Twilio Inc (TWLO) Q4 2022 Earnings Call Transcript

Twilio Inc (NYSE: TWLO) Q4 2022 earnings call dated Feb. 15, 2023

Corporate Participants:

Bryan Vaniman — Senior Vice President, Investor Relations

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Elena Donio — President of Revenue

Khozema Shipchandler — Chief Operating Officer

Analysts:

Meta Marshall — Morgan Stanley & Co. LLC — Analyst

Mark Murphy — JPMorgan Chase & Co. — Analyst

Michael Turrin — Wells Fargo Securities — Analyst

Param Singh — Oppenheimer Holdings Inc. — Analyst

Taylor McGinnis — UBS Group AG — Analyst

Nick Altman — Scotiabank — Analyst

Fred Havemeyer — Macquarie Capital — Analyst

Phil — Mizuho Bank, Ltd. — Analyst

Alex Zukin — Wolfe Research, LLC — Analyst

Derrick Wood — Cowen Inc. — Analyst

Rishi Jaluria — RBC Capital Markets — Analyst

William Power — Baird Wealth Management, LLC — Analyst

Patrick Walravens — JMP Group LLC — Analyst

Presentation:

Operator

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio Fourth Quarter 2022 Earnings Call. [Operator Instructions] Bryan Vaniman, SVP, Investor Relations, you may begin your conference.

Bryan Vaniman — Senior Vice President, Investor Relations

Thanks, Emma. Good afternoon, everyone, and thank you for joining us for Twilio’s fourth quarter 2022 earnings conference call. Our prepared remarks, earnings press release, investor presentation, SEC filings, and a replay of today’s call can be found on our IR website at investors.twilio.com. Joining me today for Q&A are Jeff Lawson, Co-Founder, and CEO; Elena Donio, President of Revenue; Khozema Shipchandler, COO; and Aidan Viggiano SVP of FP&A.

As announced in our Q4 earnings press release, Elena, Khozema, and Aidan will be transitioning into their new Twilio roles, effective March 1st. As a reminder, some of our commentary today will include non-GAAP financial measures and key metrics, reconciliations between our GAAP and non-GAAP results, and further information related to guidance, definitions, and key metrics can be found in our earnings press release and the appendix of our prepared remarks. Both of which can be found on our IR website.

The information provided and discussed today also will include forward-looking statements, including statements about our future outlook and goals. These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that are described in more detail in our most recent periodic reports filed with the SEC including in our most recent report on Form 10-Q and subsequent reports on Form 10-K or Form 10-Q and any amendments to any of the foregoing, and are available on our website and at SEC.gov.

Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly, and we expressly assume no obligation to update any forward-looking statements except as required by law. With that, I’ll hand it over to Jeff for some opening remarks, then we’ll open up the call for Q&A.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Thanks, Brian, and thank you all for joining us today. As you may have seen, we’ve made a number of significant changes to our business that we believe set Twilio off to perform in both the short, medium, and long term. As I mentioned in my prepared remarks, we are confident that this is the right set of actions in the right path forward for our customers, for our teams, and that will enable us to create more value for our shareholders.

And I’m sure you have questions, so let’s hop right into it.

Questions and Answers:

Operator

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

Meta Marshall — Morgan Stanley & Co. LLC — Analyst

Great. Thanks. I appreciate it. Maybe a couple of questions for me, just maybe to start. I know at the Analyst Day, you guys had talked about a lot of changes that you’re making to kind of the Data & Applications sales portion and just about the driver to growth, but that would be in the future. And just as you have gone through the process of floating the business units, just where do you think you are on some of those initiatives and I guess, kind of as a second question to that, where do you feel like there are synergies are dis-synergies from kind of split in the Segment as far as kind of getting customers to go from Communications customers to kind of those Data & Applications customers? Thanks.

Elena Donio — President of Revenue

Hey, Meta. It’s Elena Donio here. Thanks for the question. Couple of things that you hit on there. I’ll take them in turn and then pass it over to Jeff. Looking out at little bit of extra commentary. First question was about the Data & Applications business and kind of current state of growth and where we’re at in terms of that transformation that we’ve been talking about. We hit that one first. We have spoken across the last couple of quarters about investment there and about growth there. We also addressed a little bit of sort of the trajectory as it — related to the beginning of last year and a couple of mishaps that we made along the way. We actually feel a lot better about that business and trajectory now and we believe that this movement in separating our sales forces into these business units more discreetly is actually going to further amplify and accelerate that growth. So obviously, revenue growth lags bookings. We feel good about where our Q4 landed across our Data & Applications business and we’re also confident in that reacceleration.

I talked a little bit over the last couple of quarters about the hiring that needed to be done there. The onboarding, the enablement of those new reps. We feel really good about having buildout those teams with the right set of skills and the right capabilities, doing some internal transfers as well as hiring from the outside with the right set of bespoke skill. So really confident in how that’s turning. We’ve also talked about some macro headwinds. Those continue in a couple of areas, some lengthening of sales cycles, pushing out a decisions and things like that from time-to-time. But with all of that in mind, we feel really good about the things we can control. We feel really good about the investments that we’ve made and the trajectory ahead and we also have really — we still believe and we shouldn’t — we don’t think that this movement across two different business units should see anything different. There is a better together story here. Our products really amplify one another, but what we found is that having very specific sales focus across the unique needs of each of these buyers is a really important one and we think having moved our Segment in Flex teams into separate spaces last year started that momentum building and now, this business unit move is one more step in that direction of focus. I think that hit both of the questions and I’m going to hand to Jeff for a little bit more commentary.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Yeah. Thanks, Meta. I think your — the second part of your question was really about like synergies, dissynergies, etc. So, I’ll tell you how I think about it. Every customer who comes to us for communications like they actually have a use case in mind for how they’re going to engage with their customers, right? They need voice maybe it’s because they need a contact center. They need messaging for identity verification or for customer contact two-way. They need email for a marketing use case, right? There are these finite use cases for the vast majority of things people use us for and these use cases kind of cluster together.

So we have this opportunity to ask customers. Hey, what are you trying to accomplish? What have you — what are you trying to do with our platform? And by the way, have you looked at this other part of our platform that may actually help you achieve that better, faster or even cheaper in some cases? Our applications create value for customers by answering their need in a more direct way over the communications channels that we then just used to execute the delivery of those messages. And so I think this is how this space is going to be won over time. It’s getting at the why customers are sending these messages and doing these communications to their customers in addition to forwarding the messages themselves. So you might say, Jeff, the two business unit structure, well, it seems like that makes it harder to actually bring these two worlds together. For us that may have been the influence, but today, let me say, what we’ve learned what didn’t work was that everything lumped into one pack of sales rep and we’ve talked about that reason in the past, Elena just hit on it, right? So at this stage, what we’re focusing on is the unique needs of the various buyers with specializationer and focus, but we’re also going to collaborate and partner, utilizing our own data and intelligence to uncover opportunities to incentivize cross-team collaboration and to go understand which of our customers’ need which of these use cases and therefore would be really good customers of our applications and our data stack.

But I think it’s important to distinguish here, this is the important part between the short and medium term and in the medium and long term. Because in the short-to-medium term, it’s clear that we’ve got work to do to make communications more profitable and to take our Data & Applications business and execute on the sales model. But I see these things as foundational that the current environment is setting the stage for us to do, but we’re getting better at using our data to drive these cross-sell conversations, both in things like marketing and our automation, but also in our sales conversations and then over time, we build more and more product connectivity between these various products. And it’s obvious how with better customer data in terms of Segment we can power a smarter, better, more effective communications and that drives more usage of our platform. And so I think that’s how the synergies play out if you have to look at it short-to-medium term, medium-to-long term.

Meta Marshall — Morgan Stanley & Co. LLC — Analyst

Great. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Mark Murphy with JPMorgan. Your line is now open.

Mark Murphy — JPMorgan Chase & Co. — Analyst

Thank you so much, and congratulations to all the new folks who have been promoted. My first question is regarding the $250 million to $350 million non-GAAP operating profit that you expect this year. Should we assume that all of that is being generated by the communications business or perhaps more than 100% of that if we were to assume that the Data & Applications business is unprofitable this year?

Khozema Shipchandler — Chief Operating Officer

Yeah. Hey, Mark. This is Khozema. I’ll take that question. It’s really the latter part of what you said. It’s more than 100% and that’s kind of intentional on our part. We do think that we can be very efficient in the way that we bring the communications business to market and that it can throw off a lot of profitability, while at the same time the Data & Applications business, they are in the middle of an investment cycle and we’re early stages in that. And so we do think it’s appropriate so long as we’re making judicious investments to be able to grow the top line of that business. It’s also gross margin accretive, which we think is important longer term. But it is going to take some losses in the short term, which will work themselves out over time.

Mark Murphy — JPMorgan Chase & Co. — Analyst

Okay. Understood. And then, as a follow up. I looked at the prepared remarks, and it says that some of the macro headwinds that you had mentioned still persist. So I’m wondering, if you could just clarify whether the buyer behavior fuels any better out there, I mean, in terms of the bookings cadence in recent months or would you say that, that is still continuing to degrade somehow?

Elena Donio — President of Revenue

It’s Elena, I’ll take that one. I would say those factors persist. I wouldn’t say it’s all been flushed out of the system but I think we’re also getting better at navigating it. So we did — we are comfortable with where our Q4 bookings landed in our Data & Applications space and where we think our products actually play a vital role in tough economic times and so we’re sort of navigating that headwind in the field as best we can. We’ve updated our messaging. We’re making sure that we’re very clear about why allocating budget to these kind of products at this time in particular is vital and important and we think that message is landing, but definitely economically I don’t think we’re out of the woods yet. I’ll hand it to Kho for more commentary.

Khozema Shipchandler — Chief Operating Officer

Hey, Mark, just one other thing I wanted to add is that importantly, we do intent to drive profitability through whatever the cycle ends up being. We provided a relatively large range on the non-GAAP operating profit in light of the current macro conditions, which are pretty dynamic, but we do think we can be profitable through whatever the cycle is and we intent to be.

Mark Murphy — JPMorgan Chase & Co. — Analyst

Thank you very much.

Operator

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

Michael Turrin — Wells Fargo Securities — Analyst

Hey, there. Good afternoon. Thanks for taking the questions. I guess, just to follow on on the operating income guide, because it certainly stands out just relative to what was expected. Can we just — I know you’re guiding specifically for operating income, but just anything you can add on what would get you to $250 million versus $350 million? And how to think about just gross margin in the context of that conversation relative to the potential growth outcomes that would drive the delta potentially?

Khozema Shipchandler — Chief Operating Officer

Yeah. A lot there, Michael, so let me just try to unpack it a little bit. So in terms of — I think the way that we have planned for it is that irrespective of kind of the gross margin outcomes, we’re going to be able to deliver operating profitability within that range. I think the difference will be basically that if revenue kind of performs in line or kind of within a range of our expectations then we’ll be at the higher end of the range and if it doesn’t then we’ll kind of be at the lower end of the range. Given how dynamic the macro is, we did want to provide a little bit of a cushion. We wanted to kind of plan and run the place a bit more conservatively in light of things that we’ve seen certainly a lot of companies have reported similar, but irrespective, we will be profitable, but that’s kind of the color behind why that range. In terms of gross margins, as I said, I don’t think they will really have an impact on the way that this plays out. We’re really trying to orient the business much more towards gross profit generation.

We talked a little bit about that during our Investor Day, so long as the unit economics are good, especially in the communications business, they’re already very strong on the Data & Applications business, then we’re going to keep seeking gross profit dollars. I think a key difference being going forward that those gross profit dollars will drive incremental odd profit dollars.

Michael Turrin — Wells Fargo Securities — Analyst

Very helpful. It’s a substantial answer to a substantial question. Just a quick follow up if I may. On the expansion rates we’re seeing compression in a number of different vendors across Software. Can you just walk through what’s driving the expansion rate headwinds you’re seeing currently and how that informs the 1Q guide? Thank you.

Khozema Shipchandler — Chief Operating Officer

Yeah. I think the expansion rate basically kind of follows. Some of the revenue growth rate de-sale that you’ve seen. One of the things about our business is that, as macroeconomic factors kind of take the economy and other businesses down, given the usage-based nature of our business, we tend to feel those a little bit more acutely kind of in the same way that we felt them a little bit more acutely on the way up, right? If you kind of go back a couple of cycles or even the most recent cycle, the COVID, like we turned up very, very quickly as different macro factors kind of pulled markets up and so I think we’re starting to see that come down a little bit.

In terms of the Q1 guide, I mean, we still feel quite good about our ability to generate revenue growth in spite of a very difficult macroeconomic environment on a year-on-year basis, and we’ll just continue to monitor it.

Michael Turrin — Wells Fargo Securities — Analyst

Thank you.

Operator

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

Param Singh — Oppenheimer Holdings Inc. — Analyst

Hi, thank you. Yeah, this is Param Singh on for Ittai Kidron. So firstly, what I understand, what are the areas within Communications, you were able to cut back on overhead was it because of excess of hiring in ’21, and how much of that cut back, I — you would say some international, which has a significantly lower gross margin profile?

Khozema Shipchandler — Chief Operating Officer

I don’t think we entirely heard your questions. So I’m just going to try to play it back for a second. What I understood the question is being that. In what areas where we able to cut back in the Communications business and what proportion of that was international, relative to other markets, is that right?

Param Singh — Oppenheimer Holdings Inc. — Analyst

Yes, that was the general approximate, but I also wanted to understand like was — is this because you over-hired in ’21 in Communication that you’re getting back to more normalized number. Are there other areas of streamline — of streamlining the Communications business that we’ve previously not identified? So I just wanted to understand some of the dynamics behind the restructuring, which were announced in the past in September.

Khozema Shipchandler — Chief Operating Officer

I mean, I guess what I would say is that, there’s a couple of parts to it. So if you go back to the fall and the restructuring that we did at that time, I would call that like kind of more cost cutting. Obviously, it had the unfortunate impact of us having to part ways with about 11% of our workforce at the time and that’s — that obviously is something that we feel bad about, but that was more kind of in the cost cutting vein and I would say this time around it was more a restructuring around two different businesses that we think drive better outcomes, both for our customers as well as our shareowners, just given the different buying cycles, that economic aspects of the two different businesses.

In terms of where the costs came from, I would say it was pretty much across the board, like I wouldn’t necessarily point out that it was heavier international necessarily relative to the way that it played out domestically. A lot of our rules are kind of global facing. Certainly, once you get out to go-to-market, the rules are very global facing especially in engineering and G&A. So I wouldn’t say that we pulled more out of international than in any other kind of region.

One of the things to point out in international in particular is that and we talked about this at our last Investor Day, the unit economics of that business are actually quite strong. And so we want to continue growing in international markets, so long as those unit economics are good, and we’re going to continue pursuing business in that way, but that hopefully gives you a little bit of color in terms of the costs that we try to take out this time.

Param Singh — Oppenheimer Holdings Inc. — Analyst

Absolutely. Thank you for that. And then if I could really fit. I want to understand the level of investments you’re making in Software. Considering this past quarter is only 22% growth and $444.01 million is a little light, so I just want to understand the impact your operating headwind that you’re going to have in the near term, while you build this business to hopefully $1 billion dollar plus business.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Yeah. I mean, we’re not going to break out that number specifically. What we did do is say, in our prepared remarks that we’re guiding in the current year to about $250 million to $350 million of non-GAAP operating profit. Offsetting that are included in that number is about $150 million of incremental opex and there is two dimensions of that we specifically broke out. One was a increase in the way that we’re going to compensate employees vis a vis bonuses to help us offset some stock-based compensation, headwinds that we’ve seen over the last few years that would otherwise continue, and then the balance of that will really be predominantly investments in Segment and Flex. We think those are smart investments because we think those can accelerate the growth of those products and then there’s a little bit of other stuff in there as well, but we’re not going to break out that number specifically.

Param Singh — Oppenheimer Holdings Inc. — Analyst

Thank you so much.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Thanks.

Operator

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

Taylor McGinnis — UBS Group AG — Analyst

Yeah. Hi. Thanks so much for taking my questions. So lots of great incremental color on the call, but one area that you didn’t discuss was the 15% to 25% revenue outlook you provided at the Analyst Day. I would imagine, given some of the changes, but that outlook might be a little bit stale, but any color you could provide on how you’re thinking about the revenue potential now?

And then the second part to that question, just looking at the 1Q guide, could you maybe talk a little bit more about what’s embedded in that rev guide, and particularly how it might relate to some of the changes you made in any risk of disruption?

Khozema Shipchandler — Chief Operating Officer

Yeah. Hey, Taylor. This is Khozema, I’ll take that question. So the 15% to 25% is really a medium term guide. We both provided a revenue guide on the overall business to 15% to 25% in the medium term, which we labeled as three to five years during our Investor Day, as well as 30% plus in the Software business and those aren’t changed.

Beyond that, what we have said a few times now, is that just given the dynamic schism in the macro-environment that we’re going to continue guiding quarter-to-quarter on the top line for now until we see the macroeconomic picture kind of clear up. We haven’t seen that play out really, in fact, we’ve seen it kind of get a little bit more rocky over the last couple of months. And so we just want to be smart about the way that we guide things.

I think that the 14% to 15% that we called out in Q1 is kind of reflective of that. It is a tougher macroeconomic environment. I think in spite of that, we’re going be able to put up pretty good growth numbers on a year-on-year basis. But I think it’s basically macro signals that we’re seeing that are kind of making us think about the business in light of a number of different things that could play out and it just seems prudent to us to kind of plan and run the business conservatively, in light of that.

Taylor McGinnis — UBS Group AG — Analyst

Thanks for that. And then my last quick follow up is I appreciate that you are talking near-term about EBIT dollars and gross profit dollars in putting the focus there, but just as we think about the guide, that’s the medium term operating margin guide is on a percentage basis. So can you just talk about what gives you comfort in that 300 basis points to 400 basis points medium term outlook that you provided?

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Yeah. I mean. I guess, the way that. I would say it is, is that you’ve got a couple of factors in the mix. So, first is that we gave you to $250 million to $350 million in the current year. That gives you some sense of kind of how we’re anchoring 2023 to give us a base off of which to grow. As we look out over the next several years, we’re obviously taking into account our medium term revenue guide with some appreciation in Software, given that we’ve called that a 30% plus and so if you kind of run the math out over the next several years, and assume a few different things around gross margins and the gross profit dollars that each of those two businesses will kick out that kind of gives us a sense of how profitable business that this can become.

And then I think some discipline on the opex side, which I think we’ve shown over the last couple of periods and certainly in the most recent actions really give us a sense of just how simplified and efficient we can run the business that kind of gives us the confidence to say as we look out, we can drive additional op margin accretion, which ultimately will yield GAAP profitability in 2027.

Taylor McGinnis — UBS Group AG — Analyst

Great, thanks so much.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Thank you.

Operator

Your next question comes from the line of Nick Altman with Scotiabank. Your line is now open.

Nick Altman — Scotiabank — Analyst

Great, thanks, guys. Just a follow up on the prior question. Just given how significant of the level the restructuring you guys have done and you look at sort of the 1Q guide, how much of a headwind to growth is coming from the restructuring and having less quota carrying reps versus some of these macro factors and the shift the focus to data and applications?

Khozema Shipchandler — Chief Operating Officer

Yeah. Nick, this is Khozema. I’ll take that one. Not much to be honest. I mean, the reality is, is that in the short term, there may be some impact, so I don’t want to suggest that they’re going to be zero, but I think by and large, the Q1 guide is not informed by some of the restructuring actions either that we undertook in the last half of last year, nor the ones that we took just a few days ago. The revenue model and the way that the bookings play out, it takes a little bit of time for things to catch up. Again, as I said, I’m not going to say that’s going to be zero, but as we kind of put our planning assumptions together, we felt pretty good about the way that we guided in Q1 and took whatever impacts there may have been into account.

Nick Altman — Scotiabank — Analyst

Okay. Great.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

I may add one bit of context to that, if you will. Sorry, this is Jeff. I underscore something that was said earlier that I think there’s repeating, which is that we have usage-based pricing model and in the usage-based pricing model, we see an accelerated headwind in the macroenvironment like this and I think that’s what you’re seeing in our recent results and in our guide. What we’re not seeing though is a real change in, for example, our competitive situation, right? I think what you’re seeing is a representation of just consumer activity and the general economic activity being slightly muted during this period of time. But I think this also can play to our strength as you see economic recovery occur, because that can be an accelerated tailwind for us as well and that’s also the nature of a usage-based pricing model.

And as we mentioned earlier, where we saw it in the early days of the pandemic when people were using our product for many new use cases and so I think we are in accelerated view into the macro-economy based on the usage-based model. And as we do move towards the economic recovery, I think you’ll see a company that is in a really good position, because we are more streamlined, we are more focused and we’ve got a great customer base to enable us to see the tailwind from that recovery, including the business model. And so like I just think it’s worth again pointing out the nature of the usage model, which is generally speaking a great benefit to us during these times, feels like a little bit of a headwind for us, but I think in the long term, it’s still the right model.

Nick Altman — Scotiabank — Analyst

Great. And then just as a follow up. Earlier you had said that the $250 million to $350 million operating profit outlook does not embed any gross margin expansion on the communications side of the business, but now that you’re sort of managing the business in two separate units, can you maybe just walk us through the margin implications for the communications side? I mean, would you guys ever sort of disclose that business unit as a separate entity in reporting? Do you have plans to pay a little more attention to the gross margin profile there and and maybe be a little bit more disciplined on discounting on that part of the business?

Khozema Shipchandler — Chief Operating Officer

Yeah. I mean, so there’s a couple of things that you said in there. So in terms — let me just take the latter part first and then I’ll come back to the first part of the question. So we actually are pretty disciplined already in the way that we price the product and so I feel quite good about the way that the pricing mechanisms work. The unit economics are very strong, whether they are domestic or international and we tend to be priced higher than the other guys and as Jeff said a moment ago, we’re not losing share. And so we feel very, very good about the way that the product is priced and more importantly, about the value that our customers get from the product. In terms of disclosures, which I think is kind of the other aspect of your question. What we committed during our Investor Day is that we will provide additional transparency in terms of what we’re now calling communications and then our Data & Applications businesses and we’re going to continue doing that as we have in the current quarter. And I think one of the things that we’re going to work through over the next few quarters is just to develop a little bit more robust reporting as we operationalize the business units and we expect that, that probably will lead to additional disclosure overtime.

Nick Altman — Scotiabank — Analyst

Great. Thanks, guys.

Operator

Your next question comes from the line of Fred with Macquarie Capital. Your line is now open.

Fred Havemeyer — Macquarie Capital — Analyst

Hey. Thank you. Question perhaps for Jeff and for Khozema. Firstly, it’s great to see and hear that you are returning to the North Star in communications with the product-led growth story there. I wanted to ask with that shift and the emphasis of a sales-led motion back towards more product-led growth, should we anticipate any sort of change in, say, quarterly cadence of revenue within the Communications segment relative to what we’ve seen in prior years? And I suppose also in that context, since you are guiding fiscal ’23 on non-GAAP operating profitability, should we be thinking revenue at this point as less of a kind of like key metric for the company and something that will ultimately just be driving your operating margin outlook rather operating profitability outlook?

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Hey, Fred. This is Jeff. I’ll take the first part of your question and then I’ll hand it Kho probably for the second half of your question. But for the first part, if I understand the question, I think you’re asking like how will it affect revenue given that we’re moving to more of a product-led growth strategy. And I would say, the goal — once we win a customer, a lot of the growth in the account comes from their growth in the market, of taking something they built from a prototype that they’re testing, to beta where they test out the idea, to rolling it out to the entire customer base and then the growth of their business and their customer-base. And so really it’s about getting that kind of design win and that’s where developers are often very influential in the lifecycle of adopting some of these communications products.

And so by moving back towards more product-led growth, what I think you’re seeing is, we’re going to be investing in the things that make those developers and the companies that are in the early stages of adopting Twilio really successful in onboarding. And I think we see a lot of opportunities to go streamline the product, make it easier to get up and running, but also to scale these products as customers scale globally. And the product can do a lot more heavy-lifting in areas where I think we’ve relied on people to actually help our customers over the line in recent periods. And you’re right, this is a return to the roots of Twilio, which is to make the product enable our customers to find success quickly and easily with a really powerful product and so that’s what we’re focused on. So I think it will help us enable bringing on new customers as well as continuing to scale our existing customers in a way the customers will actually appreciate, because it’s going to be easier and faster for them to do so. So for the second part of your question, I’ll hand it to Kho.

Khozema Shipchandler — Chief Operating Officer

Hey, Fred. In terms of the second part of the question, I guess, the way that I would think about it is just maybe take a step back and then I’ll drill down for a second is that one of the things that we thought a lot about as a company and as a management team is that, we’ve become a really big business, but we also want to become a really profitable business. And so paired with becoming a large revenue generator, we also wanted to make sure that revenue threw off a lot of profit and so that’s why you’ve seen some of the restructuring that we’ve done into these two business units. We do think we have an opportunity to better focus in that way and generate a lot more profitability, for example, in the communications business, while fueling what we believe can be a tremendous amount of future growth in the Data & Applications business. With that said, we certainly haven’t given up on growth in the communications business. We still think there’s a ton more growth for us to go get.

What’s fortunate for us is that we’re operating in end markets that are still growing at very, very rapid rates. Our share is maintaining and if anything, the pie is growing and so that kind of bodes well in terms of a great growth setup going forward. We’re still under-penetrated I would say internationally and so that’s a real opportunity. And then I think on the Data & Applications business, really for us the sky is the limit. We see a lot more growth opportunity there. As Jeff and Elena have both said during the course of this conversation, we think that our data capabilities pair really well with our communications capabilities too and so we think that will yield some additional growth too. So profit will certainly be a key feature. As part of these calls, we want to give folks a sense of confidence that we do see line of sight to GAAP profitability, but please don’t confuse that with any lack of focus on the growth side.

Fred Havemeyer — Macquarie Capital — Analyst

Thank you there. And then just quickly for Elena. As you’re thinking or as you’re looking at the portfolio of apps on Twilio, where are you thinking about really prioritizing your investments into the software and services in the platform?

Elena Donio — President of Revenue

Thanks. I think we’re not going to obviously break that out in a lot of detail, but what I will tell you is that our Flex product is just at a different stage of play than our Segment product. So it’s got fewer resources behind it, fewer sales reps behind it, etc. but we both see a ton of greenfield. We see ton of greenfield opportunity across both of those solutions Segment in creating connectivity to our comms platform, to our engage product. We think that product actually will ultimately fuel Flex as well as we utilize our data capabilities to power better engagement through Flex. And so we actually see them — some real opportunity to bring them together and for them to be better together as well as fuel our communications business and vice versa. So it’s — we think they’re all equally important in our portfolio, but the Segment business is sort of just at a different stage of play. So it’s got a little more girth and heft to it than the Flex business does, but the Flex business is growing in a healthy clip as well.

Fred Havemeyer — Macquarie Capital — Analyst

Thank you.

Operator

Your next question comes from the line of Siti Panigrahi with Mizuho. Your line is now open.

Phil — Mizuho Bank, Ltd. — Analyst

Hey, this is Phil on for Siti. I just wanted to touch on the last question. So for Flex, I know it’s one of your key strategic priorities. How is it performing in this environment and what sort of changes can you guys make to increase share in the gas market and also what kind of traction are you guys seeing on the Engage platform?

Elena Donio — President of Revenue

I’ll take that. Then I’ll do them in reverse order. So just as a reminder Engage went general availability in Q4. So just a couple of months ago and we’re excited about the trajectory that we’re seeing there. We’ve got a couple dozen new customers deploying a lot of really new and interesting use cases on Engage and throwing through new email and new SMS messages, all as part of that and so we — and we’ve also talked about a couple of those customer wins in the back part of our prepared comments, there are a couple of others that. We haven’t been able to share directly but we’re pretty excited about in terms of their utilization have Engage and Segment, both from a renewals prospective as well as a good chunk of that news that we’re excited to bring live over the next couple of months.

So strong performance there with Engage and we think real opportunity going forward. Flex had good performance in Q4 as well and as I’ve mentioned in prior calls, we’re in the process of building out these specialized sales forces, doing a fair amount of hiring enablement, onboarding and as we see our sales rep coming online, getting out into the market and beating the competition has had in these deals we just — our optimism is growing for how that product will perform in this space.

Just to kind of cap it off with a word on the competition, we’re not seeing new competition. We’re not necessarily seeing loss rates that are bothersome in any way. This is a matter of sort of getting out there into the greenfield opportunity embracing it, making sure it’s about the right marketing messages, campaigns, lead generation programs, and then bringing those deals there to close. So good momentum beginning to kick in as we see these new AE coming online and looking forward to sort of how that plays out here in 2023.

Operator

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

Alex Zukin — Wolfe Research, LLC — Analyst

Hey, guys. Thanks for taking my question. And honestly, congrats on one of the best, I would say presentations and thus far as we’ve seen from the company in many quarters on multiple fronts including the buyback. I guess the first question is, maybe I missed this or I missed it in the later, but can you maybe just go a little bit deeper into the headwinds that you saw on growth on both the Communication side and the Application side in Q4, maybe also commenting on the linearity of the business in the quarter and what you’re seeing into Q1? Both in the headwinds I guess, but also the tailwinds to the point of how well — how well you can be in both markets that are up and down.

Khozema Shipchandler — Chief Operating Officer

Yeah. Hey, Alex. This is Khozema. I’ll take the question. And then if you have other color you’d like Elena can certainly chime in as well. So I guess what I would say is that I’ll just kind of echo something that Jeff said earlier which is that, number one, we’re not losing share and so that gives us a lot of confidence that the business is headed in the right direction. Number two, we’re just seeing a lot of dynamics in the macro environment and as our business is usage-based, in large part, certainly on the communication side, we start to feel those effects much sooner than many others do because we’re kind of a leading indicator in some ways, both on the way down, as well as on the way up.

And so you saw a little bit of that obviously in our expansion rate and you’re seeing a little bit of that as well in our reported Q4 results, as well as the way that we’re guiding in Q1. In terms of some of the headwinds, it’s — there’s nothing beyond really kind of the things that we called out previously. I mean, I would point to general macro, which is a very broad category, but some of the stuff that we called out previously is crypto, and social, and e-com, retail. All of those industries as you know, have been impacted pretty significantly and you see that in various earnings reports, you see that in the news cycle, and so we’re just kind of caught up in the same and I think what’s important for us is that we play through that we continue to grow through whatever the environment is and importantly, that we generate profitability in spite of whatever that macroeconomic environment is.

So that’s the way that I would really characterize it. I don’t know, Elena, if there’s anything else that you would add.

Elena Donio — President of Revenue

All right. That’s good. I don’t have anything else to add.

Alex Zukin — Wolfe Research, LLC — Analyst

And I guess just maybe following up from that. So if we look forward from here. I know, I always ask the question about net retention, but if I think about that 110% number and I think about the progression through the year when you start to anniversary some of those negative effects and to Jeff’s earlier point on the way up the the consumption model can be or the usage model can be really good.

If you think about the linearity of the year, understanding that you’re not guiding, how should we think about that progression or how are you thinking about it internally? Is it a back-half normalization stabilization of that retention rate? Is that something that shifts to more net-new, what’s the right way to categorize it?

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Alex, like say. I wish I did, No I don’t. I think that we’re planning conservatively basically given the macro. I think it’s just a really dynamic environment and so we’re not necessarily forecasting an uptick, per se. Could it be better? Maybe. I think we’re all sort of hoping it’s going to be, but we can plan for that and so we’re going to plan for it kind of playing out the way that it has been, maybe the last few months last few quarters and kind of hope that it gets better.

Obviously, our field teams are going to win like whatever the business they can. They’re going to try to grow share in every way that we can off of our existing base, we’re going to keep growing with the accounts that we have, but how that plays out in terms of DBNE, I just don’t know and as you know, like it’s not something that we’ve historically forecasted to.

All I’d say is that as the economy picks back up, our business will definitely pick back up and we’re certainly looking forward to the time that happens. By the way, I also appreciate your comments and start of your question. Thank you.

Alex Zukin — Wolfe Research, LLC — Analyst

Thank you, guys, congrats again.

Operator

Your next question comes from the line of Derrick Wood with Cowen. Your line is now open.

Derrick Wood — Cowen Inc. — Analyst

Great. Thanks, guys. As you look at driving more efficiency in the business. Can you talk about how partners are going to play a role, and maybe what you’re doing to drive more partner leverage, especially in light of shifting to a two business units strategy?

Elena Donio — President of Revenue

Hey Derek. It’s Elena. I’ll take that one. We think partners play a vital role. They are helpful in bringing in the flagship customers. You’ve heard us talk about both this quarter and over the last couple of quarters, we put them in a couple of different accounts, there’s an implementation partners that also could be reseller referral partners and then there’s also just straight-up referral partners that might have a piece of technology that works together well with one or more of our products and so we are in the process of actually creating sort of bespoke partner acquisition, partner enablement, and partner cross-selling teams across our newest business unit structure. We think that will create a lot more focus on the opportunity there.

And we’re not going to sort of break out exactly what that trajectory looks like, but we do believe that partnership will play an important and growing importantly role in our growth and new bookings both across the Data & Applications business, as well as across the Coms business.

Derrick Wood — Cowen Inc. — Analyst

Got it. Great. Maybe a follow up for you, Elena, as well on Segment, just wondering how the progression of growth trended over the year, you guys obviously you guys obviously had a lot of organizational change. Just was hoping to get a comment on that. And then as you look at kind of how Q4 ended and going into Q1, what end market demand looks like for CDP investments in this macro condition?

Elena Donio — President of Revenue

Yeah. I think, Derek and I think the way you phrased the question is right into the beginning of last year is when we had some stumbling lost a fair amount of key talent, and then began to rebuild that was a huge priority of mine when they came online in May and we’ve worked to sort of execute through that hard time and I think really finally started to get our legs under us.

Again in Q4 with a couple of really great customer wins, and they are listed in the documents from us but JPMorgan Chase was a fantastic win across multiple business units and with Engage and Segment box and a couple of others. We had some great new seven-figure consumer brand wins as well that we look forward to bring in live. So excited about the trajectory, lot more work to do. As I mentioned, these AEs or account execs are still coming online and getting their own legs under them, but we’re excited about the trajectory. I think the CDP space is still in early innings, but I think also the important thing to note is sort of where we take it from here. So we think the data and the CDP can create amazing power across our applications and then we also think we’re building in terms of orchestration with Engage, also in terms of connectivity to our communications platform as well as to Flex really just create such an incredibly powerful set of capabilities for our customers, but also competitive differentiation. So it’s a matter of getting people with precious budgets right now.

We feel like we’ve got a great message there. We feel like we really do create less for brands, particularly in a time like this when it’s really important to be super surgical about how they spend every single one of their marketing dollars. But when ad spend and marketing spend are impacted and are strained, people just want to spend a little bit more time in the sales cycle, a little bit more time making sure that it’s exactly what they want, but we also know when we get to proof-of-concept, we tend to win. And so that’s really what we’re focused on is making sure we get into the game and get those deals closed over time. So wish I had a crystal ball on the macroenvironment, but we play through and we think we do well in that context.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

This is Jeff. I point out one of the thing. I was pointing out one of the thing. If you noticed, we tweaked a lot of our messaging and signal last year for the buyers of this market, right? We said, look, this is about acquiring customers more efficiently and then increasing your lifetime value, your revenue with those customers and so that really is a targeted message based on how our products are relevant in this period of time. And I think you see some of the results that we put out, both in terms of JPMorgan adopting Engage Box, who is a long term Segment customer moving into Engage, but also a leading e-commerce company that they adopted us in order to improve their ad spend. I mean, these are really good examples from our customers that we can talk about in our prepared remarks of exactly what we see going on in the market.

Derrick Wood — Cowen Inc. — Analyst

That’s great color. Thank you.

Operator

Your next question comes from the line of Rishi Jaluria with RBC. Your line is now open.

Rishi Jaluria — RBC Capital Markets — Analyst

Wonderful. Thanks guys so much for taking my questions. Two from my end. First, I want to continue talking about Segment, maybe this one for Elena. As we think about the core communications side kind of returning to its PLG route, how should we be thinking about the kind of evolution of Segment go-to-market, especially considering the CDP market is a little bit more evangelical, it is a little bit more greenfield? And maybe alongside that, as we think about potential larger vendors trying to get into this space in a big way, be it Salesforce with its own offering in Genie or Adobe, what’s kind of the plan to maintain Segment’s market leadership as the larger software companies try to get into this space? And then, I’ve got a follow up.

Elena Donio — President of Revenue

Thanks, Rishi. This is a strategic sales motion getting in — getting the product introduced, getting customers using it in proofs-of-concept and things like that. And so we have really focused our attention on just building fantastic enterprise sales capability and blanketing the market with our message and getting in there and helping customers through sort of putting their dreams into action in the product as we show them our capabilities and turn them into paying happy customers. And so while there’s definitely more we can do in terms of demos and the sort of the developer message, this really is an enterprise sales motion and we’re investing in that accordingly and we think the price tag obviously accommodate that as well. So that said, the connectivity across our — the rest of our products is a real opportunity for left and so finding examples within our communications business, where the data can be useful and where then we can turnaround and through the orchestration of Engage push communications back out.

I think everything ultimately becomes better together and the developer as discover of those communications channel sort of opens that door for us from the communications side and then I think we get to go back in from the Segment and Engage side as well. Second part of what you talked about was the big competition and we’re certainly aware of the moves of our big competitors, but we love our chances. We have the better product. We have 100% sort of focus on the very specific and bespoke things we do in the CDP space and in the customer engagement platform space and we think we continue to stay ahead from a capabilities perspective. And just, we’ll continue to invest in the product to make sure that we stay ahead. The work for us is going to be to make sure that we’re competing every single time one of those decisions is made and we’re orienting ourselves to do just that.

Rishi Jaluria — RBC Capital Markets — Analyst

Got it. That’s really helpful. And then just a quick financial maybe for Khozema. Look, I appreciate the longer term guidance and commitment to GAAP profitability. If I just kind of think about looking out and it’s hard to predict two quarters out, let alone, five years out, but well, maybe less prior, so you’re talking about GAAP profitability in 2027 as well as bringing down your SBC to 10% to 12% of revenue. I mean, that’s just implies that your non-GAAP operating margins though in 2027, as you pivot more towards profitable growth and presumably reach a substantially larger scale, that your non-GAAP margins would be in that 10% to 12% range. And maybe just given all of the kind of areas of focus that seems like it’s maybe a little bit low as a target to reach for. Can you maybe walk me through the thought process here and maybe where I maybe wrong in my thinking on the long term framework? Thank you.

Khozema Shipchandler — Chief Operating Officer

Yeah. Hey, Rishi. Thanks for the question. So I think just one edit to what you said and I don’t know if you misspoke or not, but I think what you said towards the end was that our long-term framework was 10% to 12% op margins and that’s actually not the case. So the way that I guess we’re thinking about it is, is that there’s the $250 million to $350 million in the current year. You can kind of run the math on what the implied might be based on our Q1 guide. Obviously, we’re not guiding quarter-to-quarter right now but we are getting quarter-to-quarter. We’re getting through the year, just given how dynamic it is. Post that, we see 300 bps to 400 bps per year. And I guess, the way that we think about it is is that if you stretch it out over those — that five year period is that, number one, we get to something that probably looks like if we can execute well and at the upper end 20% plus, one.

Two, that if we can get to the 10% to 12% that I talked about or that we disclosed in the remarks on the SBC side, which we feel pretty good about just given some of the changes that we’ve made in terms of compensation, moving more from stock based to cash based. And then, three, I think that the net of those two obviously yield some GAAP profitability overall as well. So that’s kind of the math that we’re doing. I mean, could it be better? Perhaps, but that’s certainly not something five years out that I would want to commit to. We feel good about the setup. Certainly, in the current year, we — if we execute, we can be on the higher end of that. If revenue is tough, we’ll be at the lower end, but all the same, we will be very profitable in 2023 and then over multiple years out, we see really strong op margin accretion, which we think is a good signal and then being GAAP profitable is really the name of the game obviously and our ability to control SBC is going to be the principle lever and we know how to do that.

Rishi Jaluria — RBC Capital Markets — Analyst

All right. Great. That’s helpful. Thank you so much.

Khozema Shipchandler — Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of Will Power with Baird. Your line is now open.

William Power — Baird Wealth Management, LLC — Analyst

Okay. Great. Thanks. A couple of questions. Let me start I guess on the Communications segment. I am just trying to think through go-to-market and potential impacts to growth there. I think you suggested earlier, you didn’t expect limited impact, so I’m just trying to understand, just given the magnitude of the changes taking place there, how you get comfort, that was not a more meaningful impact to revenue growth and any parameters you could maybe provide around what you expect for growth in that Communications segment whether this year or next couple of years?

Elena Donio — President of Revenue

Well, I’ll take that in my capacity of my prior role just covering go-to-market writ large. it’s Elena here and then Khozema can jump if he’s got anything else to add. So understand the point, we obviously did a substantive cost cut here and I think the important — there’s a couple of important things to think about and that we’ve sort of started to talk about little last couple of quarters.

It was really important to us to begin to demand more of our products more tooling and more of our process as we think about the right go-to-market model for Communications. And so we believe there’s a lot of efficiency to begin there. We’re making progress against all three of those dimention. Now and in plans you even make more improvement and how we create efficiency across the team going forward by increasing our capabilities in product growth and in self-service.

But I think when you actually really sort of peel the layers back and how we were servicing our customers historically, we had a number of people involved in any kind of — in any sort of customer experience and we believe we are a bit over-levered there and that when you kind of get underneath, where our efficiency was great and where it wasn’t. We think we can provide those fantastic customer experiences and really benefit from our customers’ usage of Twilio, without having people involved at every stage of the process.

And really reserving that human capital for the times when our customers really and truly need us and that’s when they’re making a decision when they’re deciding whether to turn left or right, what their use case is, and when they’re struggling with something or solving a problem and so that’s really where we want to apply that human — that human capacity and capability, and we’re not going to let go of that. We will still be there for our customers when they need us.

But as it relates to sort of new customer acquisition, that’s also more human capital intensive at times when it’s big customers making running big loads on Twilio, we’ll be there for those customers as well, but there was a lot of space, where we had begun to see that our efficiency was degrading as we added large numbers of talented individuals over the last number of years.

So we just don’t feel like that’s necessary for us to continue the growth trajectory given our penetration in the space given how our tooling and products are coming along and given what we believe that we can do with the human capital we have around keeping our customers satisfied.

William Power — Baird Wealth Management, LLC — Analyst

Okay. And then maybe, Elena, just to follow up with you. I mean, I’m just shifting over to your new primary focus. Congratulations on that by the way. Thinking about Applications and Software. Can you maybe just remind us, as you think about Flex and Segment. What are the synergies there might be on go-to-market? I know you’ve got some specialized folks you’re hiring, probably, for each of those segments.

I’m just trying to think through the synergies differences and kind of how you balance that with those two different products.

Elena Donio — President of Revenue

Yeah. For sure. We really see sort of the best uses of Flex being where a customer is running a digital contact center, where engagement is key. We’ve got some great use cases of customers using Flex, where they’re actually in selling environment, not just service or support environment and so we believe there is a really interesting synergy entirely with Segment, where the data will actually create incremental efficacy in those interactions that are happening and Flex and we’re beginning to lay that track now.

We expect to see some of that capability here actually in 2023. But I wanted to lay that track first before we begin to think about this as sort of one product or one set of use cases. They are pretty different today. And so we’re going to keep those sales organizations really specifically focused on those unique customers, those unique buying patterns, what those customers need from us, but we will be working on adding some of the benefits of Segment into Flex and we expect to see some of that this year.

William Power — Baird Wealth Management, LLC — Analyst

Okay. Thank you.

Operator

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

Patrick Walravens — JMP Group LLC — Analyst

Oh, great. Thank you and congratulations on all the progress. Jeff, this is a very big picture, but Twilio has this unusual situation where you have a dual class of stock that collapses to a single class seven years after the IPO, so in June. And as the Founder, I would just love to hear your thoughts on sort of the history on why you guys originally structured that way and now that we’ve hit the milestone, how you feel about the decision and how things might be going forward?

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Yeah. Thanks, Pat. I mean, look, all along, we’ve run this business as owners and for the benefit of all of our shareholders and we’re focused on driving attractive growth, lowering opex, increasing profitability, and we extensively engaged with our shareholders over the last several months and over the whole time we’ve been public to outperform the actions that we take as management in terms of balancing growth, balancing our customers’ needs, on players’ needs, our shareholders needs.

And our goal is to create value for our shareholders and we believe in the strategy that we’re executing is going to do that. And when I think about it from the perspective of a newly public company, when we put this in place just prior to our IPO. I think the idea is for a young company to get its feet as a public company.

And that’s why we thought of it with a — an expiration that was seven years in the future. Now, at the time that felt like a long way is off and here we are. And so I think that it did shock to get us on our footing as a public company. during that whole time, we’re able to listen to our shareholders, we’re able to make decisions as a young public company, and now having the benefit of seven years in the public market that will come off from the scheduled expiration of our dual class really doesn’t change any of that — any of those ways in which we’ve run the company. And so that’s how I think about it as a Founder, as a CEO, and as a Fiduciary of the company.

Patrick Walravens — JMP Group LLC — Analyst

Yeah. That’s really helpful. Thank you.

Operator

This concludes our Q&A for this portion of today. I turn the call back to the speakers for any closing remarks.

Jeff Lawson — Founder, Chief Executive Officer, and Chairperson

Thank you all for joining today and we will speak again soon.

Operator

[Operator Closing Remarks]