Edited Transcript of TWLO earnings conference call or presentation 6-May-20 9:00pm GMT

SAN FRANCISCO May 22, 2020 (Thomson StreetEvents) — Edited Transcript of Twilio Inc earnings conference call or presentation Wednesday, May 6, 2020 at 9:00:00pm GMT

Twilio Inc. – VP of IR

Twilio Inc. – COO

Twilio Inc. – Co-Founder, Chairman & CEO

* Khozema Z. Shipchandler

Twilio Inc. – CFO

* Aleksandr J. Zukin

RBC Capital Markets, Research Division – MD of Software Equity Research & Analyst

* Meta A. Marshall

D.A. Davidson & Co., Research Division – Research Associate

Good afternoon, and welcome to Twilio’s Q1 2020 Earnings Conference Call. My name is Michelle, and I will be your operator for today’s call. (Operator Instructions)

I will now turn the call over to Andrew Zilli, Vice President of Investor Relations. Mr. Zilli, you may begin.

Andrew Zilli, Twilio Inc. – VP of IR [2]

Thanks. Good afternoon, everyone, and thank you for joining us for Twilio’s First Quarter 2020 Earnings Conference Call. This is our first time conducting our earnings call from separate location, so we appreciate your understanding if we run into any technical glitches. Our earnings results press release, SEC filings and a replay of today’s call can be found on our IR website at investors.twilio.com. Joining me virtually today are Jeff Lawson, Co-Founder and CEO; George Hu, COO; and Khozema Shipchandler, CFO.

As a reminder, some of our commentary today will be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release.

Additionally, some of our discussion and responses may contain forward-looking statements, which are subject to risks, uncertainties and assumptions. In particular, our expectations around the impact of the COVID-19 pandemic on our business, results of operations and financial conditions and that of our customers and partners is subject to change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results could differ materially from our projections or those implied by these forward-looking statements. A description of these risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K, 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.

With that, I’ll hand it over to you, Jeff.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [3]

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Thanks, Zilli, and thank you, everyone, for joining us today.

Before I begin discussing the quarter, I want to express that safety has been top of mind for us in these past couple of months. Our decisions are driven by a belief that the safety of our team, our customers and the world at large are what’s most important. With that in mind, I hope that you all are faring well during this challenge in time, and that you and your families and friends are safe and relatively comfortable as we ride this out.

I also want to stress that safety of our employees has been top of mind during COVID-19, and we moved to a fully distributed work model in early March. I want to thank our employees for their flexibility during this time and for their mutual support of each other and of our customers. You all exhibited the Twilio magic, and I thank you.

While we wouldn’t have wished it this way, in many ways, Twilio was built for this. Our platform provides 3 things the world needs: digital engagement, software agility and cloud scale. Technologies such as messaging, e-mail, voice and video have enabled many parts of the economy to continue working while keeping its participants safe, moving quickly, building prototypes and iterating as our needs evolve has been critical for nearly every kind of organization. That’s the essence of agility. And Twilio has enabled organizations to reimagine many of their communications workloads in days and weeks, not months and years.

As you can tell from the numbers, Q1 was a strong quarter for the company, both before the COVID-19 impact began and as the impact was starting to be felt across society. Our diversified customer base currently consists of over 190,000 organizations spanning many industries, countries and company sizes. From startups to Fortune 500s, nonprofits and even government bodies, this diversification served us well during this period of time. While some customers saw declines, others saw growth. As you can imagine, customers in hospitality and travel have exhibited very unusual patterns during this period. First, there were spikes in volume as airlines and hotels dealt with rebookings and canceled flights during the transition from pre-COVID-19 into travel restrictions and shelter-in-place protocols. Then there was a stark decline as business slowed. Another example is that ridesharing saw a large decline during this time with offsets, in many cases, by sharp increases in demand for food delivery, curbside pickup and retail logistics. In addition, telehealth and work-from-home contact centers saw a pickup of adoption during this time.

While we are cautiously optimistic, no one can predict what exactly will transpire in the back half of the year, given the uncertainty of the macroeconomic environment. So while we are certainly seeing headwinds to our business in certain industries, we believe that we have a resilient business model because of our diversified customer base. And long term, we expect that usage in many of the impacted industries will return, and others that may be newer to use cases, will continue to grow in importance.

We also saw other use cases where a project that was slated for some time in the future became, we need this now. And we made several product announcements in the quarter to strengthen our offering. We announced that several of our products are now HIPAA eligible, meaning customers can more fully utilize our voice, video, SMS and fit products to develop communication workflows containing protected health information in a compliant way. HIPAA is another milestone for Twilio in elevating our data privacy and security to meet the needs of our HIPAA-compliant customers and we are committed to providing a platform trusted by customers and patients.

We also released Flex Dialpad to public beta, enabling outbound calling from Flex instances. We also announced Flex Boost, which provides technical, operational and financial resources for contact centers affected by COVID-19. Shortly thereafter, we also launched Video Boost, giving qualified prospects 3 free months of our video API. We’ve seen companies across multiple industries adapt in real-time due to COVID-19. Digital transformation projects that could have taken years such as transitioning from an on-prem contact center to the cloud, instead took a weekend. Developers at companies big and small, got to work, reconfiguring the world for a work from home and nearly 100% e-commerce reality.

Let me give you just a few use cases across various industries that we’ve helped our customers with over the last couple of months. With shelter-in-place and social distancing going into effect, demand for telehealth solutions has soared. Virtual care became a new reality for doctors, nurses, clinicians and millions of patients around the world. And Epic, the company that supports the comprehensive health records of 250 million people, mobilized to build its own telehealth platform powered by Twilio’s programmable video. The solution allows providers to launch a video visit with a patient, review relevant patient history and update clinical documentation directly within Epic.

Protecting customers and employees from unnecessary in-person contact became a top priority for many businesses, including Comcast. Over the course of just a few weeks, developers at Comcast integrated Twilio Voice into their homegrown customer database, enabling technicians and customer care to contact customers for service requests remotely. They also initiated a pilot to incorporate Twilio Video into the same database, which could enable a customer to use the camera on their phone to show a Comcast technician their set up, and the technician can walk them through a self-diagnosis and repair without ever setting foot in their home.

With widespread school closures, online learning has gone mainstream in a hurry, posing new challenges to keep students engaged and on track with their studies. Blackboard is using Twilio SMS for critical communications to connect patients, and teachers and keep students updated. And schoolclosures.org deployed a distributed contact center on Flex in 2 days to connect families and teachers during the closures with an educational specialist that experience teaching from home.

Nearly every contact center, especially those on-prem, needed to be reconfigured to support distributed workforces and increased usage. The city of Pittsburgh needed a way to enable 311 operators to continue to perform their critical work without going into their legacy on-premises call center as usage was spiking in response to COVID-19. They turned to Twilio Flex for a solution. And within 4 days, we’re up and running with agents working safely from home and no disruption in service for residence.

Nonprofits have also had to scale up to support the unprecedented demand of the current environment. City Harvest provides New Yorkers with emergency food relief in a safe way through Plentiful, an SMS reservation system built in partnership with United Way for New York City on Twilio. And with 62% more clients scheduling appointments, and a 474% growth in volume of messages from partners, they are helping more people basically get food during this critical time.

I’m incredibly proud of the Twilio team for how they performed in the first quarter and how they’ve adapted to the ever-changing environment. We know that circumstances like these often bring opportunities. And based on the numerous new use cases and unprecedented digital acceleration that’s happened over the last month, I believe that this time has actually created even more long-term opportunities for us to address. As such, I’m even more excited about what lies ahead for Twilio.

I want to give a thank you to our twilio.org team for everything they’ve done to respond to this pandemic. Within a week of COVID-19 being declared a global pandemic, twilio.org donated $1 million to various organizations focused on driving the medical response to COVID-19 and serving low-income, at-risk populations who may be severely impacted by the virus. Twilio is also matching employee donations 2:1 for charitable organizations focused on the COVID-19 response, including the CDC Foundation, Global Relief International, Give2Asia, and International Medical Corps. These acts are part of our initial response to the pandemic, but we are acutely aware of more need in communities around us, and we’ll continue our efforts to invest in our communities during this time of need.

I also want to welcome a couple of new leaders at Twilio. We recently hired Christy Lake as our new Chief People Officer, and she’ll be responsible for our Global People Team, driving the company’s talent development and acquisition strategy and growing the Twilio magic around the world. We also welcome Steve Pugh as our new Chief Security Officer to lead Twilio’s Global Trust and Security Team, responsible for corporate, physical and cybersecurity. We’re excited to have you both on board.

Before I hand it over to George, I want to thank those who are on the front lines of this pandemic: the medical professionals, the truck drivers, the food delivery workers, the grocery store workers, the manufacturing workers, and everyone else who is playing a role in slowing the spread while providing us with the stocked shelves in our local stores. Thank you. Thank you for everything you’re doing for the rest of us.

And with that, I’ll hand it over to George. George?

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George Hu, Twilio Inc. – COO [4]

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Thanks, Jeff. Our team delivered great results in the first quarter, as our investments in go-to-market continue to expand our reach. Customer engagement continues to be top of mind for companies, and we are helping them drive new ways of digital engagement.

When we closed our offices in early March, the team did a great job continuing to engage with our customers. Our marketing team shifted several planned in-person events to virtual, with more than 30 virtual events, Q2 from the Twilio engagement center programs to roundtables to lunch and learns, and our first-ever virtual engage event that we held in mid-April with more than 1,500 registrants. Our developer relations team also did a great job engaging our extensive developer community online for Twilio TV and TwilioQuest and more. In fact, our developer community spent 150,000 minutes plus watching our live video content this quarter, 528,000 minutes watching on-demand video content and averaged a total of nearly 100,000 minutes learning on TwilioQuest. Thanks to the entire team for being there to support our customers and developers throughout the changing environment.

I also want to thank our partner ecosystem for stepping up during this challenging time, providing needed implementation services and Twilio packages for mass alerts, promote agent contact centers, AI-powered bots and more.

As you heard from Jeff, COVID-19 has drastically accelerated digital transformation projects across many industries, and we are uniquely positioned to help with our complete customer engagement platform. In fact, we saw a 25% increase in average daily sign-ups from March 18 through April 30 compared to the first 11 weeks of the quarter. This is a great opportunity for us to introduce Twilio to new customers or expand with additional products with existing customers. Whether it’s adding video for telemedicine, voice for IVR or e-mail for updates and notifications, the current environment has presented multiple entry points for us that expand our long-term opportunity.

But it’s bigger than just individual channels as companies need to act quickly to move their contact centers to the cloud. Prior to this outbreak, it was estimated that of the roughly 15 million contact center seats in the market, about 17% were in the cloud. Now it is expected to be 50% by 2025, and Flex provides us a great opportunity to help companies with this transition with a fully programmable contact center platform.

Let me discuss a few deals we signed in the quarter. As you know, expanding our international presence has been a key area of investment for us over the last couple of years. We’ve opened several new offices, and the percentage of our total headcount outside the U.S. has increased from roughly 19% to 27% in just the past year. This strategy is paying off as we continue to land and expand with some great international companies.

For example, we expanded our relationship with Nubank, the largest fintech company in Latin America. Nubank became a Twilio e-mail customer in 2019 and turned to Twilio to help them scale their contact center to keep up with their growth. In Q1, Nubank chose Flex to power their several thousand contact center agents with our trusted programmable platform. Thanks to our team in Brazil for building such a great relationship with Nubank.

We also signed Flex deals with AB InBev, a Fortune 150 conglomerate.

We entered into a new relationship with Standard Chartered Bank, a Global 2000 company and leading international banking group with more than 87,000 employees across 60 markets. Standard Chartered, which has been in business for more than 160 years, is an incredible example of digital transformation, and they selected Twilio to build their new enterprise messaging platform to provide the flexibility, performance and scale they need to provide the best experience for their customers.

We expanded our relationship with a Fortune 100 brick-and-mortar and online retail company that has been a customer for several years and a brand many of you have likely interacted with recently. They are building a new workflow to expand our usage of Twilio SMS for their mobile and web applications. This new workflow will offer order and shipping notifications via text messaging to guests who purchase through those channels. Adding e-mail to the platform has been very successful as it allows us to offer customers a single platform for their digital customer engagement, and we continue to see e-mail drive great new deals for us.

We entered into a new relationship with a large car manufacturer that needed a new platform with a reliable deliverability of 2-factor authentication for their customers as their existing solution was not performing. They selected Twilio as their platform of choice, combining e-mail and SMS to provide a more reliable and integrated solution to ensure a better experience for customers.

We also expanded our relationship with one of the world’s largest consulting firms as they added e-mail to power marketing campaigns and custom notifications across several products. They chose Twilio due to our ability to quickly integrate into key applications across their business in over 120 countries, enabling product teams to ideate, test and deploy with little friction.

Overall, we had a strong first quarter. Looking forward, we remained focused on supporting our customers through the current environment and ensuring our platform and our team are ready to support them as they adapt to this new environment. We’re continuing our investment in our go-to-market efforts as we extend our enterprise presence, expand internationally and grow our partner ecosystem. We believe investing in these areas today will set us up for the long term. Thanks to the entire team for delivering these great results.

And with that, I’ll hand it over to Khozema.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [5]

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Thanks, George. And good afternoon everyone. Total revenue for Q1 grew 57% year-over-year to $365 million and dollar-based net expansion was 143%. The SendGrid acquisition closed on February 1, 2019. So adjusting for an extra month of revenue in January 2020, year-over-year revenue growth was 48% and DBNE was 135%. Revenue from our top 10 active customer accounts represented 15% of revenue compared to 14% both last quarter and in Q1 2019.

International revenue was 28% of total revenue in Q1, compared to 29%, both last quarter and in Q1 2019. WhatsApp contributed approximately 7% of revenue. Verizon’s A2P, or application-to-person messaging fee, was implemented on February 1 and contributed approximately $4 million to revenue. As a reminder, this was a direct pass-through to customers and did not impact gross profit dollars.

First quarter non-GAAP gross margin was 57% and was negatively impacted by 70 basis points from A2P fees. We will continue to provide the financial impacts of A2P fees throughout the remainder of 2020.

Non-GAAP operating profit came in at $6 million, stronger than originally forecast. This outperformance was primarily driven by revenue favorability as well as reduced travel and office expenses plus slower than planned hiring.

Now let me discuss guidance. While we continue to see strength in our business, the macroeconomic environment remains dynamic, and we feel it best to employ prudence in our guidance philosophy. As such, we are withdrawing guidance for the full year. However, we are providing guidance for the second quarter and expect revenue of $365 million to $370 million, including A2P fees for a growth of 35% year-over-year at the high end. To date and Q2, we have continued to see a net increase in usage relative to our expectations and strong growth in the overall business, a testament to our resilient model and broadly diversified customer base. As Jeff said earlier, we believe we were built for this kind of environment.

We’ve performed a variety of scenario analyses across use cases, industry verticals and geographic mix to better understand possible impacts to our revenue. And while we’re not going to get into the specifics of these scenarios, our revenue guidance naturally takes into consideration headwinds from the more heavily impacted industries like travel, hospitality and ride-sharing as well as the offsetting benefits from customers in education, health care, retail and others. To note, customers we categorize in those specific impacted industries have averaged less than 10% of Twilio revenue over the last several quarters. That number excludes e-mail. In short, there are puts and takes, and so far, we have seen more puts.

We expect a second quarter operating loss in the range of $15 million to $20 million. As we discussed on our last earnings call, we view 2020 as a year of investment for Twilio. Given the strength of our balance sheet as well as the size of the opportunity in front of us, our intention is to continue investing through this cycle. We believe this is in the best interest of Twilio and our stakeholders and we’ll continue to generate elevated growth outcomes for the foreseeable future, enabling us to come out of this current environment in an even stronger position.

Let me give a brief update on each of the areas of investment we laid out on our last call. For our R&D center of excellence in India, we are leasing office space, but for now, we have virtually opened that office, continued with our hiring plans and have on boarded a number of employees who are currently working remotely. We are continuing to hire for our go-to-market team with a focus on enterprise reps, international expansion and Flex specialists. This remains a critical investment as we continue to drive deeper into the enterprise and become our customers’ platform of choice when it comes to digital engagement.

Lastly, we continue investing in our systems and infrastructure. As Twilio continues to grow, we want to leverage the benefits of scale. We continue to invest in improvements in our billing systems, quote-to-cash and other cross-functional areas that have been prioritized across the company to better enable our employees. We understand the ambiguity that exists in the world today as a result of COVID-19, but we are highly confident in the ROI these investments will generate for the long term.

Additionally, with more than $1.8 billion in cash and cash equivalents in the balance sheet, we feel we are in a position of strength to manage the business through this pandemic and come out stronger on the other side.

A few other items to discuss before opening the call to questions. Our SIGNAL conference originally planned for May is now rescheduled as a virtual event for the week of September 28. We are still working through the details of making this event virtual and the related costs, and we’ll provide an update on our Q2 call. Keep in mind, we will likely reallocate some of the planned SIGNAL expenses to other marketing-related areas. We are also postponing our Investor Day, which will also be virtual to align with SIGNAL and are now targeting Thursday, October 1. Stay tuned for more information from the IR team. Finally, I wish everyone well and hope you are healthy and safe. Thank you for joining.

Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Nikolay Beliov from Bank of America.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division – VP [2]

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Nice results here, guys. Just wanted to dig into the use cases. When I think about Twilio, I think about 3 main use cases: marketing, operations and customer support. Maybe if you can help us, give us the puts and takes in each of those and how those made out for you during the quarter? And what trends are you seeing in the use cases, what you saw in the month of April?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [3]

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Nikolay, this is Jeff. I will — Khozema, do you want to take it? Sorry, I have the coordination problem on this call like usual. Khozema, do you want to take it?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [4]

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I think some of the elevated use cases that we’ve seen so far, Nikolay, are really in categories, I would say. So we talked about some of the headwinds, for example. But I think on the other side, in terms of like some offsetting benefits that we’ve seen or use cases in education, health care, retail, which is more of a vertical look relative to some of the areas that you called out. And I think what we’re seeing is that through the first quarter, certainly on the back end of that and then as well as we begin to start Q2, we’ve continued to see a slight net increase in usage relative to our expectations, in part because of new use cases in some of those areas. And I think all of that just kind of goes to the broad overall strength in the business. The business is broadly diversified. We have a very resilient model and customer base that spans geos, industries, and verticals. And so I wouldn’t necessarily call out a specific use case, but I think we’re seeing elevated activities in some of those areas, obviously offset by some of the others that we called out.

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George Hu, Twilio Inc. – COO [5]

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Yes. This is George. I’d add on to that. I agree with Khozema. Most of the trends we’re seeing are by industry. That said, we are seeing 6 use cases that are opportunistically coming forward for us in — under COVID. And these 6 are remote contact center, self-service, contactless delivery, distance learning, telehealth and mass notifications. And those are some of the emerging use cases that we’re seeing under COVID. Certainly, we still have the core use cases that are going strong, but those are some new ones that we’re excited about.

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Operator [6]

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Your next question comes from Derrick Wood from Cowen.

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James Derrick Wood, Cowen and Company, LLC, Research Division – MD & Senior Software Analyst [7]

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Congrats on an impressive acceleration in growth and I think a big jump at the new customer accounts in the quarter. I wanted to touch on the sales strategy here. Obviously, there’s a lot of disruption with how people are communicating. You guys are talking about acceleration in digital transformation. I’m curious, are you seeing sales engagements move out of just the developer and more into the C suite? And I guess, given this opportunity, what are you doing to lean in from a sales strategy standpoint?

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George Hu, Twilio Inc. – COO [8]

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This is George. Yes, I’m really glad that we’ve really made the investments over the last few years now to both have the distribution as well as the programs, the executive engagement program so that we’ve built relationships with companies so that we can basically be able to take advantage of the situation. And what we’re seeing is a growth really across these industries that we’ve talked about. We are engaging at a higher level than before because now what we’re seeing is executive decisions coming down, hey, we’ve got to transform our contact center in 60 days in some cases or what have you. But I would say this is really just much more building on the strategy we’ve had now for a long time, which is to go into enterprise, sell higher, sell more strategically. And so we’re continuing to, I think, more execute the playbook that we’ve been preparing for several years than fundamentally alter the playbook, except for really focusing on these new use cases, which I think I’m very excited about. And we’ve really done, I think, a good job of training and arming our sales force to go prosecute these 6 new use cases well.

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Operator [9]

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Your next question comes from Michael Turrin from Wells Fargo.

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Michael James Turrin, Wells Fargo Securities, LLC, Research Division – Senior Analyst [10]

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Sorry about that. Pinball on the calls here. You talked about Flex in terms of the addition of some of the new features here, and then the uptick in remote contact center demand also came up. Is there anything else you can add just in terms of how you’ve been able to react given the contact center market, in particular, seems to be undergoing a pretty big transformation in terms of what’s happening? And it certainly seems to us like Flex is well suited to capture some of that.

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George Hu, Twilio Inc. – COO [11]

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Yes. This is George. So in addition, I think having really a great product and platform in terms of being able to have flexibility and ability to deploy quickly, which is, I think, perfect for this moment, the ability to support work-at-home agents, remote agents. I mean, I think that this time was really tailor-made for the Flex value proposition. We’ve augmented that by really beefing up some of our capabilities, our services capabilities and our partner capabilities. So internally, we’ve created a program that we’re calling the Twilio Lightning program, which is a set of services to help Flex customers get deployed very, very quickly. In some cases, we’re able to turn around some of these emergency cases in just a few days on the platform, which is incredibly exciting. And we’re also seeing our partner ecosystem step up to help us. And the Twilio Build program is starting to pay off as we saw in Q1, north of 40% of our Flex deployments involved a partner, which I think is a real testament to the work we’ve done to build not just the product and the platform and the engagement team on the sales side, but also our partner ecosystem, and we’re excited about continuing our progress there.

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Operator [12]

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Your next question will come from Matt Stotler from William Blair.

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Matthew Alan Stotler, William Blair & Company L.L.C., Research Division – Analyst [13]

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Congrats on the great results. Just a couple of quick ones for me. So one, obviously, strong results in Q1. It sounds like usage, as you said, is above expectations and so far in Q2. When you look at guidance for Q2 and think about what you’re seeing with customer behaviors, how much of your growth do you see coming from continued increasing usage at existing customers versus the behaviors that you’re seeing in terms of continuing to onboard new customers as we move into Q2?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [14]

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Yes. I think — Matt, thanks for the question. I think it’s a mix of both, honestly. We’re certainly seeing additional tailwind from education, from health care, from retail and some of the others that we talked about. I think at some point, those are going to moderate a little bit. But at the same time, I think what is also going to happen is, is that we’re going to have some of the other use cases come back that have been down a little bit. And so I think there are some puts and takes in the mix, but as we said in our earlier remarks, like what we’ve overall seen is that there’s sort of been a tailwind here.

I think in terms of the back half of the year, we’re still cautiously optimistic about the way that things are going to play out there. We felt it was prudent to withdraw our guidance for that period just given how dynamic things are, but we do remain cautiously optimistic. And I would say, certainly for the long term, we’re as excited as we’ve ever been, if not more excited.

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Matthew Alan Stotler, William Blair & Company L.L.C., Research Division – Analyst [15]

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Right. Right. Yes. That’s great. And then just one more quickly on SendGrid or e-mail in the quarter. Just wondering how that performed in Q1 and what you’re seeing there, given the environment and given all the COVID-related e-mails that we’re all seeing coming into our inboxes?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [16]

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Yes. We don’t break out the SendGrid business anymore, but it did continue to perform well in Q1. And specific to COVID-19, e-mail as well experienced similarly higher usage relative to what we talked about across the entirety of the business. I’d also just kind of bear in mind that the e-mail business is predominantly sold as buckets. And so the revenue for that product doesn’t fluctuate as much based on usage.

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Operator [17]

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Your next question will come from Pat Walravens from JMP Securities.

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Mark Chen, JMP Securities LLC, Research Division – Research Analyst [18]

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This is Mark for Pat. I’m just wondering in terms of the — if you guys have any flexible payment kind of for the SMB and if they request for flexible payment? What’s the policy there?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [19]

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Yes. Let me just make sure that I understood the question. Have there been requests for flexible payment terms? Or have we seen any kind of deviations for SMB customers? Is that right?

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Mark Chen, JMP Securities LLC, Research Division – Research Analyst [20]

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Correct. Yes.

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George Hu, Twilio Inc. – COO [21]

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Okay. We’ve received requests from a small number of customers around changes to payment terms or minimum commitments and we’re evaluating those on a case-by-case basis. But so far, we’ve not seen an impact on the business from those requests and we’ve not seen a material increase in delinquencies. Our DSO is pretty stable, and there’s no change in that really in Q1 relative to where it was at in Q4 ’19 or other quarters.

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Operator [22]

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And your next question will come from Meta Marshall from Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division – VP [23]

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Great. Just wanted to dive into the Epic deal or kind of the telehealth market. I think Epic, or at least from some news reports, have been using a different video solution previously. So just what was it that they were looking for that kind of made them transition to a Twilio platform? And just the level of engagement with kind of other telehealth providers would be helpful.

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George Hu, Twilio Inc. – COO [24]

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This is George. Yes, I think that one of the nice, I think, benefits of the tailwinds that we’ve seen is in our video product. It’s a product that is, I think, really tailor-made for this period of time in term of being able to be: A, deployed very quickly, like all of our products. It’s consumption-based so people can get started and try it without any barriers to entry. And it’s also a fantastic product that can scale incredibly well and deliver excellent quality. And so I think that combination plus the fact that Twilio is now HIPAA-compliant, supports HIPAA and be able to sign BaaS, I think the timing worked out incredibly well. And so it’s an interesting part of that story, is that, again, this started through the power of our developer community where a developer at Epic had a friend who was a huge Twilio enthusiast who actually used Twilio Video and recommended us to help address some of their challenges. And they were able to, through the power of our platform, get up and running quickly, try it for themselves, see the power of it. And that cycle end up being, I think, for us, a relatively rapid cycle because I think of the fundamental power of our business model. And the power of this platform model worked hand-in-hand with the investments we’ve made on the enterprise side with the BaaS.

So I think, again, this deal really speaks to the power of our model, the strength of our strategy of having a multichannel or omnichannel strategy and the incredible combination of develop, promotion plus the enterprise investments we’ve made. I think it speaks to all of those, and we’re really thrilled to be able to support an amazing organization like Epic during this type of time period.

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Operator [25]

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Your next question will come from Siti Panigrahi from Mizuho.

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Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division – MD [26]

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George, just getting into your go-to-market motion, given the changes. Can you talk about how the change is happening? And you talked about opportunity, mostly in the cloud contact center market. Could you talk — give some color, what kind of discussion you’re having with customers? I can understand at this point, some of the opportunity there to supplement the existing contact center. And what are the long-term opportunities you have there and the pipeline look like?

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George Hu, Twilio Inc. – COO [27]

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Yes. So great, great question. Look, I want to take a step back and say that overall, as Jeff said, this environment is showing companies that they need to really double down and accelerate on their digital transformation. But they need to be — we all need to be communicating with our customers on digital channels more than ever. And that could be messaging, that could be WhatsApp, that could be video, and that could also be voice and in the contact center, that all of these channels are incredibly important in this period of time. And the strength that we’re seeing is really across multiple products, not just the contact center. And what’s really fantastic about this opportunity for us is that certainly, while it’s challenging for our sales team, they can’t go visit customers. They’re having — obviously, all of us are having our personal challenges with stay-at-home, that our sales team is doing an amazing job of engaging our customers, engaging executives. In this age, you’re doing video calls with your customers in each other’s homes, you’re building a deeper rapport. I think there’s some really interesting opportunities being opened up to build deeper connection with customers during this period of time, and our sales force is taking advantage of that.

Now one of those opportunities absolutely is the contact center. And what we’re seeing is that not across the board, but certainly, for many companies, that this current situation is causing them to rethink many aspects of their contact center. I was talking to one of our customers who, in their contact center, they were using a BPO. And suddenly, they had to figure out, okay, how do we make sure that our BPO is socially distanced for their agents and their agents, and how do we support work-at-home agents as part of this? So there’s a huge transformation happening in the contact center. And there’s no doubt that this is going to accelerate the overall migration of contact centers to the cloud. And I think that we’re benefiting from that, hopefully, as much as anyone, because of our business model and because of our technology model.

So we’re excited about this use case. We’re excited about the transformation happening. We are engaging, and I think that this is definitely an area that amidst a lot of challenges in certain industries, we’re excited about.

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Operator [28]

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Your next question comes from Mark Murphy from JPMorgan.

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Pinjalim Bora, JP Morgan Chase & Co, Research Division – Analyst [29]

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This is Pinjalim on behalf of Mark. Congrats on the quarter. Khozema, 1 question for you. Is there any way to disaggregate the upside versus your guidance between portfolio base, SendGrid and the variable portion? Because I mean, just trying to figure out, was there any material change in the contribution from variable revenue versus what you had expected for?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [30]

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Yes. We’re not disclosing those different buckets. I mean, I wouldn’t — I would say it this way that, to reiterate a point that I made earlier that I think what we saw in Q1 was simply a reflection of a broadly diversified customer base that had a strong performance overall. And we noted a few of the areas that were more economically challenged and then some of the areas that had a tailwind, but we don’t break out those segments anymore.

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Pinjalim Bora, JP Morgan Chase & Co, Research Division – Analyst [31]

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Okay. Understood. And one quick one for Jeff, if I may. Jeff, any thoughts on the Sinch acquiring the Digital Interconnect business for SAP? How could that shape the competitive environment in messaging going forward, if at all?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [32]

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Yes. As a company, we typically focus on the means our customers have and building software that helps our customers to engage with their customers across a wide variety of touchpoints. And I think that when you look at our business, the strength of our business as far as the size that we’re at and the pace at which we’re growing at our scale and the diversification of all the different products we offer to our customers, I think that we’re in a very good position here in the United States as well as globally to serve our customers’ needs, and that’s what we’re really focused on is following our customers and where they take us.

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Operator [33]

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Your next question comes from Heather Bellini from Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division – MD & Analyst [34]

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Great. I had 2 questions. I guess, Jeff, this one would be for you or maybe for George. Just what do you think — how do you think about what we’re going through kind of making people even more cognizant of the need for kind of those omnichannel touch points? And do you have a sense of kind of where you would have pegged penetration of a pure — of a real omnichannel strategy before and how much that might be coming up in conversations with people now?

And then the follow-up for Khozema is just the A2P impact for the quarter, I think you said it was $4 million. And I think you said it went into effect in February. Does that mean we should be expecting a $6 million benefit that’s embedded in guidance for the second quarter?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [35]

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Hey, Heather. This is Jeff. I’ll talk…

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Khozema Z. Shipchandler, Twilio Inc. – CFO [36]

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I was just going to say — let me just take the second piece, and I’ll let Jeff elaborate on the first piece. The second piece, we didn’t specifically call it out for Q2, but you’re in the ballpark.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division – MD & Analyst [37]

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Great.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [38]

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Thanks, Khozema. So Heather, for the first part of your question, I mean, I think what you see going on right now is Twilio is becoming even more relevant to businesses in light of COVID. And it takes many shapes based on the type of company that it is, whether the industry that they’re in or where they’re at in their digital transformation. But I think one thing is kind of clear that for companies who are engaged in a digital transformation that oftentimes, these projects were slated for quarters or years that we’re going to take to undertake, many of these got done in weeks. And so this is going to be seen as a great digital acceleration. And in many ways, Twilio was built for this moment. We offer the 3 things that companies need as they are accelerating their digital plans. That is digital engagements; all the channels, whether it’s voice or messaging or video or chat or WhatsApp or Facebook Messenger, like all these channels; digital engagement as we’ve moved so many in-person, face-to-face workloads to digital workloads. We have the digital engagement that companies need. Agility, so the ability to build quickly and to answer to changing conditions. That’s obviously been one of the biggest things that’s going on in Q1. And Twilio provides the ability for organizations to be agile, to build iteratively as the nature of what they need to build and how they need to address the change in circumstances continues to evolve.

And the third thing we offer is cloud scale. This isn’t the moment where you can spend months planning your capacity requirements and racking up the data center to plan for your peak. You need to build something, you need to deploy it, and you needed to work pretty much instantly. And that’s true for scale, but also geographically, you need to scale it around. And so Twilio brings that to the table as well.

And so all in all, Twilio was built for this. And whether it’s the digital engagement, agility and cloud scale, these are things that every company has needed, whether — regardless of the tech of use case that is top of mind for them right now. And I believe the investments the companies are making are going to be durable, like the changes that are occurring in our society right now are going to persist in many ways. I think that many doctors’ visits, for example, are going to stay as telehealth visits after COVID is over. And I think that many more e-commerce or food delivery or curbside pickup, like a lot of these things that are getting normalized right now, will start to become even more normal. And so it is the social distancing that is going on right now is changing our behaviors, and I think many of those behaviors will change permanently, and we can help companies to address those opportunities.

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Operator [39]

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Your next question comes from Alex Zukin from RBC Capital.

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Aleksandr J. Zukin, RBC Capital Markets, Research Division – MD of Software Equity Research & Analyst [40]

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Congrats on the performance. Two for me. Maybe first, Jeff, if we step back, you called out a number of growth vectors on this call, attaching way more channels, acceleration and new customer sign-ups; entry into new verticals. What sounds like from George, a bunch of new mini Flex-like use case categories. So I just want to ask you, where is the biggest focus organizationally, and which incremental growth vector is most either exciting to you or are you most enthusiastic about?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [41]

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Thank you, Alex. First and foremost, actually, our focus for the business has been the health and safety of our employees and our customers and our communities. And so I just want to really emphasize that, that’s been priority #1 for us through this crisis. Then as we think through priority #2 is how do we serve our customers and how do we help our customers to emerge stronger through this crisis. We see a number of areas to address whether it is the new verticals that are arising. So it wasn’t actually because of COVID, but it was really a coincidence that was fortuitous that we announced HIPAA support and the ability to sign BaaS in the first week in February, and that had been work that we’ve long planned and planned to announce in that time period. And so obviously, the timing was good for us to see a very rapid rise in the number of medical-oriented use cases that we can serve during this time.

But as George outlined before, we do see really the 6 key use cases that are driving a lot of opportunities right now. And I see it as opportunities for Twilio, and I see it as opportunities to serve our customers because they are under immense pressure to reconfigure their businesses and their organizations in order to serve their customers and to continue employing their people during this time. And so that opportunity to serve our customers in those 6 use cases is both good business, and it’s also a good way for us to serve our customers and ensure their success during this time.

And so I think about health care, I think about distance learning, I think about automation. But really, our core products have stood up very well as far as messaging, as far as voice, as far as e-mail as the ways in which companies need to engage with their customers during these times, and so continue to invest in those. And obviously, George has talked a bit about Flex and some of the Flex wins that we saw in the quarter, which is some of the examples of organizations having to reinvent their contact center to accelerate their plans to move those contact centers into the cloud and into software in order to allow their people to work from home, to open up new channels, to scale up. Many organizations saw a lot of scale that was unprecedented, while at the same time, they’re having to reconfigure where everybody was working. And so we’re able to provide all those things to customers.

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Aleksandr J. Zukin, RBC Capital Markets, Research Division – MD of Software Equity Research & Analyst [42]

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Got it. And then maybe just a follow-up. So for Khozema, if we think about the overall revenue exposure to industries that may be facing some headwinds versus industries that are seeing some tailwinds, how should we think about that backdrop? If there’s any kind of high-level percentages of exposure that you can provide? And then new versus existing kind of bookings trajectory, meaning from new customers versus existing, kind of the way we think about that? And then anything around seasonality for DBNE, both for next quarter and the second half? And apologies in advance for the multi, multi-part question.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [43]

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That’s okay. I mean, I guess I would start by saying that I think that we’re very well diversified across industries. And so that helps to have a business model that’s like that, and that’s what I think creates the kind of performance that you saw of us in Q1. In terms of some of the impacted industries, we called out in our earlier remarks that as it relates specifically to rideshare, travel and hospitality, which I think have been more significantly impacted than others, there, on a revenue basis, less than 10% of our overall revenue — over the last several quarters, actually, not just in Q1, and that’s excluding e-mail. So I think in terms of that, we feel pretty good about the diversity in the business. And as we also noted, if you look at some of the newer use cases that came on, particularly in education, health care, retail, even in our .org, those have offset and then some, some of the downside exposure that we saw in some of those impacted areas. And so I think generally, we feel good. And then finally, I would just add, I guess, into Q2, I mean, that trend has largely continued, at least to date.

In terms of DBNE, which I think is what you’re getting at in terms of like seasonality and stuff like that, we’re not really providing any guidance around DBNE. That’s not been our practice historically. Again, we feel great about the overall diversity in the business and what that was able to drive in terms of DBNE, and we’ll stay focused there.

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Operator [44]

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Your next question will come from Rich Valera from Needham.

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Nathaniel Hitchcock, Needham & Company, LLC, Research Division – Associate [45]

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This is Nate Hitchcock on for Rich. I’ll echo the congratulatory remarks on the strong results in the quarter. So looking specifically at the geographic breakdown, it looks like a reversal and recent trend where domestic grew faster than international in the quarter and really wondering what dynamics were at play, maybe from a product perspective, specifically maybe calling out e-mail or SendGrid. If you could provide any color there, would be much appreciated.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [46]

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Yes. This is Khozema. I mean I wouldn’t read too much into it. Honestly, it was off about 100 bps relative to prior periods. I would say it’s in the ballpark of what we would have expected it to be. I don’t think there was any particular trend relative to any of our categories. There are just lots of moving pieces, and that can drive it one way or the other. I think the fact that we saw a strong growth in our U.S. businesses on the back of some of the areas that we highlighted, particularly education and health care, is a good thing. And I just wouldn’t read much into geographic mix beyond that.

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Operator [47]

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Your next question will come from Brent Bracelin from Piper Sandler.

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Brent Alan Bracelin, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [48]

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One for Jeff and Khozema. Jeff, really encouraging to see the vision laid out at the IPO and the diversification strategy paying off in spades here this quarter. If you would ask me in 2016, if a large operator would be a customer, i.e., Comcast, I probably would have said no. My question for you is, given we’re seeing kind of this COVID-induced acceleration in the digital opportunity, would you consider accelerating your build-buy strategy, why or why not there? And then again, one quick follow-up for Khozema.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [49]

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Yes. Thank you, Brent. I mean, I think build, buy, the two of those together means everything. And yes, we are accelerating our build versus buy, and we’re accelerating the business. As you can see, we’re continuing to invest in the long term. And I think it’s the right thing to do because we see a lot of investments that we can make, both in terms of product and distribution as well as us building the core systems and processes of the business in order to continue scaling this company for a long period of time. And so as we think about what’s going on right now and the current pandemic environment, but also the long term, 5, 10 years from now, we see this essentially as, to some point, an entry point for many, even more, long-term opportunities, both new kinds of customer relationships that we’re going to build, new markets that we may be able to participate in, but also new products and new needs of our customers that are going to merge. And we are in a position to be able to invest. And that investment can be organic or can be inorganic, but we — with the balance sheet that we have, we see this as an opportunity to invest and to emerge from the COVID pandemic stronger.

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Brent Alan Bracelin, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [50]

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Makes sense. And then, Khozema, just if I got this right, it looked like WhatsApp was 7% of revenue in the quarter. I think it was up — that’s up from 4% in the prior year. That would put WhatsApp materially higher year-over-year and at $100 million plus run rate. So I guess my question is, what’s happening at WhatsApp? What drove the strength there if that is the right number? And are there some new video use cases driving that? Any color on what drove the outperformance at WhatsApp would be certainly helpful this quarter.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [51]

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Yes. So just in terms of the number that you cited, it was 7% of revenue, and that’s what we called out in our earlier remarks. It’s predominantly one use case around account verification. We have a strong relationship with that company. We work hard at it, obviously, every day. I’d have to get back to you on some of the specific numbers that you cited. They sound directionally right to me. But again, I’d have to get back to you in terms of specifics. But I think we just maintain a good relationship with that company. And as I said, we work hard at it every single day.

Just one other thing I would add to Jeff’s remarks around build, buy. On the buy-side, in particular, Jeff mentioned, we have $1.8 billion on our balance sheet, which puts us in a position of strength. We raised that money in part to be opportunistic for a time like this. Obviously, we could never have anticipated a global pandemic when we did it, but I think that leaves us in a pretty strong spot to be opportunistic, and we’ve got a lot of optionality going forward.

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Operator [52]

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And your final question for today will be from Rishi Jaluria from D.A. Davidson.

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Russell Philip Rigby, D.A. Davidson & Co., Research Division – Research Associate [53]

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This is actually Phil Rigby on for Rishi. Can you just talk about what impacts you’re seeing related to political activity in this environment? I’m just trying to get a sense of how spend there is tracking relative to your expectations?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [54]

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I’ll give the high level. I think as anticipated in politics, especially here in the United States, messaging is proving to be a pretty effective medium for candidates to engage with likely voters. So like it was in 2016 and 2018, I think 2020 will be a year of elevated spend by the political participants. We’re not breaking out any predictions around that category of our business, but I would say it’s playing out as we expected it would play this year.

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Operator [55]

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There are no further questions. I will turn the call back over to the presenters for closing remarks.

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Andrew Zilli, Twilio Inc. – VP of IR [56]

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All right. Thanks, everybody, for joining today, and we hope you are all staying safe and healthy. And look forward to catching up with you over the next quarter or so.

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Operator [57]

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Thank you, everyone. This will conclude today’s conference call. You may now disconnect.