Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio Q3 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Greg Kleiner, Head of Investor Relations for Twilio. You may begin your conference.

Thank you. Good afternoon, everyone and welcome to Twilio’s third 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 third quarter performance in addition to our financial outlook for 2016 fourth 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 prove to be incorrect, actual company results could differ materially from these forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our final prospectus filed with the SEC on October 21, 2016 and our Form 10-Q files with the SEC on August 9, 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 of which 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 exclude certain amounts…

Thank you, Greg and welcome everybody. I am happy to report that the business produced another quarter of excellent financial results in Q3, the newly endless possibilities enabled by our cloud communications platform continues to drive success for our existing customers and attract new ones. We added a large number of new customer accounts and added some important wins in the enterprise as well. The third quarter saw several other important milestones including the launch of two new software products, our first single event in London, the third anniversary of Twilio.org and entering into an agreement for our second acquisition. Let me walk through some of these highlights. Our Q3 results came in well ahead of our original guidance and above the levels we previewed as part of our recent follow-on offering as well. Lee will discuss the results in more detail, but some of the highlights were base revenue growth of 75% year-over-year, active customer account growth of 45% year-over-year and a dollar-based net expansion rate of 155%. At a high level the inputs to our business remained strong and we are executing well against our growth strategy. All told, we added more than 3,000 new active customer accounts in the quarter. We added some great new logos in the quarter like Morningstar, Allied Barton, the Washington Post and Prudential. I'd also like to spend a moment highlighting a Fortune 100 insurance company that is planning to use our programmable messaging APIs to add an SMS communication channel to their existing contact center. Specifically their use case involves using SMS messages to follow up with clients who are on Workers Comp plans in order to deflect call volume from the call centers. This is another great example of the growing influence of developers in large organizations as the business…

Thank you, Jeff and good afternoon, everyone. Our financial results in the third quarter showed continued momentum as we saw strong revenue growth, operating leverage and progress across our key metrics. We exceeded the guidance provided on our second quarter earnings call across all fronts. Base revenue for the third quarter of 2016 was $64.1 million up 75% year-over-year from the third quarter of 2015. This compares to our original guidance of $58.5 million to $59.5 million. These results were driven by growth across our new and existing customers as we are adding new customers at a rapid clip and successfully expanding usage across our existing customer base. Total revenue for the third quarter of 2016 was $71.5 million up 62% year-over-year from Q3 of 2015, exceeding our original guidance of $63 million to $65 million. Overall base revenue accounted for 90% of the total in Q3. We continue to see strong growth rates across customers of all sizes. In the quarter, our top 10 customers was 31% of total revenue consistent with recent quarters. Within the top 10 our largest customer, a base customer who uses several of our products for a variety of used cases around the globe contributed 15% of total revenue in the quarter. WhatsApp came in at 7% of total revenue in customers 3 to 10 concluded 9% of revenue. We have a range of customers of all sizes as we go further down the list extending out to the long tail. As of September 30, 2016, active customer accounts was 34,457 up from 23,822 as of September 30, 2015. This figure includes eight variable customer accounts in both the third quarter of 2016 and 2015. Note that we did have one variable customer account that signed a contract with the minimum commitment in Q3.…

[Operator Instructions] Your first question is from the line of Bhavan Suri from William Blair.

Hey guys, congratulations. Really nice job there across all the metrics. Just wanted to touch really first on the growth and what's driving. As you look at the revenue driver this quarter, was it the increased usage or more apps developed or cross-selling activity across the various offering? As you think about the contribution of the it would be great if you can give a sense of how you might rank those that drove very healthy both bookings and overall growth?

Thanks Bhavan. This is Jeff. I'll answer your question. So yes really it's a combination of the three factors of growth that we see in our business. With every developer account on our platform we first see the ability to grow our revenue with those customers based on their building of an app and going from the prototype stage to the beta stage, to the global rollout of their product every time they advance in that product development lifecycle, they’ll interact with more customers and we see more revenue as a result. That's the first of really three expansion vectors in every account. The second vector is when our customers do it again and they build a second used case and probably a second problem that they realize they can solve with communications in their business. We really go through that whole adoption cycle again and then third is as our customers are simply growing their businesses and adding more customers to their end-user customer count well that's just more people we can communicate with that allows us to drive more usage of our platform and drive more revenue So if you think about it, we benefit from the collective sales and marketing expenditures of all their customers put together. So those are three vectors that we see inside of every account, in addition of course to bringing new accounts on to our platform and the growth that you see from us is really a combination of progress we're making across all of these different vectors.

Thanks Jeff, that's helpful color and one quick follow-up, the enterprise business, you named some enterprise accounts, you've talked about some of these big wins, you guys have invested in enterprise sales force over the last year, two years and it feels like it's getting a little more traction. Just some sense of how enterprise sales cycle is going, how the team is performing, vis-à-vis expectation and how you think of growing that team, thanks for taking my questions guys.

Yes absolutely. If I would say we're happy with the continual progress that we're making on the sales side of things, the way I would think about our approach the enterprise though is probably a little different than many traditional enterprise software companies or even SaaS companies, in that we have this developer first go-to-market where the developers are told, our goal is to have Twilio about every developer in the world. And then when that developer is at work and they see a problem that they can solve with consolidated I think they're going to pull out Twilio and solve that problem and that's what we're seeing happen now in the enterprise as developers are becoming a critical part of the strategy of every company and they're investing in software development and software developers like those developers who are looking at enterprises are bringing out Twilio and championing the use of Twilio inside those organizations. Now when you're in a large enterprise sometimes there is waters to navigate that, whether it's security and compliance or more complex buying organization and that's where our sales team comes in and to help close that deal, but I will say that they have the benefit of a tailwind really through that process as the developers are championing the use of Twilio throughout that process. And so we're investing in a sales team to help those customers to be successful on our platform and to get those products that are getting built by developers to the finish line and launched inside those enterprises and we're also investing in products to help ease the adoption of Twilio inside of the enterprise and you see this quarter the launch of the Twilio enterprise plan which brings a collection of security and compliance and organizational features that help larger more complex organization adopt to Twilio and that's a net add on top of the usage revenue that we see as this Twilio enterprise plan product. So we're investing in sales and we're investing in product to help drive adoption inside of enterprises, but again I don't think you're going to see a very large huge expenditure or drastic change in our model because we're still this developer-first approach and we're very committed to that approach.

Thanks guys. Thanks for taking my question.

[Operator Instructions] The next question is from Heather Bellini - Goldman Sachs.

Great. Thanks guys. I was wondering if you could help us think about the ramp in the business across messaging, voice and connectivity. I am just wondering if you could share with us where you're seeing faster adoption right now and if you can help share with us the success you're having in cross-selling these products into existing accounts?

Yes, hi Heather, this is Lee. So we don't break out specifically, but in general the distribution between our messaging and voice business is roughly equal. We're seeing very strong growth across both businesses. Book businesses are healthy and strong both in terms of expansion rate and bring on new customers.

Okay. Great. And then one last question, customer expansion continues to be -- your net customer expansion continues to be really strong. How do you suggest we think about the range you're thinking about for or the range that you might be comfortable with for calendar '17? I know you don't guide to it but it has been a nice bump.

It's not something that we guide to, but we do expect to have very strong and significant expansion rate going forward.

Okay. Thank you.

The next question is from Mark Murphy from JPMorgan.

Yes. Thank you. I'll add my congratulations as well. So Lee, the variable piece of the business I think was about 10% of revenue in Q3 and that's how it's been as high as 22% about a year and half ago. So seems like a very positive development in terms of the mix shift in the predictability and visibility in the model. I know it's inherently very difficult to forecast that, but at a high level, is it reasonable to think that that mix shift will continue along this trend line or at least continue in this direction beyond Q4?

We do, we focus the business on the base business which again was 90% as you pointed out and we have found that to be consistent and predictable revenue and the variable business by definition it is not predictable. We don't have high visibility on it. So we don't really forecast it. We manage the business very concertedly and just take it really as it comes.

Okay. And then Jeff I wanted to ask you on the authentication piece of the business, you mentioned Q deals in the software industry alone and another transaction that you referenced, how is that business trending in general and are you able to give us an update there and perhaps comment on the relative growth rate of that business may be compared to the base revenue growth?

Yes absolutely. Good question Mark. We're really excited about the [offy] business, two factor authentication is as important as ever. It's got more fee income security breaches around the world that have happened even in the last quarter. I think the largest security breach even happens in this quarter. So it got announced this quarter and so we think two factor is incredibly important part of every application to detect their users and we're very happy with the growth of offy and its adoption by customers. We don't give specific revenue breakout for offy nor do we really talk about the growth rates of product, but offy is growing faster than our corporate average and of course that is a subset, a small number to begin with, but we feel fantastic about the progress there. We think it's a great product and great product roadmap and feel fantastic about that segment of our business.

And then last one if I may and I realize it is very early innings on this but you spoke a bit about the program of wireless product, can you tell us a little about how customers are responding and maybe what types of innovations you're seeing there when customers get their hands on that technology?

Absolutely it is early innings as you say this product is in developer preview right now. So we're very excited about the progress. It is in the hands of handful of customers where they're putting usage on it we're getting the early feedback as they're bringing their products to market. And we're very excited about the progress here. I think the biggest category that we see so far is the first category of adoption right is IOT used cases, which is what we announced the product that's the first area that we talked about which is you got devices, they need wireless connectivity, they connect to the Internet and cellular is a fantastic option. But to date actually doing deals with carriers and things like that is going to challenge more developers and this is the Twilio playbook all over again allowing developers to very easily light up the conductivity aspects of their devices and bring them to market and we're seeing customers do exactly that and so we're excited by the early traction we see there. And then the second major category of apps that we foresee here is the BYOB used cases. So this is really the idea that if you put a Twilio powered fully programmable network into the sim card slot of a phone where you can now program every bit about what happens inside of that carrier mobile core and the developers can build business logic like I want to record every phone call and log in to my compliance engine or still every text message and put in the compliance engine for an industry like banking or legal used cases or sales team where you might find 100 phone numbers to one device so that you have a phone number every country where that sales person does business or being able to route every data packet off of that phone to the internal firewalls and compliance engines of the company. And so really almost starts to battle with the mind when you think about all the things a developer can do when you give them access to a mobile core and mobile network and that's how we built the product and we really can't wait to see what developers build.

Thank you very much.

The next question is from Richard Davis from Canaccord.

Thanks very much. Two quick questions. so when think about your product growth, product development roadmap, is it logical to think or will this happen really is as you add new features and functionality whatever they are, will they come at a higher gross margin over time depending on logic structure and things like that that they have behind them and then I just have a real quick follow-up after that.

Yes hi Richard, this is Lee. Right now we're still focusing on reach and scale of our business driving revenue, driving customers as we add products we'll be adding traditional telephony type of products to drive from the recent scale, but also we'll be adding our high-margin IT only products, used case product. So that product mix in the long run definitely will be higher margin I think in the medium-term it's hard for me to predict what it's going to be specifically, but in the long run, we will be releasing higher margin products.

Got it and then real quick you touched on this a little bit, but just in terms of the selling motion top-down through salespeople bottom-up versus developers is there and I know you don't exactly break out but just notionally is there a way to think how that mix will play out over the next year or two directionally wise, thanks and that's it?

Fantastic question, I think what I can speak to is really what we're seeing to date with sales motion that's already happening, which is really driven by developers that bottoms up approach that we can help with our sales team and go get the top level support after the grassroots initiative really get the ball rolling. That's what we're seeing happen and we're happy to support it and get customers on the platform and get them adopted and get them growing with those three vectors of growth that we've seen, but overall I can't predict what's going to happen in the future other than to say that we see this traction in this Sales Motion already happening in the enterprise and we're resourcing to make sure that those customers are successful.

Great. Thank you so much.

Great. The next question is from [indiscernible] from Oppenheimer.

Hi guys and again, congrats on a good quarter. Lee just wanted to dig in into the variable revenue and following on your comments I understand you don't have much visibility and definitely want to be conservative there, but at the midpoint of your guidance you are looking at more than a 30% quarter over quarter and year-over-year decline. So I guess my question is while we don't have visibility, can you tell us if there's any material change from your standpoint with regards to their relationship or the share that you have with variable accounts?

Yes from an operational perspective we always model decline in business. We're very conservative because of the lack of predictability and it's a fundamentally not predictable business for us. So really I have nothing different to say about it going forward. So it's really business as usual. Again we like that business because it helps us with reach and scale and improves our super network and again we treated as an upside at it comes in.

Okay. And then Jeff do you, I think clearly you're expanding the list of features and products out there quite aggressively and it's quite impressive and encouraging I guess the question is more a question of impact of all the things that you're doing, could you highlight maybe one or two that you feel have the potential to be really material for your model say within a year or two or these are all four or five years out before they can really make a material impact on numbers? How do you think about the impact of these new solutions?

Yes absolutely we continue to make investments both in existing products and making our existing products more powerful, more flexible and also introducing new product lines into the mix and so we'll continue to keep doing both of those things. As far as which are my favorites. I think I learned not to pick favorite children, but what I -- let me talk about one that I think is particularly interesting and powerful, which is our Notify product that we launched in Q2 and Doug one of the interesting things about this product it's used case API that is designed to power notification and so the original notification used case for our customers. And in particular doesn’t make cross-platform way. So it addresses notations that may occur over SMS but also over channels like push notifications to a mobile app or things like Facebook Messenger and we believe that over time as the world of communication is getting more heterogeneous and there is more apps and there is more ways to communicate, the world is getting very complicated for our customers because our customers are saying hey I want to be able to communicate with my customers wherever they are and every consumer is developing their own consumer preferences about how they're going to interact with companies and which channels they want to use to interact with companies. And so as that world is getting more heterogeneous and more complex for companies to figure out how to talk to their customers while we're introducing products like Notify to solve that problem for our customers and make it hey use one API you can use and Notify will automatically figure out the best channel for every given customer and that works if you're notifying one customer sending alerts or if you're saying hey I want to do a blast to a million customers we'll Notify for each individual customer which is the right medium to use. We think products like this are powerful and really help our customers get to production scale, faster than ever before and give them more powerful features and functionality than they have with the underwriting building blocks alone. So we're very excited about this good example of a used case API.

Very good. Good luck guys.

Thank you.

The next question is from Mike Latimore from Northland Securities.

Hey guys this is Nick Altmann on for Mike. Thanks for taking my question. Just a quick one here how much traction has the add-on marketplace gotten since being introduced this past May and then if you could how much revenue is coming from the marketplace and then if you could just outline your expectations for it going forward that would be great.

Yes absolutely the products that we just launched in May it's obviously small, it's just getting starting, but we're seeing good early traction. We got a great set of partners in there both from Alpha, IBM Watson, White Pages Pro. So we feel fantastic about first is the supply of add-ons that you can pick from and we're adding more as we go as well as the customer adoption and the ability to light up this functionality very easily. It's a really unique offering in the market because there's really nothing like it. We've already got all these developers who can supply these great services and all these developers who can buy these services and add them into their apps. In fact one that I want to point out is really Nomorobo, this is a developers who build this app to block robo calls. He actually won the FTC challenge with this app he built on and now it's in our marketplace. So you can actually monetize it with our customer base and so it's a great example of the developer doing something that's really valuable for customer base.

Great. Thank you.

[Operator Instructions] The next question is from Brendan Barnicle from Pacific Crest.

Thanks. Brendan Barnicle here. I guess Jeff wanted to dig into used cases a little bit more. You mentioned the used case API as one example, but certainly if you think about the momentum here, what are the top two used case categories if you would, where you're seeing kind of driving the bulk of your growth and then if you could just weigh a little bit on AI, we're hearing obviously more and more talk of AI you have the announcement of Derby last week obviously Watson and Einstein, if you could just provide us a little more color on your view of AI and the adoption with developers would be very helpful. Thank you.

Absolutely. So to answer your first question about used cases there really are so many used cases with Twilio that we see growth in many different areas as various used cases are getting adopted by customers. I'll point out a couple of the call centers have been a great area. I think you heard a few enterprise call center stories on the call today. We continuously traction as companies really need to modernize how they touch their customers and how their customers reach them with a polarity of new channels and new mechanisms to do that. We're seeing have to really put effort to modernize their call centers and when they do, this modular more future proof approach of using building blocks is a great way to do it and again developers inside of Allied organization are really pushing that agenda. So pleased with that progress, both with our direct enterprise customers and also with our solution partners part of the market as well. Another great used case is Anonymous Communication this is a variety of used cases that are about connecting say an employee or a contractor of a company with the consumers using services this is like the Uber model where you call the driver and you're not revealing your own phone number to that driver and vice versa the driver is not reviewing their phone number to you. This is a really need that the world increasingly becomes a set of connections that are brokered by companies between people doing business you really need that rate of security between people and so Anonymous comes used case which interestingly enough didn't exist five years ago. That whole concept is brand new but increasingly is becoming a part of many different domains of business, so very excited about that. The question things like alert notification just more and more companies are modernizing their workflows and keeping consumers and customers in the loop when things happen whether it's account balance or trade, login alerts all sorts of different things that are happening, alerts and notifications are a powerful set of used cases. Thus they notify like I mentioned earlier and what was the second question.

Just on AI, adjusted AI as you think about the news certainly picking up around other software companies and bidding AI, I would love to get your view relative to the developer perspective, what's the appetite to actually start developing and layering in Watson functionality and other AI functionality into the comp stack?

Absolutely. I'll give you sort of two answers to that, first is that we're excited to have a lot of this type of functionality in our new marketplace. So you see Watson there you see will throw an offer like there are companies who are investing in these AI stacks and we're glad to give our customer options and choices about how they want to go about thinking about these types of applications. That said I will say I think this is very early for the technology and fairly let's just call it mature in the hype cycle and you see a little bit of a mismatch I think between maybe some of the marketing and some of the stories that are out there and maybe the reality of what the technology delivers and I think a lot of technologists and I'll put myself in this bucket as well. I think there is a lot of opportunity for machine learning and AI to change the way some of the workflows of the world operate and some of those maybe communications work flows but I also think it's probably a little overhyped to date and it will take a while for those expectations or the reality to catch up with some expectation.

Very helpful. Thank you.

That was our last question. This concludes today's conference call. You may now disconnect.