Good afternoon. My name is Tashawn, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Twilio 4th Quarter 2016 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.
Thank you. I would now like to turn the call over to Greg Kleiner, Head of Investor Relations for Twilio. The floor is yours.
Thank you. Good afternoon, everyone, and welcome to Twilio's 4th quarter year end 2016 earnings conference call. Joining me today are Jeff Lawson, Twilio's Co Founder and CEO and Lee Kirkpatrick, Twilio's CFO. The primary purpose of today's call is to provide you with information regarding our 20 16 Q4 and full year performance in addition to our financial outlook for our 2017 Q1 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, our market opportunity and market trends, customer adoption of our products, our momentum, the benefits from our business model, timing and focus of expenses, impacts and expected results from our acquisition of Beepsend 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 Form 10 Q filed with the SEC on November 7, 2016, and our remarks during today's discussion should be considered to incorporate this information by reference. Forward looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law.
Also during this call, we may present both GAAP and non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago. We encourage you to read our earnings release as it contains important information about GAAP and non GAAP results as well as the reasons why we present guidance for non financial measures of loss from operations and net loss 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 a Form 8 ks furnished to the SEC. Finally, at times in our prepared comments or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our 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. We encourage you to visit our Investor Relations website at investors. Twilio.com to access our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about Twilio. With that, let me turn the call over to Jeff.
Thank you, Greg, and welcome, everybody. 2016 was a tremendous year of innovation and growth for Twilio, and the power of our platform business model drove another set of outstanding results in the 4th quarter. We finished the year on a high note with a Q4 performance far above our guidance. This strength, combined with gross margin adjustments Lee will describe, also drove our Q1 of non GAAP profitability. Customers, new and old, are leveraging our platform to create experiences for their end users by integrating communications into the software that they're building.
Base revenue grew by 73% year over year in Q4. This was driven largely by our continued successes with existing customers along with seasonal contributions from elections in the United States and Brazil. We also saw another strong performance in our key metrics with dollar based net expansion rate of 155% and year over year active customer account growth of 44%. In total, we added more than 2,000 new active customer accounts in the quarter with strength in both the enterprise and technology first organizations. We kicked off a number of new efforts in the Q4 with companies such as Capital One, Atlassian, Payment Sense in the U.
K. And 1 of the Blue Cross Blue Shield Companies. Authy also added some wins with companies including Scotiabank, MercadoLibre and William Hill in the UK. We also entered into a new relationship with 1 of the largest U. S.
Airlines. This is another great example of how working with developers within a large organization can pay dividends as the airline's technology evangelists helped champion Twilio through this process, culminating in a decision by the CIO. The initial use cases are targeted at internal facing functions, like incident alerting and conference bridges, with several other potential opportunities identified. You may recall my discussion last quarter of the enterprise plan, a product with a host of compliance, security and administrative features aimed at serving the needs of larger, more complex businesses. The enterprise plan was key to unlocking this opportunity.
As a federal contractor, this airline has very specific data storage requirements that we can now address through the capabilities of our enterprise plan. We believe this unique combination of developer credibility and enterprise quality not only helped us close the initial transaction but also identified further potential opportunities to expand our relationship with this customer. Another customer, AllWebLeads, is a leading customer acquisition marketing business focused on the United States insurance industry, and they were another important Q4 win. The core of all Weblysis business is the ability to attract, engage and qualify customers who need to purchase an insurance plan. An important part of that equation is the call center technology that drives tens of thousands of calls for their business every day, and this is what we will be driving for them going forward.
The power and flexible nature of our platform along with our scalability and monitoring capabilities are key to this win. Another example of our traction within the traditional enterprise is a new relationship we started with 1 of the leading service providers to the U. S. Automotive industry. Just like Twilio is behind the scenes powering the communications behind many of the services you use every day, this company provides services to a majority of the new cars sold in the United States.
Customer service is vitally important to this company's business as they serve tens of millions of drivers each year. By modernizing their call center operations on Twilio, we'll be helping them to improve automation and self-service options to create advanced call controls and add messaging as a new communications channel. The end result will help to improve both the efficiency of their operations and the customer experience for their millions of end users. We won this deal in conjunction with our partner, OneReach, another example of our traction with solution partners who help expand our presence in the market. On the product front, we announced a number of new offerings in the Q4.
1st, dual channel recording to improve agent productivity and enable advanced analytics in both sales and call center use cases. 2nd, interconnect for our programmable voice client offering to enable private Ethernet and MPLS connections to our cloud for our customers' voice over IP calls. 3rd, a porting API to allow customers to more easily move their numbers over to Twilio in an automated fashion. And finally, we added support for SIP registration to our programmable voice product line for customers to connect their existing phones directly to our platform. In addition, the R and D team remains hard at work on a number of other offerings we have teed up for major releases this year, like programmable chat, programmable video, programmable wireless and Notify.
We've admitted many customers into the beta programs of these early release products and are expanding the number of customers in the program continually. We're very excited to see what our customers can build with these new building blocks as we move through the final stages of our launch program. We were also pleased to have been included in the bot frameworks launched this past quarter by 2 of the major platform providers, both Microsoft Azure Bot Service and Amazon Lex Framework. We have a number of clients experimenting in this field, and I'm excited to see what comes out of it. You've heard me talk about our plans to further penetrate the enterprise market in the past.
In Q3, we launched the Enterprise plan to both aid this effort and monetize the unique needs of larger organizations. More recently, we announced that we received ISO 27,001 certification, one of the most widely recognized and internationally accepted information security standards. This is a huge milestone for our company and something that is very important to both our customers and our prospects. I also wanted to take a moment to discuss the acquisition that we announced today. I'm very excited to welcome the Beep Send team to the Twilio family.
Lee will walk through the financial details in a moment. But at a high level, the focus of this acquisition is their underlying routing platform and technology team, which we believe will benefit our entire messaging business by improving our super network. We looked at the product roadmap for our super network, and we saw a great fit with Beep Send's routing platform and the expertise of their team. In particular, their platform's capabilities to segment traffic and monitor routes will aid our messaging business, especially when combined with the quality data we receive from our proprietary routing platform. In addition to the technical benefits, we're also looking forward to the contribution from their team members as they bring a wealth of knowledge and relationships as we expand our international efforts.
Before I turn the call over to Lee, I'd like to take a moment at the end of our 1st year as a public company to reiterate our vision for the road ahead. Our mission is to fuel the future of communications. As communications undergoes a once in a lifetime transformation from its legacy in hardware and physical networks to its future in software, we see a tremendous opportunity to influence and power that future. We make continual progress towards that goal of powering the software based future of communications by doing 2 things. 1st, we work to migrate the existing communication workloads of the world onto Twilio.
And second, we work to ensure that the future workloads of communication are invented on top of Twilio. We plan to accomplish this by following 3 steps. 1st, we seek to build a broad platform that is widely applicable, priced aggressively and designed to enable developers' creativity to flourish across the widest set of use cases imaginable. To do this, we will continue to provide high quality offerings across a variety of lower level building blocks like voice and messaging. And we price these offerings to maximize their utility across a broad set of use cases, some of which aren't even invented yet.
But that is just the first step. The second step is based on the most common use cases that emerge from that broad platform, we then execute a strategy to drive deep penetration in each. See, we're listening to our customers, watching what use cases they build with our platform and bringing these learnings to a broader audience. As a result, we may offer higher level APIs like our use case APIs Authy and Notify or we may work with partners such as Zendesk and Salesforce to drive a healthy ecosystem targeting a particular use case. That's the second step.
And then 3rd, we repeat this process by further broadening our platform. This means that over time, we will look to add new products to our platform like programmable video and programmable wireless and repeat the cycle again. We plan to invest across several areas in 2017 to execute on this strategy. In product, we will invest to further our lead in this market by increasing the breadth and the depth of our product line to provide customers with more choices along with demonstrating the superior quality of the products we build. In sales, we'll be adding more fuel to an engine that's working quite well.
We'll be adding to both the key accounts and new business teams in an effort to expand our reach, penetrate our existing accounts and get our customers to a production scale faster than ever before. In marketing, we will invest in furthering our mindshare with developers and becoming a trusted asset in the tool belt of every builder in the world. Overall, 2016 was a momentous year for Twilio in many ways. In fact, November was the 8th anniversary of launching the Twilio website. So it's amazing to me all we have accomplished in the past 8 years.
I'd like to take a moment to thank all the customers, partners and investors for your ongoing trust in us. And to all of the Twilions, thank you for your continued hard work and devotion to customer success. I'm incredibly proud of what we've accomplished in 2016, and I'm eager for what lies ahead in 2017. It is still day 1 of our mission to fuel the future of communications. And now I'm going to turn it over to Lee to discuss our financial results.
Thank you, Jeff, and good afternoon, everyone. We are pleased to report strong numbers as we closed out 2016 results which exceeded our guidance. Overall, these results were driven by our continued success in adding new customers and driving further expansion across our existing customer base. We demonstrated a combination of strong revenue growth, operating leverage and progress across our key metrics. Base revenue for the Q4 of 2016 came in at $75,200,000 up 73% year over year from the Q4 of 2015.
This compares to our guidance of $68,000,000 to $69,000,000 As Jeff mentioned, we saw seasonal strength from marketing campaigns related to the elections, not only here in the U. S. But also in Brazil that contributed to the results in the quarter. Combined, we believe this activity produced a little over $1,000,000 of revenue. Total revenue for the Q4 of 2016 was $82,000,000 up 60% year over year from Q4 of 2015.
Overall, base revenue accounted for 92% of total revenue in Q4, up from 85% in Q4 of 2015. We continue to see strong growth across customers of all sizes. In fact, we ended the year with more than 2,500 customer accounts driving greater than 10,000 in ARR, a customer segment that grew faster than our overall customer account growth. In terms of customer concentration, our top 10 customer accounts were 29% of total revenue in Q4. Our largest customer organization contributed 17% of total revenue in the quarter.
WhatsApp came in at 6% of total revenue. We have a range of customers of all sizes as we go further down the list, extending out to the long tail. We continue to see strong growth across all customer revenue tiers. As of December 31, 2016, active customer accounts were 36,606, up from 25,347 as of December 31, 2015. These figures include 8 variable customer accounts in Q4 of 2016 compared to 9 in Q4 of 2015.
Our dollar based net expansion rate was 155% in the 4th quarter, demonstrating the power of our platform business model and our continued ability to both retain and expand revenue within our customers.
Before moving on
to the profit and loss items, I'd like to point out that I'll be discussing non GAAP results going forward. Our GAAP financial results, along with the full reconciliation between GAAP and non GAAP results, can be found in our earnings release. Non GAAP gross margins in the Q4 of 2016 were 59%, up from 56% in the Q4 of 2015. There were a few factors that impacted our gross margins this quarter: a favorable mix of usage in higher margin geographies internationally, ongoing efficiency gains and some end of year refunds and accrual reversals that positively impacted gross margins. Specifically, the end of the year refunds and adjustments I mentioned added roughly 90 basis points or about $750,000 to our Q4 results.
While we had a great quarter on the gross margin line, our plans do not anticipate margins continuing at this level. Please recall that we're currently operating our business to optimize for reach and scale to drive revenue growth rather than maximizing for gross margin. Gross margin may fluctuate in the near term as we pursue this deliberate strategy to further extend our market leadership. Non GAAP operating expenses in the Q4 of 2016 in total were $48,200,000 or 59 percent of total revenue. This compares to $34,000,000 for the Q4 of 2015 or 66% of total revenue.
The combination of our revenue and gross margin upside drove a small non GAAP operating profit in the quarter. Non GAAP operating profit was $100,000 in the Q4 of 2016 compared to a non GAAP operating loss of $5,000,000 in the Q4 of 2015. This was better than original guidance of a non GAAP operating loss of $4,500,000 to $5,500,000 Our non GAAP operating margin improved by approximately 1,000 basis points year over year from negative 10% to slightly above breakeven. Note that we ended Q4 with 7 30 employees. Our non GAAP income per share in the 4th quarter was $0.00 per share based upon a weighted average diluted share count of 100,200,000 shares.
This compares to a non GAAP loss per share of $0.07 per share in the Q4 of 2015 based upon a non GAAP weighted average share count of 70,900,000 shares, which assumes the conversion of preferred stock at the beginning of that quarter. There are a few new items in our reconciliation this quarter, so let's take a moment to explain them. Expense related to our charitable donation to the Donor Advise Fund or DAF supporting Twilio dot org is fairly straightforward and something I highlighted in our Q3 call. Though we're able to execute on this a little ahead of plan. We sold 100,000 shares on behalf of chulia.org in the follow on offering in October, and this charge is related to the funding of the DAP itself.
The second item, the sales tax accrual reversal, is related to our ongoing effort to establish a basis upon which to appropriately charge state sales tax to our customers. As we've disclosed previously, we've been accruing these sales taxes, including penalties and interest on behalf of our customers as an expense, while we work with each state to determine the appropriate tax rate and put the systems in place to pass these taxes through to our customers. We accrued $3,400,000 in the 4th quarter, which is reflected in our G and A line. In the Q4, we made progress across several fronts. We reached agreement with 1 state, resulting in a reversal of approximately $800,000 We are in advanced discussion with several other states, plus we have sent proposals to all the remaining states in an effort to move this process forward.
So while we're encouraged by the progress we have made on this front, this is a complicated issue and we still have significant work to do. We ended the quarter with $306,000,000 in cash and cash equivalents compared to $252,000,000 at the end of the previous quarter. The follow on offering completed in October added $65,000,000 net of expenses to this balance. But before turning to guidance, I do want to discuss the financial implications of the BeepTEN transaction that Jeff had mentioned earlier. As a reminder, the focus of the BeepTEN acquisition is the overall benefits their technology and team can provide to the super network, driving further efficiencies for our messaging business.
The acquisition closed yesterday, so let me take a minute to describe the financial impact of the acquisition, both in the short and long term. Deep Sound has been running in the high six figures of revenue per month, growing modestly and running close to breakeven. Accordingly, we expect the following impacts to our business over the balance of the year. In terms of revenue, we expect Beep Send to contribute roughly $1,500,000 in the Q1 for the period post close and about $10,000,000 for 2017 as a whole on a reported basis. Integration investments should produce a small operating loss in the first half, but the impact of the operating income should be negligible by the second half of the year.
Longer term, the benefit will largely be felt on the gross margin line in terms of efficiency gains in our messaging business, though this does not change our short term priority on reach and scale that I discussed a moment ago. There are a number of variables that impact our gross margin line in the short term. Now let me turn to guidance. We're initiating our guidance as follows, so please note that these figures include the impact from beep send I just outlined. For the Q1 ending March 31, 2017, base revenue in the range of $78,000,000 to 79,000,000 dollars total revenue in the range of $82,000,000 to $84,000,000 non GAAP loss from operations of $6,500,000 to 5,500,000 non GAAP net loss per share of $0.06 to $0.07 based on 88,000,000 weighted average shares outstanding.
For the full year ending December 31, 2017, we expect base revenue in the range of $351,000,000 to $365,000,000 total revenue in the range of $364,000,000 to $372,000,000 non GAAP loss from operations of $17,000,000 to 13,000,000 dollars non GAAP net loss per share of $0.19 to $0.15 based on 90,000,000 weighted average shares outstanding. Our Q4 results capped off a very successful year. We hit breakeven ahead of schedule in Q4 2016, driven by the overall strength of the business, along with some seasonal and one time items. Looking forward into 2017, our growth investments including some front loading of hiring, which drive modest losses in the 1st 3 quarters before we achieved breakeven in Q4. So to wrap up, I'm very pleased in the performance of the team, both in the quarter and in the year as a whole.
We're executing well against our plan. The Infrastar business remains strong, and we're very excited about the opportunity that lies ahead of us. I'll now turn the floor over to your questions.
And your first question comes from the line of Richard Davis. Your line is open.
Hey, thanks very much. Just a quick question. Do you have any access to the content that passes through your APIs such that you could like glean information that might be fed back into algorithms that might provide kind of prescriptive information back to your clients. And the reason I'm thinking about that is with voice and video conversation, which is occurring in real time, that might be something you could do. It's just maybe it's
a technical question, but I was just curious.
Thanks, Richard. This is Jeff. I'll answer the question. So it depends in many ways on how customers use our product, So, for voice product, if you do recordings, we have a marketplace of partners who can do analysis to provide more insights into the content of what was said, things like sentiment analysis, speech recognition, etcetera. We for messaging, right, there's partnerships there as well with companies that are adding value to the messages.
Things like sentiment analysis, we announced this at our conference last year. So yes, in general, other products of ours that we may not have access to, for example, our peer to peer video product that is fully encrypted between the endpoints. And so, as the way it is today, we don't have access to the media. But really, it ends up being up to customers sort of in how they use our product and whether they give access to us to plug in algorithms that can add value to that content or whether or not they do not want those algorithms to be used. But we do see adding value in the form of algorithms that are analyzing content and providing more value to business as a very interesting area, especially with what's happening in the world of artificial intelligence.
Got it. That makes sense. Super. Thank you so much.
And your next question comes from the line of Heather Bellini. Your line is open.
Great. Thank you. Yes, I just wanted to follow-up on the your comment about AI and machine learning. When you think about the company's APIs, when do you see that as starting to be a driver of top line growth and actually being built into the application set that your customers are using?
Thanks, Heather. Really good question. I mean, I think artificial intelligence, the way we look at it is a technology that's going to affect many parts of business. In some ways, it's like mobile or the web, right? They end up being used in many different ways to redefine problems and to bring new kinds of solutions to market.
And so we're already using AI for a number of initiatives under the hood, things that are behind the scenes that help Twilio to operate. And especially via our partner ecosystem, We're starting to offer AI powered solutions to our customers in the form of the marketplace that we launched last year, where we do a revenue share with those partners between our customers. And things like call analytics, dual channel recordings, things like this are tools that we're exposing to enable more and more intelligence to be driven out of the content that's being generated on Twilio, but also for sort of our internal operations of Twilio to understand our customers better.
Great. And just a quick follow-up, you have been investing in your enterprise sales force. Can you give us a sense of how much of a focus if you'll continue the same level of investment in the enterprise sales force in 2017? Thank you.
Yes, we're seeing really good response inside of the enterprise. Again, I would say this is our developer first model at play, where developers are the ones bringing Twilio into the enterprise, just like they've brought us into a number of different types of technology first companies and things like that. And when a developer brings us in to an enterprise, we often do have a more lightweight sales process that goes on behind the scenes to help the customer go from that prototype to a finished ship product. But it's really not that hero kind of sale that you might think of in the traditional enterprise software sense. But we are definitely investing in that because we're seeing it bear fruit.
But I think overall, our investments in enterprise sales, that team and that whole motion is going to be commensurate, if not dwarfed by the overall growth of Twilio that we see with our strong dollar based net expansion rate and everything else.
Great. Thank you.
And your next question comes from the line of Mark Murphy. Your line is open.
Yes, thank you. So Lee, the strength in the Q4 gross margin and also reaching non GAAP breakeven operating margin definitely shows the P and L is trending the right way. And so I'm curious, you're also guiding a bit below consensus in terms of the bottom line for 2017. I guess I'm just wondering what's the best way to reconcile that the positive trend that we see in Q4 versus that one element of the 2017 guidance? And then I have a quick follow-up after that.
Yes, sure, Mark. Yes, so first of all, we're extremely excited by the performance in Q4, both on the top line and in terms of the gross margin. And it does show the power of the platform and then the business getting and running all of its cylinders. We're committed to growing revenue and acquiring customers and that's our focus. So we will be investing in both the platform and the sales team.
We'll be doing a bit front loading of some hiring at the beginning of next year. So we have a leadership position. We want to continue to take advantage of that. So we'll be investing in the 1st part of the year, but we're still sticking by our commitment to breakeven in the Q4 of 2017.
Okay. And then as well, Jeff, I'm just wondering what has the reaction been in the industry to the announcement that Avaya filed for Chapter 11 bankruptcy? And from your perspective, is that a sign that the rate of change to newer models is accelerating? And also, do you think it could open up a higher volume of the next generation call center opportunities for Twilio?
Yes. Well, obviously, without commenting too much about a particular company and their situation, other than the fact that I see a lot of their trucks driving around, is that I think this just sort of shows the migration that's going for that's going from the legacy of physical on prem implementations to the cloud as well as to the more less flexible, monolithic application to the very flexible building that Twilio offers. This migration from a 150 year legacy of hardware and physical networks to a future which is software, I think creates an enormous opportunity for Twilio in a number of different segments of the market and the call center is certainly one of them, both for the think about the modernization of existing call centers, right, where we extend their existing investment with new functionality as a first foot in the door or with a sort of net new, like either rip in a place or a net new call center, where essentially we're taking down the entire thing, like you saw, for example, at IMG Bank. And so we do think the call center arena is a nice area for us. It's very well suited to our technologies and when we're seeing a lot of great companies, both enterprise all the way down market, being able to build or buy neat solutions powered by Twilio.
Thank you.
And your next question comes from the line of Brent Bracelin. Your line is open.
Thanks for taking the question here, Jeff. I wanted to get your view relative to some of the new platforms coming out. Obviously, you're in the final stages here. I imagine you've got a lot of customer feedback. As it relates to the programmable chat, programmable wireless, programmable video functionality, where's the most customer interest at this point?
Thanks, Brent. You're asking me to pick my favorite child, are you? Yes, I am. We're seeing a tremendous amount of interest in all of those products, I mean, albeit from different use cases in different parts of the market because each of those products does different things. But we've got thousands of developers who've signed up to get access to these new products and we're really excited to be giving those developers access and really seeing what they build.
Some of them are the use cases that we expected that they would build and then other ones are just areas where we had no idea that Twilio would be these products would be useful for this new use case that developers are really showing us the way. And I think that as we progress through the year, right, we'll have more detail on the adoption of these products as we approach GA. Most of the products we mentioned, I think, in fact, I think all of them are still in developer preview or beta stages. So it's still the early stages of getting developers hands on those products and getting the apps that they build out to production scale so that we can learn and then push them out to a GA
availability to everybody. Makes sense.
One quick follow-up for me as you to everybody.
Makes sense. One quick follow-up for me as you think about the success of higher level APIs like Authy and Notify, what's your appetite to kind of accelerate investments above the stack here in higher level API functionality to further differentiate the platform. Do you have an appetite to get more aggressive there and further differentiate the platform based on the success of those products so far?
Yes, absolutely. In the roadshow and previously, we talked about the notion of use case APIs as a way of making it easier for developers to get their use case live and scaling in production even faster than before. Notify is a great example of this as is Authy. And we think it's a great strategy. It's really a win win because when we build a use case API for a developer, they get their job done faster, right?
They're live and in production faster than if they had to build it themselves. So, they're happy. And Inturio is happy because with our usage based revenue model, the faster we get the customer live and in production, the faster obviously we see revenue from the customer. So it feels like a great win win for us. We think it's a great strategy.
And if you think about the multistep process I outlined earlier in the call, step 1 is building broad horizontal platforms and then step 2 is for the most common use cases, develop a strategy to really go deeper and to make our customers' lives even easier if they're building those most common use cases and to build our presence in that area of the market and notify Authy, right, these are just two examples of that.
Got it. Thank you.
And your next question comes from the line of Bhavan Suri. Your line is open.
Hey, guys. Thanks for taking my question and congrats. Just quickly touching on the competitive environment, Jeff, have you seen any change in the competitive environment out there, what with the introduction a number of messaging players and obviously BlackBerry is interesting announcement, which is today, but some comment what you're seeing competitively would be great.
Really, the answer is no. I mean, we feel pretty good about our leadership position. We feel we've got the developer mindshare. We've got a great product across many different product categories. And so we're not seeing a change in the competitive environment out there, nothing we haven't seen before.
Got it. And then a quick follow-up from me. Expanding, as you look at those net dollar expense rates, they're great. Just sort of what level do you think they stabilize that? And then as you look at the enterprise, you take ING, for example, sort of this broad based deployment, what is the expansion in an account like that, not them specifically, but a large account like that look like sort of at maturity?
Or is there so much room there to go from just one broad based cloud application to so many other use cases, that that's an area of expansion? How should we think about sort of at a mature enterprise account, what expansion could look like at some level? Thank you.
Yes, Bahram. Yes. Hi, this
is Lee. We'll take that. I mean,
the expansion
rate rate applies both for our technology first developer accounts and for large accounts like ING. We have multiple vectors of expansion across those. So we see that that plays out both in the technology first type company like a Square or a large enterprise like ING. These are terrific expansion rates. At some point, as we scale and grow, they won't stay at this level forever, but we see them at very high industry leading rates in the foreseeable future.
Got it. Thank you, guys. Nice job.
And your next question comes from the line of Pat Walravens. Your line is open.
Great. Thank you. So the gross margins are great. We won't expect that for next year. But long term, you've told us that we can be at least in the 60% to 65% range.
So I guess two questions on that. One, can you see the path to higher than that long term? And also, if you could walk us through what are the levers that you can pull over time on the gross margin front? I think that would be really helpful.
Yes. Hi, Pat. This is Lee. Yes. So we do see in the long term, how much from operating model, gross margin in the 60% to 65 percent range.
Noah will not commit to something higher than that at this time. We do have significant levers on those. So we talk about it. One is just the product mix. So as we bring on more of the use case products, API products that Jeff talked about, those have a much higher margin profile.
Our IP only products such as our client voice, IP chat and video products also have a higher profile. So that product mix is probably the largest driver. And then we continue to see benefit from efficiency and scale as we expand our operations.
Okay. And is there is getting sort of more volume discounts from the underlying carrier part of that or not really?
Yes, that's part of scale. So we can as we expand and move into new geographies and increase our volume, we do continue to see better deals and that's part of the super network just driving efficiency through the system.
Great. Thank you.
And your next question comes from the line of Ittai Kidron. Your line is open.
Hi, guys, and congrats on a great quarter. Jeff,
can you I want to
go back into the enterprise. Maybe you can help us think how penetration here would impact some of the metrics that you're providing. I mean, should we see I mean, longer term, do you expect the average potential from an enterprise customer to be higher or lower than a cloud based born type of an application? What does it do to average revenue per customer you think longer term? Or is the margin profile of an enterprise customer longer term you think is different?
Yes. Thanks, Ittai. I mean, the way I think about it, enterprises, I mean, one of the things that makes them enterprise is just their scale, right? And so, the larger the company is, the larger the customer is, the more potential use cases you are likely to find at that customer, right? So, a company that's got one operating business unit may have n number of use cases, but a company that's a large enterprise has 10, 20, 50 or 100 operating business units just has 100 times as many use cases.
And so every kind of company can really use our platform to improve their communications. We're very big believers in that, whether it's for internal communications or external with your own customers. Every company has an opportunity. And the bigger the company, the more communications occur and therefore the bigger opportunity for Twilio. And so it's really for us, it's just about getting that first use case at a customer and then expanding out from there.
And that's where we see the power of our usage based model and that Developer First model.
Very good. And following up, Lee, on the gross margin side, I understand the dynamics there, but every year for the last 3 year gross margin has increased. Know you weren't specific in your guide unless I missed it, but should we think about 2017 gross margin to be at least directionally higher than what 16% is?
Yes, I wouldn't make that assumption. Again, we're running the business to increase revenue and increase that customer. So we manage the gross margin line tightly, but we're not optimizing for the gross margin in the near term. We're not worried about having some linear increase in fashion. The priority is to take advantage of our leadership position and grow the business.
But if you're not seeing much in the way of competition, why do you need to be why do you need to do that?
Yes. I mean, how we think in terms of gross margin, how we look at it is we're leading in a new space.
We want
to make sure we're out there and priced to bring on more use cases and bring more customers onto the platform. So we're not looking to optimize gross margin in the near term. And then in the longer term, as we introduce our use case APIs and other products, video only product, that's where we'll start seeing the gross margin expansion.
Very good. Good luck.
And your next question comes from the line of Mike Latimore. Your line is open.
Hey, thanks. Just wondering if you can give the latest developer count and also comment, is there any are there any seasonal factors that influence Q1 here?
Yes. So this is Jeff. I'll take the developer count number. The developer count number is not one of the metrics that we plan to provide in a regular interval. It's kind of one of those special milestone type numbers that we'll probably be more likely to announce at our conference, which is a signal, which occurs in May.
So but we do feel really strong. We feel really great about the developer growth. In fact, December was our biggest month, one of our biggest months ever in form of new developer account registrations. And so we feel great about our strength with the developer world and the way that translates into the number of developer accounts on our platform. And I believe you had a second question?
Yes. Just are there any seasonal factors in the Q1 here, any industry verticals that have positive or negative seasonality?
Yes. Hi, this is Lee. I mean, typically, we don't see we see seasonality across individual customers, but across our broad customer base of 36,000 customers, it averages out. We did have a seasonal factor in the Q4, as we pointed out related to marketing campaigns for election revenue and that will not repeat in Q1.
All right. Thanks. Nice quarter. And your next question
And your next question
comes from the line of Jonathan Kees. Your line is open.
Great. Thanks for taking my question. Congrats on the strong quarter and actually congrats, Jeff for your country award. I think that project is challenging and we get to the community. My question is actually on international ironically, it's probably too polarized domestically here politically.
You talked about the wins over in the UK and you also talked about how they improved it was a boost for GM for the quarter gross margins. Can you give a I guess the first one is just a housekeeping. Can you share the breakout between U. S. And rest of the world?
And also my main question is, can you talk about your investing? You're talking about investing for growth for the revenue and number of customers. How much of that is focused internationally? I mean, not specific numbers, but if you can give us a sense in terms of at least qualitatively how big of a focus international is for your agenda? Thank you.
Yes. I didn't quite get the first part of your question in terms of the breakout.
I'm sorry, the breakout between U. S. And rest of the world in terms of revenues.
Sure. Yes. So in terms of headquarter based revenue, 17% of our revenue was outside of the U. S.
Okay. All right.
And you had a second question?
Yes. Sorry. If you didn't hear me clearly here, This my main question is really, can you talk about how much you're investing overseas? You're talking about investing to grow top line and to grow the number of customers to maintain your leadership position. I guess internationally, I see more of a leadership position from one of your peers.
How much of, and you don't have to give numbers here, but at least qualitatively, how much of your focus will be on overseas and maybe versus that of domestically?
Yes. So I mean, I
was looking really at 2 categories. So our investment in our platform, our programmable communications cloud, I mean, that's a global investment. So when we improve the platform, that's global. When we invest in our Twilio super network, that also is a global investment. So our significant investments there apply worldwide.
In terms of go to market, we did start in the U. S. And we also we are expanding our go to market relationships globally. I'll make one last comment. Even though 17% of our business is from companies headquartered outside the U.
S, a significant more amount of our volume is global volume. So customers that either terminate or originate their communications outside of the U. S. So this is a very global company.
All right. Thanks. Thank you for that.
And your next question comes from the line of Brian White. Your line is open.
Yes, Jeff. In December, you announced that Twilio was part of the new Amazon Lex service and you hinted there were upcoming collaborations. How should we think about Twilio's opportunity to collaborate with Amazon in 2017?
Thanks, Brian. Yes, we've had a great relationship with Amazon for a long time, both as a vendor to Twilio, as an investor in Twilio, and also now as a customer of Twilio's. And as a refresher, we work with them to power SMS messages, part of the simple notification service. We're excited to be part of their Lex launch in Q4. And we see significant opportunities to continue growing the relationship with them, but nothing that we have any specifics to talk about at this time.
Okay. And the Beep Send acquisition, I just want to be clear, what's the logic behind this and I didn't hear a price, we'd get a price.
So the logic behind it, when we looked at our super network and we looked at where we were going and our product roadmap for the super network, We looked at a lot of the stuff that we wanted to get done. We took a look around at other companies that were out there and Beepsend really stood out to us as a company that we kind of knew from being in the ecosystem together and had some really great technology to do things like routing and analysis and also had a great team who's been in this market for a long time and had built up a great amount of expertise. And so that's why we thought it was a great kind of great marriage there. We're excited to bring the DeepSend team on board at Twilio because we think they're going to accelerate the super network roadmap even faster than we've been moving. I think you had a second question.
Just is there a price or should we anticipate an pretty significant uptick in December quarter and I think that's from the RTC deal. So is there a price you can talk about or an increase in intangible amortization in the March quarter from this acquisition?
Yes. First, you're correct. The goodwill in the Q4 was from our acquisition of the Correnza team out of Spain. We have not disclosed the price, but it's not a material transaction. Okay.
Thank you.
And that concludes the Q and A session. Thank you for calling in and listening to today's conference call. You may now disconnect.