Twilio Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2023

Key Takeaways

  • Twilio has reorganized into two distinct business units—Communications and Data & Applications—effective March 1 to sharpen sales focus, accelerate Segment and Flex growth, and still leverage cross-sell synergies.
  • The company is guiding for FY 2023 non-GAAP operating profit of $250–350 million, driven more than 100% by Communications, while Data & Applications remains in an investment phase.
  • Twilio’s usage-based model has made it a leading indicator of macro headwinds, with lengthening sales cycles and cautious buyer behavior in industries like e-commerce and retail compressing expansion rates.
  • Medium-term revenue targets remain at 15–25% overall growth and 30%+ in software, with quarterly guidance maintained amid economic dynamism and GAAP profitability expected by 2027.
  • The company is refocusing on a more product-led growth approach for Communications to improve self-service onboarding, while boosting partner programs and deepening integrations across Segment, Engage and Flex.
AI Generated. May Contain Errors.
Earnings Conference Call
Twilio Q4 2022
00:00 / 00:00

There are 17 speakers on the call.

Operator

Afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio 4th Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

We ask today that you limit yourself to one question and one follow-up. Thank you. Brian Vanneman, SVP, Investor Relations, You may begin your conference.

Speaker 1

Thanks, Emma. Good afternoon, everyone, and thank you for joining us for Twilio's Q4 2022 earnings conference call. Our prepared remarks, earnings press release, investor presentation, SEC filings and a replay of today's call can be found on our IR website at investors. Twilio.com. Joining me today for Q and A are Jeff Lawson, Co Founder and CEO Elena Donio, President of Revenue Cozema Shiftschandler, COO and Aidan Biggiano, SVP of FP and A.

Speaker 1

As announced in our Q4 earnings press release, Elena, Khozema and Aidan will be transitioning into their new Twilio roles effective March 1. As a reminder, some of our commentary today will include non GAAP financial measures and key metrics. Reconciliations between our GAAP and non GAAP results and further information related to guidance, definitions and key metrics can be found in our earnings press release and the appendix of our prepared remarks, both of which can be found on our IR website. The information provided and discussed today also will include forward looking statements, including statements about our future outlook and goals. These forward looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that are described in more detail in our most recent periodic reports filed with the SEC, including our most recent report on Form 10 Q and subsequent reports on Form 10 ks or Form 10 Q and any amendments to any of the foregoing and are available on our website and atsec.gov.

Speaker 1

Forward looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly, and we expressly assume no obligation to update any forward looking statement, except as required by law. With that, I'll hand it over to Jeff for some opening remarks, then we'll open up the call for Q and A.

Speaker 2

Thanks, Brian, and thank you all for joining us today. As you may have seen, we've made a number of significant changes to our business that we believe set Twilio up to perform in both the short, medium and long term. As I mentioned in my prepared remarks, we are confident that this is the right set of actions, the right path forward for our customers, for our teams, and it will enable us to create more value for our shareholders. And I'm sure you have questions, so let's hop right into

Operator

Your first question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Speaker 3

Great. Thanks. Appreciate it. Maybe a couple of questions for me. Just maybe to start, I know at the Analyst Day, you guys have talked about a lot of changes that you were making to kind of the data and application sales force And just the driver to growth that that would be in the future.

Speaker 3

And just as you have gone through the process of splitting the business units, just Where do you think you are on some of those initiatives? And I guess kind of as a second question to that, where do you feel like There are synergies or dis synergies from kind of splitting the segments as far as kind of getting customers to go from communications customers to kind of those data and applications

Speaker 4

Thanks. Hey, Meta, it's Elena Donio here. Thanks for the question. Couple of things that you hit on there and I'll take him in turn and then pass over to Jeff who can add a little bit of extra commentary. First question was about the data and applications business and current state of growth and where we're at in terms of that transformation that we've been talking about.

Speaker 4

Let me hit that one first. We've spoken across the last couple of quarters about investment there and about growth there. We also Draft a little bit of sort of the trajectory as it related to the beginning of last year and a couple of missteps that we made along the way. We actually feel a lot better about that business and trajectory now, and we believe that this movement in separating our sales forces Into these business units more discreetly is actually going to further amplify and accelerate that growth. So Obviously, revenue growth lags bookings.

Speaker 4

We feel good about where our Q4 landed across our data and applications business, and we're also confident in that reacceleration. I talked a little bit over the last couple of quarters about the hiring that needed to be done there, the onboarding, the enablement of those new reps. We feel really good about having built out those teams with the right set of skills and the right capabilities, doing some internal transfers as well as hiring from the outside with the right set of bespoke skills. So Really confident in how that's turning. We've also talked about some macro headwinds.

Speaker 4

Those continue in a couple of areas, some lengthening of sales cycles, pushing out of decisions and things like that from time to time. But with all of that in mind, we feel really good about the things we can control. We feel really good about the investments that we've made and the trajectory ahead. And we also have really we still believe and we shouldn't We don't think that this movement across 2 different business units should say anything different. There is a better together story here.

Speaker 4

Our products really amplify one another, but what we found is that having very specific sales focus Across the unique needs of each of these buyers is a really important one. And we think having moved our segment and flex teams in the separate spaces last year, started that momentum building and now this business unit move is one more step in that direction of focus. I think that hit both of

Speaker 2

the questions, but I'm going

Speaker 4

to hand to Jeff for a little bit more commentary.

Speaker 2

Yes. Thanks, Meta. I think your the second part of your question was really about like synergies, dis synergies, etcetera. So I'll tell you how I think about it. Every customer who comes to us for communications like they We have a use case in mind for how they're going to engage with their customers, right.

Speaker 2

They need voice, maybe it's because they need a contact center. They need messaging for identity verification for customer contact two way. They need to email for a marketing use case, right? There are these finite use cases for The vast majority of things people use us for and these use cases kind of cluster together. So we have this opportunity to ask customers, Hey, what are you trying to accomplish?

Speaker 2

What have you what are you trying to do with our platform? And by the way, have you looked at this other part of our platform that may actually help you achieve that better, faster or even cheaper in some cases. Our applications create value for customers by answering their need in a more direct way over the communications channels that we then just use to execute the delivery of those messages. And so I think this is how this space is going to be won Over time is getting at the why customers are sending these messages and doing these communications with our customers in addition to Powering the messages themselves. So you might say, Jeff, the 2 business unit structure, while it seems like that makes it harder to actually bring these 2 worlds together.

Speaker 2

And first of all, That may have been the experience, but today let me tell you what we've learned, what didn't work was that everything lumped into one back of a sales rep. And we've talked about that reason in the past, Elena just hit on it, right. So at this stage, what we're focusing on is the unique needs of the various buyers with specialization there and focus, But we're also going to collaborate and partner, utilizing our own data and intelligence to uncover opportunities to incentivize cross team collaboration, and to go Understand which of our customers need which of these use cases and therefore would be really good customers of our applications in our data stack. I think it's important to distinguish here, this is the important part, between the short and medium term and the medium and long term. Because in the short to medium term, it's clear that we've got work to do to make communications more profitable and to take our data and applications business and execute on the sales model.

Speaker 2

But I see these things as foundational that the current environment is setting the stage for us to do. But we're getting better at using our data to drive these cross sell conversations, both in things like marketing and our automation, but also in our sales conversations. And then over time, we build more and more product connectivity between these various products. And it's obvious how with better customer data in terms of segment, We can power smarter, better, more effective communications and that drives more usage of our platform. And so I think that's how the synergies play out.

Speaker 2

You do have to look at it short to medium term, medium to long term.

Speaker 3

Great. Thank you.

Operator

As a reminder, we ask yourself to limit yourself to one question and one follow-up. Thank you. Your next question comes from the line of Mark Murphy with JPMorgan.

Speaker 2

Your line is now open.

Speaker 5

Thank you so much and congratulations to all the new folks who've been promoted. My first question is regarding the $250,000,000 to $350,000,000 non GAAP operating profit that you expect this year. Should we assume that all of that is being generated by the communications business or perhaps more than 100% of that if we were to The data and applications business is unprofitable this year.

Speaker 6

Yes. Hey, Mark. This is Khozema. I'll take that question. It's really the latter part of what you said.

Speaker 6

It's more than 100% and that's kind of intentional on our part. We do think We can be very efficient in the way that we bring the communications business to market and that it can throw off a lot of profitability, while at the same time, The data and applications business, they're in the middle of an investment cycle and we're early stages in that. And so we do think Appropriate so long as we're making judicious investments to be able to grow the top line of that business. It's also gross margin accretive, which we think is important longer term. But it is going to take some losses in the short term, which will work themselves out over time.

Speaker 5

Okay, understood. And then as a follow-up, I looked at the prepared remarks and it says that some of the macro headwinds that you had mentioned still persist. So I'm wondering if you could just clarify whether the buyer behavior feels any Better out there, I mean, in terms of the bookings cadence in recent months or would you say that that is still continuing to degrade somehow?

Speaker 4

It's Elena. I'll take that one. I would say those factors persist. I wouldn't say it's all been flushed out of the system, but I think we're also getting better at navigating it. So we did we are comfortable with where our Q4 bookings landed in our data and application space.

Speaker 4

And We're we think our products actually play a vital role in top economic times. And so we're sort of navigating that headwind in the field as best we can. We've updated our messaging. We're making sure that we're very clear about why allocating budget to these kinds of products at this time in particular is vital and important, and we think that message is landing. But definitely economically, I don't think we're out of the woods yet.

Speaker 4

I'll hand it to Koh for more commentary.

Speaker 6

Hey, Mark, just one other thing I wanted to add is that importantly, we do intend to drive profitability through whatever the cycle ends up being. We provided large range on the non GAAP operating profit in light of the current macro conditions, which are pretty dynamic. But we do think we can be profitable through whatever the cycle is and we intend to be.

Speaker 7

Thank you very much.

Operator

Your next question comes from the line of Michael Turrin with Wells Fargo. Your line is now open.

Speaker 8

Hey there. Good afternoon. Thanks for taking the questions. I guess Just a follow on, on the operating income guide because it certainly stands out just relative to what was expected. Can we just I know you're guiding specifically for operating income, but just anything you can add on what would get you to 2 50 versus 350 and how to think about just gross margin in the context of that conversation relative to the potential growth outcomes that would drive the delta potentially.

Speaker 6

Yes, a lot there, Michael. So let me just try to unpack it a little bit. So in terms of I think the way that we've planned for it is that irrespective of kind of the gross margin outcomes, we're going to be able to deliver operating profitability within that range. I think the difference will be basically that if revenue kind of performs in line or kind of within a range of our expectations, then We'll be at the higher end of the range. And if it doesn't, then we'll kind of be at the lower end of the range.

Speaker 6

Given how dynamic the macro is, we did want to provide a little bit We wanted to kind of plan and run the place a bit more conservatively in light of things that we've seen. Certainly, a lot of companies have reported similar, but irrespective will be profitable, but that's kind of the color behind why that range. In terms of gross margins, as I said, I don't think that they'll really have an impact on the way that this plays out. We're really trying to orient the business much more towards gross profit generation. We talked a little bit about that during our Investor Day.

Speaker 6

So long as the unit economics Are good, especially in the communications business. They're already very strong on the data and applications business. Then we're going to keep seeking gross profit dollars. I think a key difference being going forward that those gross profit dollars will drive incremental op profit dollars.

Speaker 8

Very helpful. It's a substantial answer to a substantial question. Just a quick follow-up, if I may, on the expansion rates, we're seeing compression in a number of different vendors across software. Can you just walk through what's driving the expansion rate headwinds you're seeing currently and how that informs the 1Q guide? Thank you.

Speaker 6

Yes. I think the expansion rate basically kind of follows some of the revenue growth rate Given the usage based nature of our business, we tend to feel those a little bit more acutely, kind of in the same way that we felt them a bit more acutely on the way up, Right. If you kind of go

Speaker 9

back a

Speaker 6

couple of cycles or even the most recent cycle to COVID, like we turned up very, very quickly as different macro factors kind of pulled markets up. And so I think we're starting to see that come down a little bit. In terms of the Q1 guide, I mean, we still feel quite good about our ability to generate revenue growth in spite of a very difficult macroeconomic environment on a year on year basis and we'll just continue to monitor it.

Speaker 7

Thank you.

Operator

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

Speaker 10

Hi, thank you. Yes, this is Param Singh on for Atay Tedron. So firstly, I want to And what are the areas in communications you were able to cut back on overhead? Was it because of excessive hiring in 2021? And how much of that cutback, I would say, from international, which has a significantly lower gross margin profile?

Speaker 6

I don't think we entirely heard your question. So I'm just going to try to play it back for a second. What I understood the question is being that In what areas were we able to cut back in the communications business and what proportion of that was international relative to other markets. Is that right?

Speaker 2

Yes, that was the general crux of

Speaker 10

it, but I also wanted to understand like was is this because you overhired in 2021 in communications That you're getting back to more normalized level or are there other areas of streamlining your communications business that were previously not identified. So just wanted to understand some of the dynamics behind the restructuring that you announced in the past since September.

Speaker 6

Yes, I mean, I guess what I would say is that there's a couple of parts to it. So If you go back to the fall and the restructuring that we did at that time, I would call that like kind of more cost cutting. Obviously, it had the unfortunate impact of us having to part ways with about 11% of our workforce at the time. And that obviously is something that we feel bad about, but that was more kind of in the cost cutting vein. And I would say This time around, it was more a restructuring around 2 different businesses that we think can drive better outcomes, both for our customers as well as our share owners just given the different buying cycles that have economic aspects of the 2 different businesses.

Speaker 6

In terms of where the costs came from, I would say it was pretty much across the board. Like I wouldn't necessarily point out that It was heavier international necessarily relative to the way that it played out domestically. A lot of our roles are Global facing. Certainly, once you get out of go to market, the roles are very global facing, especially in engineering and G and A. So I wouldn't say that we pulled more out of international than in any other kind of region.

Speaker 6

One of the things to point out in international in particular is And we talked about this at our last Investor Day. The unit economics of that business are actually quite strong. And so we want to continue growing in international markets So long as those unit economics are good and we're going to continue pursuing business in that way. But that hopefully gives you a little

Speaker 10

The level of investments you're making in software considering this past quarter is only 22% growth and $44,401,000,000 is a little like. So I just want to understand the impact of your operating headwind that you're going to have in the near term while you grow this business to hopefully $1,000,000,000 plus business.

Speaker 2

Yes, I mean we're not going

Speaker 6

to break out that number specifically. What we did do is say, in our prepared remarks that we're guiding in the current year to about $250,000,000 to $350,000,000 of non GAAP operating profit. Offsetting that or included in that number is about $150,000,000 of incremental OpEx And there's 2 dimensions of that, that we specifically broke out. One was a increase in the way that we're going compensate employees visavis bonuses to help us offset some stock based compensation, headwinds that we've seen over the Few years that would otherwise continue and then the balance of that will really be predominantly investments in segment and flex. We think those are smart investments because we think those can accelerate the growth of those products.

Speaker 6

And then there's a little bit of

Operator

Your next question comes from the line of Taylor McGinnis with UBS. Your line is now open.

Speaker 11

Yes. Hi. Thanks so much for taking my questions. So lots of great incremental color on the call, but one area that you didn't discuss was the 15% to 25% revenue outlook you provided at the Analyst Day. I would imagine given some of the changes that that outlook might be a little bit stale, but Any color you could provide on how you're thinking about the revenue potential now?

Speaker 11

And then as a second part to that question, just looking at the 1Q guide, Could you maybe talk a little bit more about what's embedded in that rev guide and particularly how it might relate to some of the changes you made in any risk of disruption?

Speaker 6

Yes. Hey, Taylor. This is Khozema. I'll take that question. So the 15% to 25% is really a medium term guide.

Speaker 6

We both provided a revenue guide on the overall business of 15% to 25% in the medium term, which we labeled as 3 to 5 years during our Investor Day as well as 30% plus in the software business and those aren't changed. Beyond that, what we have said a few times now is that just given the dynamism in the macro environment that we're going to continue guiding quarter to quarter On the top line for now until we see the macroeconomic picture kind of clear up. We haven't seen that play out really. In fact, we've seen it kind of get a little bit more Rocky over the last couple of months. And so we just want to be smart about the way that we guide things.

Speaker 6

I think that the 14% to 15% that we Called out in Q1 is kind of reflective of that. It is a tougher macroeconomic environment. I think in spite of that, we're going to be able to put up pretty good growth numbers on a year on year basis. But I think it's basically macro signals that we're seeing that are kind of making us think about the business in light of a number of different Things that could play out and it just seems prudent to us to kind of plan and run the business conservatively in light of that.

Speaker 11

Thanks for that. And then my last quick follow-up is, I appreciate that you're talking near term about EBIT dollars and gross profit dollars and putting the focus there. But just as we think about the guide that's the medium term operating margin guide is on percentage basis. So can you just talk about what gives you comfort in that $300,000,000 to $400,000,000 medium term outlook that you provided?

Speaker 6

Yes. I mean, I guess the way that I would say it is, is that you got a couple of factors in the mix. So first is, is that we gave you $250,000,000 to $350,000,000 in the current year. That gives you some sense of kind of how we're anchoring 2023 to give us a base off of which to grow. As we look out over the next several years, we're obviously taking into account our medium term revenue guide with some Appreciation in software given that we've called that at 30% plus.

Speaker 6

And so if you kind of run the math out over the next several years and assume A few different things around gross margins and the gross profit dollars that each of those two businesses will kick out. That kind of gives us a sense of How profitable a business that this can become? And then I think some discipline on the OpEx side, which I think we've shown Over the last couple of periods and certainly the most recent actions really give us a sense of just how simplified and efficient we can run the business that kind of gives us the confidence to say as we look out, we can drive additional op margin accretion, which ultimately will yield GAAP profitability in 2027.

Speaker 11

Great. Thanks so much.

Speaker 6

Thank you.

Operator

Your next question comes from the line of Nick Altman with Scotiabank. Your line is now open.

Speaker 7

Great. Thanks, guys. Just to follow-up on the prior question. Just given how significant of a level the restructuring you guys have done and you look at sort of the 1Q guide, How much of the headwind to growth is coming from the restructuring and having less quota carrying reps Versus some of these macro factors and the shift of focus to data and applications.

Speaker 6

Yes. Nick, this is Kazem. I'll take that one. Not much, to be honest. I mean, the reality is, is that in the short term, there may be some impact.

Speaker 6

So I don't want to suggest that they're going to be 0. But I think by and large the Q1 guide is not informed by some of the restructuring actions either that we undertook In the last half of last year, nor the ones that we took just a few days ago. The revenue model and the way that the bookings It takes a little bit of time for things to catch up. Again, as I said, I'm not going to say that it's going to be 0. But as we kind of put our planning assumptions together, we feel Pretty good about the way that we guided in Q1 and took whatever impacts there may have been into account.

Speaker 1

Okay. Great.

Speaker 7

I may

Speaker 2

add one Bit of context to that if you will. Sorry, this is Jeff. I'm going to underscore something that was said earlier that I think bears repeating, which is that we have a usage based pricing model. And in the usage based pricing model, we see an accelerated headwind in a macro environment like this. I think that's what you're seeing in our recent results and in our guide.

Speaker 2

What we're not seeing though is a real change in, for example, our competitive situation, Right. I think what you're seeing is a representation of just consumer activity and the general economic activity being slightly muted during this period of time. But I think this also can play to our strength as you see economic recovery occur because that can be an accelerated tailwind for us as well. That's also the nature of a usage based pricing model. And as we mentioned earlier, we saw it in the early days of the pandemic when people are using our product for many new use cases.

Speaker 2

And so I think we are an accelerated view into the macro economy based on the usage based model. And as we do move towards the economic recovery. I think you'll see a company that is in a really good position because we are more streamlined, we are more focused, And we've got a great customer base to enable us to see the tailwind from that recovery, including the business model. Like I just think it's worth again pointing out the nature of the usage model, which is generally speaking a great benefit to us during these times feels like a little bit of a headwind for us. But I think in the long term, it's still the right model.

Speaker 7

Great. And then just as a follow-up, earlier you'd said that the $250,000,000 to $350,000,000 operating profit outlook does not embed any gross margin expansion on the communication side of the business. But Now that you're sort of managing the business in 2 separate units, can you maybe just walk us through the margin implications for the communication side? I mean, would you guys ever sort of disclose that business unit as a separate entity in reporting? Do you have plans to pay a little more Attention to the gross margin profile there and maybe be a little bit more disciplined on discounting on that part of the business.

Speaker 6

Yes. I mean, so there's a couple of things that you said in there. So in terms let me just take the latter part first, then I'll come back to the first part of the question. So We actually are pretty disciplined already in the way that we price the product. And so I feel quite good about the way that the pricing mechanisms work.

Speaker 6

The unit economics are very strong, whether they're domestic or international, and we tend to be priced higher than the other guys. And as Jeff said a moment ago, We're not losing share. And so we feel very, very good about the way that the product is priced and more importantly about the value that our customers get from the product. In terms of disclosures, which I think is kind of the other aspect of your question, what we committed during our Investor Day is that We'd provide additional transparency in terms of what we're now calling communications and then our data and applications businesses. And we're going to continue doing that as we have in the current quarter.

Speaker 6

And I think one of the things that we're going to work through over the next few quarters It's just to develop a little bit more robust reporting as we operationalize the business units and we expect that that probably will lead to additional disclosure over time.

Speaker 12

Great. Thanks guys.

Operator

Your next question comes from the line of Fred Havemeyer with Macquarie Capital. Your line is now open.

Speaker 13

Hey, thank you. Question perhaps for Jeff and for Khozema. Firstly, it's great to see and hear that you are returning to the North Star in communications of the product led growth story there. I wanted to ask with that, with that shift in the emphasis of a sales led motion back towards more product led growth, Should we anticipate any sort of change in say quarterly cadence of revenue within the Communications segment relative to what we've seen in prior years? And I suppose also in that context, since you're guiding fiscal 2023 on non GAAP operating profitability, should we be thinking revenue of revenue at this point as Less of a kind of a key metric for the company and something that will ultimately just be driving your operating margin outlook or rather operating profitability outlook?

Speaker 2

Hey, Fred. This is Jeff. I'll take the first part of your question and then I'll hand it to Coe for the second half of your question. But the first part, If I understand the question, I think you're asking like how will it affect revenue given that we're moving to more of a product led growth strategy. And I would say, look, the goal once we win a customer, a lot of the growth in the account comes from their growth in the market, Taking something they built from prototype that they're testing to beta where they test out the idea to rolling it out to the entire customer base and then the growth of their business and their customer base.

Speaker 2

And so really it's about getting that kind of design win and That's where developers are often very influential in the lifecycle of adopting some of these communications products. And so by moving back towards more product led growth, what I think you're seeing is we're going to be investing in the things that make those developers and the companies that are in the early stages of adopting Twilio really successful in onboarding. And I think we see a lot of opportunities to go streamline the product, make it easier to get up and running, but also to scale these products as customers scale globally. And the product can do a lot more heavy lifting in areas where I think we've relied on people to actually help our customers over the line in recent periods. And you're right, this is a return to the roots of Twilio, which is to make the product Enable our customers to find success quickly and easily with a really powerful product.

Speaker 2

And so that's what we're focused on. So I think it'll help us Enable bringing on new customers as well as continuing to scale our existing customers in a way that customers will actually appreciate because it's going to be easier and faster for them to do so. So for the second part of your question, I'll hand it to Ko. Hey, Fred. In terms

Speaker 6

of the second part of the question, I guess the way that I would think about it is maybe take a step back and then I'll drill down for a second. Is that one of the things that we thought a lot about as a company and Management team is that we've become a really big business, but we also want to become a really profitable business. And so Paired with becoming a large revenue generator, we also wanted to make sure that revenue threw off a lot of profit. And so That's why you've seen some of the restructuring that we've done into these two business units. We do think we have an opportunity to better focus in that way And generate a lot more profitability, for example, in the communications business, while fueling what we believe can be a tremendous amount of future growth and the data and applications business.

Speaker 6

With that said, we certainly haven't given up on growth in the communications Since we still think there's a ton more growth for us to go get, what's fortunate for us is that we're operating in end markets That are still growing at very, very rapid rates. Our share is maintaining and if anything the Pie is growing and so that kind of bodes well in terms of a great growth set up going forward. We're still underpenetrated, I would say, internationally and so that's a real opportunity. And then I think on the data and applications business, really for us, the sky is the limit. We see a lot more growth opportunity there.

Speaker 6

As Jeff and Elena have both During the course of this conversation, we think that our data capabilities pair really well with our communications capabilities too. And so we think that will yield some additional growth 2. So profit will certainly be a key feature as part of these calls. We want to give folks a sense of confidence that We do see line of sight to GAAP profitability, but please don't confuse that with any lack of focus on the growth side.

Speaker 13

Thank you there. And then just quickly for Elena, as you're thinking or as you're looking at the portfolio of apps on Twilio, Where are you thinking about really prioritizing your investments into the software and services in the platform?

Speaker 4

I think we're not going to obviously break that out in a lot of detail, but what I will tell you is that Our Flex product is just at a different stage of play than our segment product. So it's got fewer resources behind it, fewer sales reps behind it, etcetera. But we both see a ton of green build we see a ton of green build opportunity across both of those solutions. Segment is creating connectivity to our comms platform through our Engage product. We think that product actually will ultimately fuel Flex As well as we utilize our data capabilities to power better engagement through Flex.

Speaker 4

And so we actually see them Some real opportunity to bring them together and for them to be better together as well as fuel our communications business and vice versa. So we think they're all equally important in our portfolio, but the segment business is sort of just at a different stage of play. So It's got a little more girth and heft to it than the Flex business does, but the Flex business is growing in a healthy clip as well.

Speaker 13

Thank you.

Operator

Your next question comes from the line of Siti Panagrahy with Mizuho. Your line is now open.

Speaker 14

Hey, this is Phil on for Citi. I just want to touch on the last question. So for Flex, I know it's one of your key strategic priorities. How is it performing in this environment? And what What sort of changes can you guys make to increase share in the CCaaS market?

Speaker 14

And also what kind of traction are you guys seeing on the Engage platform?

Speaker 4

I'll take that, and I'll do them in reverse order. So just as a reminder, Engage went general availability in 4, so just a couple months ago, and we're excited about the trajectory that we're seeing there. We've got a couple dozen new customers deploying a lot of really new and interesting use cases on Engage and throwing through new emails and new SMS messages, all as part of that. And so we and we've also talked about a couple of those customer wins in the back Part of our prepared comments, there are a couple of others that, we haven't been able to share directly, but we're pretty excited about In terms of their utilization of Engage and Segment, both from a renewals perspective as well as a good chunk of net news that we're excited to bring live over the next couple of months. So strong performance there with Engage and we think real opportunity going forward.

Speaker 4

Flexa has good performance in Q4 as well. And as I mentioned in prior calls, we're in the process of building out these specialized sales forces, doing a fair amount of hiring, enablement, onboarding. And as we see our sales reps Coming online, getting out into the market, and beating the competition head to head in these deals. We just our Optimism is growing for how that product will perform in the space. Just to kind of cap it off with a word on the competition, We're not seeing new competition and we're not necessarily seeing loss rates that are bother In any way, this is a matter of sort of getting out there into the greenfield opportunity, embracing it, making sure it's about the right marketing messages, campaign, lead generation programs, and then bringing those deals through to close.

Speaker 4

So good momentum beginning to kick in as we see these new AEs coming online and looking forward to sort of how that plays out here in 2023.

Operator

Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is now open.

Speaker 15

Hey, guys. Thanks for taking my question. And honestly, congrats on one of the best, I would say presentations thus far that we've seen from the company in many quarters on multiple fronts, including the buyback. I guess the first question is, maybe I missed this or I missed it in the letter, but Can you maybe just go a little bit deeper into the headwinds that you saw on growth on both the communication side and the application side in Q4, maybe also commenting on the linearity of the business in the quarter and what you're seeing into Q1, both the headwinds, I guess, but also the tailwinds to the point of How well you can be in both markets that are up and down?

Speaker 6

Yes. Hey, Alex, this is Khozema. I'll take the question and then if you have other color you'd like, Elena can certainly chime in as well. So I guess what I would say is that I'll just kind of echo something that Jeff said earlier, which is that number 1, we're not losing share. And so that gives us a lot of confidence that the business is headed in the right direction.

Speaker 6

Number 2, we're just seeing a lot of dynamicism in the macro environment. And as our business is usage based in large part, certainly on the communication side, we Start to feel those effects much sooner than many others do because we're kind of a leading indicator in some ways, both on the way down as well as on the way And so you saw a little bit of that obviously in our expansion rate and you're seeing a little bit of that as well in our reported Q4 results as well as the way that we're guiding in Q1. In terms of some of the headwinds, it's there's nothing beyond really kind of the things that we called out previously. I mean, I would Point to general macro, which is a very broad category. But some of the stuff that we called out previously is crypto and social and Ecom, retail, all of those industries, as you know, have been impacted pretty significantly.

Speaker 6

And you see that In various earnings reports, you see that in the news cycle. And so we're just kind of caught up in the same. And I think what's important for us is that we play through, that we continue to grow through whatever the environment is and importantly that we generate Profitability in spite of whatever that macroeconomic environment is. So that's the way that I would really characterize it. I don't know, Elaine, if there's anything else that you would add.

Speaker 4

I think that's good. I don't have anything else to add.

Speaker 15

And I guess just maybe following up from that. So if we look forward from here, I know I always ask the question about net retention. But if I think about that 110 number and I think about The progression through the year when you start to anniversary some of those negative effects. And to Jeff's earlier point, on the way up, The consumption model can be or the usage model can be really good. If you think about the linearity of the year, understanding that you're not guiding, How should we think about that progression or how are you thinking about it internally?

Speaker 15

Is it a back half normalization, stabilization of that retention rate? Is it something that shifts to more net new? What's the right way to categorize it?

Speaker 6

Alex, I wish I did know, I don't. I think that we're planning conservatively basically given the macro. I think it's just a really dynamic environment. And so we're not necessarily forecasting an uptick per se. Could it be better?

Speaker 6

Maybe, I think we're all sort of hoping it's going to be, but we can't plan for that. And so we're going to plan for it kind of playing out the way that it Has been maybe the last few months, last few quarters, and kind of hope that it gets better. Obviously, our field teams are going to win like Whatever business they can. They're going to try to grow share in every way that we can off of our existing base. We're going to keep growing with the accounts that we have, but how that plays out in terms of DB and E, I just don't know.

Speaker 6

And as you know, like it's not something that we've All I'd say is that as the economy picks back up, our business will definitely pick back up and We're certainly looking forward to the time that that happens. By the way, I also appreciate your comments at the start of your question. Thank you.

Speaker 7

Thank you, guys. Congrats again.

Operator

Your next question comes from the line of Derrick Wood with Cowen. Your line is now open.

Speaker 12

Great. Thanks, guys. As you look at driving more efficiency in the business, Can you talk about how partners are going to play a role and maybe what you're doing to drive more partner leverage, especially in light of shifting to a 2 business unit strategy?

Speaker 4

Hey, Derek, it's Elena. I'll take that one. We think partners play a vital role. They are helpful in bringing in The flagship customers you've heard us talk about both this quarter and over the last couple of quarters. We put them in a couple of different camps.

Speaker 4

There's implementation partners that also could be reseller referral partners and then there's also just straight up referral partners that might have a piece of technology that works together well with 1 or more of our products. And so we are in the process of actually creating sort of Spoke, partner acquisition, partner enablement and partner co selling teams across our new sort of business unit structure. We think that will create a lot more focus on the opportunity there. And We're not going to sort of break out exactly what that trajectory looks like, but we do believe that partnership will play an important and growing importantly role in our growth and new bookings both across the data and applications business as well as across the comms business.

Speaker 15

Got it. Great.

Speaker 12

Maybe a follow-up for you, Elena, as well on segment. Just wondering how the progression of growth trended over the year. You guys obviously had a lot of organizational change. Just was hoping to get a comment on that. And then as you look at Kind of how Q4 ended and going into Q1, what end market demand looks like for CDP investments in this macro condition?

Speaker 4

Yes. Thanks, Derek. And I think even the way you phrased the question is right. Into the beginning of last year is when we had some stumbling, lost a fair amount of key talent and then began to rebuild. That was a huge priority of mine when I came online in May.

Speaker 4

And we've worked to sort of execute through that hard time and I think really finally started to get our legs under us again in Q4 with a couple of really great customer wins. They're listed in the documents from us, but JPMorgan Chase was a fantastic win across multiple business units and with Engage and segment box and a couple of others. We had some great new 7 figure consumer brand wins as well that we look forward to bringing live. So excited about the trajectory, a lot more work to do. As I mentioned, And these AEs or account execs are still coming online and getting their own legs under them, but we're excited about the trajectory.

Speaker 4

I think the CDP space is still in early innings, but I think also the important thing to note is sort of where Take it from here. So we think the data and the CDP can create amazing power across our applications. And then we also think what we're building in terms of orchestration with Engage, also in terms of connectivity to our communications platform as well as to Flex really just create such an incredibly powerful set of capabilities for our customers, but also competitive differentiation. It's a matter of getting people to put with precious budgets right now. We feel like we've got a great message there.

Speaker 4

We feel like we really do Create lift for brands, particularly in a time like this when it's really important to be super surgical about how they spend every single one of their marketing dollars. But when ad spend and marketing spend are impacted and are strained. People just want to spend a little bit more time in the sales cycle, a little bit more time making sure that it's exactly what they want. But we also know when When we get to proof of concept, we tend to win. And so that's really what we're focused on is making sure we get into the game and get those deals closed over time.

Speaker 4

So I wish I had a crystal ball on the macro environment, but we play through and we think we do well in that context.

Speaker 2

This is Jeff. I'll just point out one other thing. If you notice, we tweaked a lot of our messaging at SIGNAL last year for the buyers Of this market, right. We said, look, this is about acquiring customers more efficiently and then increasing your lifetime value, your revenue with those customers. And so that really is a targeted message based on how our products are relevant in this period of time.

Speaker 2

And I think you see some of the results that we put out both in terms of JPMorgan adopting Engage, Box, who is a long time segment customer moving into Engage, but also a leading e commerce company that they adopted us in order to improve their ad spend. I mean, these are really good examples from our customers that we could talk about in our prepared remarks of exactly what we see going on in the market.

Speaker 12

That's great color. Thank you.

Operator

Your next question comes from the line of Rishi Jaluria with RBC. Your line is now open.

Speaker 16

Wonderful. Thanks guys so much for taking my questions. 2 from my end. First, I want to continue talking about a segment, maybe this one for Elena. As we think about the core communication side kind of returning to its PLG roots, how should we be thinking about the kind of evolution of segment go to market, especially considering the CDP market is a little bit more evangelical, it is a little bit more greenfield.

Speaker 16

And maybe alongside that, as we think about potential larger vendors trying to get into the Based in a big way, be it Salesforce with its own offering in Genie or Adobe. What's kind of the plan to maintain segment's market leadership as the larger software companies try to get into this space. And then I've got a follow-up.

Speaker 4

Thanks, Rishi. This is a strategic sales motion, getting in, getting the product introduced, getting customers using it in proofs concept and things like that. And so we have really focused our attention on just building fantastic enterprise sales capability and Blanketing the market with our message, and getting in there and helping customers through sort of putting their dreams into action in the product as we show them our capabilities and turn them into paying happy customers. And so While there's definitely more we can do in terms of demos and the sort of the developer message, This really is an enterprise sales motion and we're investing in that accordingly. And we think the price tag obviously accommodates that as well.

Speaker 4

So that said, the connectivity across the rest of our products is a real opportunity for Lyft. And so finding examples within our communications business Where the data can be useful and where then we can turn around and through the orchestration of Engage, push communications back out. I think everything ultimately becomes better together and the developer as Discoverer of those communications channels sort of opens that door for us from the communications side. And then I think we get to go back in from the segment and Engage side as well. 2nd part of what you talked about was the big competition and we're certainly aware of the moves of our big competitors.

Speaker 4

But we love our chances that we have the better product. We have, a 100% sort of focus on the very specific and bespoke things we do in the CDP space and in the customer engagement platform space. And we think we continue to stay ahead from a capabilities perspective and just We'll continue to invest in the product to make sure that we stay ahead. The work for us is going to be to make to where that we're competing every single time one of those decisions is made and we're orienting ourselves to do just that.

Speaker 16

Got it. That's really helpful. And then just a quick financial one for Tazeemah. Look, I appreciate the longer term guidance and commitment to GAAP profitability. If I just kind of think about Looking out and it's hard to predict 2 quarters out, let alone 5 years out, but maybe let's So you're talking about GAAP profitability in 2027 as well as bringing down your SBC to 10% to 12% of revenue.

Speaker 16

I mean, that just implies that Your non GAAP operating margins though in 2027 as you pivot more profitable growth and presumably reach a substantially larger scale that your non GAAP margins would be in that 10% to 12% range. And maybe just given all of the kind of areas of focus that seems like it's maybe a little bit low as a target to reach for. Can you maybe walk me through kind of the thought process here and maybe where I may be wrong in my thinking on the long term framework.

Speaker 10

Thank you.

Speaker 6

Yes. Hey, Rishi. Thanks for the question. So I think just one edit to what you said. And I don't know if you misspoke or not, but I think what you said towards the end was that, our long term framework was 10% to 12% op margins and that's actually not the case.

Speaker 6

So the way that I guess we're thinking about it is that there's 250 to 350 in the current year. You can kind of run the math on what the implied might be based on our Q1 guide. Obviously, we're not guiding quarter to quarter right now or we are guiding quarter to quarter. We're not guiding for the year just given how dynamic it is. Post that, we see 300 to 400 bps per year.

Speaker 6

And I guess the way that we think about it is, is that if you stretch it out over those That 5 year period is that number 1, we get to something that probably looks like if we can execute well and at the upper end 20% plus 1, 2, that if we can get to the 10% to 12% that I talked about or that we disclosed in the remarks on the SPC side, which we feel pretty good about just given some of the changes that we've made in terms of compensation moving more from stock based to cash based. And then 3, I think that the net of those 2 So yield some GAAP profitability overall as well. So that's kind of the math that we're doing. I mean could it be better? Perhaps, but that's certainly not something 5 years out that I would want to commit to.

Speaker 6

We feel good about the setup certainly in the current year. If we execute, we can be on the higher end of that. If revenue is tough, we'll be at the lower end, but all the same, we'll be very Profitable in 2023 and then over multiple years out, we see really strong op margin accretion, which we think is a good signal. And then being GAAP profitable is really the name of the game obviously and our ability to control SBC is going to be the principal lever and we know how to do that.

Speaker 2

All

Speaker 16

right, great. That's helpful. Thank you so much.

Speaker 6

Thank you.

Operator

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

Speaker 9

Okay, great. Thanks. A couple of questions. Let me start, I guess, on the Communications segment. I'm just trying to think through go to market and potential impacts to growth there.

Speaker 9

I think you suggested earlier you didn't expect limited growth limited impact. I'm just Trying to understand just given the magnitude of the changes taking place there, how you get comfort that there's not a more meaningful impact to revenue growth. And any parameters you could maybe provide around what you expect for growth in that communications segment, whether this year, next couple of years?

Speaker 4

I'll take that in my in the capacity of my prior role just covering go to market writ large. It's Eleni here and then Khozema can jump in if you've got anything else to add. So, understand the point. We obviously did a to cost cut here. And I think the important there's a couple of important things to think about and that we've sort of started to talk about over the last quarter.

Speaker 4

It was really important to us to begin to demand more of our products, more of our tooling and more of our process. As we think about the right go to market model for communications. And so we believe there's a lot of efficiency to be gained there. We're making progress Against all three of those dimensions, now and plan to even make more improvement in how we create efficiency across the team going forward by increasing our capabilities in product led growth and in self-service. I think when you actually really sort of peel the layers back in how we were servicing our customers historically, We had a number of people involved in any kind of in any sort of customer experience, and We believe we are a bit over levered there and that when you kind of get underneath where our efficiency was great and where it wasn't, We think we can provide those fantastic customer experiences and really benefit from our customers' usage of Twilio without having people involved at every stage of the process, and really reserving that human capital for the times when our Customers really and truly need us.

Speaker 4

And that's when they're making a decision, when they're deciding whether to turn left or right with their use cases, and when they're struggling with something, with solving a problem. And so that's really where we want to apply that human capacity and capability and we're not going to let go of that. We will still be there for our customers when they need us. But as it relates to sort of new customer acquisition, that's also more human capital intensive at times when it's big Customers making running big loads on Twilio will be there for those customers as well. But there was a lot of space where we had begun to See that our efficiency was degrading as we added large numbers of talented individuals over the last number of years.

Speaker 4

So We just don't feel like that's necessary for us to continue the growth trajectory given our penetration in the space, given How our tooling and products are coming along, and given what we believe that we can do with the human capital we have around keeping our customers satisfied.

Speaker 9

Okay. And then maybe Elena, just to follow-up with you. I guess shifting over to your new primary focus, congratulations on that by the way, in thinking about applications and software. Can Can you maybe just remind us as you think about Flex and segment, what are the synergies there might be on go to market? I know you've got some specialized folks you're hiring probably for each of those segments.

Speaker 9

But just trying to think through the synergies and differences and kind of how you balance that with There's 2 different products. Yes, for sure.

Speaker 4

We really see sort of the best uses of FLAX being where a customer is running a digital contact center where engagement is key. We've got some great use cases of customers using Flex where they're actually in selling environment, not just service or And so we believe there's a really interesting synergy and tie with Segment, where The data will actually create incremental efficacy in those interactions that are happening in FLAX and we're beginning to lay that track now. We expect to see some of that capability here actually in 2023. But I want us to lay that track first before we Begin to think about this as sort of one product or one set of use cases. They are pretty different today.

Speaker 4

And so we're going to keep those sales organizations, really specifically focused on those unique customers, those unique buying patterns, what those customers need from us, but we will be working on adding some of the benefits of Segment into Flex, and we expect to see some of that this year.

Speaker 2

Okay. Thank you.

Operator

Your next question comes from the line of Pat Walravens with JMP. Your line is now open.

Speaker 7

Great. Thank you and congratulations on all the progress. Jeff, this is a very big picture, but Twilio has this unusual situation where you have a dual class of stock that collapses to a single class 7 years after the IPO, so in June. And as the founder, I would just love to hear your thoughts and sort of the history on why You guys originally structured it that way. And now that we've hit the milestone, how you feel about the decision and how things might be going forward.

Speaker 2

Yes. Thanks, Pat. I mean, look, all along we run this business as owners and for the benefit of all of our shareholders. And we're focused on driving attractive growth, lowering OpEx, increasing profitability. And we've extensively engaged with our shareholders over the last several months And over the whole time we've been public to help inform the actions that we take as management in terms of balancing growth, balancing our customers' needs, our employees' needs, our shareholders' needs.

Speaker 2

And our goal is to create value for our shareholders. And we believe in the strategy that we're executing Is going to do that. And when I think about it from the perspective of a newly public company, when we put this in place just prior to our IPO, I think the idea is for a young company to get its feet as a public company. And that's why we thought of it with An expiration that was 7 years in the future. Now at the time that felt like a long ways off and here we are.

Speaker 2

And so I think that it did its job to get us On our footing as a public company, during that whole time, we're able to listen to our shareholders. We're able to make decisions as a young public company And now having the benefit of 7 years in the public market, that will come off and the scheduled expiration of our dual class really doesn't change any of that, Any of those ways in which we run the company. And so that's how I think about it as a founder, as a CEO and as a fiduciary of the company.

Operator

This concludes our Q and A for this portion of today. I turn the call back to the speakers for any closing remarks.

Speaker 1

Thank you all for joining today, and we will speak again soon.

Operator

Thank you for attending. You may now disconnect.

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