Thank you. Good afternoon, everyone, and welcome to Twilio's Fourth Quarter and Year-End 2018 Earnings Conference Call.

Joining me today are Jeff Lawson, our Co-Founder and CEO; Sameer Dholakia; the CEO of our Twilio SendGrid unit; George Hu, our COO; and Khozema Shipchandler, our CFO. The primary purpose of today's call is to provide you with information regarding our 2018 fourth quarter and full year performance in addition to our financial outlook for our 2019 first quarter and full year.

Some of our discussions and responses to your questions may contain forward-looking statements, including but not limited to, statements regarding our future performance, including our financial outlook, which includes SendGrid with the closing date of February 1 onwards; the potential benefits of our acquisition of SendGrid; impacts and expected results from changes in our relationship with our larger customers; our market opportunity and market trends; the growth of our customer base; customer adoption of our products; our momentum; the benefits of our business model; our delivery of new products or product features; and our ability to execute on our vision. These statements are subject to risks, uncertainties and assumptions.

Should any of these risks or uncertainties materialize or should any of our assumptions, as outlined in our earnings release and the documents referred to in that release, prove to be incorrect, actual company results could differ materially from these forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our most recent Form 10-Q filed with the SEC on November 8, 2018, and our remarks during today's discussion should be considered to incorporate this information by reference.

Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law.

Also during this call, we may present both GAAP and non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago.

We encourage you to read our earnings release as it contains important information about GAAP and non-GAAP results as well as the reasons why we present guidance for our non-GAAP financial measures of income from operations and net income per share but not the comparable GAAP measures. The earnings release is available on the Investor Relations page of our website and as part of a Form 8-K furnished to the SEC.

Finally, at times in our prepared comments or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly or annual results. Please be advised that this additional detail may be onetime in nature and we may or may not provide an update in the future on these metrics.

I encourage you to visit our Investor Relations website at investors.twilio.com to access our earnings release, periodic SEC reports, a webcast replay of today's call or to learn more about Twilio. I'll now turn the call over to Jeff.

Thank you, Greg. Welcome, everybody, to this quarter's call.

I'd like to start by welcoming all of the SendGrid folks, now full-fledged Twilions to the family. We're all incredibly excited to build a future together with all of you.

We had an exceptional Q4 that capped off an incredible year for Twilio. I wanted to take a moment to thank all of the Twilions around the world for all of their incredible accomplishments in 2018, including our R&D teams, moving our innovation forward while scaling our services reliably, as well as our sales and marketing teams, who brought on so many new customers in the year and made our customers widely successful by consistently wearing our customers' shoes, and our G&A teams who helped support the rapid growth of our business; and of course, to all of the Twilions and SendGrid folks who helped make the largest acquisition in the history of our company possible.

Thank you. All of your hard work showed again in Q4.

Our core business continued to power strong revenue growth, amplified by a few one-time events, which Khozema will go into later. Both our core products, voice and messaging, continue to generate significant growth and drive our business.

And our engagement platform strategy is working well. It's changing the types of conversations we're having with customers and producing early success with products like Flex.

And we've proven our ability to augment our developer-led go-to-market model with a significant sales motion, driving deeper, more strategic relationships with our existing customers and successfully acquiring new customers. But we're just getting started.

From our perspective, we're at the early stages of a complete transformation of communications from its legacy based on physical networks to its future based on software. And in that transition, we see the opportunity to help every company elevate their digital engagement strategy with their customers.

Our developer-first go to market is an efficient way to reach this broad range of companies. And with our platform business model, we see opportunities to power a tremendous range of applications for our customers across almost every customer touch point.

And as a platform, we get a front-row seat to learn the major business problems that customers are looking to solve. This view drives our product roadmap, resulting in products like Flex.

That's why we plan to continue to invest across the company to support elevated growth over an extended period of time rather than taking profits in the short term. Our product priorities coming into 2019 remain consistent with what we've discussed last 2018 but updated to reflect the progress we've made throughout the last year.

We are focused on elevating Twilio into the world's leading customer engagement platform and expanding our position as the developers' first choice for communications. Our engagement platform vision, backed up by the go-to-market team George's organization has been building, is up-leveling our interactions with customers and prospects alike.

For those who are able to attend SIGNAL last year, I hope you noticed the changes from the customer logos to the discussions to the sessions and more. And from a product point of view, the launch of Flex was just the first step of this evolution.

The customer reaction to Flex has been tremendous but our journey has just begun. Empowering developers to build a future has long been the foundation of Twilio, and we will continue our devotion to serving their needs.

Obviously, adding e-mail to the platform is part of this strategy, but it's also expanding our efforts to meet developers where they are around the world, making further improvements [for council] [ph] and developer experience and launching a new version of TwilioQuest, our interactive learning system, and more. There are well over 4 million registered developer accounts across the combined base of Twilio and SendGrid, and we look forward to powering their innovation in the future.

To help drive our efforts to scale the company, we've added to our executive team recently by welcoming Chee Chew as our Chief Product Officer. Chee has spent more than 25 years working at some of the world's leading technology companies like Amazon, Google and Microsoft.

Most recently, Chee was the Vice President of Consumer Engagement at Amazon, responsible for its core shopping experience on the web and mobile apps. Prior to Amazon, Chee was the Vice President of Engineering for Google, responsible for their real-time communications efforts, including Google voice and Google hangouts.

His experience across the scope of customer engagement and software development will serve him well in his new role at Twilio. We also added Donna Dubinsky, a technology industry pioneer, to our Board.

Donna is a serial entrepreneur, best known for her role as CEO of both Palm and Handspring, innovators who created the first successful handheld computers and smartphones. Earlier in her career, Donna spent 10 years in sales, sales support and logistics at Apple and at Claris, an Apple software subsidiary.

Donna is currently the CEO of Numenta, where she is focused on reverse engineering the neocortex and applying that knowledge in the creation of machine intelligence. Her experience building leading technology companies will provide valuable insights to our Board discussions.

So to wrap up, we continue to put the right pieces in place to fulfill our mission to fuel the future of communications. As you can see by our results, voice and messaging remain incredibly vibrant markets, and we're thrilled now to add e-mail to the picture.

Between voice, messaging and now e-mail, we have the full breadth of ubiquitously used channels for customer engagement. And the reaction from customers, prospects and developers since our announcement of the SendGrid acquisition has been great.

Together, we have more than 140,000 customer accounts, giving us even more visibility into the big, unsolved problems that we can help our customers to solve. We feel that we have the opportunity to disrupt a massive market and are uniquely positioned to do so, collapsing the industry that has been fragmented between carriers, hardware, software and operators.

Our platform of flexible building blocks is much more powerful to customers, allowing them to both reinvent existing use cases and create entirely new ones. Learning from our customers who are building on the core components of our platform, now including e-mail as well, will help inform this future.

This is just the beginning, and we are investing to accelerate our engagement platform vision for our customers. Now in addition to adding Chee and Donna to the leadership of Twilio, we also added another fantastic executive to the team, Sameer Dholakia, the CEO of SendGrid.

So Sameer, let me turn the call over to you for some thoughts on our future together.

Thanks, Jeff, and I'm so proud to be joining the leadership team and this extraordinary company. One of most important aspects of making combinations like this successful is the people dimension and how the individuals feel about the cultural fit and shared values between the two companies.

And I can say, speaking for all of the SendGrid folks, we are incredibly excited to work arm-in-arm with our new team mates. While we won't to be reporting our standalone SendGrid Q4 results in full detail, I'm happy to report that we had another strong quarter of growth across the business, producing revenue of $41 million.

More importantly, we've been hard at work planning for our future together. One of the many reasons that led us down this acquisition path is the conversations we've had over the years with customers looking to create an integrated communications platform, serving the full scope of their customer engagement requirements.

We've had a number of exciting discussions with customers and prospects about this potential once their platforms are combined. A great example of this is a Fortune 100 retailer who spoke at our opening kick-off in January.

They happen to be a joint customer of both companies and foresee a future where Twilio is the foundation of their customer engagement platform across all channels, letting their end customers choose their preferred method of communication for every interaction. It's clear to me that both companies are kindred spirits in so many ways.

We have an opportunity to help companies around the world to engage with their end customers in a whole new way. To all of the former SendGrid shareholders who have supported us thus far in our journey, thank you.

Thank you for your confidence in us along the way. I'm so looking forward to the next chapter as part of Twilio as we're still at Day 1 of this extraordinary opportunity.

George, let me turn the call over to you.

Thanks, Sameer. We're excited to start this journey together as well.

We've also been having many of the same conversations with our customers in the past few months. Our joint efforts in the field have just begun, but I look forward to what we can deliver in 2019 and beyond.

Let me touch on 2018 as a whole before to talking about the road ahead. 2018 was a tremendous year for the go-to-market team, and our investments produced tangible results.

Our developer team attended more than 300 events across 20 countries in 2018, driving awareness in the developer community that fuels our business. We held Engage at superclass events in 15 cities around the world, bringing Twilio to a new broader audience, including builders within the broader business community.

We added significantly to our coverage while continuing to deliver strong results. We launched our Twilio Build program, establishing the foundations of our partner programs that we believe will help to amplify our business in the future.

And we held our biggest SIGNAL ever. Quite a year.

In the fourth quarter in particular, we were very pleased with the results and the continued momentum of the business. One of the focus areas for our go-to-market investments has been further penetrating the traditional enterprise, and our team closed a number of new deals in Q4.

Ecolab will be using our Programmable Messaging product as part of a strategic initiative focused on strengthening the productivity of their field service team. They'll be using our platform to send alerts and notifications to the field service team when customer requests come through with their contact center.

Also, STANLEY Infrastructure will be using our Programmable Video product to empower their support technicians for their distribution channel to video chat with end users. This feature will be built directly into their mobile app, allowing remote technicians to show issues with equipment, diagnose problems and identify broken parts.

The video will also be recorded for training purposes. We're, of course, also very excited about the GA of Flex and the reaction we're getting in the market from customers and prospects.

The product launch has now enabled the broader sales force to start working on deals. We closed more early adopters in this past quarter as well.

One great example was 1,000 seat deployment at a leading software company. This customer will be moving off of their legacy provider onto Flex while taking advantage of some of our new products like Autopilot and to provide a better experience for their customers.

Another Flex win from Q4 was ezCater, an online marketplace that helps businesspeople order office catering from more than 60,000 restaurants across the United States. This deal was yet another great example of where developers were involved from the beginning to the end of the process.

ezCater's journey with Flex began when a few of the developers attended one of our Engage sessions in Boston to learn more about our platform. ezCater runs a complicated contact center attempting to coordinate food suppliers, buyers and drivers through a white glove service interaction, and they found their existing provider wasn't able to support their needs as they grew.

Flex is helping them to build a solution they needed to scale their business and serve their growing customer base. And we're also seeing continued success with industry disruptors with our core products.

A great example is a Programmable Voice deal we did in the quarter with GoDaddy, a company that empowers everyday entrepreneurs with 18 million customers worldwide. One of the products they offer to support their community is an app called SmartLine that allows customers to easily add a second phone number to their cell phones, keeping their business and personal identity separate.

GoDaddy will be utilizing our platform to support the SmartLine application both here in the U.S. as well as around the world.

We also entered into a new relationship with E*TRADE in Q4. E*TRADE sends a wide variety of messages to their customers from transaction notifications, to price alerts to news and so on.

They'll be using our Programmable Messaging products for their SMS alerting option for our customers. All in all, another great job by the go-to-market team in Q4.

We continue to invest in the strategy that we've been laying out, more account coverage and increasing our bets in the enterprise with partners and internationally. To drive our Twilio Build partner strategy going forward, we promoted Chetan Chaudhary, a Twilio veteran with an extensive background in building channel programs, to Global VP of Partners.

We're also planning to increase our account coverage again this year, including outside the U.S. because of the remarkable opportunity we see globally.

In EMEA, we've hired David Parry-Jones, formerly of VMware and Microsoft, as Regional VP of EMEA, to lead our sales efforts and increase our account coverage in the region. We saw tremendous success in APAC last year, so we're adding to that team as well.

And on top of that, our plan to capitalize on the combined power of existing SendGrid and Twilio customers and products as well as developing new relationships, we have an amazing opportunity ahead of us in 2019 and the years to come. With that, let me pass the mic to Khozema to discuss our financial results.

Thank you, George, and good afternoon, everyone. I'm thrilled to have joined such an amazing company at a pivotal point in its history as we rapidly approach our first $1 billion in annual revenue.

I look forward to interacting to many of you on the call today and the coming years. Let's dive into some of the highlights.

Q4 was an extraordinary quarter with base revenue growing 77% year-over-year. Our products are resonating with customers, and our go-to-market investments continue to work well.

These results were driven once again by the success we are creating within our customer base with our dollar-based net expansion rate coming in at 147%. As we previously indicated, this is the last quarter where we will be providing the ex Uber versions of both these metrics.

So if you have them for your models, the ex Uber stats for both were 79% and 148%, respectively. And while the majority of our base revenue growth came from the normal drivers of our business, we did have two items that amplified our Q4 results: First, we saw significant seasonal spending ramp from a large international customer that we added earlier in 2018; Second, we saw positive impact related to the midterm elections in the U.S.

Combined, the two items added roughly 10 points to our year-over-year growth in Q4. As you think about the impact from these 2 items into 2019, the spending levels from that international customer I mentioned have returned to more normalized levels in Q1, and the election-related spend obviously won't reoccur this year.

The top 10 active customer accounts contributed 20% of total revenue in Q4 compared to 18% last quarter and 17% in Q4 2017. We had 6 variable customer accounts in the fourth quarter once again.

Gross margins came in at 54% in the fourth quarter, in the range of recent quarters. The change in the sequential basis was driven largely by some elevated activity in lower-margin regions internationally and some end-of-year cleanup and software capitalization.

Looking forward, simply put, you should continue to expect some fluctuations in our underlying gross margins. Adding SendGrid to the mix will obviously provide an upward lift in the short term but our priorities remain the same.

We are focused on growing the business around the world rather than maximizing gross margins in the near term. We continue to see things that could impact our gross margins like product, country and customer mix, network service provider fees, foreign exchange and more.

So let me turn to guidance for a moment and how SendGrid folds into the picture. You can see the guidance for the combined company in the release.

Note that all of SendGrid's revenue will fall into our base revenue category. As the acquisition closed on February 1, we will be getting 2 months of contribution from SendGrid in our Q1 and 11 months in our 2019 results.

This equates to roughly a $27 million to $28 million contribution to our Q1 revenue guidance and roughly a $168 million to $170 million revenue contribution to our full year revenue guidance. So if you normalize for the full 12 months of 2019 in rough numbers, this guidance equates to about 45% organic year-over-year growth for Twilio-only base revenue and about 25% organic year-over-year growth for SendGrid or over 40% organic year-over-year growth for what will be the combined base revenue category going forward.

It's also worth spending a moment on our business plan overall and our philosophy for operating profitability in 2019. As mentioned in prior calls, the focus of the company, given our leadership position in the early stage of this market, remains on the reinvesting of the business to drive revenue growth.

We plan to hire aggressively across sales and marketing and R&D, along with the G&A to support these groups in the coming year, which we believe will continue to drive elevated growth outcomes in the years to come. In 2019, we expect these investments will result in a modest level of non-GAAP operating profit on a quarterly basis once we get past Q1.

One other thing to note that's new in our guidance this year is an assumed non-GAAP tax rate of 25%. So in summary, the fourth quarter results were very strong across a number of fronts, and we have a tremendous opportunity in front of us.

We plan to invest appropriately to expand our presence around the world and drive our growth going forward. Thank you, everyone.

Operator?

Hey, guys. Thanks for taking my question.

Congrats on another really strong quarter. Maybe the first one just for George, as we start to come to the anniversary of the some of the sales changes you put in place last year that involved slightly higher touch with potential accounts in the enterprise can you speak to the benefits you believe that you've seen in your dollar-based net expansion metric?

And then how might we be thinking about that metric going forward, for Khozema, and how does SendGrid folding into the business impact that metric as well? And then I've got a quick follow-up.

Thanks, Alex. I'll answer the first half of that question.

We feel very good about the strategy of increasing our coverage to work more closely with our customers. I think you are seeing that in the results of the revenue growth as well as the net expansion.

And we've seen lots of things, like we've talked about the Lyft Flex transaction, for example, coming out of just really providing a higher touch on that account is a great example. So we did execute that strategy.

And I'm very excited about the opportunity going forward because I think we've just begun -- really still beginning to work with [key 2K] [ph] customers and international customers, partners. I still think there's a world of opportunity ahead of us to work more closely with our customers and grow those accounts.

And I think, Alex, just for the second part of your question there, we don't guide specifically on expansion rate. But I think as you can see from the comments that I made already about organic growth just based on our guidance, SendGrid is going to lower that number a little bit.

But I think just in general, we see really strong expansion rates going forward, and the business model and what George and his team's been able to do is working really well.

Perfect, and just a quick follow-up. You mentioned some of the service provider fees, I think, before you've spoken a little bit about some of the fees from Verizon that go into effect in fiscal '19.

Could you maybe talk about how that actually applies to -- what kind of tailwind that's going to be to revenues in fiscal '19, and how we should think about those mechanics also on a gross margin basis and how you see it evolving?

Yes, of course. So Verizon is a little bit delayed, and it's unclear exactly when that's going to come in to play for the year.

And so what we've done is fully remove any revenue impact from our forward guidance.

Perfect. Thank you.

Sure.

Hey, great. Thanks, guys for taking my questions.

With SendGrid, look, now that the deal's closed, I was hoping we could talk about maybe some of the initial low-hanging fruit you see with that opportunity and maybe what folding SendGrid into the Twilio go-to-market engine could do for that business over time as well.

Yes, this is Sameer. Thanks for the question.

And we're certainly very excited about the opportunity. I think there are lots of things that George and the go-to-market team here at Twilio have done with Twilio's go to market in 2018 that have every bit of opportunity for us to replicate.

So putting another market-leading API product into the bag of a very talented go-to-market team, we think, is going to be very exciting, both for new customers and our existing installed base.

This is George. We're keeping off our campaigns now to market each other's products to their respective customer bases.

And I think we're very excited to see the demand that comes from that, and interest that comes from that. We -- I know our sales teams are very, very excited to sell the combined product sets, and it is -- that message is resonating with customers.

So I think we're going to go hard at the opportunity.

That's great. And then quickly, can we just touch on the Engagement Cloud today?

Is there a way to think about customer adoption today versus where it was this time last year? And without giving anything from your playbook going forward away, is there a way for us to think about the extensibility across additional use cases there over time?

This is Jeff. I'll take the question.

As we think about that Engagement Cloud, Flex is really our anchor tenant of the Engagement Cloud. And Flex didn't even exist 1 year ago.

And in fact, we just introduced it early last year. We GA-ed it in Q4 at our big conference, so it's still a very new product for us.

It's been well received by customers and the market, so we think it's got a good opportunity ahead of it. But it is early days for that product having just GA-ed it.

And our early customers are happy, and we look forward to getting many more customers onto the product over time. But I'll also point out that with our core products of voice, messaging and our e-mail growing so nicely in such a large revenue size that the impact of the Engagement Cloud and Flex as a percentage of that total is going to take some time to catch up, obviously.

We're optimistic about Flex, we think it's for a fantastic product, and customers are excited by it as well. So there's a great opportunity there, but it's the early stages.

Appreciate the color there. Thanks.

Congrats on the strong results and year, guys.

Thank you, Michael.

Hi. Thanks for taking my questions.

And congratulations on results. Can you give us a sense of the blended gross margins for 2019 as well as the guidance numbers for Twilio, how you're talking about 5, 6 years [ph] to make sure all models are aligned here.

And secondly, when you think about free cash flow breakeven, I'm just wondering now with the combined models would you give us an update on [indiscernible]?

Nikolay, I'm sorry, we didn't catch any of that. Your line is not coming through clearly.

Not powered by Twilio.

Not powered by Twilio, not coming through clearly. Can you try again?

I was talking about blended gross margins for 2019, how [Technical Difficulty] And when will you be cash flow breakeven going …

I think we got part of that about blended gross margins for 2019. Do you want to talk about gross margins going forward, Khozema?

Yes. So we'll try on basis of what we heard.

So the way that we're thinking about gross margins going forward is, is that we expect to land somewhere around the mid-50s. Obviously, with the addition of SendGrid to the mix, that will give us a little bit of a lift based on where we were from kind of a Twilio without SendGrid, and now, Twilio with SendGrid.

And so as we move through the year, we continue to expect to hang around sort of mid-50s. And then over the long term, obviously, we want to continue what [indiscernible] and are committed to do so in the long term to something that's approaching 60s.

My second question was around breakeven on free cash flow margin.

Nikolay, we're going to have to chat afterwards. We're having a really hard time hearing you.

Hey, guys. Can you hear me okay?

Yes.

Good, All right, great. Congrats, really nice job.

I guess I want to follow up a little bit on the SendGrid side, so maybe a quick question for Sameer here. You've done a really nice job with the enterprise team at Twilio with George.

George, a nice job. And sort of -- if you think about where e-mail is headed as part of the enterprise play -- I think Sameer and Yancey, there was a talk about maybe augmenting the enterprise team at SendGrid.

Do you think that, that's a sales force that you'll leverage with Twilio folks in this relationship? Or do think it's a separate set of investments you need to make to keep those two machines working in parallel?

How should we think about how this is going to play out over the next, say, 12, 24 months?

Yes. Thanks, Bhavan.

Yes -- no, I absolutely believe we're going to be leveraging the existing Twilio go-to-market engine and field sales force. We want to speak to the market with one voice about the incredible opportunity.

And what we keep hearing from customers is they really do want one integrated communications platform. So we're going to have one sales force that's out there taking that message to market.

Got it, got it. That's really helpful.

And I guess one of the other questions I had is, as you think about sort of pricing power, the dynamics are interesting on the two businesses. In the one you are sort of a premium-price player at SendGrid, and the opportunity to raise pricing existed.

Twilio, obviously, on the course of just voice and text, that's been a business where the incoming [ph] volume, there's been some pressure over there. And then with the software piece, obviously, there's some pricing power, obviously, with that and Flex and things like that.

And maybe this is for all of you or whomever, but strategically, now as a combined entity, if we were to think about the blended price, do you think you have pricing power? Or do you think at this point it's stable?

How do you guys think of that from a 3- to 5-year strategic process? Thank you.

This is George. I think our focus is on creating -- delivering software value that takes advantage of having multiple channels.

And we think that long term we're going to drive margin and higher customer count value, and frankly, just more stickiness with customers by working on that. So we're hard at work at that and that's a key part of our integration strategy.

Got it. Thanks, guys for answering my questions and congrats.

Thank you. One here for George or Jeff, and then one follow-up for Sameer.

I wanted to drill back down into the base business. If I even take out the seasonal election benefit of $10 million, it looks like the average revenue per customer continues to grow at this 25% to 30% rate.

I guess my question specifically is what's driving that? Is there a handful of customers that are skewing that consumption rate higher?

Is it broad-based? Are you seeing just improving sales productivity?

Any color to help explain the strength even after adjusting for the seasonal election benefit.

Yes, this is George. So the simple answer is it's broad-based growth.

It's -- we see strong growth both in our largest customers as well as our long-tail customers. And I think it just really speaks to the amount of interest in the market.

I mean, broad-based demand for engaging with customers in new channels and new ways, and we're benefiting from that plus, I think, the efforts of our go-to-market engine.

Helpful. And then, Sameer, just as a follow-up here.

What's been the customer feedback on the price increase that was implemented here at the low end? And then feedback on -- from some of your larger customers now that you're adding an omnichannel capability?

Any color on those two things would be helpful. Thanks.

Yes, Brent, no material change at all on churn rates related to the pricing change. Certainly, it's been adopted in the marketplace and recognized SendGrid as the premium provider in the market.

So no issues there. Second, in terms of larger customers, I'd say again, the feedback has been universally positive about the acquisition and the combination of the two market-leading APIs coming together because they've been asking for it.

They know what we can do with it to help them create a new customer engagement platform so they can transform the way they engage with their customers, meet their customers where they want to and how they want to be communicated with. So the reaction from customers has been tremendous.

Brent, this is Khozema. One correction based on what you said earlier, if we got the question right, is that the seasonal benefit on the elections wasn't 10 points.

It was the elections as well as the international customer we called out. Just wanted to clarify that.

Those were the two, okay. Very helpful.

Thank you.

Thanks. One kind of just tactical question and one more strategic.

Europe is kind of, I guess, leading the world in regulation. Whether that's good or bad, you can argue about it.

But I think on September 2019, you're going to have to do this strong authentication for payments and stuff. Are you guys positioned for that?

And then just the second question kind of ties in with just big-picture thinking about how you're going your business and customer engagement. Do you think about this as a vertical play or should we go up a stack?

Or is it -- as outsiders, we're just trying to kind of figure out how this thing plays out because I don't know, it's a pretty big platform so we're just trying figure that out. So two kinds of questions, tactical and strategic.

Thanks.

Hey, Richard. This is Jeff.

I'll take the questions. Our PSD2 requirement in Europe is certainly a potential driver for our Authy business.

Authy provides both two-factor authentication as well as identity verification, which are ingredients to how you can solve for the PSD2 requirements for transactions -- large transactions occurring on a bid counter or any purchase. So that is a potential driver for Authy.

Cool. And then just how do you think about -- because you're helping guide companies in their kind of customer engagement market, leading them on that kind of end journey.

How do you -- is there a way to think about that as outsiders? I mean, I know you've talked about it, but is there -- should we think about you as kind of moving up, sideways, thoughts?

Any additional color would be great.

Meaning as it relates to PSD2 or just in general?

Yes -- no, no, no. More with the whole Flex and all the other -- the tools in the platform that you're building.

Yes, I mean, the reason why we have the customer engagement cloud, right, is customer engagement is the top of mind for just about every single company out there because what is more important than having a great relationship with your customers. And in a digital era with every company becoming a digital company, how you engage with your customers is about these digital connections.

It's about digital communications. And that is what most customers use our platform for, some form of engagement across a part of the customer life cycle.

Whether it is authentication a transaction with PSD2 or customer service or when you're doing sales, when you're marketing with e-mail and SendGrid or when you're doing field service. A number of customers this quarter had field service use cases.

There's all these touch points that companies have with their customers. And in order to compete in today's economy, digital economy, companies have to invest in software and they have to invest in great customer engagement.

And I think that is the main driver of why companies of every shape and size in every industry can see Twilio as a solution to one of their biggest, most pressing problems.

Perfect. Thank you so much.

Thank you. This is Pinjalim.

Congratulations guys and - on behalf of Mark here. Jeff, we hear a lot about Flex.

I guess, that's the flavor nowadays. Everybody talks about Flex, about Twilio, but we don't care much about IoT, while you have been doing slowly a lot of stuff on the IoT side.

Could you talk about some real customer use cases where Twilio has been used in IoT. And how do you think about the opportunity in that space?

Absolutely. I'd say they use cases for IoT, for Twilio wireless are really there's two major categories here.

Number one is the use cases that have leveraged the existing 4G networks, where you typically have relatively expensive modem and a relatively expensive data cost because it's piggy-backing off of these networks that were designed for essentially consumer use cases which are relatively speaking fairly expensive to deploy. Like this was originally built for smartphones.

And so you see things like asset trackers. And we see a lot of use cases in mobility, whether it's automobiles, whether it's fleet tracking of semi-trailers, stuff like that, but also in the micro mobility space, where customers with dockless bike and scooters, track those assets with Twilio wireless.

And so we see a lot of great use cases for the sort of 4G networks in that asset tracking-type category. Now you also have coming down the pipe a new category of use cases based on the narrowband protocols.

We announced a new product, Twilio wireless narrowband at SIGNAL last fall, which is a new type of protocol that is a lot cheaper, both to operate the data cost, but also the hardware costs are a lot cheaper. And what we see is, when you can reduce the cost of the modem that goes into the device substantially and when you can reduce the cost of data substantially, I'm talking about the order of magnitude or more, then that increases the types of devices and the number of devices that are ultimately going to get connected via wireless technologies to the Internet, and so you start to see things like sensors and -- smaller, less expensive.

The device doesn't have to be worth $100,000. If you don't think it's worth tracking, you can take a small sensor that maybe is a $5 sensor and throw a low-cost modem in it and bake the price of a lifetime of conductivity into the purchase price of that device and now have it connected to the Internet from the moment it comes out of the box through when it's already to the end of life.

And that is really exciting because it's a whole new category of use cases that open up for IoT that aren't available when the connectivity costs and the modem costs and all that are as high as they are now, and battery life, too, by the way. The battery life is going to come down massively.

You can power a device for a 5-year lifespan of a device with a single AA battery. That's pretty interesting.

It opens up brand-new use cases. So those are the two major categories of IoT use cases that we're starting to see.

The narrowband use cases, by the way, brand new. We just announced the product and those narrowband protocols, which are a part of the 5G rollouts that carriers are doing all around the world, those are just starting to come online.

But we're way ahead. We've got the first developer platform for narrowband.

Awesome. And quickly on the guidance -- on the 2019 guidance, it seems -- revenue guidance, it seems like it implies a lower level of dollar expansion rate that -- than you're used to, I guess.

And I understand it's partly because of law of large numbers, but maybe there's some conservatism built in. Well, first of all, has there been maybe change in the guidance philosophy per se?

And second of all, can you help us understand how fast has been the expansion rate for maybe your oldest couple of cohorts going backwards and how that has been trending?

Yes, thanks for the question. So let me -- there's a couple of things in there, so let me take them one at a time.

So I think just in general, there's been no change in terms of our philosophy on guidance. We're doing it the same way that we have, and that's been pretty consistent.

I would say, just to get in the meat of it, we're coming off a really, really strong year. We feel good about the way that the business is trending into 2019.

And one of the things that's obviously happening is that the comparisons are getting tougher as we go forward and as we get -- become a larger company. It's still relatively earlier in the year, but I would say that as we approach to $1 billion, the growth is going to be harder to maintain at those levels.

And there's just not that many companies that are out there at that size and able to scale as rapidly as we have. And this is really best-in-class growth, if you will, at this scale.

Thank you for taking my question. Great quarter.

Are there -- you had discussed about how you're going to invest more into the marketing -- go-to-market strategy. Any particular regions, either North America or around the globe, that you see some of the companies are more aggressively adding Twilio capabilities and use cases than other regions?

And the reason I'm asking the question is a year ago Atlanta really increased in size. You added up to 50 people in the region, up significantly from the year before.

So I'm just kind of looking for an idea, by region, what areas do you think are more golden nuggets for you than others? Thanks.

That's a great question, Catharine. This is George.

So first of all, as I've said previously, the growth we're seeing is fundamentally broad based. And we are investing across the board to capture the opportunity across different geos and segments.

That being said, we are going to -- while we continue to invest in the United States, we're also planning to invest a little more internationally because we see like a huge untapped opportunity there. And then in terms of your specific question around Atlanta, we just continue to diversify our talent base in the company, but I wouldn't read anything into that about where we see our opportunity.

All right. Thank you.

Thank you. I wanted to touch quickly on the guidance as well, maybe in a bit the more granular manner.

I look at the kind of the SendGrid and Twilio breakdowns you guys gave on the organic basis. I can appreciate the 45% growth of Twilio heading into '19.

That's -- you called it maybe slightly above the market growth rate and you obviously came off of a very strong 2018, growing 68%, 70%. So I get that.

But on the SendGrid side, now that you're combining 2 companies together, to be guiding for 25% organic growth doesn't seem that impressive given you came off of a 30% year in 2018 and you have tons of cross-sell selling synergies on a blended basis. So just walk me maybe what the market's doing or is this just conservatism on your part?

Like why aren't we accelerating kind of organic growth of SendGrid under Twilio umbrella?

Yes, thanks for the question. So I would say just to start off, it's very early days in the integration of both companies.

And so by definition, we're very, very early in terms of evaluating cross-sell opportunities and things of that nature. We do feel good about the business.

They had a really strong year as well. And at this point in time, we feel really comfortable with the guidance that we're providing for that part of the company.

Okay. And maybe to just follow up on the margin side, which kind of goes along hand in hand here with the revenue guidance.

You're guiding for -- you called out some continued fluctuation, but you also said sort of not to expect much of an uptick there, kind of mid-50s, I think, is what you're guiding for the entire year. SendGrid comes in with a 76% margin, so you should be seeing maybe 4 or 5 points of uptick there.

Why are you sort of guiding for mid-50s? Like, what's driving that?

Yes. I mean, I think as we mentioned in the remarks earlier that SendGrid will obviously help the mix just in terms of providing an upward lift in the short term.

I mean, there's a number of variables that go into our gross margins ultimately, things like international, product mix, what have you. And so I think mid-50s is what we've said consistently since the IPO, and we don't necessarily see any change relative to that which we think has been pretty consistent.

Okay. Great.

And maybe one more if I could squeeze in for Khozema. You've now been on the job for 4 months.

You're tasked with building say, a $10 billion company here. You're sort of scratching $1 billion already.

What are the key areas that you're focusing on? And being new to the story, I'd love to hear your thoughts here.

So appreciate that feedback.

Yes, sure. I mean, I would just say -- to start off with, I mean I'm thrilled to be here, right.

It's really a remarkable company. I think we're a truly unique moment in time in terms of the marketplace opportunity that's in front of us, and all the investments that we're making are really geared at maintaining a position of leadership.

More to your point, I think one of the principal dynamics of me joining and why I was selected ultimately is because part of scaling a company is better recognition and putting in the systems, tools and processes that grow with really scaling up an enterprise. And I think -- those are dimensions that I hope to bring to the role.

And as we continue growing, we're going to have to continue investing in those areas.

Thank you very much.

Thank you. Maybe just a question and perhaps a follow-up.

Maybe first, probably, for George, just coming back to Flex. I'd love to hear your latest thoughts on go-to-market strategy, what inning you're in, where you are with respect to direct sales, partner relationships to push that product.

It was great to hear that you're already seeing success at the developer channel on that front. So I just would love to kind of understand going forward what the biggest opportunities are to kind of get product out in the market.

Yes, that's a great question. So first of all, I'm really excited about the customer reaction to Flex.

I think we have fundamentally differentiated products and architecture in the marketplace that is very compelling. It's a company that I think the value proposition is resonating with the prospects and customers I'm talking to.

I think that we are in the very, very early innings in terms -- the product just went GA last quarter. So we've been laying some groundwork by hiring a team to go after the opportunity as well as building a partner channel.

And we've seen some growth in terms of our number of certified partners, consultants, which I think is on par for where we would it expect to be. And we're seeing customer traction as well.

So I think that it's a very exciting time, and I think we have, as I said, a very differentiated product, which I think is really the starting point in any types of endeavor. So I'm very excited about the opportunity.

Okay. And do you think -- I mean will it be the developer group be the bigger driver of that going forward or will it be some of these other partnerships that your processes are forming?

We've said that our target market for the product is the enterprise, 1,000 agent and up market opportunity because of where -- our customization and kind of tailoring exactly for their business process, value proposition really resonates. And that is exactly where we are squarely focused right now.

So I think that will be a combination of direct sales. Obviously, we'll continue to have developers to bring in some of those companies, but I don't think fundamentally these accounts will be closed self-service.

I think they're going to require some investment on our side to go after them and close these transactions.

Okay, great. And then just a quick follow-up on the Q4 impacts.

A, is there any way to get a split between the two items that were referenced, roughly 50-50 contribution in the Q4 benefit? And then the second piece is on the international customer and the seasonality associated with that, is there something more one-time-ish in that?

Or is that a seasonal impact that we should expect to recur again next year?

Yes, good question. The international was slightly larger in terms of the impacts relative to the election, just to answer the first part of the question.

And then -- and we viewed it as a bit of a one-time event that transpired into fourth quarter. I mean it's hard for us to speculate, obviously, in terms of what plays out exactly with the customer next year.

We really view it as more of a onetime. But we're certainly not assuming an uptick in our guidance next year based on what transpired in the fourth quarter.

I think at one point you had mentioned you might give application services revenue sort of once a year. Do you have that for the fourth quarter or year 2018?

We're not going to break it out today. I think it's not necessarily something that we're planning to break out every quarter.

What can say is that we're certainly happy with the traction that we're seeing around application services. It's still growing faster sort of on an overall year-over-year basis, and we feel great about where things are headed there.

Great. And then can you talk a little bit about -- how often is the sort of CIO getting involved in decision-making now versus a couple of years ago?

And when they do get involved, is it more a cost discussion or more around security compliance? Any color around that would be great.

I think that historically, Twilio started with the ground-up developer, if you will. And I would say starting a couple of years ago, we started to see a little bit more energy at the VP level and even the CTO level.

Now we're starting to see broader-based executive penetration, I think, through our Engage program, our coverage, increased account coverage. For example, we had a terrific creator summit at SIGNAL this past year which was focused on VP and above titles within our customer accounts.

And that was very, very well attended, like well over 100 people at that event. So we're starting to us penetrate more into the higher-level titles.

It's not specifically the CIO, I would say. I mean, honestly, I think it's a lot -- sometimes it's a CTO, sometimes it's a VP of Customer Engagement, sometimes a VP of Customer Service.

I think that we're not so much focused on that one title as much as just broadly speaking getting into the business and talking about customer engagement strategy versus a more tactical communications conversation.

Hey, guys. Thanks for taking my question.

Just quickly wanted to get a sense for what sort of traction you've seen with Twilio Build so far, and maybe if there's any noteworthy partners or pilots that you can point to for -- within the quarter or in the pipeline.

Yes, this is George. We're definitely on track for our program goals in terms of partners and certified consultants.

We're seeing traction with great partners like Proficience [ph], which is a public company. They're investing in Twilio Flex, and we're doing some early transactions with them, for example.

So I think good stuff and more to come.

All right, great. Thanks, George.