Twilio Inc. (NYSE:TWLO) Merger & Acquisition Conference Call October 12, 2020 8:30 AM ET

Company Participants

Andrew Zilli – Vice President, Investor Relations and Treasury

Jeff Lawson – Co-Founder and Chief Executive Officer

Peter Reinhardt – Co-Founder and Chief Executive Officer, Segment

Khozema Shipchandler – Chief Financial Officer

Conference Call Participants

Derrick Wood – Cowen

Michael Turrin – Wells Fargo Security

Meta Marshall – Morgan Stanley

Ittai Kidron – Oppenheimer

Alex Zukin – RBC

Matt Stotler – William Blair

Ryan MacWilliams – Stephens Inc.

Will Power – Baird

Rishi Jaluria – D. A. Davidson

Jeff Kvaal – Wolfe Research

Brent Bracelin – Piper Sandler

Siti Panigrahi – Mizuho

Shelby Seyrafi – FBN Securities

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Twilio Signs Definitive Agreement to Acquire Segment Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I now like to hand the conference over to Mr. Andrew Zilli, VP of Investor Relations and Treasury. Please go ahead.

Andrew Zilli

Thanks, Sharon. Good morning, everyone. And thank you for joining us today on such short notice. Earlier today, Twilio announced its acquisition of Segment. The details of the transaction can be found in a press release issued this morning at approximately 4:30 A.M. pacific time. Joining me today to discuss the transaction are Jeff Lawson, co-Founder and CEO of Twilio; Peter Reinhardt, co-Founder and CEO of Segment; and Khozema Shipchandler, CFO of Twilio.

Let me remind you that the purpose of today’s call is to discuss the segment acquisition and we will not be discussing our third quarter or earnings results, which are scheduled to be released on October 26. You can also find an investor presentation discussing the transaction on our Investor Relations website at investors.twilio.com. This discussion and the accompanying presentation contain forward-looking statements.

All statements other than statements of historical fact, including statements regarding expected market size expansion, growth, opportunities with additional customers, partners and developers, plans, products, and services, competitive positioning and market trends, expected timing to close the acquisition, and management’s objectives for future operations of the combined company are forward-looking statements.

These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, actual results could differ materially from these statements. A description of these risks, uncertainties, and assumptions, and other factors that could impact these forward-looking statements are included in our SEC filings, including our most recent report on Form 10-K, and subsequent reports on Form 10-Q.

Our remarks during today’s discussion should be considered to incorporate these factors 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.

Finally, please be advised that any unreleased services or features referenced in today’s discussion or other public statements are not yet available and may not be delivered on time or at all. Customers who purchase our services should make these decisions based on features that are currently available.

So, with that, I will hand it over to you, Jeff.

Jeff Lawson

Thank you, Zilli. Welcome everyone, and thank you for joining the call. We’re incredibly excited about our announcement today. We believe that combining Segments market leading customer data platform with Twilio will greatly enhance our vision to build the world’s leading customer engagement platform. We started Twilio about 13 years ago, to make communications accessible to developers as building blocks, because we saw how important communications was to help businesses create great experiences for their customers.

The communications itself is not the goal. The end goal is great customer engagement. Customer engagement is all the touch points that companies, particularly B2C companies have with their customers. It’s the stuff that makes customers love the companies. When their communications are targeted, relevant and personalized to you, we as consumers love it. Companies are wasting our time, and that happens across a wide variety of touch points that companies have with their customers. Whether it’s in our marketing or our sales when they’re trying to acquire you as a customer, or when you’re using their product or about to make a purchase when you need service or support.

Several years ago, we started building the next layer of Twilio’s customer engagement platform. We started taking our building blocks and assembling them into a fuller vision. We call this the Twilio customer engagement platform. Twilio Flex was the first step in this vision of creating the leading next generation platform to power amazing customer engagement for every kind of company, but in order to fulfill on this vision, the platform needs customer data to drive smarter decisions and more relevant engagement, and our customers are telling us this too.

Building great customer engagement starts with understanding your customers. Yet today, data about customers is spread across many different systems, and these data silos are the greatest impediment to companies truly serving their customers across all the touch points. As I’ve noted in the past, the hodgepodge of systems and monolithic apps that companies use to engage with their customers is one of the biggest pain points that companies, especially B2C companies face. We’ve all had that experience when you’re browsing say men’s t-shirts on a website. And for some reason, they started sending you marketing for their sale on women’s pants, or you call a company and some automated system asks you for your account number and your mom’s, dog’s, maiden name like three times on the same call, just so you can find out where your package is.

These experiences, and many more like them, stem from the challenges that companies have fighting these data silos. The funny thing is nobody wakes up in the morning saying they want to create these bad experiences. Most companies know that their customers want better communication that each customer has different needs, interests, and if they have different preferences for how companies engage with them, targeted communication are the key to effective engagement, as personalization improves responsiveness, and customer conversion rates, while personalized customer service leads to brand loyalty.

Driving more effective engagement can lead to higher ROI through strong customer acquisition, decreased customer churn, and higher lifetime customer value. Personalized communications are the key to effective engagement, and it all starts with data. More importantly, the quality of this data depends on capturing interactions for different systems that each have a piece of the puzzle, and it’s a hard problem to solve, but Peter and the team at Segment have built up a leadership position doing just that. That’s why an incredible list of companies have turned to Segment over the past several years.

As the leading customer data platform, Segment enables developers and companies to unify customer data from every customer touch points at every system of record, empowering marketing, sales and service leaders with the insights they need to design and build relevant data driven customer engagement. The combination of segments and Twilio means that we will be able to help any business make their customer engagement across every channel more personalized, timely, and impactful.

For example, over time as we combine segments CDP with Twilio Flex, it will facilitate getting the most up to date information about a customer in front of the agents. It’s obvious, really, and we believe that it’s just the start of the opportunity to bring data and communications together under great API’s to transform how customers build better, more integrated and more relevant engagement across the board. By leveraging segments ability to create a single view of a customer, we will be able to increase communications across channels, improve targeting and personalization, and enhance many forms of engagement across the customer lifecycle.

So, let me pass it over to Peter Reinhardt, CEO of Segment to discuss this a bit further. Peter?

Peter Reinhardt

Yeah, thanks, Jeff. We’re really excited about today’s announcement. We’ve spent years building the tools for businesses to better understand their customers and Segment helps companies assemble the highest quality first party data and addresses a $17 billion growth market with about 2 billion coming from existing customer data platform software spent in that market and 15 billion in do it yourself and other software tools used for data and integration.

We are the leader in the customer data platform market with market share that is just over two times larger than our closest competitor. We started by building a tailored stack that is platform and channel agnostic. So, we help companies collect customer data wherever they create it. The next step is ensuring that customer data meets the four C’s. So, complete, correct, consented, and compliant. This is an important point for us as our mission is to enable customer focus growth with good data, which to us mean no third party data.

Everyone should have control over their own data and know where and whom it’s being sent. And like Twilio, we care about data security. We then have the ability to synthesize all this customer data so that it’s centralized, resolved, aggregated, and accessible. And then finally, we operationalize insights on that data by sinking it in real time, helping folks access raw data, respond to signals, and orchestrate outcomes. And all these core capabilities that we’ve developed over the years, paired with Twilio’s platform will enable us to build the customer engagement platform of the future.

So, let’s talk a little bit about our products, segment connections, segment protocols, and segment personas. So, connections helps companies collect all their customer data from every source whether that’s website mobile apps, servers, help desks, CRMs, SMS, email, ad, you name it, every customer touch points. And then once you have that data connection it helps companies take all of that collected customer data and activate it into downstream communication channels like email, SMS, ad, helpdesk, CRMs, and so on.

Segment protocols is their second product, and it helps companies ensure that all the data entering Segment connections is incredibly high quality, accurate, and compliant. And then once all this customer data is in-segment, our third product Segment personas structures all this raw data into unified customer profiles. And personas becomes the segmentation and personalization engine or sort of the brain if you will for every company’s customer communication.

So with Segment personas, a company can personalize messages across channels, optimize ad spend, improve targeting, it’s the data driven personalization compliment to all the rock communication channels that Twilio has built today. So, when we combine Twilio’s API’s and marketing campaigns with segments data we’ll be able to dramatically improve the effectiveness in marketing from attracting and converting new customers to improving up-sell or cross-sell promoting brand loyalty is an incredibly valuable proposition, given that marketing now drives 70% of purchase decisions, and targeted communication is the most important factor for lead generation. But it’s more than just marketing.

By bringing Segment’s data into Flex, we can drive the loyalty via excellent customer service, and this is key for Twilio customers as we know that customer service promoters drive significantly higher long-term value, and more than 70% of users expect service agents that know their customer profile. The addition of Segments data platforms to Twilio’s customer engagement platform will give companies incredible power to drive customer engagement across every communication channel.

Let me hand it back over to Jeff.

Jeff Lawson

Thanks Peter. Let me take this off of you. Our two companies have a great deal in common. We share the same vision, the same model, the same values, we share the same vision to drive meaningful customer engagement through intuitive technology across every channel. We share the same model by empowering the developer for a low friction go-to-market model that is strategic to the enterprise. Our focus on the developers is where it all starts, as they are the ones building these next generation customer engagement solutions.

And finally, the cultures of both companies are incredibly aligned. Peter as a developer CEO shares so much with me and how we’ve built our respective companies. Segment’s values like ours combine compassion and performance. They say karma, we say be humble. They say tribe, we say be inclusive. They say focus, we say ruthlessly prioritize. They say drive, we say be bold. We share a devotion to customers, constant innovation, and empowering developers to build new engagement solutions. This shared culture was a key consideration for the steel.

We’re excited to add the Segment team to the Twilio family and I look forward to meeting more of segments team over the coming months. Segment has built a great business and we have no intention of disrupting that momentum. Once the deal closes, Segment will operate as a division of Twilio with the existing management team intact and Peter leading the way. I believe this is going to be an amazing combination, and I can’t wait to see what we can build together.

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And with that, I’ll turn it over to Khozema. Kho?

Khozema Shipchandler

Thank you, Jeff. Under the terms of the definitive agreement, Twilio will acquire Segment for approximately $3.2 billion in an all stock transaction and we expect the acquisition to close in Q4. The combined companies will have a strong financial profile in large, fast growing, and still nascent markets. Upon closing the acquisition, Segment will be accretive to our total revenue growing north of 50% for current year 2020 and gross margin at approximately 75% on a non-GAAP basis.

Twilio and Segment’s priorities will remain the same, focusing on delivering elevated revenue growth as we address the tremendous opportunity ahead of us. On top of the great business, Peter and team have build we’re confident in our ability to bring the teams together. This confidence stems from our shared goals, culture, and values.

We’ve also proven this with the success we’ve driven following the acquisition of SendGrid as we have accelerated SendGrid’s revenue growth and increased the dollar base net expansion while continuing to grow Twilio’s core business. I’ll also add, while we expect some cost synergies, we plan to reinvest any potential savings to support growth for the combined entity.

Thank you for joining the call. With that operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Derrick Wood with Cowen.

Derrick Wood

Great. Thanks and congrats on what seems like a great transaction. Two questions. First, I suspect you guys have a good amount of joint customers. So, it’d be great to hear a story about how our marquee customer strategically leverages Twilio and Segment or perhaps how you think they will and the two are combined? And then second, when you look at the route to market for segment, I think they’ve typically sold into marketing and sold into the data engineering buyers, how do you see the end buyers being additive or synergistic with Twilio? Thanks.

Jeff Lawson

Alright. I will take the beginning of that. I think it’s a good question, Derrick. So, as far as how customers use, our customers were using both Twilio and Segment in a variety of ways actually/ I think that, you know, when I look at how customers are using it, they started with Segment to say, with all this data in all these different systems and different data uses different keys, so identify customers as different pieces of the story. And they struggle to bring them together. And so they start by using Segment to pull data out of variety of systems, such as ecommerce systems, marketing systems, support systems. And then what you see is, they take that data and that informs them how to better engage with customers.

And so for example, putting that data in front of an agent in Flex to enable them to see the full picture of the customer is one obvious used case. Another one is to create smarter segments for their customers to segment those customers into groups to then target better marketing and advertising and things like that. And so those are some of the key used cases that we see, but segment is really part of a core data architecture for companies that data architecture that allows companies to use the right channel to engage their customer, get the right content in front of that customer or from the contact center agent, and ultimately create a more relevant, more personalized, and more targeted communication across one of the many touch points that companies have.

And Peter, I want to hand over to you for the – to talk about the synergies.

Peter Reinhardt

In terms of the joint, sort of go-to-market motion, I think it’s actually a little bit of a misnomer that that segment would sell primarily into marketing. While we do address marketing used cases, actually one of Segment’s core long-term differentiators, and the way that we approached the customer data platform market was much more by focusing on the developer and the developer experience. We launched an open source library and, you know, the vast majority of our buyers are actually folks on the engineering or IT side, or folks who report jointly into IT or engineering.

So, there’s actually a lot of sort of philosophical, spiritual sort of joint go to market alignment between Twilio and Segment. We’ve actually looked up to Twilio for many years in terms of how they’ve approached developer evangelism, designing and building API’s and documentation for that reason. A key part of the segment differentiation relative to other customer data platforms has always been that we’re focused on the developer.

Derrick Wood

Great. Thanks for the color. Congrats.

Operator

Next question comes from Michael Turrin with Wells Fargo Security.

Michael Turrin

Hi there. Thanks. Good morning and congrats from me as well on the deal here. One for me, looking at the stack slide you’ve laid out with Segment sitting there directly below the engagement cloud, it looks to us like there’s a lot more you can add to the app layer going forward. So, can you maybe expand on how Segment and the customer data platform they’re providing here can help enable further innovation on the app side for Twilio over time? Thank you.

Jeff Lawson

Absolutely, you know, if you think about building a great customer relationship, really, it starts with understanding your customer, and then acting on that understanding in order to build a relationship. And so the understanding of a customer that’s data. In a modern company, the data that resides in all these various systems when pieced together values your best understanding of your customer. Acting on it, that’s communication, right? You’re taking everything you know about the customer and having targeted and relevant and timely information for customers. You know, that’s how you act on that data in order to build a relationship.

If you think about the best experiences that you’ve had in a variety of companies it’s when they take everything they know about you and they build up – and they use that to build a great relationship with you. And so, while we think about Flex as an obvious place where we can integrate the CDP, you also think about, you know, myriad opportunities around, for example, machine learning, where we can take knowledge of a customer and help our customers to build models that might enable them to, you know, for example, target those messages better.

It might help them send the right message over the right channel, at the right time, individualized for each customer or tailor those messages for even better outcomes. And so, I think, you know, there’s no shortage of ways in which bringing together knowledge of a customer and then how you engage with them over one of those or all of those customer touch points creates opportunities to do a better job of engaging those customers and that’s really what we’re focused on.

Michael Turrin

Makes a lot of sense, thank you.

Operator

Next question comes from Meta Marshall with Morgan Stanley.

Meta Marshall

Great, thanks. Just kind of following up on the question on path-to-market, you know, clearly, Twilio and Segment will always kind of be developer-led organizations. But just as we think about, you know, Twilio having kind of higher level of conversations with, you know, more of the CMO or higher level executives, just how should we think about Segment being brought into that conversation and maybe time that you would expect for kind of an integration to take place so that a joint sale could take place? Thanks.

Jeff Lawson

Absolutely. Thank you, Meta, I appreciate the question. So, you know, as I look at it, Twilio has long executed sort of a dual pronged strategy for how we reach customers and we start more at the grassroots level with developers and developers being able to adapt Twilio’s API’s, build things quickly with very little friction and very little upfront commitment, get the ball rolling inside of large companies, and then, we can go in at the executive level and the top down and talk to them about how our customer engagement cloud helps them do the things that executives think about, which is build better relationships with their customers.

And so, it’s a two pronged attack, if you will and I think that Segment has done a very similar job in how Segment has been brought into these enterprise opportunities. And if you look at how we’ve evolved our go-to-market over the past several years, we have successfully taken that developer motion and turned it now into an enterprise sales motion as well. You know, if you look at, you know, SIGNAL, our conference that we held just two weeks ago, when you look at – you know, we had the CEO of Nike, we had the CEO of Delta Airlines on stage talking about Twilio, and that’s just a kind of relationship that we might not have been able to unlock five or six years ago.

And so, I think our dual-pronged approach with developers at the grassroots level, as well as the executive messaging and the more strategic rationale for a customer engagement platform, at the executive level, is working well, and I think that is – Segment furthers our ability to fulfill on that story for executives of building a leading customer engagement platform now with a complete understanding of the customer and I know Segment has had a similar approach as well.

Meta Marshall

Great, thanks.

Operator

Next question comes from Ittai Kidron with Oppenheimer.

Ittai Kidron

Hey, guys. First of all congrats on the deal, very interesting. Jeff, maybe you could talk about a couple of things. First, how do you think about where you draw the line between what you want to bring in into Twilio and just kind of a little bit of and perhaps of a bigger picture question? And then, as a follow up, how does Segment change your competitive landscape? In what way are you now stepping on people’s toes that you haven’t before? How do you navigate that going forward? It’ll be interesting to hear your thoughts on that.

Jeff Lawson

Thank you, Ittai. So, for your first question, where we draw the line, it’s a funny way to phrase that. But the way I look at it is look, our vision and what we’re doing is we’re building a leading customer engagement platform because what we’ve seen by working with customers is that companies, especially B2C companies, have to build their way to having differentiated customer experiences, customer engagement. As the world has turned to digital and increasingly the experience that we have with companies is via a screen, it’s via mobile app, it’s via a web browser, that the battleground essentially for customers’ hearts and minds becomes the digital battleground.

And so, companies in that world have to go build the answer to the things that customers need in order to differentiate to [indiscernible] customers. This is a market that didn’t exist 10 years ago because it used to be, you just bought some software and you call it a day, but now companies have to go build, and so, we are powering all the companies who realized that in order to compete and win in this digital era in customer engagement in all the touch points down to the customer, you really need to be able to have more flexibility and more agility and operate across the myriad channels that customers expect on this digital landscape. And so, that’s to us, what the customer engagement platform looks like.

Now, you asked the second question, does it change your competitive landscape? No, it really doesn’t. I think this is a – essentially a net new market because what we’ve seen is that B2C companies in particular, as they go about building, they have needed essentially a set of products and services that haven’t traditionally existed [in the world]. This is an underserved market because it’s been emerging over the past decade, and, by the way, accelerated because of COVID how companies need to use digital technologies in order to provide great digital experiences and that’s – you know those are the customers that we’re serving and this is the opportunity that customers in many ways are leading us to. They’re showing us the ways in which their needs have changed from yesteryear to really compete and win in the current digital landscape and that’s what we’re serving.

Ittai Kidron

I couldn’t help but notice that Salesforce shows up as a – on the leader quadrant in the CDP space, clearly, the – a customer engagement platform, but at the application level. So in one way, do you see the application guys rubbing against you on the infrastructure layer underneath to enable the engagement?

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Jeff Lawson

You know, I think what we do is just different, right. We help companies to take their investments in various apps [indiscernible] and actually take the data that exists in silos for most companies, right. They bought a bunch of our apps, typically SaaS apps to power their business. They may have an app for marketing; they have an app for sales, and they have an app for customer support. They have myriad apps across the enterprise and it’s the data silos that results from having bought all those apps.

You know, that is the enemy really of great customer engagement. And so, the amazing thing that Segment does is they enable companies to leverage those investments, but still form a complete picture of their customer, and then, get that data back to those apps so they can make even better decisions. And so, I think Segment allows companies to both have the infrastructure that they’ve already bought and use it better, and then, build upon it and that’s what’s so powerful of what they do.

Operator

Next question comes from Alex Zukin with RBC.

Alex Zukin

Hey, guys. Thanks for taking my question. I guess maybe just first, back to Ittai’s question, Jeff, if you think about the evolution of the CRM market over the next, you know, call it few years with both Adobe and Salesforce and Twilio now kind of fully invested in the CDP vision, do you expect those vendors to try to come into your market around CPaaS anymore? Do you – and also, if you think about how you go to market from a pricing and packaging perspective with the product on this, you know, is it priced similarly or [indiscernible] economics basis?

Jeff Lawson

Thanks. You know, the way we’ve historically thought about the market here and pricing [indiscernible] is that, you know, Twilio breaks down services that companies need and developers need into building blocks, and then, allows developers to adopt them [indiscernible] and with a low-commitment model that encourages them to develop. And what this does, this helps give us a very efficient go-to-market model. If you look at our growth rate, how fast we’re growing with the [skill we have] coupled with our spend on sales and marketing, it’s one of the lowest in the entire software industry.

And so, it allows us to [indiscernible] the customers very effectively and it allows us to expand in those accounts very effectively and that’s represented by the dollar based [net expansion rate]. And so, you know, with regard to any other particular competitor, like obviously, I can’t speak to what their strategic priorities are or what they might do, but what I can say is that, you know, our playbook is pretty well known.

We want to empower developers with the best infrastructure, break down, you know, what historically had been monolithic systems in some more flexible, agile building blocks, and enable those developers to adopt them with ease so that they can get started very easily, and then, as they expand, allow us to share in the success when our customers succeed in using our products. And I think that’s how we will continue to execute for the foreseeable future. And I think Segment has a similar pricing and building block philosophy [indiscernible].

Alex Zukin

Makes sense. And maybe just a quick follow-up. As you think about the proportion of Segment’s customers that are using it to power, you know, either marketing, sales or service, can you help break that down for us a little bit? And to the earlier question, where do you expect the first kind of killer app or Flex Like app to emerge from this acquisition? Is it on the marketing side? Is it on the sales acceleration side? Where would you expect that to come from?

Jeff Lawson

You know, I’ll pass it over to Peter to talk a little bit more about Segment’s customers and how they use [Segment].

Peter Reinhardt

Yes, it’s interesting. When people interact with their customers, there’s a huge, huge variety and a number of different channels and apps that they use to actually interact with there. I think, part of what is – so in other words, I’m not sure that there is a killer app, per se, and what was really interesting about Twilio’s strategy of building blocks for developers to build things and Segment’s approach in having an open ecosystem of partners is that there doesn’t have to necessarily be a killer app, but you have to take advantage of a huge ecosystem of developers and partners building on top of that.

So, you know, Segment integrates with about 300 to 350 different partners that help execute on various customer workflows downstream, that’s expanding rapidly, and is now something that partners integrate with Segment instead of the reverse. So, I expect to see that sort of market ecosystem with the 7,000 companies today continue to expand, continue to sort of multiply, and, you know, we’ll be at the customer data platform and execution channels for that ecosystem.

Operator

Next question comes from Matt Stotler with William Blair.

Matt Stotler

Hey, guys. Thanks for taking my questions. Just a couple quick ones for me, so first off, in terms of what the CDP market looks like, you’ve identified kind of $17 billion of current market opportunity, a lot of which looks, you know, pretty much like Greenfield. Can you just tell us on how fast the market is growing and what you expect the CDP market will look like in three or five years?

Jeff Lawson

So, Peter, why don’t you want to take that one?

Peter Reinhardt

Sure. In all the research I’ve seen, I think, it’s probably growing about 30% year-over-year on a total kind of aggregate basis, but what we’re seeing is people moving over to no longer DIY, but, you know, buying something off the shelf faster than that, so maybe [indiscernible].

Matt Stotler

Yes, that’s helpful. And then, obviously, the acquisition is closing in Q4. You kind of commented on the structure of the organization, but, you know, I guess how much work, how much investment will it take to integrate Segment as a company in terms of the product portfolio platform into Twilio to provide, you know, the full benefits of the customer?

Khozema Shipchandler

Yes, this is Khozema, let me take that one. I think for the foreseeable future, the way that we see it is that Segment will operate as a division of Twilio, and obviously, over time, we will create a holistic platform. And I think in terms of integrating products and integrating various functions, we’ll probably start as we typically do with some of the G&A areas at first. We’ll probably flip it a little bit in this case and focus on some of the product dynamics first. I think, as Jeff and Peter both alluded to, there’s a number of exciting things that we feel like we can do there, and then, probably get to go-to-market last.

Matt Stotler

Got it. That’s helpful. Thanks guys.

Operator

Next question comes from Ryan MacWilliams with Stephens Inc.

Ryan MacWilliams

Thanks for taking the question. Looking at the Segment [CDP report], I noticed that the second most likely destination that Segment users were sending data to was to e-mail marketing platforms. Can you talk about the potential integration up-sell opportunities here with Twilio SendGrid and its marketing campaigns?

Jeff Lawson

Sure, this is Jeff. Yes, I think there’s obvious opportunities to help customers to bring data, bring the complete picture of their customer in to power smarter marketing campaigns because if you think about it, the better a company can segment and target a customer with a relevant message over a relevant channel and over using the relevant messaging based on everything they know about you, the better those campaigns are going to run.

And so, integrating the Segment capabilities or [indiscernible] things they already are, in many ways, integrating Segment into marketing campaigns is a logical step, but I – you know, I – [further accentuate] by the way. You know, I think the opportunity as Segment goes far beyond marketing campaigns, like that’s an obvious one, Flex is an obvious one, in fact, all of the touch points that companies have with customers are better when they’re powered by data.

Which channel to use? What message to send? Which will actually results in, you know, more repeat purchases or more customer satisfaction? These are all places where data coming from myriad places can help companies make better decisions and automated systems and machine learning systems drive better outcomes and that occurs across many of the touch points, not just marketing or not just contact center, but really it’s everywhere.

Ryan MacWilliams

Perfect. I definitely think that speaks to the different number of destinations that Segment [indiscernible]. Maybe just one for Peter, last year [indiscernible] said that Segment tracked over $500 billion in events per month on its platform, growing at 60% year-over-year for 2019. How has COVID affected this growth? Like have you seen the number of events significantly change since March? And how have new customer additions been impacted by COVID? Thanks.

Peter Reinhardt

Yes, generally growing quite quickly. Surprisingly, COVID has not had major impact for us in terms of customer adoption and new customers. In terms of overall API usage, we’ve actually seen dramatic acceleration of API calls and total volume that we’re processing there. I don’t think I can share numbers on that today, but you know, data volumes, certainly as everyone has moved to online experiences, and so, we’ve definitely seen a huge uptick in data volume.

Ryan MacWilliams

Thanks guys.

Operator

Next question comes from Will Power with Baird.

Will Power

Well, great. Thanks, yes. I guess a couple of questions if I can. So, maybe first, Peter, I’d love to get your just a little more perspective, in your mind, which really kind of sets Segment apart from some of the other CDP leaders. It looks like you’ve got a nice leadership position there. I think I’m looking at Slide 14 in the presentation deck, so just trying to figure out from your perspective, I guess, it’d be more kind of what the secret, you know, [sauce] has been and the sustainability of that as we move forward here? And then the second question, probably for you Jeff or Khozema, I guess you referenced the success you’ve had with SendGrid, the opportunity to accelerate, you know, growth there as it became part of the Twilio platform. So, I’d just love to help you kind of crystallize what you see as the parallels there, maybe kind of how you think about maybe the lowest hanging fruit, if you will, as you combine these platforms going forward from a revenue growth perspective? Thanks.

Peter Reinhardt

Yes. So this is Peter. To answer the first question on, you know, what sets Segment apart from other CDP players, it’s interesting. I feel like the – we’ve had this focus specifically on the customer data and when you put the focus on the customer data itself rather than where most of the players go is to sort of a marketing first workflow, like high-level tool UI built specifically for marketers. The differentiation for us has been when you put that focus primarily on the customer data, it leads you down a path that is actually much more focused on the developer, and much more focused on the developer experience of collecting, consolidating, managing and integrating that customer data.

And so, fundamentally, it’s the approach of what problem are you really solving? If you’re solving the customer data and infrastructure problems associated with that, then you really end up in a world where you’re building first and foremost for the developer to eventually solve the marketer’s problem or the support person’s problem or so on. That has been the core of our differentiation. We have a whole go-to-market motion around [indiscernible] much like Twilio we’ve built from developer first adoption up into an executive level sale and a global deployment. So yes, that is the crux of the differentiation and the sort of flywheel that gets created between developers and the adoption of really fixing customer data.

Jeff Lawson

And this is Jeff. You know, I think in terms of the parallels we see with – between SendGrid and Segment, yes, I mean I think there’s a lot of obvious ones. You know, one is a very developer-focused platform that is further enhanced by a mature sales motion. And so, you know, I think there’s a lot of similarities there. And I think, you know, if you think about SendGrid, what we hear from customers regularly is that, you know, they would rather have, you know, fewer vendors to work with. They’d like to be able to work with one company, get their developers, you know, [indiscernible] to go use a wide variety of services and be able to engage with their customers without having to pull in, you know, new vendors all the time.

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And so, I think that, you know, this – like SendGrid enables us to be able to serve a wider breadth of customer needs and customer engagement that will continue to drive more usage and more customer success. And when we accelerate ability for – companies abilities to build those customer engagement, like apps and experiences that they’re trying to build, we can make our customers more successful faster, as well as start to do the integration of these services together over time that enables our platform to be a one-stop shop, if you will, for where companies can come and really build out their complete customer engagement vision.

And so, I think, you know, SendGrid was part of our hypothesis in terms of like adding another channel that – you know, pretty much every company uses e-mail under the umbrella of Twilio. And then, I think Segment makes the entire platform smarter. And so, that’s another thing that I hear from executives and developers. It’s such a wide variety of companies that building that one view of their customer is critical to their success.

And now with Segment, they can also do that on top of Twilio and I think that will help us to accelerate not just the adoption of Segment, but also the adoption of really sophisticated workloads on top of Twilio, using all these channels, using data and then using the aspects of our [engagement cloud] that allow them to deploy these at scale for all these different customer touch points.

Will Power

That’s great. Thank you.

Operator

Next question comes from Rishi Jaluria with D. A. Davidson.

Rishi Jaluria

Hey, guys, thanks. Thanks for taking my questions. Two quick ones, first is on the pricing model and just the small differences. I mean just looking to the Segment website, it appears to be more prepaid and annual plan versus, you know, the consumption-based model portfolio? Just can you give us an understanding of, you know, is it going to be – is there any potential changes to the models? Or are there going to be customers who – you know, who would be using Twilio and paying for usage after and prepaying for Segment? Maybe help us understand and I’ve got a follow up.

Khozema Shipchandler

Yes, I would say, Rishi, in the beginning, what you’ll probably see happen is that you’ll have a blend. You know, as you probably remember, even from our Investor Day recently, without Segment, we have a blend of both usage, as well as, you know, subscription like revenues that run through our company. And so, I think in the beginning, you’re going to see the same sort of dynamic here. We haven’t made – I mean, you know, we haven’t closed the transaction yet, obviously. We’re just announcing it today and we haven’t really made any detailed calls around how we’re going to be pricing and packaging sort of together.

We obviously like our usage based model. Segment has been incredibly successful with their existing model. And so, rather than tinker with that sort of thing too much, I think, what’s – we’re going to wait and see and figure out the right thing for both the combined into the over time.

Rishi Jaluria

Okay, that’s helpful. Yes, and then, just wanted to ask a question, just in terms of – [regarding] the transaction makes a lot of sense. Obviously, it’s going to be a great fit. Can you help us understand to get the rationale for doing this as an all-stock transaction versus, you know, just given the amount of cash that you have? You know, and especially with SendGrid, right, doing that as an all-stock transaction and the ultimate purchase price ended up being a lot higher than the analysis because the Twilio stock ended up doing so well between announcing the deal and closing, maybe just help us understand the rationale there? Thanks.

Khozema Shipchandler

Sure. We view the stock as an attractive acquisition currency today, I would say, and you know, I think as we’ve said repeatedly, we’re in the early stages of disrupting a very large and fast growing market. And when you look at our recent history, as you pointed out, the SendGrid acquisition was an all-stock transaction that worked out really well, you know, for both companies and really helped align our interests. You know, the value to their shareholders and our shareholders today is a lot greater than what it was when we acquired the business. So, we felt like this is pretty similar in that regard and the right structure.

Rishi Jaluria

All right, great. Thank you.

Operator

Next question comes from Jeff Kvaal with Wolfe Research.

Jeff Kvaal

Yes, thank you. I wanted to follow up on that question a little bit. I mean, you did raise a decent amount of money over this summer. And so, I’m wondering, you know, what the plans are for that is done with the time, like M&A would be a portion of that if not most of it, and here we are with the deal that’s mostly stock. So, what might be on the agenda for that?

Khozema Shipchandler

I mean, I’m not sure. I have a totally different answer. I would say that, you know, from our perspective, the two follow-ons that we’ve done over the last couple of years were an effort, you know, to ensure that our balance sheet was incredibly strong and would provide maximum optionality, basically, through any cycle. You know, we’ve been pretty consistent about that. We are constantly evaluating, you know, what the right consideration mixes for these transactions, and, you know, we remain focused on a variety of M&A opportunities and we certainly have a pretty active game board. And if we feel like the right value alignment is there for cash, that’s how we’ll do it. In this particular transaction, we felt like the right alignment was for stock, and so, that’s why we [went that route].

Jeff Kvaal

Okay, that makes sense. We’ll keep [indiscernible] to the ground. And then secondly, I’m wondering what can you tell us, if anything about what the additional revenues and/or costs may be as they come into the model?

Khozema Shipchandler

Yes, we’re not there yet. I mean, I think – what I will say is that, you know, we pointed out that they’re going to be accretive to our growth rate. They’ve been a 50% grower, and so, we’re pretty excited about that. The second dynamic is, you know, gross margins were – you know, we’re certainly excited about where their non-GAAP gross margins are, excuse me. You know, we’re anticipating this closes in Q4, so it’s going to be a pretty modest contribution to, you know, calendar year 2020, but we’ll certainly provide more details as we go forward.

Jeff Kvaal

Okay. On the closing, perhaps?

Khozema Shipchandler

Perhaps.

Jeff Kvaal

Okay. All right, thank you.

Operator

Next question comes from Brent Bracelin with Piper Sandler.

Brent Bracelin

Thank you. One for Jeff and one for Peter, if I could here. Jeff, I totally get the strategic rationale around adding the Segment API’s and data layer, but my question is more around the why now? Is this all around accelerating the vision here, customer pain points and recent threshold, maybe just spend a little bit more time around the why now? And then for Peter, you’ve got billions of events and API calls flowing through Segment today, how much heavy lifting from a technology standpoint would it be required to automate the Segment data layer with the Twilio engagement layer, essentially automating real-time events with sending a direct customer kind of message?

Jeff Lawson

Thanks, Brent. So, you know, your first question was why now. And look, you know, I think that first of all, we’ve been hearing from customers for a long time that assembling the single view of their customer is one of the biggest challenges they have. And Segment, the leader in this space, is doing a great job of solving that really [have a problem]. And then, the second thing I think is as you see us pushing into customer engagement with things like Flex, the value of having that single view of the customer becomes even more important and even more front and center for the kinds of services that we are now building.

And so, it, you know, at some point becomes obvious that solving this problem enables us to serve customers even better. It allows us to unlock new types of used cases and outcomes that our customers want us to power for them, and so, this is a fantastic time. The more I’ve gotten to know Peter and the Segment team over the past several years, the more conviction that both I and Peter had developed around, hey, this makes a ton of sense. And our gut instinct from what our customers are showing us as far as the problems they need solved, our ability to solve it together is a fantastic one. And so, you know, in some ways, that’s why the deal and that’s why now.

Peter Reinhardt

On the second question of how much heavy lifting to automate things, I think there’s a few pieces of sort of deep infrastructure that Segment has already built that are probably the heavy lift. One is just how you accept and collect and process and manage all this data flowing in, in real time, you know, hundreds of thousands of data points per second is sort of order of magnitude to think about here, so that is the heavy lift on infrastructure. The second heavy lift is how you manage identity.

So, as you have user ID and other things flowing in, how do you understand how to stitch those things together into a user profile? That already exists within Segment that is fundamentally our third product in Segment personas, which I spoke about earlier. So when you think then about what’s the lift required to, you know, integrate that and into sort of deeper engagement there, actually, the really hard infrastructure problems are things that already exist inside Segment today and the beauty of an API-based model is that these things are connectable by developers and engineering teams. So, I think the hard problems are solved already.

Operator

Next question comes from Siti Panigrahi with Mizuho.

Siti Panigrahi

Thanks for taking my question. Congratulation. Just to ask Brent’s question a little differently, Jeff, so what triggered you to acquire Segment? And then from a communication platform, you could have gone many different ways, so you [reached] the goal to get into CDP or CRM or indeed something that in Segment that you saw? Or is it Segment wanted to [merger to here]? So, anything will be helpful if you could help us like what triggered you to acquire Segment?

Jeff Lawson

Yes, absolutely. Absolutely, Siti. The – you know, our goal all long has been, you know, as we’ve communicated for a long time is to be the leading customer engagement platform. And as such, you know, there’s really two parts to great customer engagement or great customer relationships, right? It’s, you know, understanding a customer, and then, acting on that understanding to build that customer relationship. And so, understanding the customer, that’s customer data, acting on it, that’s communication.

And so, Segment really adds that next layer of understanding and intelligence to our platform that enables us to fulfill on that vision. And so, I think it – you know, understanding customers holistically is just a critical part for every company. The more we talk to customers, the more we work with businesses, both at the developer level and at the executive level, we’ve come to realize that even more and more and more over time just how important building this understanding of your customer is and that’s why this combination makes so much sense.

Siti Panigrahi

Thank you.

Operator

And the last question comes from Shelby Seyrafi with FBN Securities.

Shelby Seyrafi

Yeah, I wanted to know about the revenue of mobile being 20 times, is that the latest 12 months statement, which would imply around $150 million for Segment revenue?

Khozema Shipchandler

Yes, again, we’re not going to break out the revenue, but you’re in the ballpark based upon, you know, the multiple that we’re talking about. You know, as we said, based on 3.2, it’s more or less in line with prior transactions, but not breaking out the exact specifics.

Shelby Seyrafi

Okay, thank you.

Operator

And at this time, I will turn the call over to the presenters.

Jeff Lawson

Great. Thank you, Sharon and thank you, everybody, for joining us today. We’re really excited about this transaction and look forward to speaking with you in a couple of weeks when we report our third quarter earnings.

Operator

And this concludes today’s conference call. You may now disconnect.



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