Yahoo Finance Twilio Inc. (NYSE:TWLO) Q1 2024 Earnings Call Transcript
Twilio Inc. (NYSE:TWLO) Q1 2024 Earnings Call Transcript May 7, 2024
Twilio Inc. misses on earnings expectations. Reported EPS is $-0.30577 EPS, expectations were $0.6. Twilio Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Twilio Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Senior Vice President of Investor Relations and Corporate Development, Bryan Vaniman.
Bryan Vaniman: Good afternoon, everyone, and thank you for joining us for Twilio's first quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described.
Many of those risks and uncertainties are described in our SEC filings, including in our most recent Form 10-K and our forthcoming Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements except as required by law. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q1 results and then we'll open the call for Q&A.
Khozema Shipchandler: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio had a solid start to the year, exceeding our Q1 guidance, delivering $1.047 billion in revenue and $160 million in non-GAAP income from operations. Our team has executed well across the board in Q1, as evidenced by a record quarter of non-GAAP gross profit of $566 million, a 54% year-over-year increase in our non-GAAP income from operations and another strong quarter of free cash flow of $177 million. We are in the early stages of reinvigorating the business and are optimistic about our progress thus far. In fact, we're executing with greater discipline, rigor, and focus on innovation than ever before. In the last five quarters, we've begun delivering significant non-GAAP operating profitability.
In the last four quarters, that's been paired with significant free cash flow and we are committed to additional operating leverage and accompanying free cash flow. In the meantime, we are also making new targeted R&D investments that we expect to reaccelerate growth over time. In March, we announced an accelerated target for GAAP operating profitability to Q4 2025, and we also announced that the Board authorized an additional $2 billion of share repurchases, bringing our total share repurchase authorization to $3 billion. This is a reflection of the Board's confidence in our strategy and the opportunity ahead. As of today, we've repurchased approximately $1.5 billion of shares and we're targeting to complete the remaining $1.5 billion of repurchases by the end of this year.
At that same time, we also completed our operational review of Segment. And the team is focused on executing the plans we outlined, including more focused product innovation, embedding Segment's capabilities into communications products, and a commitment to getting Twilio Segment to break-even on a non-GAAP operating income basis by Q2 2025. We are making progress in each area. Across the board, we're innovating and releasing new products, many of which are underpinned by CustomerAI, our predictive and generative AI layer. Finally, we welcomed a new bench of leaders to Twilio who will play an important role in shaping the next chapter of our Company as we operate with greater financial discipline, operational rigor, and focus on innovation.
And now, let's turn to our business highlights. Our Twilio Communications business had a strong first quarter with revenue of $972 million, up 7% on an organic basis year-over-year and representing 93% of our overall revenue. During the quarter, Communications landed meaningful customer wins, released new products, and deepened our relationships with ISVs, partners, and resellers. With this disciplined approach, we're focused on growth levers that we believe will drive reacceleration in both the short and long term. In the short term, our growth will be fueled by expanding our network of ISVs and global partners, driving more self-service and cross-sell momentum, and extending the value that we're delivering to customers. In Q1, we signed a seven-figure partner agreement with China Unicom, one of China's wireless carriers who will re-sell a majority of our Communications products for its enterprise customers across Singapore and Hong Kong.
We also signed a partnership with Bloomreach, a leader in the marketing automation space, and will be working with them to co-sell Twilio products. Over the long term, our focus on innovation will unlock more value for customers, creating stickier relationships and ultimately expand Twilio into new markets and larger deal sizes. We made progress on a number of our AI products and are driving better synergies with our Communications and Segment products. In Q1, we announced Agent Copilot, our first of three launches in 2024, where Twilio will natively embed Segment into Twilio's Communications products. With Agent Copilot, we've embedded Unified Profiles powered by Segment within Flex, giving agents deeper insights into their customers' behaviors and preferences.
By accessing the real-time data from Unified Profiles, Agent Copilot assists in intelligent routing to agents and provides them with actionable insights for each customer interaction, automating and enhancing agent productivity while reducing resolution times. Agent Copilot and Unified Profiles are currently in public beta and customers like Universidad Uk are already leveraging these capabilities within their contact centers. As a result, they've driven a reduction in handle time by 30%, and by using our embedded AI automation tools, they've been able to deflect 70% of support cases in just two months. While it's still early, these results are impressive as it illustrates how our customers are able to quickly realize tremendous business value at scale when combining segment within our Communications capabilities.
Our customers also continue to realize tangible benefits when using our other customer AI innovations, including Voice Intelligence, which has gotten a great response from our initial public beta customers. With Voice Intelligence, brands like PGA of America are leveraging transcriptions for their customer support interactions within their Flex instance, getting valuable data insights from call recordings. Of the hundreds of customers that have deployed Voice Intelligence, over half are using Language Operators, which allows brands to trigger an action based on any keyword allowing for better personalized communications. We also recently introduced language operators that uses Generative AI and large language models to determine the best sentiment for the overall conversation, so brands can get a better sense of where escalations or customer churn may take place.
And we're continuing to embed AI capabilities into our Verification products. We currently have over 11,000 customers leveraging Verify Fraud Guard, and in Q1 alone, Fraud Guard blocked more than 62 million fraudulent messages. We are not only saving our customers money, but we're also ensuring our customers' end users have a seamless experience. During the quarter, we signed a competitive deal with Bluesky, a social media app which recently launched its app to the public. They chose Twilio's Verify API to ensure a seamless and secure sign-up process for new users. At launch, the company saw an impressive amount of sign-ups, gaining almost 800,000 new users in one day. And Fraud Guard not only helped save the company hundreds of thousands of dollars, but it ensured new users received secure authentication.
Now, turning to our Twilio Segment business. For Q1, Segment revenue was $75 million, up 2% year-over-year. It was a challenging quarter, but we came out of our Segment operational review in March with greater clarity around a shortlist of priorities that we believe will address the underperformance of Segment. We will continue to focus on rationalizing our investments to right-size Segment's cost base, accelerating time to value for customers by using AI to automate onboarding, and enhancing data warehouse interoperability, delivering three products in 2024 that natively embed Segment into Communications and capitalizing on CustomerAI momentum. In the month following the review, we've already made meaningful progress against all of these areas, and we believe that we have the right set of plans in place to turn this business around, address churn and contraction, and improve its financial performance.
We are also committed to getting Segment to breakeven on a non-GAAP operating income basis by Q2 2025. During the quarter, we deepened our partnerships with Databricks and Snowflake. With Databricks, we launched a new bidirectional integration that allows customers to seamlessly ingest and activate data. We are on track to deliver further enhancements to our data warehouse interoperability offerings across partners in Q2. And as mentioned earlier, we delivered focused product innovation like Agent Copilot that demonstrates Segment's value when it's natively embedded into Communications. CustomerAI Predictions is continuing to get adopted by new customers. And since its GA in Q3 2023, more customers are realizing the benefits and positive material impact to their businesses.
For instance, XP Inc., a Brazilian investment management company, said that since implementing CustomerAI Predictions and by using our out-of-the-box tools, they've been able to save their team four weeks of data science work and improved audience engagement and conversion rates. Looking ahead to Q2, we'll bring our second product that natively embeds Segment into Communications into Beta, which further demonstrates the value we can deliver to our customers by combining Segment data with our Communications products. Before turning things over to Aidan, I want to take a moment to welcome the new leaders that have joined my management team. During the quarter, we welcomed Inbal Shani as our Chief Product Officer for Twilio Communications; and Thomas Wyatt as our President of Segment.
And yesterday, Chris Koehler joined as our Chief Marketing Officer. We've also taken a thoughtful approach to evolving our governance practices. First, we welcomed Andy Stafman, a Partner at Sachem Head Capital Management to Twilio's Board of Directors. And second, we announced in early April that we plan to hold an Investor Day within the next 12 months, at which time, we'll share an updated medium-term financial framework and set of targets. And finally, we recently submitted a proposal for the declassification of our Board, which will be voted upon at our Annual Shareholder Meeting in June. In summary, we're making a lot of progress in a very short period of time, and we're continuing to drive significant change. We're maturing as a Company and as a team.
We're making deliberate decisions with discipline, rigor, and focus to deliver attractive levels of growth and profitability over the medium term. While we've started to see positive impacts from some of these changes in our recent financial results, others will take longer to bear fruit, but we are confident that the opportunities we pursue will create meaningful value for all of our stakeholders and allow us to deliver on our commitment to drive durable profitable growth over the long term. And with that, I'll turn it over to Aidan.
Aidan Viggiano: Thank you, Khozema. In Q1, we exceeded our guidance on both revenue and non-GAAP income from operations and delivered our fourth consecutive quarter of solid free cash flow generation. Q1 revenue was $1.047 billion, up 4% reported and 7% organically year-over-year. Communications revenue was $972 million, up 4% reported and 7% organically year-over-year. And Segment revenue was $75 million, up 2% year-over-year. Our Q1 revenue growth was impacted by the crypto headwinds that we've referenced the past several quarters, as well as the sunsetting of the software component of our Zipwhip business that we discussed during our Q4 2023 earnings call. These represented a combined 210 basis point headwind to our organic revenue growth in Q1.
Excluding these items, consolidated Q1 organic revenue growth was 9% and communications organic revenue growth was 10% year-over-year. We have now lapped the crypto headwinds and do not expect a material negative impact to revenue growth from these customers moving forward. We continue to expect modest headwinds throughout 2024 from sunsetting the software component of our Zipwhip business, which we estimate to be roughly 100 basis points in Q2 and 80 basis points for the full year. We also previously announced the sunsetting of our Video product. However, based on customer feedback, we've extended the transition support timeline through 2026. As a result, we no longer expect notable headwinds from Video in 2024. Our Q1 dollar-based net expansion rate was 102%.
Our dollar-based net expansion rate for Communications was 103%, a modest improvement quarter-over-quarter. Our dollar-based net expansion for Communications was 105% excluding crypto and Zipwhip software customers. Our dollar-based net expansion rate for Segment was 92%, driven primarily by elevated churn and contraction. As discussed during our operational review in early March, we are focused on improving customer time to value and we're also investing in data warehouse interoperability, both of which we believe will improve Segment's churn and contraction over time. We delivered record non-GAAP gross profit of $566 million, up 8% year-over-year. This represented a non-GAAP gross margin of 54.1%. This was up 180 basis points year-over-year and 170 basis points quarter-over-quarter.
The margin improvement quarter-over-quarter was primarily driven by lower international messaging mix and lower hosting fees as a result of larger credits on our cloud spend, which benefited both Communications and Segment gross margins. As a reminder, we continue to manage the business towards gross profit dollar growth. Q1 non-GAAP gross margins for our Communications and Segment business units were 52.2% and 77.6%, respectively. As a reminder, we are migrating a part of Segment's architecture to new infrastructure providers this year to recognize greater efficiencies. During this transition, we will incur some overlapping vendor expenses. As a result, we expect Segment's gross margin rate to decline throughout the year until the migration is completed.
Q1 non-GAAP income from operations was $160 million, up 54% year-over-year. As we mentioned last quarter, this included $19 million of sequential incremental expenses associated with our new employee cash bonus program, which we initiated to reduce stock-based compensation expenses over time. Our Q1 non-GAAP operating margin of 15.2% was up almost 500 basis points year-over-year and down 80 basis points versus the prior quarter, driven by 180 basis point impact from the new employee cash bonus program. Q1 non-GAAP income from operations for our Communications business was $249 million and the Q1 non-GAAP loss from operations for our Segment business unit was $21 million. Q1 GAAP loss from operations was $44 million, which included $10 million of expenses associated with restructuring charges.
Stock-based compensation as a percentage of revenue was 14.9% in Q1, excluding approximately $2 million of restructuring costs, down 40 basis points quarter-over-quarter and 100 basis- points year-over-year. We generated free cash flow of $177 million in Q1, inclusive of $23 million of restructuring payments. This was up $292 million year-over-year and over the last 12 months, we've generated free cash flow of $655 million. I'm really pleased with our continued progress on free cash flow. It's been a key area of focus for the team over the last several quarters and reflects our ongoing work to drive efficiency in the business. As a reminder, in March, we provided fiscal year 2024 targets of 5% to 10% organic revenue growth and $550 million to $600 million of non-GAAP income from operations, inclusive of an estimated $90 million of incremental expenses associated with the new employee cash bonus program that was introduced to reduce stock-based compensation expenses over time.
And Khozema as mentioned, we accelerated our target for GAAP operating profitability from fiscal year 2027 to Q4 2025. We also committed to driving Segment breakeven on a non-GAAP income from operations basis by Q2 2025. Finally, we're continuing to make good progress on our $3 billion share buyback program, having repurchased over $720 million since our last earnings call in February. This brings our total repurchases to date to approximately $1.5 billion. We intend to complete the remaining $1.5 billion of authorized repurchases by year's end, which should meaningfully reduce our outstanding share count over the next few quarters. Moving to guidance. For Q2, we're initiating a revenue target of $1.05 billion to $1.06 billion, representing year-over-year growth of 1% to 2% on a reported basis and 4% to 5% on an organic basis.
We're also reiterating our full year organic revenue growth range of 5% to 10%. Turning to our profit outlook. For Q2, we expect non-GAAP income from operations of $135 million to $145 million. This is down sequentially, primarily due to incremental payroll expenses associated with our standard varied increases that go into effect in Q2, consistent with prior years, as well as increased marketing and travel expenditures. However, given our outperformance in Q1, we're raising our full year non-GAAP income from operations guidance to $585 million to $635 million. Additionally, we are continuing to focus on improving our free cash flow profile, and we anticipate that full year free cash flow generation will be in-line with our full year non-GAAP income from operations.
As we look ahead, we're investing in initiatives to reaccelerate growth. At the same time, we've accelerated our path to GAAP profitability. We're generating significant free cash flow and [Technical Difficulty] share buyback program. I'm excited to continue to build on the progress we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarters. And with that, we'll now open it up to questions.
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