Twilio Inc

NYSE:TWLO

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio First Quarter 2022 Earnings Conference Call. [Operator Instructions] Thank you.

Bryan Vaniman, SVP, Corporate Development and Investor Relations, you may begin your conference.

[Bryan Vaniman, SVP, Corporate Development & IR]

Thanks, Emma. Good afternoon, everyone, and thank you for joining us for Twilio’s First Quarter 2022 Earnings Conference Call. Our prepared remarks, earnings press release, investor presentation, SEC filings and a replay of today’s call will be found on our IR website at investors.twilio.com.

Joining me today for Q&A are Jeff Lawson, Co-Founder and CEO; Elena Donio, President of Revenue; and Khozema Shipchandler, COO.

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

Additionally, our discussion and responses contain forward-looking statements, including our projections and expectations regarding future performance. These forward-looking statements are subject to risks, uncertainties and assumptions. And should any of these risks materialize or should our assumptions prove to be incorrect, actual financial 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 subsequent reports on Form 10-Q. And a remark – marked 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.

And with that, I’ll hand it over to Jeff for some opening remarks. Then we’ll open the call for Q&A.

[Jeff Lawson, Co-Founder, CEO]

Thanks, Bryan. We delivered another strong quarter of results and continue to execute against our long-term strategy to build the world’s leading customer engagement platform. We remain confident in our ability to deliver 30% plus annual organic revenue growth through 2024, and we’re committed to delivering annual non-GAAP operating profitability starting in 2023.

To achieve this goal, we’ll continue to make the necessary investments in 2022, which will put us on a solid trajectory to deliver against our growth and profitability targets over the coming years.

And as you likely saw in our prepared remarks and press release, we are really excited to welcome former Twilio Board member, Elena Donio, as our President of Revenue. Elena is a remarkable executive and a leader with deep knowledge of the Twilio business, our market, our value proposition and our culture having served on our Board since 2016.

Elena has extensive experience leading massive growth and scaling go-to-market activity as the former CEO of Axiom and the former President of SAP Concur. Elena will help Twilio to its next phase of growth, and I’m thrilled to officially welcome her to the team. And of course, I want to thank Marc Boroditsky for his partnership and contributions to Twilio over the last 7 years. And lastly, May the Fourth be with you all.

With that, let me open the call for questions.

[Operator]

[Operator Instructions] Your first question today comes from the line of Meta Marshall with Morgan Stanley.

[Q –Meta Marshall]

Perfect. Just maybe starting on the CRO transition. Could you just give a little bit more background of what the thinking behind that was? And just given kind of recent management changes, any continuity kind of efforts or considerations that you had in making that change? Maybe as a first question, and then I have a follow-up.

[A –Jeff Lawson]

Absolutely, Meta. So look, I’ve had continuing and ongoing conversations with Elena throughout the years as she was considering her next operating role and about the opportunity to get her more actively involved in Twilio’s leadership team. And we’re incredibly fortunate that with Marc’s intended departure, we have the perfect person to step into the role and a perfect role for her given her experience. And she was already tremendously familiar with the organization, the team, the people involved, the opportunity, our customers, et cetera.

And look, I always believe when you have an opportunity to bring on a world-class leader of Elena’s caliber, like you jump at the chance to do so. In addition to her tremendous insights into our company, the culture and products from her time on the Board, she obviously brings a wealth of direct experience in software, in SaaS, in go-to-market, in products and scaling organizations while managing costs through a period of rapid growth. And those are all the things that we’re focused on doing.

So I’m extremely excited to have Elena to join the company as President of Revenue and in the latest forward in our go-to-market efforts. And by the way, I’m incredibly grateful to Marc for his enormous contributions in Twilio over the years.

[Q –Meta Marshall]

Got it. Appreciate that. And as a follow-up, I mean, clearly, you guys have noted in the past that there would be quarter-on-quarter kind of volatility in the organic growth rate in that, that growth may not be 30% in any given quarter. But just any trends, Khozema, that you think are worth noting in just the Q2 guidance that may be caused the sequential downtick in growth or in a sequential growth rate?

[Khozema Shipchandler, COO]

Meta, not really. I mean I think the big thing to keep in mind here is that the 30% organic target is obviously on an annual basis, and we’ve been pretty consistent about communicating that. And then last year, in Q2 ‘21 that we had a really, really strong organic growth quarter at 50% year-over-year. So as we look at the second quarter at 36% to 38% reported and then 27% to 29% organically, we feel pretty good about Q2. And then as we look out for the balance of the year, we see a more favorable set of comparisons as we go through the second half. And so we do feel good about 30% for the year, and we also feel pretty good about 30% for 2023 and 2024, as we’ve communicated previously.

[Operator]

Your next question comes from the line of Kash Rangan with Goldman Sachs.

[Kash Rangan, Goldman Sachs]

Jeff, I'm curious if you could give us some thoughts on the broader environment. Obviously, there's been a lot of volatility in rates and customers' propensity to deploy tech or maybe that has not changed. Give us your state-of-the-union perspective on how customers are prioritizing investments in Twilio. And also secondly, it's laudable to see the company gear more towards operating leverage, et cetera. What are the things operationally that Twilio has determined that will provide sources of operating leverage in the future? That's it for me.

[Khozema Shipchandler, COO]

Yes. So Kash, this is Khozema. There's a couple of things in there. Why don't I start? And then if Jeff has anything to add, you can comment as well. So just in terms of the macro, I think that's where you started. I think, obviously, if like the economy were to dip into like some sort of significant recession, we're not necessarily immune from that. But what we see based on both our internal studies, and we alluded to the customer engagement report as well as a number of external studies, is that digital transformation remains a top boardroom priority. That obviously benefits Twilio as a variety of companies look to invest in their engagement strategies going forward.

And we're not -- it's not like we don't see the macro environment, whether it's economic or geopolitical, but we just think this business is extremely well positioned to capitalize on ongoing company's digital transformation efforts. And despite impacts that we see that are inflationary, whether it be supply chain, which we talked about in the past, or labor inflation more recently or interest rates, as you mentioned, we've built those impacts into our models. We also have the benefit of having a really strong balance sheet, which obviously helps in these environments.

And as I said in the prior question, we feel good about our guidance at 30% plus revenue growth through 2024, and again, about non-GAAP annual profitability -- or operating profitability in 2023.

More to your question on the profitability because I think that's where you ended. What we've been saying really over 3 years is there are a number of investments that we felt were very important to make. And these were planned investments. And in general, they were in Flex, our go-to-market capabilities, obviously, more recently, with Segment as we see that as a crucial piece of our customer engagement stack. And we're kind of coming to the peak periods of growth in those investments. And it's not like we're not going to invest going forward, but the rate of cost growth in those investments is going to be lower than where we've been historically. And so slowing that cost growth, I think, will be the way that we end up getting there into the non-GAAP profitability for next year.

[Operator]

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

[Michael Turrin, Wells Fargo]

Gross margin saw a meaningful improvement sequentially. The prepared remarks still referenced just some near-term fluctuation potential. Just in sort of adding some more context around that. I guess the question is just why wouldn't that be at least somewhat bottoming if we're looking at sort of a point in time where U.S. growth is moderating? Some of these 10DLC impacts are playing through. Are you at all comfortable that gross margin can at least remain around a similar ZIP code regardless of our messaging mix plays through? Or anything else you could just provide to help us think through normalization of what these fluctuations can look like?

[Khozema Shipchandler, COO]

Yes. That's a good question. I mean I think with respect to the gross margins in Q1, we are obviously happy with them improving to 53%. I think, Michael, the thing I'd encourage you to keep in mind is that just the size and scale of our messaging business is what tends to drive it. And so that's why we're kind of signaling some level of fluctuation in gross margins in the near term. I think it'll be in the ZIP code. I mean I'm not going to be prepared to call the bottom or anything like that. But I'd also remind you that we like the messaging business a lot. And while it does carry that lower gross margin, it also generates a lot of gross profits that we reinvest back into the business.

And we've spent some time over the last few quarters talking about this in and up strategy, and messaging still serves as that important foot in the door with our customers so that we can execute on that in and up. And obviously, on those deals, we evaluate everyone on those opportunities, looking at whether or not they're going to drive lower gross margins and making sure that there's real strategic value there.

I think the flip of all of this is that our emerging software business continues to grow at elevated rates and obviously does carry significantly higher gross margins. And as we think about like our long-term targets around 60% plus over time, we continue to see a lot of tailwind there, and we continue to like the software businesses quite a lot. And we just have to continue executing on that up strategy that we've been talking about sort of for the last several quarters.

[Michael Turrin, Wells Fargo]

Yes. That's all really useful. And then I think great to see Elena coming off the board onto the field. Can we just go back to just how you keep continuity in making that change midyear? Are there any near-term changes we should expect? Or how should we assess the transition there? It looked like sales and marketing spend maybe ticked down a touch sequentially. So if you can just kind of hit on those, I think that's also useful.

[Khozema Shipchandler, COO]

I will answer a few of the lens of maybe go-to-market results. And then I'd love for Elena to maybe just introduce yourself and provide some of her own comments. But I think in short, we don't really expect the transition to have much of an impact certainly on the short term. And I think in the long term, we certainly anticipated that Elena is going to have a very positive impact on the business.

Right now, look, we've got a great team in place. That go-to-market leadership team is very strong. We have a clear plan for execution. The results that we've already seen in Q1 are a good setup for the rest of the year. And as I said, I mean, I think with Elena coming on board, I'm very excited personally, and I think she's going to have a really positive impact. I think her track record speaks for itself and -- to bring a person of her caliber on to the management team is really lucky on our part.

But let me maybe just turn it over to her for a moment, and she can tell you a little bit more about how should be thinking about things.

[Elena Donio, President, Revenue]

Thanks, Kho. Michael, nice to meet you. Having served on the Board for the past 6 years, which was just really the ride of a lifetime, I have become really familiar with the company. But with all that as a backdrop and knowing our products, our sales motion, our customers, our team from the Board lens is quite different from knowing it from an operating lens. And so I look forward to bringing my own background, skill set and lessons learned to the team but also doing a ton of listening and learning, particularly in the early days. I've spent my whole career driving operations and hopefully, delivering operational excellence, growth and scale. I see a huge opportunity to bring that capability into the company. We start with a fantastic team. I'm really, really proud of everything they've done in the past and the Board role in that, but I think the road ahead is perhaps even more exciting.

I'll also say I'm actively engaged with many of our team members, customers, even investors. And so I feel like I have a pretty good perch to sit from, but I'm also really excited about continuing to learn from here, to meet the rest of the team, to congratulate them on all of their accomplishments historically, but also to jump on the ride with them from here and envision a great future as the leader in customer engagement.

[Operator]

Your next question comes from the line of Mark Murphy with JP Morgan.

[Mark Murphy, JP Morgan]

And forgive me, I joined a minute or 2 late, if in case it's redundant. But last quarter, you had mentioned some domestic friction on the ADP registration side. Could you just describe that a little? And I'm trying to understand if the friction is kind of solely related to the onboarding process versus anything about the fees themselves? And then was there a deadline for customers to get that done during March? And I have a quick follow-up.

[Khozema Shipchandler, COO]

Yes. Mark, this is Khozema. Good to hear from you. So the growth slowdown just kind of domestically generally and the friction associated with 10DLC was really to do with the onboarding process for both new and existing customers. And it does create some friction in the short term, but over time, creates a lot more trust on our platform. And as a result of some of the friction that we saw, we have built a number of features to make that registration process more seamless for our customers. And the majority of our traffic has now been able to get through that registration process. And so we believe that that's behind us.

With respect to your question about a deadline, there was a deadline, and that was March 1. And I think now with that behind us and the majority of our traffic, also having completed that initial process, we do expect domestic messaging to normalize through the balance of the year.

[Mark Murphy, JP Morgan]

And then just a quick one for Jeff on the topic of 2-way messaging. In the past, I believe you said that it's still early days. And so now you've got another quarter under your belt. You've got the conversation with API and the front-line product developing. Do you see any more activity? Or is there any kind of a backlog building perhaps in terms of 2-way messaging?

[Jeff Lawson, Co-Founder, CEO]

Yes. Thanks, Mark. I think that there's a tremendous opportunity as I've long said in Twilio messaging. And first of all, the interesting thing is that the one-way messaging where like the world and the market has been for the last decade or so, it's actually a great place to be opening the door for 2 ways. So it's a great lead in to all those customers who are using messaging for alerts and notifications and all that kind of stuff. Like it just invites you to apply. And then the question of the company has is, okay, when you want to talk to us? What are we going to do about it?

And increasingly, companies are saying, look, our customers want to talk to us? Are we actually trying to ignore them? Are we actually going to say a customer that wants to talk to us. We're just going to give radio silence or given some automated apply that says call us? Or are we going to listen and pay attention to our customers? In fact, customers wanting to be out to us, like, how on others in the business, we pay advertisers to get customers who want to talk to us. And then over here, we're ignoring them. And so it just makes a ton of sense that you would open the door for these 2-way conversations.

And we're seeing it like in certain markets like financial services, right? You saw the large fine lobbied against one of the major banks because they were doing noncompliant 2-way messaging. Okay, that whole industry has now taken attention to this matter. Other ones like retail, clienteling -- and we've got a lot of customers that we've planned to over the history of using us for that, whether it's companies like Nike who use Flex to allow their salespeople, they call math leads in the stores. They will talk to customers who are in the app or on the website, saying, hey, I want an expert advice. And you see a lot of opportunities there. And that's why we're investing in the product road map that we are because we are hearing from companies that, yes, like engaging you're not 2-way conversation is really the future of how they're going to build a real relationship with their customers.

And so you're right, conversations is -- the API layer is the substrate to connect the dots between multiple conversations, whether they're multiple parties in the conversation, where they're occurring over different channels like SMS and WhatsApp and Facebook and even voice and things like that, combine them all together. And then we express conversations through our products in Flex, in Frontline and elsewhere so that companies could start to see the true line of all of these different points of contact in the company with their customer as one long-running conversation.

At the end of the day, by the way, that's what we see it as a consumer. When you're on the other end of it, you see it as one conversation with this company. Yes, they might see it as well. I got 20 departments and 50 people, and everyone -- they're like, well, that's your customers care about that. They actually just care number 1. If they try to talk to you, are you there listening? And number two, is it a coherent conversation? Or is it completely destroyed across a bunch of different phone numbers and shortcuts, all sort of software or does it make sense? And that is the really big opportunity, and we've been investing in that for a while.

And I think we see increasingly more and more companies are adopting. Actually, I'll give you a customer example that I experienced just a couple of weeks ago. And I can't tell you who it is, but it's a company that sells a musical gear. And I placed an order at this company, and they're a Twilio customer, a really cool company. And when that could shift, I got a text message from my salesperson. They said, hey, Jeff, I just wanted you to see that your package shipped. It was really cool. And I was showing actually somebody this example. I was like, is this new. And somebody said, what happens if you reply? I don't know, it seems like it's from a person. Let's find out. Started replying with like some question. I feel bad I was wasting his time. But I look see, I asked him a question and sure enough, turn around right got back to me. Oh yeah, I can help you with that, sent me some links, some blog posts about how to setup this and that. I'm like, look at that. It's amazing, amazing customer experience.

And now I've got a person I can talk to at this company, and I'm telling everybody, including everybody listening to this call now, about the amazing customer experience company has. So yes, I think the 2-way messaging is fantastic, whether you're buying a mortgage, a banking product, a musical instrument or a snorkel.

[Mark Murphy, JP Morgan]

Maybe you can play us some music some time.

[Jeff Lawson, Co-Founder, CEO]

You don't want that. You'd rather go snorkel --

[Operator]

Your next question today comes from the line of Derrick Wood with Cowen.

[Derrick Wood, Cowen]

Jeff, I guess for you, first. You guys have seen a lot of leadership change over the last year. It sounds like there is a little bit of increased attrition in the quarter in Q1. We've seen this certainly from many companies that have scaled so quickly and have to evolve into a much larger organization. But just curious, have all these changes been -- had any disruption kind of looking backwards or looking near-term forward? And then as you just look at adding kind of headcount and backfilling some of the attrition in Q1, what are the plans in terms of investments for the rest of the year?

[Jeff Lawson, Co-Founder, CEO]

Thanks, Derrick. I'll answer the question about the executive. And I think it's a fair question. you never like to see executive turnover for sure. And attrition is elevated across the market aside of this Twilio. It's not just tech. It's actually the entire economy, basically, and you see it probably, and especially true in companies that are growing as quickly as Twilio is. And so in some ways, it's the reality we're all living in every company, but it's also a reality for any fast growth company.

But what I really look at is that we have been consistently able to attract incredible leaders to Twilio with highly relevant expertise necessary to take the company to the next level. And that's what we are always doing as we grow the company and very appreciative of the leaders that have gotten us to where we are, but also looking forward to leaders who are going to take us where we go. And you can do both those things at the same time.

And Elena brings a tremendous wealth of direct experience in software, in SaaS, in building go-to-market and in product and in scaling organizations while managing costs through rapid growth. And like, look, these are all the things that we are doing right now and that we are going to be doing for the coming years.

And so look, I'm incredibly excited to have her driving our go-to-market efforts going forward. And look, I always -- it's always bittersweet, right, when you say go by to an executive. You've been in the trenches. You work with faults, but you also then really look forward to the people coming in or here to bring you where you're going. And I've been running Twilio for 14 years. So like, yes, I've seen groups of executives come in, help me build the company to where we are today, a $3.5 billion revenue company, growing very quickly. And it's just sort of part of what happens when you grow a company incredibly quickly.

[Derrick Wood, Cowen]

No doubt, you've had incredible growth. That makes a lot of sense. Real quick, Khozema, for you. I know we're not getting specific numbers on application services, but anything to share in terms of how growth trended or how that performed against expectations? And anything to share around the efforts and training -- the broader sales force around Segment?

[Khozema Shipchandler, COO]

Yes. I mean, I'd say, in general, it's kind of a repeat of what we've talked about in the past, which is we feel really, really good about the Segment product. We feel great about the performance of it. And certainly, that team has been really, really additive to the long-term success of Twilio.

More specific to your question, that software category more generally has been growing at elevated rates. And obviously, based on the margin profile, we clearly like that a lot. And that certainly underscores our faith that we can get to our long-term gross margin targets of 60% plus. And I think having as many people trained up on the product as we possibly can, obviously, should accelerate its growth over time. So feel really good about where we are with Segment, and it's going to be really important to us as we build out our customer engagement leadership.

[Operator]

Your next question comes from the line of Samad Samana with Jefferies.

[Samad Samana, Jefferies]

I guess first one for you, Khozema. When I think about the disclosure on 4Q, the international versus U.S., and I go and put that mix back in, I'm just curious how we should think about the gross margins. I don't want to re-litigate 4Q necessarily, but usually, the U.S. domestic higher gross margins than international. So I'm just curious if it was not mix, maybe was there something else that we should think about for the 4Q gross margin pressure? And then I have a follow-up for Jeff.

[Khozema Shipchandler, COO]

Yes. It's -- Samad, it's a fair question. So maybe first off, just to kind of own what happened, there was a discrepancy in the mix of that domestic versus international revenue, and it should have been caught in Q4. Luckily, it was caught as we ran the closing process in Q1, and we noticed the discrepancy then. We have put in place some additional analytics as well as some additional controls to make sure something like that, that doesn't transpire. But I did want to own it before answering your question.

In terms of that split, the way that we provide the disclosure, that split is based on the IP address or the mailing address of a customer at the time that they register with Twilio. And so effectively, it's something that we used for reporting purposes, but it's not actually how we manage the business day to day.

And I mean, Samad, you know the business pretty well. Like where we focus tends to be on where those messages actually terminate, and we continue to see very strong growth in messages that terminate outside of the U.S. And if you go back a couple of years SIGNAL, when we did the Investor Day, we showed them that, that split is about 50-50, and it's continued to grow from there. And that tends to be the much more significant impact on gross margin. Obviously, there is some correlation between destination messaging as well as what the customer origin is, and it can deviate obviously from period to period. But that's the gist of why that commentary from Q4 remains true today.

[Samad Samana, Jefferies]

That's really helpful. And I definitely appreciate the additional clarity there. I think that clears a lot of it up. And Jeff, I want to follow up with something that Khozema touched on, which is the knowing the business and look -- at the end of the day, the growth is still very strong and on big numbers. So I guess when I think about the company and the growth going forward, what are the maybe go-to-market changes that you think are going to happen? Or are there go-to-market changes that are anticipated in kind of reiterating that 30%-plus guidance or higher? How should we just think about it based on the changes in the management team?

[Jeff Lawson, Co-Founder, CEO]

Thank you, Samad. Why don't I have Elena answer that question?

[Elena Donio, President, Revenue]

Thank you. So first of all, I'd say a lot is going well. Like we really like our long-term growth trajectory, and I tend to continue along that trajectory. And so when I think about how I spent my first couple of months, first and foremost, it's obviously about getting to know the team and customers more deeply so that I can internalize their aspirations and really get to know them as we have our plans. But I would say there's a couple of really important short-term priorities that go along with that.

Number one is accelerating software growth, especially Segment and Engage once launched. Number two is calibrating our resource model explicitly towards the greatest efficacy possible. And so that means nurturing our product-led growth engine that we've built over time in messaging, but also amping up our direct and channel sales capabilities and software. And lastly, doing both of those things while driving additional operating leverage and go-to-market overall so that we're ultimately paying off the investments we've made over the past number of years.

[Operator]

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

[Ittai Kidron, Oppenheimer]

Maybe, Jeff, I'll start with you on Twilio Engage. Can you be, first, perhaps a little bit more specific on timing? When is that finally going to be available? And any color you can share with regards to the trial activity with customers? How should we think about traction and adoption here once it's out?

[Jeff Lawson, Co-Founder, CEO]

Thanks, Ittai. So first of all, timing, we're looking at GA and Engage in the second half of the year, and second is on the -- what are we learning from our early customers. And as you know, you bring a new product into a market. You do it as a beta format, and you bring on your handful of early customers. And they help you guide the road map, and they tell you where to be focusing. And so we have great feedback from the early customers of Engage, and we actually have more customers requesting data access and we can accept. And that's always a good sign. But we've been receiving great feedback from those pilot customers and are taking the steps -- responding to feedback, really understanding the problems they want to solve with Engage and making sure we're building the product, the list them solve their problems uniquely.

And look, I think Engage is filling a hole in the market with a platform that is built to help B2C companies, in particular, first of all, really understand their customers in terms of data and then execute on that understanding by personalizing every part of the journey and like empowering the employees with these Engage apps we're building.

And so when I think about what Engage is doing, it is taking a data-first approach to marketing. And that is the modern way companies are marketing, especially in this whole privacy-forward world where you don't have -- you can't do the lazy thing with third-party anonymous cookies and IDFA and just kind of turning through customers that you bought on an advertising platform. Really, modern marketers are saying, I need to understand my customer. I need to personalize the journey that, that customer is on and pay really good attention to them so that they become loyal, happy repeat customers. And so those are the types of companies that we are seeing early on in our pilot who are resting access because they're saying, look, here's the tools out there to do this are not what we need. And so Twilio's filling this gap.

And look, in the fullness of time, I think all marketing is going to go this way. I think every marketer is going to, first of all, be spending money on having the best data, which is where all of the starts, and then going to me to have a platform that really is about activating data as opposed to like blindly sending campaigns and just measuring, well, how many people want to subscribe. I think those days are over.

And the other neat thing about using data as the basis for the marketing tool is that you can optimize for the outcome of the business care spot because Segment sees the flow of data from a variety of systems. We can tell the marketer not just, like this campaign, you got this many opens and there's many clicks. Nobody gets -- companies don't make money with opens and clicks. They make money by big sales. And Segment sees that, too. So they can say, hey, this campaign resulted in this amount of dollars of sales. This campaign is working. This one is not. That's amazing. And so you think about the value proposition you'd be able to give to a company and to the marketer who now can justify the spend on that tool because they're saying, look, we're making money on it. So I think it's a really great value proposition. But obviously, still early in the life cycle of that product, but we anticipate bringing it to GA in the second half of the year.

[Ittai Kidron, Oppenheimer]

Okay. That's great. And then a follow-up for you, Khozema. Just on the gross margin again. Great to see the progress. I'm just trying to tie that to the registration date, March 1, where I think you talked about you expect messaging to normalize. I assume that, that means that around that date, messaging was somewhat depressed because some customers were not registered – and so is that stick into the second half of the year political activities part of your adjusted gross margin, and that clearly is going to come at a higher volume in the second half of the year. And you also have normalization around the messaging volumes in the second half of the year. So should we not expect any incremental perhaps gross margin improvements between now and year-end just because messaging, some -- these 2 elements are going to inflate messaging volumes in the second half of the year? Is that the right way to think about things?

[Khozema Shipchandler, COO]

Yes, Ittai. I think if all of that broke our way, it's possible, but it's certainly not something that we're necessarily forecasting. As you know, I mean, we don't guide on gross margins. I would say the factors that are really going to drive it more than anything are going to be just the way that the messaging business kind of fluctuates up and down. I mean it's just -- it's so big, and the scale of it is such that it really tends to be the principal driver.

And based on what I said in the prior question, the way that those messages end up terminating and who drives that traffic and how that all plays out, I mean, it's a fairly complex mix of things. And so I think it's going to be in the ZIP code, but it's not something that we're guiding to today.

[Operator]

Your next question comes from the line of Joe Goodwin with JMP.

[Q –Unidentified Analyst]

Great. I think that might be me, Pat. Elena, I have a question for you. Just I would love to hear any sort of learnings that you have from your time at Concur or some of the other boards you're on or other companies that you think might be relevant and might be things you can apply at Twilio.

[Elena Donio, President, Revenue]

Yes. Thanks for the question very much. I hope there's a lot of learnings. I started at Concur when my Bellevue startup was acquired in 1998. And so saw some amazing years from the early 2000s of the dot-com boom and bust through to 2008 and all of the products and kind of market transitions that went along with that. So moving the company from on-premise, shipping CDs to a SaaS company from a company focused on sort of a Web front end to mobile, from a company that sold one product that's reporting to one that sold travel invoice management and a whole host of others and ultimately became a platform company while growing overseas, growing into the U.S. federal government, growing downmarket.

So certainly have seen a lot of different transitions and take a lot of lessons away from that, including moving into the President role when we were acquired by SAP in 2014, and all of it came with a period of intense change for our people. And so maybe those are some of the things that I think I pride myself on the most is sort of navigating a period of fantastic growth, but equally embracing our people, making sure we're thinking about careers and growth and the human side of leadership. So I'm excited to bring as much of that as I can to the process.

In terms of other boards, Twilio was a great learning ride for me over the last 6 years, and I think it's given me an interesting unique lens into the business. But that lens will shift as I move into this new operating role.

Lastly, I'd say I think board work in general, I do still sit on a number of other private boards, and I think that board work in general just keeps me in the mix, hearing from other boards, other investors, other leadership teams, building other products that I think are both interesting as opportunities to learn from. And so I’m excited about that. I'm excited to continue to do that work and bring the best that set of learning into the sort of house to Twilio, but also vice versa, I hope still be a mouthpiece in the industry as I learned here from all the wonderful talent that will be around me here in this building virtually.

[Operator]

Your next question comes from the line of Frank Havemeyer with Macquarie.

[Frederick Havemeyer, Macquarie]

Close. Fred Havemeyer. So I wanted to firstly ask -- we've discussed a couple of the executive changes that have happened within Twilio recently. And I noticed that recently, you made a couple of actually 2 prominent privacy and trust-related hires. So I just wanted to ask, what is the importance of both privacy and trust to Twilio as you're expanding globally and also perhaps as you are navigating the inherently trust-based environment of 10DLC policies?

[Jeff Lawson, Co-Founder, CEO]

Yes.

[Khozema Shipchandler, COO]

Go ahead, Jeff.

[Jeff Lawson, Co-Founder, CEO]

Fred, this is Jeff. I'll answer it. Look, I mean, with privacy and trust, I mean, this is the just some of the most important concepts of our era, right, for companies to be investing in privacy and, obviously, trust with their customers. And it's -- as I think about privacy in particular -- we talked a lot about privacy and how it's changing the way companies acquire and serve and build relationships with our customers. And the privacy landscape is really changing the nature of like advertising companies and like where the revenue is coming from. I think you see some of that coming through in earnings. I think that you see the way companies go about building their customer bases. I think about it every time I go to a website, and you agreed with that dialogue. It's like do you want to sell your personal information or not? Can you click no? And then you've got like 3 layers of like, yes, please don't sell my not private information, you’re like, [indiscernible]. And like this is really the world we have. This is getting in a way in that we wins growth is the fact that the privacy landscape and the way companies have to navigate it to do it their testers lot, not just the government, is incredibly complex. So not only is Twilio obviously doing that for our own customers and our own employees and everything like -- the things that every company is doing to comply with privacy, but we're also building products that are helping our customers through this like Segment.

Think about what Segment does. They help companies understand their customers better so that they don't have to rely on third-party shenanigans and cookies and all this kind of stuff and navigate the IDFA changes that Apple has brought about because, a, the platforms are dictating it and, b, consumers want a world where the privacy is respected. People are going to be tracked across the Internet. And so this is one of the largest shifts that's gone on since the Internet became out a vehicle for business, honestly.

And so helping not only Twilio navigate that, but helping us help our customers navigate that is incredibly important. So Amy is going to lead the team responsible for navigating this complex -- compliance program and the privacy regulations and the shift of this utterly enormous changes on the Internet works.

[Frederick Havemeyer, Macquarie]

And now I suppose it'd be the analysts asked the M&A question, but you have a solid positioning on your balance sheet. Just wanted to ask with the valuations having compressed in this market, generally, how is Twilio thinking about its M&A appetite? And then as a kind of related question, could you give any update on where or how the Syniverse relationship is progressing?

[Khozema Shipchandler, COO]

Fred, this is Khozema. Let me take the second part first. In terms of Syniverse, I think subject to the closing conditions of the agreement, we do anticipate closing that transaction by the end of May. I think that's probably what you're getting at. And the relationship with that organization remains great, and we think that will be an important part of how we go forward certainly in the messaging business.

Relative to M&A more broadly, I mean, you're right that we do have a very strong balance sheet. We're certainly going to remain opportunistic. And we look and evaluate different opportunities all the time and maintain a game board.

I think if something comes along and we feel like it's a good fit, and we'll certainly take a look, but there's nothing necessarily imminent planned at this time. And that's really all about that I can say about it.

[Operator]

Your next question comes from the line of Matt Stotler with William Blair.

[Matt Stotler, William Blair]

I guess just one. Kind of looking at your application services, but specifically Flex and Segment, so I mean, just kind of looking at the overall trends in the market and what we're seeing and kind of spending intentions and what's happening with customers and partners, I mean, it seems like we're setting up for a pretty interesting year for Flex in terms of opportunities, right? Obviously, it's been growing quickly. But it seems like we're in a particular advantageous position right now. So I'd like to maybe just get some color or just expand thoughts on how that pipeline is developing. Any thoughts on kind of the year for that? Obviously, I'm not asking for product guidance, but more qualitative.

And then in terms of how it relates to the CDP, what kind of interest you're seeing in bundling there? And if the addition of Segment is kind of having a pull-through effect as you're looking at the ramp of Flex over the course of this year.

[Jeff Lawson, Co-Founder, CEO]

Yes. Thanks, Matt. This is Jeff. I'll answer the question. Look, we're really excited with the progress we're continuing to make with Flex. And we continue to see really great traction with customers, and in particular, pay attention to the customers that we call out on our earnings calls. You see a really nice selection of companies in different verticals, different sizes, everything from like the digital disruptors all the way up to like enormous Fortune 500, Fortune 100 legacy, legacy gen companies. And so you see a really great set of customers who are the adopters of Flex.

And we consistently hear from companies that -- and the thing is the legacy solutions really just can't provide the flexibility or the channels that they need to address customers in the digital world today. And this is why we remain so excited about the traction of we’ve seen with Flex and the opportunity ahead of us.

I mean we're seeing customers take Flex on like for the first time like Compass was the one we talked about in the prepared remarks today, but we also see companies expanding their use cases like a Global 2000 financial services company, a Global 2000 automaker, I mean, these are companies we've referenced on prior earnings calls. And so overall, our traction is strong.

We're just scratching the surface of what's possible also with our partner ecosystem. And we've talked about the partners we brought on Board to help accelerate our go-to-market to actually take it into verticals and take it into different types of segments of the market. So we're really excited about the market we're addressing here. We think it's an amazing opportunity for the partner ecosystem that we're building, for the direct customers we're serving.

And I love the fact that we're seeing -- look, you've got your digital disruptors. You've got your enterprises. You've got everything between all around the world also, if you notice, using Twilio and -- or using Flex in particular. And so I think those are the [trends] I have seen, which is you're hitting a broad market need, and you see a great set of customers helping you that way and proving out your hypothesis. That's what we see.

[Operator]

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

[Taylor McGinnis, UBS]

Another one on gross margin. But when we think about -- or when we look at the 1Q sequential increase, is there any color you can provide on how much of that would have been driven by maybe a recovery in domestic growth versus Segment and some of the other high-margin businesses becoming a bigger portion of the mix? And I guess, too, as we look ahead, based on what you're seeing today, any thoughts on the mix of messaging versus customer engagement in the revenue line and how that could evolve just given the tough comp that there is in 2Q and then easier compares as we get throughout the year and how that might just be influencing your view that gross margins could stay in the ZIP code?

[Khozema Shipchandler, COO]

Yes. Taylor, this is Khozema. So a couple of questions in there, so let me just try to unpack it a bit. So in terms of just the comp set for Q2 and then the second half of the year, I mean, I was really alluding to the business in total there, not any specific pieces, Q2 relative to last year. Last year was a 50% organic growth quarter. And so therefore, that's why we guide the way that we did for Q2 this year, whereas the second half next year provides a more favorable setup for the back half of this year. And that's why we continue to feel great about our 30% plus guidance for the year.

In terms of the margins themselves that are kind of underneath that, looking at sequential Q4 to Q1, I mean, I think, obviously, we're happy with what inspired. But in our business, just given the relative size of messaging, most things are driven by various fluctuations in the way that various accounts are behaving in that part of the business what are they terminating, what their margin rates are, what have you. And so the mix of messaging tends to drive kind of the mix of Twilio more broadly.

And as I alluded to earlier, we were comfortable with the gross margins of that business. We love the gross profit that it throws off. We reinvest those profits. And probably most importantly is that messaging provides a very interesting entry point for us into customers. And we just make sure that those deals hurdle in a meaningful way that the margins that they provide are not just accretive, but also strategic relationships.

In terms of the software components of the business, as I said, we still feel really, really good about Segment. You heard Jeff's comments a moment ago about Flex and the energy that we have around that product. And that part of the business and other application services, too, continue to grow at elevated rates that do carry higher gross margins, as you said.

And I think as we go over time, we feel great about our longer-term gross margin guidance of 60% plus. And it'll take some time given the size of messaging, but we do anticipate that, that mix shift happens over time. And we gave you some indication of that in our disclosures in the prior quarter.

[Operator]

Your next question comes from the line of Ryan MacWilliams with Barclays.

[Ryan MacWilliams, Barclays]

So we heard from some customers that there could be a price increase this month on Twilio U.S. SMS. If this is the case, like this looks like the first price increase in recent memory in the U.S. So how should we think about maybe the thought process behind that, if that's true? And maybe what this can mean for U.S. rev growth?

[Khozema Shipchandler, COO]

I didn't hear the last part of your question, Ryan. What could it mean for what?

[Ryan MacWilliams, Barclays]

U.S. rev growth?

[Khozema Shipchandler, COO]

U.S. revenue growth, is that what you said?

[Ryan MacWilliams, Barclays]

Yes, yes.

[Khozema Shipchandler, COO]

So yes, it is true. We did update SMS pricing in both the U.S. and Canada to reflect our underlying costs as well as continuous improvements to our infrastructure and software and to provide trusted and reliable global messaging. The price changes that we put through; they'll take effect on the 11th of May. And it doesn't affect our customers who were locked into a fixed price, and we don't necessarily expect a material impact on our results in the short term. And we're still evaluating whether or not additional price increases make sense in other products. But we obviously are in an inflationary environment. And so it felt like it made sense to us given the value that we offer to customers, the technology and just given the current environment.

[Ryan MacWilliams, Barclays]

I just follow up really quickly. Just on the first quarter rev line. The $10 million beat to the high end of your guidance revenue, is this kind of in line with your commentary on what you were thinking last quarter about like a new guidance philosophy going forward around guidance?

[Khozema Shipchandler, COO]

Yes, pretty much. I mean, as we mentioned, we did refine our guidance approach. We wanted to provide guidance more consistent to actual to just give investors a better approximation of where things are headed, and that's basically the way that Q1 played out.

[Operator]

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

[Alex Zukin, Wolfe Research]

I want to follow up on pricing first. So if we think about it, was this driven more by kind of the inflationary environment? And if you think about it, is there an opportunity to do this globally? Is there a way to tie this to a more strategic interaction with the customer around the application services? Just walk through is pricing a strategic lever here or was this more of a onetime kind of adjustment that you haven't really exercised over the course of the company's life.

[Khozema Shipchandler, COO]

Yes. I mean I think it's a lever. I wouldn't say that we have necessarily Grandios plans to roll it out globally or across every single one of our products. I think we're still evaluating stuff like that. But just maybe to take a step back, I mean, we have done price increases in the past, not necessarily -- it's been a while in SMS, but we have done them, for example, in the e-mail business. We've done them a few times actually even under our ownership. They've also been done in other parts of the business, most notably in Segment. And so it's not like it's something that's not planned or something that hasn't happened before in Twilio. So I don't want to leave you with that impression.

I think for us, we're seeing enough inflation in the environment, both based on our variable cost line as well as the labor inflation that we felt like it was appropriate to pass through price increase, like I said. While those changes take effect on the 11, there are a lot of customers that are still on fixed price contracts. And I don't think it's going to be material in the short term, but it's something that we'll evaluate as we go through the balance of the year, and we'll see how things play out.

[Alex Zukin, Wolfe Research]

Perfect. And then, I guess, with respect to the second half, you called out the more favorable comparables from the prior year. This maybe goes back to Kash's question about just the macro environment. Like is there any adjustment or anything you're doing in your models at all to take into account any impacts from Europe or revenue in Russia and Ukraine? And then separately, as we are coming out of the pandemic, hopefully, are there any verticals that you're starting to see where use cases bouncing back stronger than others?

[Khozema Shipchandler, COO]

Okay. There's a lot there. So let me take them one at a time. So on Russia, Ukraine, I wouldn't say there's been really much of an impact at all. Volume in that region is a pretty small piece of our global traffic, and we haven't seen a material impact in our business to date.

What I can tell you is that for any new business in Russia, we've suspended doing any. And to the extent that we had any traffic with state-owned customers, we've terminated that. And then we've seen a little bit around the fringes with some isolated customers who might pause their traffic to Russia. But it's a pretty de minimis impact to our business. And yes, we have modeled it to the extent that it would even impact us.

In terms of broader macro, I mean, we're watching all the same factors that you all do. I think what I would go back to is that what we're finding both based in our conversations on the ground with customers, what we're seeing in our revenue line, what we're seeing in some of the research that we've done and what others have done is that digital transformation continues to remain a top boardroom priority. And so we see that as a very secular trend, not one that's cyclical. And so as that continues to happen over a long period of time, we feel like there's a lot of tailwind here for Twilio.

And I mean, of course, there are economic factors, geopolitics, supply chain, labor, et cetera, but all that stuff is largely built into our models. And so our 30% plus growth confidence as well as being profitable next year has a lot of those impacts baked in, and we obviously have a strong balance sheet as well.

I'd say there's one other part of your question Alex, I can't remember that.

[Alex Zukin, Wolfe Research]

The verticals that are coming back are stronger than others?

[Khozema Shipchandler, COO]

Yes. I mean what we saw kind of transpiring going into the pandemic, I mean, obviously, ride share, travel, hospitality were pretty significantly impacted to the bad. And based on some of the reports you've even seen recently, like those industries are coming back pretty nicely. And obviously, that drives some additional volume to us. I think the thing to bear in mind there is that we're very, very diversified now in terms of our customer base. And so no one industry necessarily drives an outsized impact on our revenue line.

I think the things that we saw during the course of the pandemic that we expect to be quite durable are, for example, e-commerce, health care, financial services. A lot of the use cases in those categories became elevated. But I think what we're hearing from our customers in those verticals is that now that they've gone down the path of digital transformation and they've seen such significant ROI, they want to keep going. And so we've just gotten started with those verticals, and I think there's a lot more that now Elena and her team are going to be able to do in helping customers solve their different problems in those areas, and we stand ready to do that with them.

So I'd say a bit of tailwind in some of those industries and then a bit of tailwind in those that I referenced earlier that were down on the early part of COVID.

Operator, I think with that, we're going to wrap it up as far as questions and answers. Thank you, everybody, who joined the call. Certainly, the IR team is available subsequently, and we welcome your questions afterwards.

Thank you very much, and we'll talk to you soon.

[Operator]

Thank you for attending today's conference call. You may now disconnect.