Twilio, Inc. (NYSE:TWLO) Goldman Sachs Communacopia + Technology Conference 2022 Call September 12, 2022 7:30 PM ET
Company Participants
Jeff Lawson – Co-Founder, Chairman & Chief Executive Officer
Conference Call Participants
Kash Rangan – Goldman Sachs
Kash Rangan
The last session of the day, we’re jampacked in a really big room. That’s a testament to you guys. Thank you.
Jeff Lawson
What size of the room?
Kash Rangan
This size — no size of the room. It takes a lot. So, this conference is off to an unbelievable start, Jeff. You’ve been in meetings all day long, and we combined two conferences Communacopia and Technology together. And even on apples-to-apples basis, ended up — I’m told this is the largest Goldman Sachs conference across all sectors ever done. So, wow. And that’s — because of people like you, we have good content. Good stories to tell. And our investors also for flying in from literally all parts of the world. So, thank you for your support.
Question-and-Answer Session
Q – Kash Rangan
With that out of the way, Jeff, what — tell us since we’ve been through a lot on Wall Street, levels set us — it’s only Wall Street, the rest of the world’s been totally quiet. What happens on Wall Street is an exaggeration of what happens in the real world upside, downside. Level set as, where you want to be in the next four to five years. We know what Twilio does. You’ve been run for a brief period of time. Where do you want to be in four to five years? Level set as what are your wildest dreams for the company, aspirations and how you plan to get there at a super high level?
Jeff Lawson
Yeah. Absolutely. First of all, thank you everybody for being here today. Great to see so many familiar faces and new folks.
Look, Twilio started as a communications company, right? We started by providing the leading APIs for voice, for messaging, for email, et cetera. And what we found by working with, we have 375,000 — or sorry, 275,000 customers today. And you can imagine these customers represent companies of every shape and size, new and old, your digital disruptors, your incumbents, every industry you can imagine. And the common thread among all these companies, they’re coming to us because they’re trying to build a better relationship with their customer. Like, that’s why you need communications. Now there’s all these like internal use cases, PBX’s or collaboration or whatever. Like, we don’t really play in that space, because the reason why companies really need to innovate is not on their internal collaboration. You just go buy the thing off the shelf.
But when it comes to talking to your customer of using all this digital technology to go build a digital relationship with your customers, to acquire customers, and then to keep them engaged through the course of the customer relationship, right? That’s a story of communications of how do you stay relevant to your customer? How do you keep them, pulled in through your sales, your marketing, the product, service renewing, et cetera. And that’s why all these companies are bringing in Twilio.
And so when we realized that several years ago, we said, the real purpose that Twilio serves is not to power these communications, but it’s to power these relationships. And the things that companies told us are what get in the way of building great relationships of using all this digital technology is that they’ve got all these systems and all these pieces of software that they’ve been sold through the years that aren’t connected. They don’t understand their customers. And they can’t bring it all together to land. Like, what’s the perfect customer journey. And that’s why as customers, like we always feel this disjointed sense in companies we do business with. When we go to their e-commerce website, yet the marketing has no idea who we are and like what we were shopping for, or when the service experience has no idea why we’re contacting them. Even though we’ve made exactly one order and it’s been lost in the mail for a week, right? It’s like, these are the experiences that frustrated us or make us into raving fans of a company, yet companies are struggling to bring that together.
And so what we’ve evolved the company to become is communications is a foundation, but it’s not the only thing you need to build that relationship. The other part is data about your customers, understanding your customers, knowing who your customers are. And that’s why a couple of years ago we bought Segment, the leading customer data platform. And with Segment, companies can take all the various bits of data that, that they have about their customers coming out of the website, the mobile app, the e-commerce system, the marketing system, the service support system, et cetera, and stitch it together into one golden profile about each customer. And then based on that profile and similar customers in that customer base start driving journeys, drive campaigns, figure out what does each customer need from me right now? And how do I personalize everything I do so that every touchpoint, every communication, whether it’s sales, marketing, service in product, et cetera, is relevant to where that customer is. And we’re stitching customer data and communications, because we’re the leading communications platform, the leading customer data platform. And now we’re bringing those two things together and laddering it up into what are the applications of engagement, the things that companies use to buy software from a bunch of different vendors that are all disconnected, that don’t talk to each other that create this big mess that companies are trying to unwind. So that’s a contact center, that’s our Flex product; marketing, that’s our Engage product; sales, that’s our Frontline product. And then identity verification, that’s our Verified product.
And together these form the core building blocks of essentially the front of house that companies need in order to build well orchestrated customer engagement, which you go back to the original point of all of this was how do I build relationships? And today, like in 2022, the conversation that I’m having with customers is connecting the dots between how all this technology that Twilio brings together, how does this help you lower your customer acquisition cost and increase your lifetime value of your customers? Because that’s what every company is thinking about. Like that’s what every company wants to do. When you think about how do we do more with less resources? How do we acquire customers in this world where cookies are going away and the IDFA token disappeared? And so the cost of advertising is going through the roof and our ability to target customers is getting worse and worse.
Well, Twilio has the antidote to all those problems. And so it’s actually a really good time for us to be talking to customers and building these relationships, because ultimately we’re going to bring customers forward in this future where they have a platform approach that is supportive of the entire customer journey, as opposed to a bunch of siloed disconnected apps. And like, I make the analogy to the back office of the company. Most companies have an ERP system or financial system or both. And everything the company does has to integrate with that financial system. Because the CFO mandates it. Like, well, we don’t — we can’t close the books. If you don’t integrate the financial systems, everything goes into that system. The front of house, though, for companies, things that touch customers, the things customers actually care about. There’s no such thing in the world. It’s like every buyer went off in their own direction. The marketers bought this, the sales people bought that, the data warehouse people bought that, the analyst bought that. I mean, everyone’s got a different thing and it’s an end squared problem where the number of things you bought, you have to square. That’s the number of integrations you have to do to get it all to work together. And companies are chronically chasing after how do we make this technology work for us?
That is the big problem that we are addressing that allows us with this customer engagement platform to help structure this for customers. It’s an architecture for success. The financial system doesn’t do all the financials work of the company, but it’s an architecture to let everything plug in successfully. And we’re building that for the front end of the house and B2C companies in particular operating at internet scale, there is no such thing. So, we’re solving that.
Kash Rangan
That’s a very different narrative then what exists at the time of the IPO, which is CPaaS company. And it was all about the developer, now it’s different.
Jeff Lawson
It’s interesting, right? Like with the leading CPaaS company, but in some ways you ask yourself, okay, well, where are we going with this? One of the benefits that we have of being the leader in CPaaS now also in customer data platform, CDP, is that you get the most access to learn from customers faster. And that’s what leads us to the why behind customers buying what they do. If you think about it, companies who have their developers, go spend their valuable time and then whatever they spend on Twilio combined, like if this was a solved problem, they wouldn’t be taking their software developers and ask them to go build solutions. If it was a solved problem with those some turnkey thing out there, they would just say, great, we’ll use the turnkey thing, but it’s not a solved problem.
Therefore, companies are taking their very freshest software developers saying, go figure out how to achieve this business goal of actually serving our customers better and building relationships and like try to glue all these things together to build this experience we want, having a front row seat to all of that work that our customers do, all the investments that they’re making really paints this very clear picture of a very big unsolved problem. And I think our role as a platform gives us a unique viewpoint.
If you’re a company that builds solutions and you say, like, I know there’s this specific customer problem out there, you go build that solution. Customers that have that problem, they kind of come to your solution and you serve them. And customers who have a different problem, well, they don’t come to you because they’re like, well, that’s not what I need and say go. We get all the people who are like, no one has done what we need, so we’re going to go build it ourselves. And so that paints this picture as a platform company of the very reason that customers come to us is because they’re coming to us, because there’s an unsolved problem. Great. How can we solve that problem better that having hundreds of thousands of companies all go have to do it on their own.
Kash Rangan
So when I listen to friends at, the big biggest building West of Mississippi, your neighbor, Salesforce, they have a very similar take on what they’re solving for the customer. Zoom info talks a lot about this customer journey and another company that I cannot name is also, that you know about, is also involved in the customer journey, the sales, marketing, service, et cetera. How does this all play out?
Jeff Lawson
Well, look — like there’s no shortage of companies that like talk about the customer journey, for sure. And it’s a huge market, so let’s be clear. This is an absolutely enormous opportunity. The way I think about it is, there are a lot of companies who have a piece of the customer journey. Now sometimes they expand the journey into like being maybe bigger than it is. What we’re doing as a platform truly is the customer journey. Because as a platform, we can address many parts of that journey. And it really starts with data. That’s why the data component is really important. And then activating that data throughout all the different touchpoints is the most important part.
Now you mentioned Salesforce, great company, they got tall buildings. They’re a B2B company.
Kash Rangan
They’re integrated. The building is integrated.
Jeff Lawson
Building is integrated. Yeah. I see what you’re saying then. They are B2B company, I mean, there’s two things. I think what you’re getting at with that is number one. They’ve made a lot of acquisitions. They’re not integrated. I don’t think that’s their strategy, so it doesn’t really solve this problem. In fact, it creates that problem — the problem. And then the second thing is that they’re B2B company. They’ve brilliantly solved the problem for companies with sales teams. Enterprise style sales teams, where the sum of what you know about a customer is the notes a salesperson has wrote into the CRM. So what’s the deal with our relationship? Let’s go read the notes and see what it says. What’s the next opportunity? Where are we in the deal cycle? Did we close it? Did we win it, et cetera? That’s the sum of what you know about a company.
And our estimate is that the worldwide total number of sales notes written per second is about 4,000 or 5,000. Like every salesperson in the world typing into every CRM that exists in the world is on the order of like thousands of notes written per second. In the consumer world, trillions of data points a second. But every click, every scroll, every thing that happens on the web and on the mobile is signal to these companies about what their customers are doing and how they can serve them better. Totally different scale of problem, totally different solution.
When I go to Amazon, there isn’t a person sitting at a CRM, making an opportunity that Jeff might buy a spatula today and creating a plan to close me on that. No, it’s a tale, told by volumes of data about what might Jeff buy and how does that change? How we merchandise the store, how we market to him, how we tune this process in real time, in like a thousand different ways. That’s the scale of the consumer problem. So, we’re really targeting B2C companies. Companies that deal with millions of customers and the story of understanding their customer and acting on it, is not a story of really a salesperson in their notes. It’s a story of how do you leverage internet scale data, automated systems to tune journeys, one to one for millions of customers in real time, it’s a completely different problem. Now other companies could get there, but I think we have an advantage in terms of we don’t have any legacy. We don’t have innovators dilemma against competing with our own business. We have a history of bringing a powerful platform approach powered by the best technology and one with a usage based pricing model. And that’s how companies operating at internet scale. That’s how they want to buy, that’s how they want to consume.
Kash Rangan
You talked about the macro environment in your second quarter earnings conference call, talked about longer sales cycles and softness in crypto, social media, et cetera. What — how resilient do you think the business can be — while we go through these question problems, what is your current assessment of how these external factors are changing your business or not changing your business?
Jeff Lawson
Well, as we’ve talked about in the earnings call, we have a very diversified customer base. And like I said, 275,000 customers across every vertical, the digital disruptors as well as the incumbents across every industry. And so that means that as the world changes, sometimes in stark ways, as we’ve seen in the last few years, our business has remained robust through that. And so like, for example, at the beginning of COVID, we saw like ride sharing in travel. Well, you can imagine that that usage went down, but then to compensate for that, we saw online, e-commerce, we saw food delivery, we saw a number of other areas, healthcare pop up to compensate. And so, we performed very robustly through COVID. Now we look at the — sort of macroeconomic turmoil that’s going on.
So in Q2, we talked about how our diversified customer base gives us some signal there, but ultimately has resulted in a robust company. We talked about how we’ve seen some declines in social and in kind of on demand economy and in crypto, as you might imagine. But then the flip side is we see financial services, in the stock markets all over the place, customers are logging into their financial service products and using more of those service — those financial service products. And so that has gone up. Similarly we’ve seen IT spending actually go up. So we have a whole category of customers, which are they themselves, SaaS companies who are driving the technology needs of companies.
And I know one of the questions that investors have had, like what happens to software during this period of time. And what we’ve seen from a usage based standpoint is that companies are responding. They’re trying to get more efficient. They’re using actually technology to do a lot of that efficiency gain. And therefore, our technology services segment has actually performed really well during this period of time.
And so I think it’s like most things having such a diversified customer base is both a boon to us in terms of performance, through a wide variety of macro environments that we’ve seen over the last few years, but also some insights into what’s happening in the world.
Kash Rangan
Do you think at this point the world does not improve? You still have a resilient business model.
Jeff Lawson
We believe so. I mean, we can’t predict every possible outcome. We’ve modeled several ways the world can go. We reiterated our guidance saying that like, look, we are cautiously optimistic that we’re going to make our 30% growth goal for next year. And we say cautiously optimistic because there are a wide range of scenarios. As of the Q2 earnings call, I say we learn more every day, of course, but I can only speak to what we talked about in our Q2 earnings call is that, there’s a wide range of outcomes that could happen in the world from various recession models and things like that. But we believe we have a very robust business and that’s why we — we’re able to reiterate our guidance.
Kash Rangan
Got it. What more opportunities do you have? I’m sure the answer is a positive. One in the core messaging business, what are the things that you waiting to still accomplish in that business? Be it standardization, supporting new applications, writing new applications, maybe making you in acquisitions, new partnerships? What are all the levers that you have at your disposal to make this an even bigger business?
Jeff Lawson
So, our communications business continues to grow very robustly, right? In fact, too much so as investors have basically told us. But it’s — I mean, to say that companies are having to reach their customers in new ways is like an understatement. Think about five years ago, 10 years ago, how rare it was to get a text alert that, something was going on, your package shipped, your flight is delayed, et cetera. And now think about it. We start to get those all the time, which is great, but there’s still a fraction of companies that have adopted this. And we’re seeing new ones all the time saying, Hey, we’ve got more parts of our workflows. We need to plug in. We need to talk to our customers.
But now think about how many times when you receive one of those messages from a company, you can actually reply to it. It’s very small. Yet the companies who do, find it’s a great way, not only to engage with customers, customers are happy when you can reply to the message. Because you get these messages like, your flight’s delayed call this one 800 number. Like, well, why couldn’t you have just said, there’s three flights, reply one. And you rebooked on the next one. Like that would’ve been so easy. So you’re like from a customer standpoint, these would be great workflows. But then from the company standpoint, think about this. If I call a company, right, it’s a synchronous thing. So I have a synchronous conversation with an agent and they say, sorry, our wait time is 20 minutes. You’re sitting there on hold. Now, increasingly we do this less and less, but when you do need to talk to a company, that’s the experience you have and it’s horrible.
Now think about messaging. Think about SMS or whatever messaging app you use. When you talk to your friend or family member. First of all, in that messaging app, that is your digital history. That is your digital relationship, except for your closest relations, close friends, close family, who you might talk to or see regularly. We probably have hundreds of people on that list that are not closest acquaintances. That is our digital relationship right there in that app. What we’ve texted to each other.
Then think about it, when you text somebody there’s a — they might reply right away. They might take 20 minutes, because they’re in a meeting. They might get back to you tonight, because they’re pretty busy. They might get back to you in a week. Now those are all basically acceptable outcomes to us. If a friend texts us back in an hour, we’re like that’s normal, no big deal. And so if you think about the flexibility, it gives companies as a channel to engage with their customers. It’s amazing because now when I keep a co a customer on hold for 20 minutes, their furious with me. But if I text them back in an hour and they’re delighted, that gives me so much more staffing flexibility for the human part of this operation because the SLA with my customers is so much looser. So I think we’re still at the very beginning of this journey to actually bring messaging into how we’re engaging with companies, both in terms of automation and bots and things like that. But also in terms of the human to human interactions that are happening over these channels.
Now two years ago in the early days of the pandemic, I actually bought a truck via text message. And I was like, this is — I was surprised actually I can make it all the way to the end doing this whole thing over messaging. But I did. So, I’ll tell you quickly, I mean, it’s a neat customer.
Kash Rangan
What are you using it for the truck? Did you buy it?
Jeff Lawson
Well …
Kash Rangan
Did you take it for the delivery?
Jeff Lawson
Yeah. We got an RV. It’s a long story. We have an RV. We need a truck to pull it. So, I’m on — identified the truck I wanted, I’m on the internet. There’s a dealer in LA that actually has the exact truck that I want. And on the ad online, it says, call us or fill out this form or just text us with a phone number. And we have a few customers, actually what their business model is, is CRM for auto dealers, a category of business that I never knew existed until I started Twilio, right? But literally they’re just the technology vendors into car dealers when they need technology too, right? So, I text this phone number because who wants to talk to a car dealer. And over the course of about a week, I learn about the truck. I negotiate a price, negotiate everything and I don’t actually talk to a person live until someone delivers the truck, drives it to the door and I sign the document and they leave.
And it’s like, the notion of commerce over messaging. It’s — what are the very earliest stages of this. And so you think about how often these things happen in your daily life? Almost never. So, I think that’s another interesting area. But the thing about it is all of these types of experiences you have, they require a great software to drive them, right? They require great software to understand what’s going on inside of these flows. And that’s what we’re building the software layers that we’re building to actually accelerate the adoption. That’s what we built Flex. That’s how we built Frontline, because we believe we can accelerate the adoption of many of these new technologies in order for great companies to engage with their customers.
I mean, how many of you have had an Amazon delivery where you get a text because like you’re not home and you can actually go back and forth with the driver about where to leave it or whether to come back tomorrow. That’s great. I think UPS should have that. I think FedEx should have that, but it’s hard to build those things. That’s why we’re building it for everybody else.
Kash Rangan
My experience with both those companies, I cannot mention my name has been horrendous, whereas it’s exactly the opposite DoorDash, Amazon, very up to the minute up to the second. I want to ask you one about gross margins with all the 10DLC A2P. I don’t know who came up with the doc and then I want our clients to have a shot at, asking you a few questions if that’s okay.
So, we get a lot of inbound questions. The gross margin dynamics, which I’m sure you’ve not ever heard about. Puts and takes, you’ve got these fees, price increases in the U.S. for SMS. It seems to be a complicated mix of things that are going on international versus U.S. SMS as 10DLC A2P that you may be able to pass along or not. Help us understand how you unpack all these items and put it back together if we are to get conviction that you gross margins in that business definitely have leverage in the future.
Jeff Lawson
So the way I think about it is this, right? Messaging has a structurally lower gross margin than software. It just does. There’s only so many levers, we have to change that. We believe we have a superior product. We believe we have superior distribution, et cetera. But it’s never going to be in and of itself a software gross margin business.
Kash Rangan
Because you raise prices.
Jeff Lawson
What’s that?
Kash Rangan
You could raise prices if you have so many applications that are …
Jeff Lawson
Yeah. There’s a lot of value in this channel is one of the key things. There’s a lot of value. When you send a text message, what you — what we’re really selling is you get to reach the customer’s lock screen of their phone. Because SMS is one of the only apps that you will never turn off notifications, the messaging apps. But every other app, when you install it, your bank app, your insurance app, your whatever app it says, do you want enable notifications? You like, no. It’s about most of our customers find that it’s like 20% of their customers say yes to that dialogue. 80% of your customers where you don’t have the ability to reach the lock screen of the phone. The lock screen of the phone is the most valuable real estate on the planet. Because that’s where you grab the attention of your customers. That’s why the messaging product has been flying off the shelf for the last 10 years. And that’s why it continues to have value.
A lot of — when we launched SMS in what, 2009, 2010, a lot of people said, oh, SMS, that’s old. Well, yeah, it actually is old, but the value — it got new life in the value proposition with the advent of the lock screen of a phone. And that’s why it’s so valuable. And so, to answer to your question, like, yes, it is structurally lowered gross margin. Absolutely. But we’re winning in that market, and we’re bringing in a lot of customers.
And now the task for Twilio as we evolve from a company that was content selling you communications to a company that is selling you software is to make that migration. And oftentimes it is, Hey, why are you trying to — why do you need text messages? You do discovery with the customer. Well, we’re trying to do this. We’re trying to build an omnichannel journey. Well, have you looked at engage our omnichannel journey or exploration product powered by the best data? We’re trying to build like a conversational commerce. Okay? Well, have you looked at Flex for how you’re going to power that because nobody else really is first-in-class at how you use messaging in these ways. And so what the messaging leads us to is the conversations about why, who’s the actual buyer at the company. The actual buyer is usually marketing sales service or product. Great. Let’s figure out the problem they’re trying to solve and now sell software to them.
And it’s one of these interesting things where we have a choice between, do we put more of our selling resources against software or do we put more of it against the thing where there’s a pull and Elena, our President of Revenue talked in our Q2 earnings call about how, we see a lot of opportunities to get more leverage in our go-to-market by taking the products that fly off the shelf like messaging, and continuing to make them more self-service and continuing to make them easier to adopt and things like that, which is really the history of Twilio. And then to be able to apply more of our selling energy to software, which is the thing that we’ve been focused on. And I think we’re accelerating that with the focus on getting more of our selling calories going towards software in order to accelerate, achieving that vision, which ultimately will grow gross margin.
I mean, people ask, well, what’s going to grow gross margin. It’ll be taking our very large customer base, our very engaged customer base and turning it into an also software customer base. We’re really pleased with the results so far, understand that investors want to see it go faster, so do we. And so we’re — all the levers available to us to make that happen are the things that we as an executive team are working on pulling.
Kash Rangan
Is it just a mix shift or is it that they’re structurally could be the case for better margins than the core messaging, because your software defined as non-investing, is not big enough to move the needle that rapidly, right? Could you be doing some something structurally in the core messaging business that could give you economies of scale, maybe raising prices, differential pricing that could give you better structural margin?
Jeff Lawson
I mean, we could. We have raised prices, and our customers have stuck with us through that. So that’s good. I go back to — I think we have not reached the point of elasticity of demand, because there is so much value in reaching the lock screen for the customer. But I’ll like, I think, look at Verify, which is our password deauthentication product. Customers love it. And here’s the thing. A lot of customers might come to our door saying, Hey, we’re trying to build an SMS based verification loop, right? Like you all give your bank or whatever, and they send you a text message. And if we let them adopt SMS, they’ll get the text message that they want, but it’s a missed opportunity for us to sell them what they really want, which is passwordless verification. And now we have a passwordless verification product that takes SMS, takes voice, takes silent network authentication and other capabilities, and packages them up into an authentication product that is a software value proposition. And when we do that, it drives messaging revenue. Sure. But it’s also driving a software gross margin for every one of those authentications on top of the messaging component. And in fact, in some cases it will reduce the amount of text messaging because for some customers, it should be a push actually instead of a text message. But we have a software margin here with when needed messaging here.
So, I think it’s a matter of — there are some levers we can pull, but I think the most meaningful drivers are of us upselling our customers into software based products, which — those products have not minor changes to gross margin, major changes to gross margin. And so, I think that’s really what we’re playing for. Because keep in mind, look, it makes all you happy when we do that, which is great.
Kash Rangan
You happy too.
Jeff Lawson
Yeah. Makes me happy to, don’t get me wrong. But most importantly of all, it makes our customers happy. It gets them a solution to the problem they need live faster in a first class way. And we capture demand because they come to our door saying, I think what I need is a text message. And we get to say, well, actually I think what you might need is this authentication solution. And that’s why it is a great motion to take customers in because we have the broad based demand, but figure out what they really need and bring them a software solution. Instead customers are happy. We’re happy. You’re happy, everyone wins.
Kash Rangan
Got it. Questions, anybody? Just raise your hand. Yeah, we’ll go to you, moment first. And then to you, second.
Unidentified Analyst
I guess, just to repeat, thinking about the upsell motion sometimes with kind of the communication side, you have a developer that’s there and uses that use case. I mean, how do we go from a customer that comes in like that moving to the upsell motion then as we evolve there thinking about the go-to-market, how do you think about milestones? Investors can look at to see about how our go-to-market is evolving there as well?
Jeff Lawson
Absolutely. The question was essentially is the developer, the starting point, can you upsell the developer? What I’d say is like we often have developers that start the relationship with Twilio, but no customer gets to any kind of meaningful spend without that relationship evolving to someone else who’s a budget holder. So, developers bring us in the door, and it’s great. They’re not the check signers. And so, when you find out who the check signer is, they’re signing that check because it’s solving the business problem.
So, somewhere in our sales cycle, like we are meeting that decision maker who has a business problem and that’s the opportunity to upsell. And as our relationships evolved and in some ways it’s actually interesting. Messaging is a relatively high ASP and that benefits us. If customers were spending small dollars, we might never have the opportunity to meet that decision maker. But because messaging does have a higher ASP, it actually accelerates us getting to know that decision maker because they care it’s their budget.
What’s your second part of your question? Milestones? Yeah. There’s a — here’s what I would say. Obviously, you can look at the gross margin as the trailing indicator of the mix, the product mix that’s going on between software and messaging. And international messaging has continued to grow really well. That’s no secret. Partially I want to be unapologetic for serving demand that’s out there for our customers. But I also understand that we need to muscle the software business into a role where it is eclipsing the growth of messaging.
At Analyst Day, we’re going to talk about more than we have talked about in earnings calls. That’s what Analyst Day is good for. So, I would say like attend Analyst Day, and we will give you more insights into how we’re thinking about that evolution, what leverage we’re pulling and how you should measure us on that. And Analyst Day is November — Hayden, November 4th, third.
Kash Rangan
So, can you give us a little bit of an inkling as to what you talk about at the end day? Is it, I mean, not the number, but conceptually, are we talking about a makeshift in the business app services up 66%, a certain percentage of revenue? Are we expecting that to continue to outpace the core messaging? Is that how you get the margins?
Jeff Lawson
Well, I don’t want to say what we’re going to say it at Analyst Day, because obviously that’s the venue for that.
Kash Rangan
Everybody’s listening. I mean, this is a public webcast.
Jeff Lawson
I understand. Yeah. Never mind. We don’t need, let’s just do it here.
Kash Rangan
This is it. The worst best answer.
Jeff Lawson
What I would say is I understand there’s a hunger to understand how we’re pulling this lever to accelerate the software business. And we are pulling these levers. We are focused as an executive team on this transition to a software business built on top of the communications business. And we understand that there’s a hunger for you to see a little more inside that machine. How are we doing that? What are the actions we’re taking, and how should we measure the results? And I believe that that is what you are asking of us and that’s how we’re using Analyst Day.
Kash Rangan
Great.
Jeff Lawson
So, that’s what I can say.
Kash Rangan
You had a question. I’m like bursting with questions, but it’s only six more minutes, but you should go first.
Unidentified Analyst
Yeah. So, when I think of this business, I mean, one of the key appeals, right, is your messaging business. And I guess it’s an inherent circularity, right? When you sell more of your software probably will drive more messaging volume. So, at the end of the day, it kind of begs the question, what can you do right to affect the gross margin of your messaging business?
And I guess maybe looking from an opposite view instead of pricing, to what extent can you affect the cost, or that gross margin at the cost level for your messaging business? It seems there’s been some hesitancy maybe to be more aggressive with the telcos and say, look, [indiscernible] huge. You should be directly connecting to us. Should we kind of expect more deals like Syniverse, maybe outside of kind of the U.S., you going up to telcos and saying, look where worthy partner, work with us.
And then maybe just from the sales and marketing side, I mean, we’ve obviously already gone a bit through this transition about, trying to get more software as a percentage of, I guess, revenues and gross profit. Do you think that there’s maybe more that needs to be done just in terms of reshaping that Salesforce? I appreciate Elena is like outline to think a number of pretty good initiatives, but I just — I guess maybe in terms of the people there, do you think there needs to be some churn unfortunately, and maybe just reaching Salesforce altogether. Thanks.
Jeff Lawson
So, your first question about, can we work with carriers to bring down COGS? Obviously that’s something that we do, right? We have whole teams that work with carriers. We have direct connects into a lot of carriers already and we add more pretty frequently. Is that a, like some magic bullet? I don’t think so. Right? Like to me, we can bring down costs of carriers. And sometimes we pass that through to customers. Sometimes we don’t. But ultimately the structural margin of messaging isn’t going to be that of a software company. And I think that just is what it is. And I accept that. Right?
And I look at other great companies that are built on top of lower structurally gross margin products where you’re moving a velocity of the product. But to me the point isn’t
Kash Rangan
AWS, Azure.
Jeff Lawson
Yeah. I mean, there are some really good businesses out there that are built on top of some lower margin, but high demand products in the world. But to me, it’s what you do with them, right? It’s what you do with that. I think if you sit content with that business the way it is, it can throw off cash, but I don’t think it’ll ever help us achieve the vision of the impact on our customers that we want to have. That’s why we’re saying customer engagement, the why behind you’re doing that communications is the important thing. And we’re going to attest to that.
I just got back from a trip to the field internationally where I met with the C-suite at major banks. Did the C-suite of major banks talk to like the SMS vendor? No. Do you unlock major budget of major projects without those conversations, without that buy-in? No. We’re able to get that buy-in because of what we’re building in customer engagement, not because of what we’re doing in messaging. And I just think that’s the bogie that the company is focused on and what we shall be focused on. Can we work with carriers to bring COGS down in places? Sure, we can. And we do. And we do direct connections with carriers and we’ll do more of them. But I don’t think that’s actually the path that is the most important one for us to be following.
And the second question you had, which is about the shape of the Salesforce. Elena has talked about levers that we see to bring into self-service in automation, things that don’t require the human touch so that our human sellers can focus more on the more complex sales honestly. Software is a different type of selling process. And so, we are bringing our soft — our sellers into selling software and making it so that the messaging product or the communications products are more able to do the heavy lifting themselves in the product with self-service, with self activation, self expansion, so that we can spend more sales calories doing solution selling of great software and reaching those decision makers and selling those cycles as opposed to the sort of lower sales cycles, if you will.
Kash Rangan
Would that be a separate Salesforce, or just separate — higher incentives for the same Salesforce to sell software that’s Flex or CDP? How do you go about that?
Jeff Lawson
We have had history of both. We’ve tried both. We currently have sales teams for Flex, for Segment and for Communications.
Kash Rangan
Okay. Any other question. Please, Marshall.
Unidentified Analyst
It’s my understanding that if you take the messaging business and you break out the 10DLC A2P and the other carrier pass throughs, the gross margin starts to look like the rest of the business. Why A, is that true? And B, if it is, why not break that out for investors and let us value you as a high margin software company rather than a reseller of carrier minutes?
Jeff Lawson
Well, before a lot of the new fees came into place over the last say, 24 months, we did kind of break out the delta and we showed here’s what the addition of these fees, which we are passing through to customers, does to the gross margin. And it did pretty much exactly what we said it was going to do. And so, we have broken it out. But I still think that there’s just maybe a response to the gross margin going down, which I understand of saying, how are you going to be profitable with the gross margin going down? And that’s a fair question. We all to ask. We’ve committed to profitability next year for the calendar year 2023. And we recommitted that in our Q2 earnings call. And the — we can break that out. We have broken it out.
But I think a little bit the question isn’t just gross margin. I think the question is profitability and show us your path to profitability. And so, I think that’s more than anything. The thing that we as a company are focused on, because at the end of the day, gross margin is in service of the long-term profits of the company. And so, I think that’s really the thing that we’re focused on even more than just saying, Hey, let’s give you transparency in the gross margin, which by the way we have, and I just think investors are a little saying, you can give us transparency, but it still is what it is. But that’s probably a longer conversation, but that’s what I observe in the baseline. We have said, Hey, here’s what the carrier fees have done to our gross margin. And I think investors still have said, great, but what about profitability? And so, I think we’re in the mode where we need to show you all that we are going to be profitable in 2023 and beyond. And we have reiterated that as of our Q2 earnings call.
End of Q&A
Kash Rangan
That’s right smack at the end of the 40 minutes. Thank you so much, Jeff. Very good conversation, all limitations. I mean, no questions held back on anything that people wanted to ask in their mind. So, thank you for being very open with us. Thank you for your questions. Thank you for your participation. End of the day.
Jeff Lawson
Thank you, Kash. Thank you everybody for coming.
Kash Rangan
Have a lovely evening and we’ll see you tomorrow, bright and early.
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