Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio Q2 2016 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Greg Kleiner, Head of Investor Relations for Twilio. You may begin.

Thank you. Good afternoon, everyone and welcome to Twilio’s second quarter 2016 earnings conference call. Joining me today are Jeff Lawson, Twilio’s Co-Founder and CEO and Lee Kirkpatrick, Twilio’s CFO. The primary purpose of today’s call is to provide you with information regarding our 2016 second quarter performance in addition to our financial outlook for 2016 third quarter and full year. Some of our discussion and responses to your questions may contain forward-looking statements, including but not limited to statements regarding our future performance, including our financial outlook, our market opportunity and market trends, customer adoption of our products, our momentum 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 proved to be incorrect, actual company results could differ materially from these forward-looking statements. Discussions of the risks and uncertainties related to our business is contained in our final prospectus filed with the Securities and Exchange Commission on June 23, 2016 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. Our commentary today will contain certain non-GAAP financial measures, including discussions of gross profit, operating expenses, loss from operations, net loss per share and weighted average shares outstanding. Non-GAAP financial measures may exclude certain amounts which are included in our GAAP financial measures. Accordingly, the following items are available in our earnings release, which we issued a short time ago, the most directly comparable GAAP financial measures, the reconciliations between these GAAP financial measures and non-GAAP financial measures, information regarding the reasons why we are presenting non-GAAP financial measures, as well as the reasons why we present guidance for non-GAAP measures of loss from operations and net loss per share, but not the comparable GAAP measures. The earnings release is available in the Investor Relations page of our website and is part of Form 8-K furnished to the SEC. Finally, at times, in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results. Please be advised that this additional detail maybe one-time 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. Now, I will turn the call over to Jeff.

Thank you, Greg and good afternoon to everyone on the line today. Thank you for joining us today for our first earnings call as a public company. We are excited to share both our results from the second quarter as well as our vision for how software will drive a massive shift and how we communicate and how Twilio plans to power that future. Twilio was a company founded by developers, for developers, a concept that most said couldn’t be done when we started the company back in 2008. Many of you listening today maybe new to the Twilio story, so let me spend a few moments describing our business and what makes Twilio unique before walking through some of our Q2 highlights. As a backdrop, we have entered into a new era of software. In the first era of software, 25, 30 years ago, companies use software for back office applications and each project involved multimillion dollar decisions and multiyear timeframes to implement and thus require that the CIO drive the decisions. Then 10, 15 years ago came the next era of software with software-as-a-service. At that point, line of business managers could buy the software systems required to run their parts of the business without needing IT to deploy it and this was a major innovation. But the fastest growing enterprise software company in history is not on-prem and it’s not SaaS, it’s not even an application, it’s Amazon Web Services. This signals a new era of software, the era of cloud platforms. Instead of selling applications, you are selling building blocks. Instead of selling seats or licenses, you have a usage-based pricing model. And instead of selling directly to CIOs or line of business owners, you are selling through developers. And as every company starts to invest…

Thank you, Jeff and welcome to new investors on the call. I will begin with a brief overview of our financial model and key metrics and cover our financial highlights from the past quarter. As Jeff mentioned earlier, we created the cloud communications category providing a platform that allows companies to easily embed and scale communications into their software applications. We have built the business that combines rapid revenue growth at scale with an efficient go-to-market model. Our platform revenue model is primarily usage based. So, every message sent, every minute of phone traffic or every authentication that’s processed by our cloud communications platform generates revenue for Twilio. This activity occurs hundreds of times per second across our broad customer base. We break our revenue into two categories, base revenue and variable revenue. Base revenue constitutes the majority of our revenue. Base revenue has historically been predictable and is the basis on which we have always planned and operated our business and accordingly will be the focus of our discussions today. We also plan to provide specific guidance on base revenue to help investors evaluate and track our business. The second category of our revenue is variable revenue. Variable revenue comes from a small subset of our customers called variable customers, where we believe the revenue is more likely to fluctuate significantly between periods. We define the variable customer as a customer whose revenue has exceeded 1% of our total revenue in the quarter, but has not entered into a 12-month minimum revenue commitment agreement. Variable revenue provides benefit to our business through added scale and gross profit dollars despite its limited predictability. In the second quarter, we had 9 variable customer accounts accounting for approximately 13% of our total revenue, with the majority of this variable revenue coming from…

[Operator Instructions] Your first question comes from the line of Heather Bellini with Goldman Sachs. Your line is open.

Great. Thank you very much and congratulations on the offering gentlemen. I was just wondering if you could share with us obviously everyone knows that the customer concentration that you guys have, but I was wondering if you could go a little bit deeper and think of customer ten and below and maybe talk to us about the spending trends and the penetration you are – trends you are seeing amongst that base of customers as they continued to expand their use of your technology?

Yes. Hi Heather, this is Lee. So in terms of customer trends, it’s been very consistent across a broad base. So we have our 30,000 plus active customers. Our top ten customers were 31% of revenue and then we trail all the way off to the long tail to evenly spend all the way down to our active customers which are over $5. So we have seen consistent trends in growth across all revenue categories.

But are those customers growing faster than the top ten, I guess that’s what I am trying to get at?

Yes. I would say across the base I don’t think any bucket or category of revenue growth rate is faster than any larger customer at a macro level.

Okay, great. Thank you.

Your next question comes from the line of Mark Murphy with JPMorgan. Your line is open.

Yes. Thank you very much and congratulations on the strong results. So Jeff I had a couple of questions for you, first of all, how much upside potential do you see over time in targeting enterprises more along the lines of what you have announced with ING and also with others, I am wondering what is your confidence level in terms of being able to replicate what you have done for technology firms and trying to do that on the same scale across many other industries?

Absolutely. Thank you, Mark. We are optimistic about the ability to continue to expand into the enterprise. We see some of the largest enterprises on the planet adopting the same software strategies that technology first companies have been adopting for years, that’s because every company is moving to begin to figure out how it uses software to effectively compete in the market. And so we see strength from the developers as they begin working for those larger companies and as those companies start employing software developers of the world that those developers are going to bring in the tools that they know how to use to use those jobs. And we see an increasing number of enterprise companies in our pipeline. And so as those companies begin to leverage the power of software and invest in developers to build differentiated software offerings those developers will bring Twilio and we see that as the opportunity.

Great. And also Lee, I heard your comment on the gross margins, they did come in a little higher than we would have expected and I am curious if you could just comment on what you are experiencing in terms of pricing discussions with carriers as your volume grows so rapidly and I would think the trust in the brand is moving further ahead of the field, are you benefiting at all just in terms of the pricing that we see manifest in your cost structure over time?

Yes. Mark, I will answer that in two parts. So the first part I wouldn’t read anything into a fluctuation on a quarterly basis, our gross margin can fluctuate based on geographic mix, customer mix, rollout of infrastructure and all and as a refresher we are not running the business to maximize the gross margin in the near-term. We are running the business for reaching scale. More, the broader answer, as we continue to scale the business, we do see benefits from our super network, so we continually see improvements in our cost structure as we grow and scale the business.

Okay. One last one Jeff, I am wondering just how you are looking at the usage of in-app notifications or push notifications and maybe if you can comment on how you are Notify product is playing into that trend, so for instance, are you seeing that as a net positive, if the customers are deciding that they can’t solely rely on in-app or push notifications and therefore they have to orchestrate across multiple channels, is it something that is driving the interest in the Notify product?

Yes. I think that’s roughly accurate, Mark. So there is obviously many channels available the company use to communicate with their customers and a lot of it actually ends up coming down to customer preference about how they want to be communicated with. And while push has been around for a while, probably 2010 push came out, what you find is that different customers will be in different places, right. One customer you may be able to talk to via SMS, because essentially what you have is their phone number, another customer may have decided to download your mobile app. And when you ask them enable notifications, they say yes, well, now you can actually talk to them via push. But then again maybe the following week they get a new phone and they forget to reinstall your app, so now you can’t talk to them over push and so you will fallback to SMS. And so those kinds of real world scenarios that companies see as they try to communicate with their customers over multiple channels and that’s why we built the Notify product, because it takes care of the very complex business projects needed for a company to keep track of how best to communicate with each one of its customers based on the preferences of that customer.

Thank you very much.

Your next question comes from the line of Pat Walravens with JMP Securities. Your line is open.

Terrific. Thank you and congratulations. I was hoping we could dig into the dollar based net expansion rate a little bit, because it’s really best in class in terms of our coverage universe. So, maybe if you could comment just a little bit on how it is that you guys generate such high, effectively same-store sales. And then also Lee, what should we expect the trend to be like in that number just because you have some tougher comps coming up? Thank you.

Absolutely. Thank you, Pat. This is Jeff. So, I will answer about a little bit of how the mechanic works better and I will let Lee answer some of the quantitative aspects. But the way we look at our usage based model as part of our business model for innovators, it provides us with multiple expansion vectors inside of every account, right, as a developer starts building using our product, we will often spend very little, because as they are prototyping, it’s a very small amount they need and we think that’s a positive thing, because the more efficient you can get started building that is going to encourage more innovation. But then as you take some prototype and roll it out maybe as a beta to a subset of customers, well the usage is going to grow and therefore our revenue is going to grow. Then when they roll it out to the entire customer base, again, the usage will grow and our revenue will grow. And so as an innovation migrates through the product development lifecycle Twilio’s revenue grow. That’s the first vector driving our dollar-based net expansion rate. The second vector is when the developer does that again and she builds the next used case and then that used case gets traction as it goes through from a beta to a general release, right, the same thing happens again, drives more usage, Twilio gets more revenue. And the third vector of expansion is just as our customers are building their own customer bases and they have more people to communicate with as end users, well that will also drive more usage and increase our revenue. And so these three vectors of growth are working inside of our customer base to drive this dollar-based net expansion rate that we see. With that, Lee, I will let you answer the second half of that question.

Yes. So, we are not going to be guiding specific to expansion rate, but I think it is a good point talking about some comps and what’s happened over the prior quarters. So, the past few quarters we had very high revenue growth rate in the 90s and very high expansion rate. We benefited from some easy compares over the prior year. If you actually look at our revenue growth rate is in the 90s the past two quarters than in the prior quarters, prior three, four quarters in the 70% range, similar trend in terms of expansion rate. So, we did have the benefit of comparables over the last quarters. Again, I am not going to guide going forward, but the inputs to the business are strong, remain strong. Those vectors that Jeff talked about will hold. So, we do expect to have strong expansion rates going forward.

Great. Thank you guys very much.

Your next question comes from the line of Bhavan Suri with William Blair. Your line is open.

Hey, guys. Thanks for taking my question and congratulations. Apologize for the background noise. I guess my first question maybe to Jeff is on the partner channel just sort of how you guys are thinking about investing to drive the partnership? So, obviously the platform is great, but are you seeing some of the partners start to build applications and certainly customized communication applications to their customers and how you guys are approaching sort of going to market in that space? Thanks.

Thank you, Bhavan. Yes, so we believe that partners we call them solution partners are an important segment of our business, because it’s solution partners. These are customers of ours like Zendesk or Salesforce or ServiceNow who builds solutions on top of Twilio and then sell that solution into the customer base. That category of customers really allows us to address the fullness of the market. So, whether a company wants to build a solution or whether they want to buy one, Twilio can power that customer regardless. And so we have historically seen success in the segment of the market. I think our ability to build APIs that understand the needs of a solution partner building multi-tenant applications on top of Twilio is an important part of the investments that we have made and we will continue to make those investments. And we have been at the focused effort by our sales team to really engage with these types of new solution partners and to further enable our existing solution partners as well to build more advanced or enter new markets with Twilio. A good example of that is Zendesk launching last quarter, Zendesk SMS, right, which extends Zendesk voice into a new channel communication that is also powered by Twilio.

Got it. And one quick follow-up for me, you spoke a bunch about IoT here, just a little bit update on the relationship with T-Mobile, the programmable SIM opportunity and sort of how you guys think about that and how does that layer into this business? Maybe not in, let’s say, ‘16 or ‘17, but maybe 2 or 3 years out, how should we think about what that could be from a revenue opportunity perspective for Twilio? Thanks.

Absolute, Bhavan. And for the benefit of those listening in, this is our Twilio programmable wireless product. This is the SIM cards that are powered by Twilio that allow a developer to program every aspect of the communication that runs over that SIM card whether it’s voice, SMS, data as well as the provisioning lifecycle and we are excited about the opportunity to power both IoT devices with this product line as well as BYOD used cases inside of the enterprise. I will say that the relationship with T-Mobile who is our launch partner in this has been fantastic and we are excited for where this product is going to go, it is the earliest days of the product. We announced it at SIGNAL, our developer conference in May and that was announced in a developer preview. So, as that product gets rolled from developer preview to a broad release and eventually into a G8 [ph] release, we will be excited to see what used cases developers build and how those get to play, but right now, it’s the earliest days of that product and in the most literal sense, we can’t wait to see what developers build.

Thanks. I guess it’s clear you and Lee don’t want to put up like a 5% of revenue in ‘18 kind of number. I appreciate it guys. Thanks for taking my questions and congratulations again.

Thank you.

Your next question comes from the line of Richard Davis with Canaccord. Your line is open.

Great. Two kind of good questions. I guess, one, you have talked in the past about kind of investing in scalability and stuff like that, could you maybe just flesh that out a little bit? And then I guess this is more hypothetical, but you are working with Facebook on the messenger and there is all these chat bots and things like that, I mean, it’s early days there. Do you see that business as a general statement taking off and things like that? It just reminds me of some of the artificial intelligence back 15 years ago. But I was just curious if you have a point of view on that? Thank you very much.

Great. Thank you very much, Richard. So, as far as the scalability goes, I mean, we review resiliency as one of the key aspects of the service that we offer. And we have a mantra internally that we also talked about at our conference for how we think about R&D at Twilio and that is to achieve agility with resiliency. And so we are always investing a substantial amount of energy in not just building new products as you have seen, we launched a number of new products in this quarter, but also increasing the resiliency and the scale and the quality of the products that we have already got in market. And that’s why I think you see as a platform, we do invest substantially in our product. We believe that’s the right thing to do. This is – we have invested 23% of revenue in engineering, in R&D in Q2 and we believe that an outsized investment in R&D both from the perspective of innovation, but also from the perspective of resiliency is the right thing to do as a platform business. And I believe the second part of your question was about Facebook?

Yes, just chat bots and all that whole, there is a lot of talk about that. And do you think it’s going to be a big thing for the industry in broad terms or not? I am just curious because you are right there at Ground Zero?

Yes, fantastic question. We do believe that as with the lot of things, there is a hyped cycle around artificial intelligence and bots exactly where we are on that hyped cycle, it’s probably not entirely clear, but there is a lot of optimism around what can be done with artificial intelligence and bots. We are excited for what some customers of ours are doing with bots and we think that an investment there makes sense and we believe that there is a lot of interesting. We believe it’s the early days of discovering what the used cases are. Although it’s clear that there will be used cases as artificial intelligence gains more and more ability to do some tasks for us. An interesting example of bots – well, actually I will also point out that sometimes I think bots mean artificial intelligence, but other times, bots simply mean using messaging as an efficient interface to communicate with customers and we see interesting things like the New York Times who is currently powering its Olympic coverage with SMS to provide flash updates to its subscribers over Twilio SMS with what’s happening down in Rio and we think that’s a neat innovation and we expect to see more of that type of innovation occur as many industries discover the power of messaging to drive new forms of engagement with their customers. But as far as whether it’s exactly artificial intelligence that drives all of that, artificial intelligence will play a role undoubtedly, but it may also be slightly over-hyped at the current, will be my guess.

Got it. Thank you so much.

As there are no further questions at this time, we thank you for your participation. You may now disconnect.