, SendGrid, Twilio, Core Twilio have been asked. But I just curious to see, and I could appreciate the holistic sort of approach for 1 collaboration cloud where you have multiple channels.
But are there any customers moving to SMS faster than moving to SMS versus email or vice versa in those cross sell opportunities that you're chasing? Is there can you delineate that at all? Or is it about equal impact from one set of customers moving to email from SMS and then vice versa from SMS to
email? I think it's too early to draw too many conclusions from the data we have. But I I would say we see interest in both directions. I think that the dollar value of ASPs that we see for the Twilio products are greater than the email products. So our belief is that in the long term, there will probably be a greater revenue opportunity in that direction.
But we're
seeing interest in both directions.
Okay. Thanks, George. And then secondly, I wanted to follow-up on the A2P Horizon disclosure you guys put out as it affects your margin as well as revenue. And I appreciate being transparent about it and sort of giving us a framework how to think about it. What I wanted to sort of double click on is actually the revenue impact.
If I heard you correctly, you said that this will be a positive impact, right, to revenue in 2019 of about $8,000,000 to $9,000,000 while a negative impact to margin. So how does that what gives you confidence there's a positive impact to revenue? And how do you sort of come up with that? Are you assuming any price erosion, price discounts with that or not? I'm just if you could sort of double click on that and explain your thinking there, that would be super helpful.
Sure, Dmitry. Hi, it's Khozema. It's actually much simpler than that. It's literally a pass through fee to our customers, and so it carries 0 margin. And so just think about it as we're adding the same number to the numerator and the denominator, and so that's just
the margin rate drag that has no impact whatsoever on gross profit.
But what would you expect, Khozema, that if there is a carrier tax that you passing through to your customers, the customers, particularly the high volume ones might come back to you and ask for a discount?
It's not what we've seen. And I think, again, I mean, we don't have a lot of experience with it because we haven't gone through the process yet, but that's not
what our expectation of how it will play out is.
Okay. I appreciate that. Thank you.
Sure.
Your next question comes from Will Power with Baird. Your line is open.
Great. Thanks. This is actually Charlie Ehrlich on for Will. I was hoping you could talk
a little bit about the customer adoption you're seeing in Europe or EMEA, especially since hiring ahead of the EMEA business a little while back. Has sales meaningfully picked
up in that region since then or is it still a little
bit too early to tell? Thanks.
Hi, Charlie. This is George.
I think we're very pleased with the growth and the traction we're seeing in EMEA since David has taken over. Just Eat is a great example of that. And I think the best data point I can give you is that we'll continue to add capacity in coverage in EMEA and adding it more aggressively than before David joined. So I think that's a sign of our beliefs in the opportunity and
the momentum in the market.
Great. Thanks, George.
Welcome.
Your next question comes from Nadine Amladi with Guggenheim Partners. Your line is open.
Hi, good afternoon. Thanks for taking my question. You talked a little bit about SendGrid, but I have a sort of platform level question. Given that product has a structurally higher gross margin, presumably because you don't have termination fees associated with it. Is there any benefit to physically integrating SendGrid with the rest of Twilio?
Are there any plans to do that? And will the how closely will the roadmaps of those two sets of products be aligned?
This is Jeff. I'll answer the question. If I understand the question correct actually, I'm not sure I understand the question correct.
Sure. Now I was simply asking, will are there plans to integrate the SendGrid code base with the traditional Twilio platform? Is there any real benefit to doing that? And if so, how closely will the future roadmaps be aligned?
Well, I think in general, we want the product experience of a customer of either Twilio or SendGrid,
we want the customer to have
a unified and great customer experience. And so in the fullness of time, we want customers to have one account, have one bill and be able to use any of our individual APIs as easily as you might use video or voice or SMS, you can use e mail, as well as be able to use any of the channels in any of the products that we build above the API layer. So an engagement cloud layer, you should be able to use any of these products seamlessly with 1 customer account, 1 bill and one great customer experience. And that's what we're working towards.
Thank you.
Thanks, Tommy.
Your next question comes from Mike Latimore with Northland Capital. Your line is open.
Great. Thanks. Great quarter. As your volumes grow and new verticals open, are you seeing the influence of the CIO on deals increase? Or does it really kind of still remain heavily developer led here?
I think that what we're seeing as we move in up stack with Flex and other engagement cloud solutions is more engagement with higher level decision makers, not just like the CIOs, what I would say. I had significant prospects in our office last week. They flew here from Atlanta, and they had both their CTO as well as they had a
they actually have 2 heads
of products that both heads of product in the room and then one developer portion of the room too. So I think that that's kind of continues to speak to our, I think, uniqueness of our model, continue to bring the developer along and that's a unique asset for us in the sales motion, but the people in the room are continually up leveling. And I think you saw that with our attendance and our at Signal and our VP our VIP track last year, and we're seeing that play out in more and more of the types of people we're able to engage. And but I wouldn't focus it exclusively on the CIO. Got it.
And how about the, the Twilio wireless product? I mean, you didn't mention that, but how does the pipeline look there? I think that we've seen good momentum for the products, and I'm glad you asked about it. It's a product we can be excited about. And yes, we just continue to build pipeline.
That product is on track. So excited about it.
There are no further questions at this time. Thank you for participating in today's conference. You may now disconnect.