Preface

A brutal tech market this year has not spared shares of cloud software maker Twilio (NYSE:TWLO), its stock down after earnings.

 

But, if any company is going to come out of this downturn in the right form, it is a company set structurally for years of profit, according to Twilio’s CFO, Khozema Shipchandler.

 

Shipchandler sat down with Capital Market Labs following the company’s first-quarter earnings report May 4th, as he has many times in past.

 

The key message from Shipchandler is that 2022 is the peak in the company’s investment spending, setting up the company for profit in the years following, while still maintaining annual revenue growth of 30% or better.

 

“There's just no reason we can't be a profitable company from here on out,” Shipchandler told CML.

 

Twilio has certainly not been spared any pain this year, the stock down 62% this year, and 67% in the past twelve months. But, says Shipchandler, the set-up going forward is better for the company given that investors may increasingly turn to companies that can be profitable while having relatively high growth. 

 

“In this backdrop, being high-growth and profitable is a much better place to be,” says Shipchandler. “Our setup for 2023, I think is also very, very attractive if you're an investor.”

 

A key element of that profit picture is the shift in Twilio’s business to multiple products that have higher gross profit. That includes “Segment,” the customer data platform, or “CDP,” software that Twilio acquired in 2020 for about $3 billion. It also includes Flex, the company’s customer contact center software, introduced in 2018.

 

Twilio unveiled its marketing product, “Twilio Engage,” in October, as the latest part of what it bills as a “Customer Engagement Platform” spanning multiple front-office functions including sales and customer service.

 

“These are all materially higher margin products than our core messaging product,” notes Shipchandler.

 

All three programs, says Shipchandler, will give Twilio customers a way to use their first-party data to reach out to customers in a world where cookies are now frowned upon — the new “D to C,” direct-to-consumer, frontier.

 

“We're used to these sorts of things in the physical world,” says Shipchandler of the high-touch approach to customer service.

 

“We all remember the sales rep walking around the counter at a high-end retailer, let's say, that feels pretty awesome,” he says. “If you can deliver that digitally, it's really, really cool. I think what it allows for is much stickier relationships between customers and consumers, and it's our job to now unlock that.”

 

The company has seen substantial new executive appointments. The company in November announced the appointment of Eyal Manor as Chief Product Officer, followed in April by the announcement of Reeny Sondhi joined the company as Chief Digital Officer, and Amy Holcroft joined the company as Chief Privacy Officer.

 

While all that turnover could make the Street skittish, Shipchandler speaks extensively of the value of new talent coming into the company. “I think we got a couple A+s in terms of the talent that occupies those roles,” he says. “So I feel really, really good about it.”

 

And with the earnings announcement, the company announced that SAP veteran Elena Donio will become Twilio’s President of Revenue.

 

The premise of continued high revenue growth and profit is important, because in a world of rising interest rates, Shipchandler expects the company can say goodbye to the big capital raises it did in years past — even as it continues to pursue M&A.

 

“We're not going to be in the capital markets,” he says. “We don't need to raise equity, we don't need to issue more debt; I think we're in a good spot.”

 

One-on-One with the CFO

CML: What things, first of all, do you think are most important for investors to focus on from the results and outlook?

 

Khozema Shipchandler (CFO TWLO): I think there's a couple things. I think one is that we continue to grow [revenue] about 30%-plus. We're now growing at an annualized $3.5 billion run rate and to continue — That's on an organic basis by the way — to continue growing organically on that basis is just really, really impressive for a company of this size and scale.

 

The second thing is that we've reiterated that we'll keep doing that for the balance of the year on an annualized basis, that we'll do it in '23, that we'll do it again in '24. We set those commitments four years ago, and the only thing that we've done since then is routinely beat them at significantly elevated levels. We continue to, kind-of, set new benchmarks in terms of what the size of the company can be and how we can grow.

 

Third thing I'd say is that we've been pretty public that we can both be a big and high-growth company as well as a profitable company. We did put up a small profit in Q1, but more importantly, we intend to be a profitable company next year. We've been very public about that, that this will be the last year in which we're not profitable on a non-GAAP basis, and that starting in next year, and from there on out, that we'll be a profitable company.

 

Fourth, to underscore that, we actually put in place, the board did, a performance share scheme such that a very, very significant portion of the executive team's compensation is tied to us both achieving ongoing 30% growth targets as well as being profitable next year and beyond.

 

CML: I know that you talked about this a little bit on the call. You were asked a number of times about investments as they pertain to sort of peak, I guess, investments might be one way to phrase it. Are we now in this year then, Khozema, in an era of peak investment for you that it tapers off in terms of the intensity or the rate?

 

KS: Exactly. That's exactly how it's going to play out. We made three investments with some level of intensity over the last three years, one in our R&D area, which was predominantly targeted towards Flex. Then once we bought Segment, Segment as well. Number two was in our go-to-market. We invested across international, enterprise and then again, in Flex and Segment. Then third was on the G&A side in infrastructure and systems. A good example is we're in the process of putting in an ERP system. That ERP actually is in the process of…

 

CML: Good luck!

 

KS: … going live. Yeah, I know. It is in the process of going live, and the spending that's associated with that has just got to come down. So we'll continue to invest in those areas and in others, but the rate of that spend will moderate certainly relative to our revenue growth rate.

 

CML: That's amazing. I have never run a company of much size at all, much less a company of your size. How does one know when you say this is going to play out in such and such a way? How do you know over years, yeah, we can say, probably, let's say this is the peak year, and then it's less next year and less the year after? How do you know those kind of things at any given point in time?

 

KS: Well, when we set out to make the investments three years ago, we knew that these were the areas, and we knew that over time the overall business would improve. It's hard to do these things in a — you can't do them five years later when the growth has already happened, and the company's already too large. We wanted to do these things on the way up. We also had very good instincts that during those three years, we would start to realize economies of scale against those investments. That was all just kind of part of the plan. I think what we're starting to see now is even when we try to "lose" money as a result of an investment quarter, we're not able to because we are starting to reap those economies of scale. I think going to next year with all of those building blocks in place, there's just no reason we can't be a profitable company from here on out.

 

CML: Well, I admire you for being able to plan that far out. I can't plan my week that far out as far as dining out. I always end up with a larger dinner tab dining out than I forecasted. How was…

 

KS: That's the wine…

 

CML: …Yeah, I wasn't going to go there. This is the second quarter maybe I think since you took over COO?

 

KS: Yeah.

 

CML: How's it going? How's it changed for you?

 

KS: It's going great. The way that we've done it is that Jeff [Lawson, Twilio CEO] obviously runs the company in totality, but in a lot of the day-to-day activities, he's asked me to really take the charge and running the operations of the company. I think we've been very lucky in that we've hired a fantastic chief product officer, Eyal Manor, who came out of Google and knows organizations and how to run them at scale, and very, very good from an engineering perspective.

 

I'm sure you saw that we had an executive change with Elena Donio taking over as our president of revenue. So, so excited to be able to partner now with her as well. I think having a set of teammates who are, kind-of, at the top of the company across ops, across go-to-market, across engineering who have seen scale, who know how to grow the company not just fast but with operating leverage in mind, to me is really exciting. It also frees up a lot of capacity for Jeff to think about what do the next 5, 10, 15 years for this company look like, and to continue building out that strategy and vision. So I think it's been going great.

 

CML: Has he come to a decision about what the next 15 years is?

 

KS: Well, I think we're already into the next five to 10 years with data. I think the customer data platform [CDP] that we have — we very deliberately bought Segment because they're the number one CDP in the marketplace. It's always important for us to buy market leading products. I think it pairs extremely well with our existing core communications capabilities, which are also number one in the marketplace.

 

If you look to the future of where we're going with this thing — let's reflect on your dinner tab for a second. If you provided that restaurant, for example, with first-party data that you consented to providing, not that's scraped on the back end, that you've consented to providing, a company like Twilio with Segment and its capabilities can use that data that you've agreed to provide, so it's not creepy, but it's consented. We can use it in a way in which we can communicate with you during, after the fact, before you might have the next dinner engagement based on the way that your reservation patterns look like, and we can help one of our customers design what is a really delightful dining experience vis-a-vis the digital capabilities that we offer you.

 

The thing is it's on you whether or not that tab runs too high again the next time, but it's on us to ensure that that's a delightful experience. You're used to these things in the physical world. You are used to them every now and then in the digital world, but when they happen, you really take notice. Our goal is to democratize that experience for all of our customers now using data. What Jeff is really setting up is, is that the next 5, 10, 15 years are going to be our effort at ensuring that we cement ourselves as the world's leading customer engagement platform through data paired with our communications capabilities.

 

CML: Wow. Which brings me, sort-of, into a Venn Diagram with some other companies that are out there like Qualtrics and Zoominfo and companies that are trying to get into customer experience, et cetera.

 

KS: Yeah, I think, to some degree. I mean, those aren't really the companies I think that we'll end up competing with. We're, kind-of, creating a new space in many ways here. You've got the B2B CRM companies, but no one's really conceived of the consumer as the customer, and where the records are, and where the data is. So this is really more of a B2B2C angle. Again, the great thing about it is that it puts us on the right side of consumers who want privacy. You are very much willing to consent to provide data for organizations that you really care about, that you want to have ongoing interactions with. The great news for our customers is that they're going to make a buck off of those experiences as well, and we'll take a little bit of a piece of that.

 

CML: We heard from one individual — I didn't hear from them, my editor heard from someone who was a former director of product managing marketing and app platform development at Twilio who had departed in 2020, who said that Segment has just got the whole market "nailed" and has, "Won that market hands down compared to the rest."

 

KS: Yeah, it's in a great spot. I mean, the technology really is very special, and it's no small feat to grab the right data out of all these myriad source systems that exist inside of companies, organize them in a way that actually makes sense from where you can draw insights, and then to be able to take it that one next step to deliver an experience to you. Orchestrating all of that, when done well, is really cool. We're used to these sorts of things in the physical world. We all remember the sales rep walking around the counter at a high-end retailer, let's say, that feels pretty awesome. If you can deliver that digitally, it's really, really cool. I think what it allows for is much stickier relationships between customers and consumers, and it's our job to now unlock that.

 

CML: Interesting. I downloaded the IDC report, Khozema. There's a lot of other. It looks like Segment's the biggest single shareholder in this area of CDP with about 10.5%, but then there's fifty-some percent of the market is other. It's the big wedge. What is that?

 

KS: It's pretty fragmented. The number one competitor that we see is DIY. You'll have organizations that have attempted to construct these things over time themselves, and it's a relatively straightforward value sell when we go into a customer. We can show what we can do literally within moments. We can run a demo off of their data and create that really special experience. Our share is relatively low. Our job is obviously to gain as much share as we possibly can, and I think we have an opportunity to do that.

 

CML: But you're already, in other words, the singles biggest share holder of distinct, identified share holders, which is a good place to start, I guess.

 

KS: Right, right.

 

CML: Has the medium-term landscape changed for Segment because of advertising trends and recession and inflation?

 

KS: I don't really think so. I think there's maybe two trends that I would point to. I think one is that you've had a lot of changes in the privacy landscape with IDFA for example. We view that as tailwind for Twilio. Again, being on the first party data side, that puts us on the right side of the consumer. Clearly the EU is way ahead on this stuff, but I think those regulations are coming to the US as well. Several states, as I'm sure you've seen, have adopted some privacy measures. I think that'll all end up synchronizing with the EU. Again, we view that as tailwind.

 

I'd say the second, kind-of, macro thing is that let's just suppose for a second there is a recession, hopefully there's not, but let's say that there is. I think front-of-office activities tend to be the last place that you'd go. It's not to say that we're completely immune if there were to be a significant recession. I don't want to imply that. But I think given that digital transformation is still such a boardroom priority and that front-of-office spend tends to be the last place, I think we're in a pretty good spot.

 

CML: Okay. Right. They would sooner consolidate operations and back office, consolidate infrastructure or something than cut a marketing spend you're saying.

 

KS: Yeah. I think the other way you have to think about it is that advertising tends to be blast, marketing automation tends to be highly specific. The ROI from marketing automation, and the capabilities of pairing data with comms, is just so much higher than if you, kind-of, see an advertisement that's flat.

 

CML: Yeah. I was just talking with the former publisher at Barron's today about this and just how much of what is supposed to be transparent and accountable online never really was that in terms of marketing spend, ad spend. It was promised, but it never really turned out to be.

 

KS: Exactly. I think we're now really starting to see that — you're starting to see a glimmer of it in your inbox and on your phone, but you'll see more.

 

CML: Yeah. Organizations like Barron's that have large desirable cohorts, sort-of, tend to say, "Look, just come to us with your advertising because you'll get a good audience a priori, and we'll get first party data of some kind that's useful." It seems to be that's what is the new landscape now.

 

KS: Yeah. But I think the real new landscape is D to C [direct to consumer], where if you are the customer, you can now take back the power. You don't need an intermediary to be able to deliver your message. What we see today is a little bit of personalization in third party providers who are, sort-of, doing it on behalf, but you've got hosts there. What we're now starting to see is if you take a customer of ours, like an Allergan — which, I'm sure you probably know the name — the work that we're able to do with them using Segment and Twilio capabilities, and now deliver on the promise of a D to C experience, it's pretty remarkable. Because there's significant cost savings in that because we take out the middle person participant, and at the same time the ROI goes way up.

 

Let's say that cost is neutral, which it's not, but let's say we just put it to the side, the ROI goes way up because the personalization goes way up. That's a pretty, pretty cool experience that we can drive for a customer like that, just using their customer loyalty program. All D to C now is really, really interesting.

 

CML: So, Engage is coming.

 

KS: Yeah.

 

CML: G.A. [general availability] in the second half. How fast does that develop for you? Because are the deals already on the table that when it goes G.A., it starts to really generate revenue?

 

KS: Well, the way that we do it is, we've got it in a private beta right now where we've got customers basically beating it up. What I can tell you is that the customer feedback that we're getting — well, first of all, we had much more interest from customers than we could possibly handle. We just can't take hundreds of customers in a private beta so we tend to really shrink that down. That's usually a good sign. The customer feedback that we've gotten within the confines of that private beta has been really, really strong and has energized us to go as fast as we can. We want to get it right. Nailing the architecture on these things is always important.

 

One of the things that you know about the company is we really pride ourselves on developers really loving the experience. So we want to make sure that we nail that part of it as well. So we feel really good about the customers that are on board, and the second half looks great. I think it'll be a big accelerant to what we're trying to do in this D to C landscape and in customer personalization more broadly.

 

CML: So you don't, in other words, when you're at that stage where you're taking those things step by step to make it go right, you don't start making predictions about how it's going to develop into revenue?

 

KS: Sure, we have predictions. We have a business plan that's predicated on the success of it, but I'm not prepared to talk about that today.

 

CML: Okay. I was going to say if you felt that you needed to talk to someone about talk to someone about, you could talk to me about that.

 

KS: [Laughs] Yeah. You'd have to run up a higher tab.

 

CML: Generally speaking, over time, is Engage something that gets you to — I think there's, correct me on this if I'm wrong, Khozema, you have a long-term gross margin percentage goal of 60%?

 

KS: That's right.

 

CML: I think. Does Engage contribute to that in some way over time?

 

KS: Yeah. Engage does, Segment does, Flex does. These are all materially higher margin products than our core messaging product. We're very excited about the promise of Engage, and for sure over time it'll mix our margins up.

 

CML: So watch this space to see how that develops.

 

KS: Indeed.

 

CML: You were asked a bunch on the call, in a bunch of different ways, about executive turnover. Jeff was asked about this with Elena coming in. Elena, am I saying her name correctly?

 

KS: Yeah.

 

CML: You had a bunch of others for chief legal officer, chief digital officer. There's been some turnover. Have you communicated what this is about because people want to know is it the Great Resignation or Rotation, or is there something where people are just leaving?

 

KS: I think you've got to parse it a little bit. So it's a bit different based on what we're talking about. I'd say broadly speaking, we're certainly not immune from Great Resignation-type dynamics. I don't think that's what's going on at the executive ranks, but I think we are feeling that in our broader workforce to some degree. We're still below the tech benchmarks that we look at, but we're definitely elevated, so I don't want to give you a misleading impression there.

 

CML: Below for attrition versus other tech firms in other words?

 

KS: Yes. But we're definitely elevated relative to where we were, let's say, a year or two ago. On the executive side, it's a little bit more specific because we don't have a lot of executives, obviously, and every one of them is a little bit of a unique story. I would say it this way, that with folks like Dana, who's our chief legal officer, we had a long time Twillion retire after seven years from the company. I'm not shocked that she did that after that period of time. She had a great run here, a good personal friend of mine, but people retire.

 

On the chief digital officer side, that was someone that we brought over, a couple executives that we already had both on the security and IT side. So we wanted to bring in someone — all this digital engagement stuff sounds great. We should probably do it inside the company as well, and bringing on a chief digital officer just makes a ton of sense in that regard.

 

On the chief product officer and chief revenue officer side, the way that I would characterize it is we just have a shot at some really, really skilled leaders with Elena and Eyal and having had them see so much SaaS scale, and having done it while driving operating leverage, I think, is a huge advantage to the company. We feel really, really strongly — they're the two largest organizations in the company, and I think we got a couple A+s in terms of the talent that occupies those roles. So I feel really, really good about it. I've been working with Eyal for a long time since he's gotten here, obviously, and then Elena has been here six years, and so I've worked with her in a number of board dynamics too.

 

CML: These are positions that report to you?

 

KS: No, no, no, no, no, no, no, no, no.

 

CML: Jeff?

 

KS: The chief legal officer reports to me, the chief digital officer reports to me. Elena and Eyal both report to Jeff.

 

CML: Well, you have enough reports to handle it sounds like. There's a lot there. For another couple of items on the quarter, Khozema, the customer additions, as far as I could tell, the new customer additions was slightly below consensus. Was there a slowdown that that was pointing to?

 

KS: Oh, I actually am surprised that you said that. They're actually a little bit up relative to where they've been over the last couple of quarters. Actually Q1 sequentially tends to be a slightly higher quarter on customer additions than most other quarters are. So, I actually feel pretty good about where we are in customer additions. If you were to unpeel it one step further, and look at it on a unit basis, dollars per customer are also up. So I feel pretty good.

 

CML: The other thing that some folks had pointed out to me, from the buy-side, they said organic revenue growth and operating income for the outlook for the Q2 guide was below consensus. Was that macro factors or was that you being conservative?

 

KS: They're different. On the revenue side, we're slightly above consensus actually. We did guide at 27 to 29% [revenue growth], which is just a hair shy of 30%, obviously. We reiterated 30% for the year. What's important about Q2 is that in Q2 of last year — all this is organic by the way — in Q2 of last year, we grew it 50% organically. That's a tough, tough comp.

 

CML: That's a tough comp.

 

KS: So, yeah. So, in the second half, all that normalizes and we'll be 30% plus for the year. On the profit side, I think we're just a hair off of consensus on operating loss. Again, we've been consistent that we were going to take a loss in this year. It'll be our last year of loss, and then we'll be profitable next year. So I'm not really worried about either one. The setup for the quarter's good, the setup for the year's great, and we look forward to 2023 commitments as well.

 

CML: You had some capital markets activities last year, '21. We're in a different landscape now, it feels like, for capital markets — or maybe we're not. How do you feel, should you at some point in the future want to go back for other debt or equity raises, in this environment we're in?

 

KS: We have $5.3 billion of cash on our balance sheet, which is well in excess of…

 

CML: Pretty good.

 

KS: …virtually every one of our peers. So, we're not going to be in the capital markets. We don't need to raise equity, we don't need to issue more debt. I think we're in a good spot. The only conceivable circumstances I can even think of would be associated with some sort of a transaction. I don't think we need to, just given the balance sheet size right now.

 

CML: So in other words…

 

KS: We're in a great spot, balance sheet-wise.

 

CML: So, You were astute in going capital markets prior to now, maybe?

 

KS: Yeah, I think we were very smart about the way that we did it on the way up. You want to use that cash obviously when asset prices are down. The whole point of it is to obviously buy low, sell high. We see some opportunities on the M&A side. I wouldn't read more into that than I just said. We want to be opportunistic about it with every asset price having traded down. We maintain an active game board on that side.

 

CML: Is there a thematic quality to your potential M&A activities?

 

KS: I'd say by and large, if we did anything, we'd want it to be additive to Segment or Flex. Again, there's nothing imminent on the docket, but those are the places that we tend to look.

 

CML: Fair enough. We can come back to that when there is something imminent. Again, if you need someone to talk to about that in advance of the transaction…

 

KS: Again, we can discuss that over your dinner tab.

 

CML: Touché! This is a rough market for software stocks as well as tech stocks. From what I see on FactSet, the shares are down 59% this year, 65% in 12 months. Better than some companies, worse than some others. What is going on with investors these days? Is there nothing specific to Twilio or any other company in what's going on? Do you have a sense as you talk to them?

 

KS: Yeah. I mean, I think there's obviously a lot of macro stuff out there. I think interest rates are pretty tightly correlated with high-growth tech, and you've got a lot of geopolitical, obviously. I think the conversations that we've had over the last couple days, we've kind of reiterated, "Look, this is a company that is saying that it's going to grow at 30%-plus over multiple years. The only thing that we've done is exceeded that target." It's also a company that in response to what's happening in the marketplace — we were going to do this anyway, but in this backdrop, being high-growth and profitable is a much better place to be. Our setup for 2023, I think is also very, very attractive if you're an investor.

 

I think on the flip side, we obviously don't love the equity being down where it is, but if you're an employee who's joining right now, it's very attractive entry point to be able to grow your wealth, and we have no trouble attracting employees in this marketplace. Look, tech will be back. I think we're going through a bit of a cyclical correction right now, and very much tied to interest rates. But I think there's some that are much worse off. We're not in that category. We certainly saw some animated activity during the heart of the pandemic. I think as we come out of it, what we're proving is that this is a very durable and resilient company that continues to grow at high growth levels despite the macro environment.

 

CML: Anything else you wanted to add we didn't go over?

 

KS: No, just that I'm really, really proud of the results of the company. I don't think there are many companies that are able to do this as consistently as we have. Really proud of the way that we've delivered for customers over long periods of time, especially during COVID. Incredibly excited to welcome Elena onto our leadership team. Really excited to work with her.

 

CML: I remember when you first came on board and we were talking about sneakers. Do you remember that?

 

KS: We were back in offices back then.

 

CML: Nobody's with the sneakers anymore.

 

KS: We still do it. We still hang those shoes. I think that's what you're talking about. We've got a lot of those sneakers in the closets, but we still hang them in our offices as a marker for literally wearing our customer's shoes. It's still, I think, an important symbol for the company and really brings one of our values to life. So it's still a big deal.

 

CML: Thank you Khozema. I appreciate your taking the time, as always.

 

KS: Great seeing you. Have a great weekend.

 

Conclusion

Thanks for reading, friends.

The author has no position in Twilio at the time of this writing. 

Please read the legal disclaimers below and as always, remember, we are not making a recommendation or soliciting a sale or purchase of any security ever. We are not licensed to do so, and we wouldn’t do it even if we were. We’re sharing my opinions, and provide you the power to be knowledgeable to make your own decisions.

Legal
The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Capital Market Laboratories (“The Company”) does not engage in rendering any legal or professional services by placing these general informational materials on this website.

The Company specifically disclaims any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if we have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

The Company makes no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that The Company endorses, sponsors, promotes or is affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.