Twilio (TWLO) Q4 2021 Earnings Call Transcript

Twilio (TWLO 1.47%)
Q4 2021 Earnings Call
Feb 09, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twilio fourth quarter and full year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Andrew Zilli, vice president of investor relations, you may begin your conference.

Andrew Zilli -- Vice President of Investor Relations

Thank you, Chantal. Good afternoon, everyone, and thank you for joining us for Twilio's fourth quarter and full year 2021 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; Marc Boroditsky, CRO; and Khozema Shipchandler, COO.

As a reminder, some of our commentary today may be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and further information related to guidance can be found in our earnings press release. Additionally, some of our discussion and responses may contain forward-looking statements, which are subject to risks, uncertainties, and assumptions. In particular, statements about Twilio's outlook for the quarter ending March 31, 2022; Twilio's goals regarding delivering non-GAAP operating profitability beginning in 2023 and meeting annual growth rates and long-term non-GAAP gross margin targets; Twilio's expectations regarding our products and solutions; Twilio's expectations regarding business benefits and financial impacts from our acquisitions and our partnerships and investments, including the associated transactions; our expectations regarding the impact of recent and future privacy changes on certain third-party platforms on Twilio and our customers; and Twilio's ability to manage changes in network service provider fees that we pay in connection with the delivery and communications on our platform and the impact of those fees on our gross margins, are subject to change.

Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements. A description of these risks, uncertainties and assumptions, and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-Q. And our remarks today should be considered to incorporate this information by reference. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made.

We undertake no obligation to update any forward-looking statements made during this call to reflect the management circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. With all that out of the way, I'll hand it over to Jeff for some opening remarks, and we'll open the call for Q&A.

Jeff Lawson -- Co-Founder and Chief Executive Officer

Thank you, Zilli. I am very happy with our 2021 results built on some great outcomes for customers that continue to generate the best-in-class growth for investors that you see today. I've never been more excited about the future of the company that I am sitting here right now. We have an awesome leadership team.

The combination of our leading cloud communications platform with Twilio Segment's No. 1 customer data platform gives Twilio an unparalleled view into the customer journey, setting us up as the company that can truly deliver on the customer engagement platform vision. We intend to become the software player that digitally connects every business to their customers to introduce true personalized engagement and relationships in the next chapter of the fab. We're builders.

So, our work is never done, and I'm incredibly eager to continue building the company in 2022 and beyond. With that, let's open the call for your questions.

Questions & Answers:

Operator

[Operator Instructions] Our first question comes from Samad Samana with Jefferies. Your line is open.

Samad Samana -- Jefferies -- Analyst

Hi. Good afternoon. Congrats on the strong finish to the year. It's great to see the organic growth.

Maybe, Jeff, first for you. And just in reading over the prepared remarks, I think the company really did a good job of expressing, moving from just the infrastructure side to more of the solution layer. I'm curious if you could maybe help us understand how the adoption is going for the more solution-based products that the company is rolling out, and how we should think about maybe the traction changing. I know you guys call that IDFA, in particular, as a driver.

Like, are we at an inflection where that's accelerating? Or how should we think about the shape of that adoption?

Jeff Lawson -- Co-Founder and Chief Executive Officer

Yes. Thank you, Samad. So, you know, I think there's two parts to that question, which is essentially, first of all, really pleased with how the introduction of our software layer is going. If you think about -- look at some of the customers that we're talking about in our earnings calls, not just this time, but really every quarter, right? We've got great companies who are adopting Flex and Segment.

Like I love the Vertu Motors example that we talked about today of them bringing Flex and Segment together to make a contact center better. You look at Stripe adopting Flex for their contact center needs and Flex expanding in Global 2000 financial services company and Global 2000 automaker and Nubank, many others, Invisalign putting Flex for their process. I mean, we could come up with so many of these customer stories. But really, the answer is that our approach of in-and-up strategy is a great one because Twilio is used by so many companies around the world.

Every industry, every shape and size, every continent, I mean, this really is -- the need for things like email and messaging is so ubiquitous. And developers see there's so little friction. We're able to use those initial wins and that initial traction that we get to move up the value chain, move up work chart and move up the software staff to then go address the things that our customers are trying to solve, whether it's in their contact center, whether it's in their sales process, their marketing, inside their products. And that is really what the in-and-up strategy that we're talking about is all about: leveraging the ubiquity of Twilio across all these different kinds of companies into building this customer engagement platform that, from our conversations with customers, they all need because they all have to go build great relationships with better customers.

The way to do that is by understanding the customer and then engaging with them. And that's why Twilio having the leading CDP to understand customers. They're in the leading communications platform. They go engage with them.

And this is definitely such a powerful combination. The second part of your question about IDFA provided by privacy. Look, I think the society is on the right track, right, investing in privacy, testing regulation and laws and things like deprecating tracking tokens that, if most consumers knew what had happened on the Internet, they'd be pretty horrified, actually. So, we are on the right track.

And what this is doing is forcing customers, our customers, businesses to focus on the fundamental business. I think about my grandfather. We sold paint to hardware stores in Detroit. And what you have to do is to know your customer and then talk, you know, about their business and how you're going to help them.

But that's the fundamental of the business, understand the customer and talk to them. And so, by investing in privacy, the companies have to actually use the first-party data there to help people use their product, help people use their website, their mobile app, what they buy, what they return, etc., and use all that as signal for how they can digitally engage with their customers and make that experience more personalized and compelling. And so, I believe that is a trend. That is a big trend.

It's a whole direct-to-consumer market that's going -- which -- again, it's like two sides of the same coin, if you will. That means the companies have to build their customer base and then engage them and turn them into repeat, happy, loyal buyers, instead of just turning to customers and then acquiring more by buying more ads. And I think this is a big change they're putting on ecosystem that we and Segment and the CDP and then with the rest of our products helping them follow us.

Samad Samana -- Jefferies -- Analyst

Great. That's very helpful. And maybe just a quick follow-up for Khozema. First, appreciate the additional disclosures and the numbers around organic growth.

That was very helpful by you and the IR team. Maybe if I just -- the outlook for getting to profitability in 2023, I know we're still a ways out from that. But can you maybe help us understand what the assumptions are around -- is that going to come on the gross margin line? Or is that mainly because of opex leverage or revenue mix? How should we think about what allows the company to get to that profitability and what you're assuming in that?

Khozema Shipchandler -- Chief Operating Officer

Yeah. Samad, thanks for the question. Appreciate you asking. So, I think it's actually a combination of things, some that will play out in the short term and then others that will kind of play out in the medium to long term.

So, the way to think about it, I think, at least for the short term is that the improvements largely are going to come from operating expenses. And one of the things that I mentioned in my prepared remarks and as we talked about in the past is that we haven't been investing in a number of areas over the last several years. In particular, what we've been calling out historically has been Flex, enterprise go-to-market, international go-to-market, and the core infrastructure. And we expect that rate of cost growth in those areas just starts to moderate basically in the second half of the year.

And I think a good example of that is our ERP project, which goes live in the middle of the year. And it's not to say that we're not going to invest in the other areas. We will. But I think the lower -- the rate of growth in those investments will be a little bit lower than what we've seen historically.

And I would add that up to this point, we really prioritize growth in scaling the company. And I think growth certainly remains the priority for the company, and we actively made that trade-off historically. But I think we're at the point now where we've got enough scale that we can actually start reaping the benefits of that scale and just become more efficient in our core operations. And so, we see a real efficiency opportunity as we move out, and we're really confident in our ability for non-GAAP profitability in 2023.

I think over the time, in medium to long term, we do expect improvements in our gross margin line as well. Obviously, that number has bounced around from period to period in the short term, not the trade-off, but would be also actively made because we like the fact that we're onboarding customers and have an opportunity to grow with them. But very consistent with what Jeff said a moment ago, as we onboard those customers and really leverage the in-and-up strategy and bring them into higher levels of the software stack, I think we have a real opportunity to provide value to customers, and I think that will bring margin improvement for us as a company. And that's why we stand by our 60% loss over time in the gross margin line.

Samad Samana -- Jefferies -- Analyst

Great. Very helpful. Thanks for taking my questions.

Khozema Shipchandler -- Chief Operating Officer

Thanks, Samad.

Operator

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

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks. Nice to see a strong quarter. Congrats.

Jeff or Marc, I mean, you guys have been on this journey to build out this kind of CRM suite of applications. You referenced this in and up motion, and the product portfolio has certainly matured quite a bit. So, from a go-to-market perspective, looking in 2022, how are you planning to be more aggressive in this up-stack, the up part of the motion? And what would you like to see kick into a new gear in 2022?

Marc Boroditsky -- Chief Revenue Officer

Derrick, thanks. Great questions. This is Marc Boroditsky. It is front and center in the way that we are going to market in 2022.

As a matter of fact, we're in the final days of our sales kickoff this week, and the primary objective that we're enabling the team on are the in-and-up strategy. So, leveraging our installed base and access to customers efficiently through email and messaging, to sell them more broadly on the vision of the customer engagement platform. You may remember, we announced the customer engagement platform with SIGNAL this past quarter. It's resonating with customers of all sizes, driven by their desire to take more control over their digital engagement customers.

And we're hearing interest across the entire arc of their end consumer engagement from top of funnel all the way through the long-term loyalty. So, the training we're doing now as we're looking out to 2022 is supporting our sales team to ensure that they're ready and able to approach the opportunity that we see as significant in the market today.

Derrick Wood -- Cowen and Company -- Analyst

Great. Great to hear. One for Khozema. Could you double-click on the change in your guidance philosophy? How has your approach changed versus what it was before? And I guess, what kinds of new insights have you gained or more comfortable with in order to better predict consumption behavior?

Khozema Shipchandler -- Chief Operating Officer

Yeah. Great question, Derrick. So, as you know, I mean, if we run a usage bases business model, for the most part, we have a little bit of stack in there as well. And I'd say with each passing year, we just had a lot more insight as to the way that customers end up using our platform.

And we're just able to better predict usage patterns over time. And so, what we end up doing with our FP&A team is basically fine-tuning that forecasting model every year. And as we could collect additional information, we're able to be more granular about the ways in which we can do that. So, for Q1, we are refining our guidance philosophy basically to provide guidance that is ultimately more consistent not just with actuals but also to give investors a better approximation of our expected performance.

And as you saw in our Q1 guide, we're showing continued growth of 45% to 47% on a reported and then also 32% to 34% organically. I think it was important for us to call that out. That obviously does include Segment now. And we have a lot of confidence that we'll be able to deliver on our 30%-plus growth target over the next several years.

And just lastly, I would say, Derrick, that we obviously do get a lot of good feedback from our investors and from of our analysts, and we take that into account, too. And I think this just provides for a more consistent setup over time.

Derrick Wood -- Cowen and Company -- Analyst

Great. Well done, and great job on the disclosures. Thanks. 

Khozema Shipchandler -- Chief Operating Officer

Thanks, Derrick.

Operator

Our next question comes from Michael Turrin with Wells Fargo Securities. Your line is open.

Michael Turrin -- Wells Fargo Securities -- Analyst

Hey there, thanks. Good afternoon. Appreciate you taking the questions. Maybe my least favorite question to ask on the call but feels worth asking is on gross margin.

Clearly, the growth is outstanding. The gross margins are stepping back here. It's clear, international messaging strength is carrying forward. But how should we think about the trade-offs and when app services can help flatten that trajectory? And maybe, secondarily, we saw this Syniverse transaction ended this morning.

Is there still a chance you can partner there or comment to improve the core gross margins? Or is that no longer the right way to think about that relationship?

Khozema Shipchandler -- Chief Operating Officer

Yeah. That's a great question, Michael. Let me take the second one first, and then I'll answer the gross margin question more fully in a moment. So, first of all, with respect to Syniverse, I know there is some press that they're suggesting that we might buy Syniverse.

We are definitively not doing that. What you probably did see in some of the press announcement this morning is that the merger agreement between M3 and Syniverse now come to a termination as a result of the mutual agreement between those parties, and that largely reflects market conditions as they stand today. The way that that agreement worked was it did also provide for an alternative path, which is a minority investment in Syniverse. And so, that's now the path that we're going to be assuming.

The commercial wholesale agreement that we also referenced historically, that's very much in place. We have a great relationship with Syniverse. It's been very long-standing, and we intend to continue that. And frankly, that partnership gives us a great product for us to be able to leverage in the United States.

So, I don't really see a significant impact in the near or medium term as a result of any of that, and I just want to provide you a little bit more clarity on some of what have been reported and speculated and clean that up. With respect to gross margins more broadly, for us, and we've had conversations with you and a number of others in the past, obviously, we have this really, really high-growth messaging business. And we feel great about the way in which that business has been performing. And the way that it played out in Q4 was that our international volumes really took off.

And I mean, you're right, like that part of the business carries a sort of lower gross margin structurally, certainly relative to some of the other products that Marc and Jeff have alluded to, but the messaging business also cranks out really significant gross profits that we like and that we want to reinvest. And I think most importantly, as Marc alluded to, it brings us an installed base, which is sort of the door for us to execute our in-and-up strategy. As you saw on the last page of the presentation disclosures, while all of that is going on, our application services are actually growing at a faster rate. kind of the good problem that we have is that our messaging business organically also grew 52% last year.

And so, that's just kind of trade-off that we want to make. As long as we continue to generate high gross profit, as long as we can generate great growth off of application services in Segment, we feel confident that, over time, we will be able to grow into that 60%-plus range that I talked about earlier, and we have a lot of confidence in that. But in the short term, you will see a bounce around a whole bit up and down. And again, in our disclosures, we probably -- we tried to give you some sense of, you know, how the A2P fees and stuff like that impact as well.

Michael Turrin -- Wells Fargo Securities -- Analyst

It's a very comprehensive answer. Appreciate it. Thank you.

Khozema Shipchandler -- Chief Operating Officer

Thanks, Mike.

Operator

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

Mark Murphy -- JPMorgan Chase & Co. -- Analyst

Yes, thank you very much. And I'll add my congratulations. Khozema, I'm wondering if you can shed any light on any specific products that are growing materially above or materially below this organic growth level of about 39%. I would imagine Flex video segment are outpacing.

I'm less certain about voice, email, Authy, some of these products. Just curious if you're able to comment on any of the major outliers there.

Khozema Shipchandler -- Chief Operating Officer

Yes, Mark, appreciate you asking the question. I mean, I'm not going to go through every single product and give the breakdown here, but here's what I will say and answer your question. Again, just referencing the last page of our disclosures. If you look at our growth rate over the course of the prior year, we grew our messaging business at incredibly high rates, 52% organically, which, on any basis, it's really super performance.

And in spite of the fact that that part of the business is growing really fast, our application services category, which includes a number of those products that you just referenced a moment ago, basically pre-Segment, pre-SendGrid, non-telephony-based cost products, that's growing at a faster rate. The good problem that we have is that that messaging business, as you again can see on that page in terms of its revenue contribution, it's just really big. And so, it's going to take some time for this in and up to play out in our financial statements, even though this is playing out very much in real life of our customer base. Beyond that, you also saw in the prior quarter, Segment has a really fantastic quarter, really significant growth sequentially year over year.

Obviously, we don't break that out because of this is inorganic in the prior period, but you can see the sequential wins was really, really strong. And now that it's in our numbers, we still have a tremendous amount of confidence in that 30%-plus over the next three years, which, quite frankly, is off a much higher base, and we have been consistently beating that since the time that we announced that we can do that.

Mark Murphy -- JPMorgan Chase & Co. -- Analyst

Thank you. That's very helpful. And as a quick follow-up for Jeff. You had mentioned the in-and-up strategy.

I'm just wondering how rapidly perhaps your R&D investment is shifting toward products that might be sold more to a marketer rather than a developer. For instance, the customer journey insights, the Engage product, and kind of the orchestration of messages rather than the delivery of messages.

Jeff Lawson -- Co-Founder and Chief Executive Officer

Yes. Thanks, Mark. I mean, you can see we've got investments in, obviously, our Conversations products, in Segment, the core customer data platform, as well as new products are building above those two layers. And the way I think it, which is developers are assisting the sale and for the communication APIs products, like developers, can take us a long way, maybe all the way there.

But for a product into a marketer or in a contact center buyer, you're going to have a line of business that was going to make the final decision. But with Twilio, they get the support of their internal technical teams on the purchase. Meaning the developers, the technical people, they're at the table, telling that this is decision-maker like, yes, that thing that we want to do, we believe we can do it with Twilio. In fact, we've already built the prototype.

And that's important [Inaudible] with sale. As opposed to a world where like -- I talked to a lot of our sales leaders and like the yesteryear careers like power companies, they would be selling their line business owner and the line business owner would say, "Oh, this is great. Can we do this?" They turn to their IT team. And the IT team with arms folded was like, "No, no.

Another work. Can't do it." And so, you've got detractors on the technical team. And I think the magical thing about Twilio is that we can have proponents of Twilio both on the technical side and now with more investment in the sort of application area also in the line of business owners. I think it's a colorful combination, and that's why we focus so much on winning the hearts and minds of developers, are going to bring into the company, and then making them some of our biggest champions as we make our way through the org chart and filling up the value stack of software.

And so, we are announcing obviously in both and help us think of the application products that we're building are also very developer-centric in terms of customizability, flexibility, using codes to really build what companies need is for to those products. We're not trying to provide just a turnkey and like you can't customize that type of solution. We are trying to build products that while they do the things you want them to do out of the box, give you ample footprint to go in and turn them into the solution that the company needs for a long period of time. You don't get state-of-the-art with something that's not serving your needs as markets evolve, as customers demand new things, etc.

And I think our approach is as proven by the adoption, by a wide variety of customers, whether they're the young digital disruptors or whether they're the Global 2000, Fortune 500 companies, I think we see across the spectrum, this approach is working.

Mark Murphy -- JPMorgan Chase & Co. -- Analyst

Very helpful. Thank you. 

Operator

Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Congrats. A couple of questions. One, you noted disclosure of having about 36% of the Global 2000.

And just wanted to get a sense of, is some of your confidence about the 30% growth rate for the next couple of years driven by room that there is within kind of this core customer set? Or is it by the opportunity to win some of the more of Global 2000? I guess I'm just trying to get a sense of how much of it you feel like you've already landed that gives you confidence of that 30% growth rate. Second question, maybe building on what you just said, Jeff. You've made a compelling argument at SIGNAL about why Twilio is best enabled to help customers on their customer journey versus kind of some of the competitors out there. I guess are you finding with customers that you're even having to do some of this evangelism about why you versus others? Or it's still kind of in its infancy where they're just happy to have a solution that you can provide and give them? Thanks.

Khozema Shipchandler -- Chief Operating Officer

Yeah. So, Meta, thanks for the question. Let me take the first part of the 30%-plus dynamic, and then I'll have Marc add to that, and then I'll turn it over to Jeff. So, in terms of 30%-plus, I mean, the reason we have such confidence in our ability to do that over multiple years, it's not just because we have relatively low concentration in G2K.

But at the same time, we were able to do a ton of business that's really creative and innovative with digital disruptors as well. And if you look at the way that the company has evolved over basically since the IPO, like a couple of dynamics have played out, which I think are really interesting and give us the level of confidence that we have in that number. The first is that if you look at the distribution and concentration of our customers, it used to be relatively high. And since then, we've taken on more business in our top 10, while that overall number has consistently shrunk over a number of different years.

And so certainly, you have some large companies in that bucket. You also have some digital disruptors in that bucket who were really taking off. But the real point is that the rest of customer that we serve is massively wide, which means that we're not overly concentrated in any one customer. We're not overly concentrated in any one industry.

And that allows us to grow at scale now. I'd say the second thing is that we've talked a lot about in the call already like our messaging business. But in addition to our messaging business, like we sell a lot more other products that we're able to sell into these customers. And so, our ability to now kind of go up back with our application services, with Segment, with email, I think, allows for another interesting kind of upsell/cross-sell opportunity that we're able to do as well.

And then I would say the third thing, and we've called this out in the past, is that we obviously have been making an investment in our international go-to-market efforts. We're starting to see that really pay off. You obviously saw a lot of takeoff velocity in the most recent quarter with respect to that investment. And so, I would expect to see that continue over time.

And obviously, there are a lot of customers out there in the world that we are really eager to serve. Marc, do you want to add anything to that?

Marc Boroditsky -- Chief Revenue Officer

Yes. Absolutely. Great question, Meta. Picking up where Khozema left off, the opportunity for us is still very massive beyond our existing footprint.

So, primarily landing new logos remains an important part of our in and up execution. So, landing with SMS or email and then being able to build a trustworthy relationship with the customer, as we've referenced a couple of times. That's a true situation across all of the market segments. And as you pointed out, we still have a majority of the G2K out there where we have opportunity to build that initial relationship.

The second dimension is expanding our footprint for reaching after the full white space of the account. And across our entire base, we have that opportunity to go back to those customers and continue to build our relationship and expand the commercial results that we're generating. And then lastly, we're recognizing that there are many enablers that are making a difference for us in the market. Like as an example, we power by two ISVs.

They're selling packaged solutions, again, it's product requirement. As partners, we're helping them to get into more of the base like we are also pursuing with SIs and resellers that are projecting this into other kinds of opportunities. Like what we shared in our disclosures, in our pre-written statements, we are seeing traction with organizations like BPOs. We shared with you on the last earnings announcement this relationship with HGS.

We recently announced a relationship with Teleperformance. And HGS has had significant progress with over 20 of their customers moving over to Flex. Now, these are accounts that are relying on a channel strategy, if you will, for us to become adopters of our platform. So, we're going to be pursuing growth in all those dimensions.

And I think, largely, the opportunity is still in front of us.

Jeff Lawson -- Co-Founder and Chief Executive Officer

And, Meta, this is Jeff. I'll answer the last part of your question about to what extent are we evangelizing to our customers. I mean, the way I look at it is customers have what they need to accomplish, right? Like they've got their challenges. They've got their market dynamics, their competitive pressures.

And what that is leading most companies do is realizing that they need to have these direct relationships with their customers. When I talk to executives of every kind of company you can imagine, understanding a customer, building that complete picture of their customer and then acting on it to improve the outcome of their business, to spend less on marketing, to spend less on advertising, in particular, to increase their retention rates, to increase their -- or decrease their customer acquisition costs and increase the lifetime value, I mean, these are the metrics that drive executives at pretty much every kind of company. And I think oftentimes, what happens is the people -- the more bottom-up motion that Twilio has are the people on the front lines who are tasked to solve these big problems, and everyone recognizes that Twilio can solve these problems. They bring Twilio in.

And then we follow up with some more top-down education around the market, a new approach. And I think that's working very well. We have both a bottom-up and a top-down approach to our customers. I'll share a quick story with you, which is -- which I felt was sort of illustrative of this, which is interesting.

I was talking to the CEO of one of our customers, a pretty large company in the education space, and they've been using our products. And I was telling them about our engagement platform, and I was talking about Flex and Frontline and Engage and all these new products we've been bringing to market over the last several years. And the CEO stopped me in my tracks, "Wait, wait, hold on and share the screen, share the screen. I'm doing -- saying, I just got the report here that says the old way of doing it with monolithic apps and the new way of composable APIs.

Jeff, you're not getting rid of APIs, are you?" Of course, I was like, "No, no, no, of course not. We're building all this with our own APIs. We're making it so that you can actually build on top of these platforms and unlock the things that you're trying to unlock by integrating these experiences together and hiring developers, building for your customers." And he was like, "OK. OK.

Whew, I'm glad to hear that." And it was so interesting to me to hear the CEO of like an education company evangelizing to me the value of APIs, the value of composability that it was mobilized there. A lot of these ideas are now widespread, right? Think about the fastest-growing companies in the software and technology space, companies like AWS, like Twilio, like Stripe, I mean, these are APIs. These are the building blocks that allow companies to go build their future and innovate with their customers, increase the agility of their company. That is what customers want, and we are able to provide it to them.

And there's always some degree of evangelizing when you are kind of moving the technology all forward. It's not like we're just selling guacamole, and everyone knows what that is. It's just a question of whether you want cilantro or not. Really, this is technology and how technology is enabling them to build their business, which does take more time in education than just selling guacamole.

But I like the business that we're in.

Meta Marshall -- Morgan Stanley -- Analyst

Perfect. Thank you so much. 

Operator

Our next question comes from Alex Zukin with Wolfe Research. Your line is open.

Alex Zukin -- Wolfe Research -- Analyst

Hey, guys, thanks. I want to ask you maybe two questions. First one on -- and I don't know if maybe somebody has already asked this, but I'll try it a different way. When you think about the major differences in the demand drivers between Q3 and Q4, obviously, it was just two very different quarters.

And, Khozema, you mentioned it's a consumption-based business, and inherent in that is some volatility. But just help us understand, if you can or if you would, what were kind of the biggest differences? Like what made Q4 just such a great quarter relative to Q3? And then the follow-up is just how to think about now particularly with Segment going into the organic bucket, what's the right way for us to think about a model dollar-based net expansion going forward? I know you're not -- that's not a metric you guide to, but any help there would, I think, at least help set the right model framework going forward to better understand the various components.

Khozema Shipchandler -- Chief Operating Officer

Hey, Alex, those are good questions. Appreciate you asking. I would say in the demand driver space, I mean, there's nothing materially that really changed from one period to the next. I mean, we talked a lot about the fact that this is a usage-based business.

And in being that kind of a business, you're always going to see like a little bit of an up and down period to period. You're going to see certain customers take off. In certain periods, you're going to see a little bit of domestic versus international mix. I'd say in the most recent period, international like really took off.

And so, that was something that we feel really good about obviously because that's an investment that we've made over a number of different years. But it's not like we're trying to necessarily like tune the business so that international kicks off one period and domestic goes a different way or that one product set goes one way or the other. I would just really kind of point to broad-based strength across the totality of the business, and we feel like the business was really good in Q3. We felt it was really good in Q4, and we really like the setup coming into 2022 and multiple years beyond.

So, it's hard for me to really point to like that one thing, which I think is really the base of your question. There really isn't one other than we have broad-based strength across the business and feel good about the performance. I think with respect to the way that you should think about Segment getting layered in, I mean, we obviously have provided separate disclosures on Segment on a year-over-year basis. We haven't kind of broken out.

That's TBD. There will be -- I don't think I'm going to guide to that here today. What I will tell you is, is that we feel really good about the growth prospects of that business. You could probably intuit from the fact that it was up 10% sequentially that we really like the growth trajectory of where it's headed.

And I think you can probably indicate from Marc's and Jeff's comments that we're seeing tremendous traction with customers there, not just in terms of what we can do in combining it with messaging but also with respect to combining it with Flex, which is really, really exciting. And we think that business has really, really strong growth prospects going forward.

Alex Zukin -- Wolfe Research -- Analyst

Indeed, indeed. Well, thank you, guys. Congratulations.

Operator

Our next question comes from Will Power with Baird. Your line is open.

Will Power -- Robert W. Baird & Co. -- Analyst

Great. Thanks. A couple of questions. First one, perhaps for Khozema, you pointed this out, but international growth clearly accelerated.

It looks like quite a bit, and it sounds like messaging was a big piece of that. I'd love if there's just any other color as to what the drivers behind that kind of surge in international messaging might have been and what else you might have seen internationally that drove some of that acceleration.

Khozema Shipchandler -- Chief Operating Officer

Yeah. Thanks for the question, Will. I'd say there's two dynamics. I think the first is that it's -- you've been a longtime follower of ours, obviously, and we've talked a lot about our international go-to-market investments.

And Marc built a really great team internationally, and I think we're really starting to see the fruits of that investment. And you've seen that, I think, over multiple quarters now with our ability to grow in international markets. I think the second dynamic is, is that there was one customer in particular whose volumes really, really took off in Q4, which we felt pretty good about as well. That happens from time to time, too.

And I'm positive this gross margin dynamic is helping that as well. But I feel great about the way that international lands, and we think there's continued strength over a long period of time.

Will Power -- Robert W. Baird & Co. -- Analyst

OK. Great. And then -- and maybe for Jeff, just building on some of the other commentary, just looking at your growing strategic position around first-party data, the in-and-up strategy that you've referenced. What are the pieces that you think could bolster that further? I mean, it doesn't sound like you guys necessarily need anything.

But are there natural tangential areas that, you know, further solidify that? And I guess more broadly, maybe how do we think about, you know, kind of the M&A pipeline and appetite here?

Jeff Lawson -- Co-Founder and Chief Executive Officer

Yeah. Thanks, Will. Appreciate the question. First of all, just sort of like what are the pieces that bolster it, and I think it's continued execution.

I mean, we've got products that, at great revenue scale, will continue to expand very nicely. So, when I think about how are we continuing to make sure our messaging product is best-in-class or a product is best-in-class, Segment, I think it's fantastic for bringing customers in as well. So, we've got a lot of best-in-class products. We've got a lot of the pieces, and we're in the process of bringing them together.

And so when I think about what is ahead, it's like we're bringing these pieces together, and we've got, really, three pillars of our engagement platform. We've got Engage for the marketer, which is still very early in its cycle. By the way, we just announced it in Q4. We've got Frontline, which can be used by frontline workers and even sales teams and things like that.

And then you've got Flex for the contact center. So, clearly, there's a lot of buyers there. There's a lot of TAM there already, and we're continuing to bring those together, bring those products to more and more and more customers. As far as M&A pipeline, I mean, I'll give you the answer that I always give because it's true, which is that we always have an active game board because, obviously, if there are acquisitions out there that are accelerating our road map, we should be willing to do that.

But we also, of course, maintain a high bar. Great companies, great cultures, great products, and those are things that we're interested in. But we don't have any particular strategic goal or anything that we're going after. But of course, like any company of our size and with our balance sheet, we're aware of what's out there.

Khozema Shipchandler -- Chief Operating Officer

Will, I'll just add one comment with Jeff at the end there, which is, obviously, in the current market, there may be some attractive opportunities, and we'll be on the lookout. But the reality is we're very, very focused on our organic growth rates right now. And we want to continue growing the business that we've got. We don't see a burning need to necessarily do anything.

And I would just reiterate for anyone that missed earlier like there was some speculation that we might purchase Syniverse, and we're certainly not going to do that.

Will Power -- Robert W. Baird & Co. -- Analyst

Yeah. Appreciate that. Thanks.

Operator

Our next question comes from Ryan MacWilliams with Barclays. Your line is open.

Ryan MacWilliams -- Barclays -- Analyst

Thanks for taking the question. Looks like Twilio's presence in Global 2000 customers doubled since the end of 2020. So, congrats. Jeff, I know it's still early, but would love to hear about the strategy and expectations behind Engage and how customers so far are starting to come around the idea of using Twilio as their like unified customer engagement platform.

Jeff Lawson -- Co-Founder and Chief Executive Officer

Absolutely. I'll start with Engage. I mean, the way we see the market is that historically, marketing automation products, they're focused on running a campaign, right? So, you get creatives in there. You [Inaudible], and you get to see how many people will open the -- some people will open the campaigns.

And like that's the way they were designed 15, 20 years ago, and that's still a product that most companies use today. But actually, the more modern marketing stack is one that's driven not by campaigns but by data. It's actually driven by a rich set of data, about every customer and who they are and sort of what message is going to actually resonate with most of them. And by the way, all I'm looking for isn't just if they open an email.

It's like if they make a purchase, if they increase their lifetime value, are they actually a more valuable customer? And these are anything like complex sets of campaigns, multi-brand analysis. Like great marketers today are using data in incredibly interesting ways that the legacy marketing software just really isn't set up to accommodate. And that's the opportunity that we're going after. And we're going after a very data-centric approach to marketing in the belief that many marketers are already there.

And the ones who aren't are going to get diverse. And I think this was already proven out by the traction that the Segment CDP has in the market because the CDP is actually how we rate the whole campaign. It's actionable insights to the marketer. The last step is just trying to -- it's actually the campaign.

And that's what we're adding on with Engage. But the hard part about that whole equation is the data part. And we already do that. We're already leading the market in that.

And so, adding actually the marketing execution side onto it is actually a relatively likely occurrence. We're very expected by the feedback we're getting from our early customers. We think that we've got a really novel and attractive approach. And ultimately, at the end of the day, look, it is the same budget.

We're going after the legacy products we enjoy today because that's the marketer's budget. But I think that it's where the market is going, and I think we're going to have a leading product as the market is getting there. And you already see traction in some of the market going on. The second question, Ryan, was it guidance --

Ryan MacWilliams -- Barclays -- Analyst

No. That was great color. Appreciate it. Just my second one is for Khozema.

Just pleased to hear about non-GAAP operating profitability for fiscal '23. Just getting some questions here on gross margin. Like I completely understand how it can vary from quarter to quarter. But as we think about the path forward from here, can we think about gross margin being higher on a yearly basis going forward given the elevated growth in the higher-margin application services business?

Khozema Shipchandler -- Chief Operating Officer

Yeah. Ryan, I think it's a totally fair question. We're not going to guide on a year-to-year basis per se on gross margins. What I will say, though, is that we feel very, very good about the progress that we're making on application services.

That's kind of the nontelephony-based cost product that we have. That's Segment, SendGrid. As you saw our exposure in the prior year, that grew at a much faster rate than even our very fast-growing messaging business. And so, as that trajectory continues, we feel very good about the prospects to get to our 60%-plus target, to which I would add, we feel really, really good about the way that Segment is going.

We feel very, very optimistic about how Engage has already started. And so, the combination of those factors, I think, gives us very high confidence in 60%-plus over time. In the meantime, as long as the messaging business that we put on generates high gross profits, we are comfortable from period to period with that gross margin number bouncing a little bit up and down. But over time, we still feel very good about 60%-plus.

And I think we have a great track record with investors of delivering what we say we'll do. And I think over time, we will get to this 60%-plus.

Operator

Our next question comes from Fred Havemeyer with Macquarie. Your line is open.

Fred Havemeyer -- Macquarie Group -- Analyst

Hey, thank you. J Jeff, Twilio's products and platform has certainly expanded a lot since, I think, its heritage as a platform and channel to be able to recall people back in 2008. And I wanted to ask, from your perspective as Founder, whenever you put on your coding gloves and you're thinking about what's exciting on Twilio's platform and what are the products that are disruptive or interesting or that you would use to build the next iteration of start-ups and growth businesses, what gets you most excited about what is happening with Twilio?

Jeff Lawson -- Co-Founder and Chief Executive Officer

Well, that's a fantastic question. When I think about it, it really goes back to the mission of our company. And if you noticed, we updated our mission last year, and we talked about it a little bit last year. And we'll talk about it more in some upcoming venues.

But like we updated our mission to really reflect the reason why I and so many of Twilio get out of bed in the morning, and it's to unlock the imagination of the world's builders. And what's so exciting about that mission is that people are [Inaudible] -- the world that we see today is created by people who build, and there are builders for thousands and thousands of years. And what you see now happening in the world of software, in the internet is people building at a scale that was previously unimagined. A developer or a start-up or a company can build a product.

And if they build the right thing, millions or billions of people can become their customers practically overnight. And that is a scale of execution and an idea that I think is underappreciated in the world, that with software and the Internet and the distribution mechanisms that the Internet provides, anybody can be a builder. Anybody can unlock a new idea, and that goes for developers. That goes for a wide variety of builders inside of companies.

It also goes for the companies themselves. And I love seeing when a start-up enters a market, it comes out with some great new big idea. And then the incumbents follow suits. And actually, they start coming up with big new great ideas.

Like I've been watching what's going on in the EV market, for example. It's like Ford has done a great job bringing out cool new EV products. I'm like, I'm going to [Inaudible] by mentioning these things. But it's really cool to see how the markets evolve and software ultimately becomes this vehicle, no pun intended, for companies and people to change the world.

And so what gets me tremendously excited about the products that Twilio builds is that we get to unlock the imagination of the builders who aren't ours. And for so long, companies have been told -- because they bought a bunch of apps, that's all of their business. They have an app for this, an app for that. And then they had this idea, they're like, "Oh, we want to go -- like our customers want this.

Let's go do that." And when you're told, you're like, "No, it doesn't do that." And you're told, "No, we can't do it." And what I love is giving our customers the path to yes. This idea that we have for how we're going to better serve our customers, so we're going to help innovate our competition, the answer is with Twilio it's yes. And that's our API. That's our platform approach.

That's Slack. That's Frontline. That's Engage. That is Segment.

This is unlocking the imagination of the world's developers. And like aside from the various TAMs of like marketing and contact centers and messaging and all that stuff, if you take a step back and you think about the addressable market of people who build, like that's the story of humanity. And that's my favorite part about building Twilio.

Fred Havemeyer -- Macquarie Group -- Analyst

Thank you.

Operator

Our next question comes from Matt VanVliet with BTIG. Your line is open.

Matt VanVliet -- BTIG -- Analyst

Yeah, thanks for taking my question. Nice job on the quarter. You've kind of touched on parts of this, but I wanted to maybe bring it together in one -- for ease of question. When you look at Segment and the rate of adoption across the enterprise, it seems like the idea maybe at the very high end, Jeff, to your point of talking to a CEO, it's a great idea.

Everyone realizes that they need more data to be smarter and more individualistic in terms of their outreach. But in reality, how many of these companies that you're talking to are ready to implement Segment? How much of sort of a customer education and maturity level is broadly out in the market? And maybe the follow-up to that is, is there a potential that you could see this pretty dramatically accelerate over the next couple of years as companies get a little smarter maybe or technology a little more up to date across other parts of the organization to really leverage Segment?

Marc Boroditsky -- Chief Revenue Officer

Matt, Marc Boroditsky. Great question. And it's a added lens to the earlier question regarding the opportunity that's in front of us. The opportunity is it cuts across the entire market.

We see the interest that comes from small customers all the way to the largest customers. And your point about are they ready to adopt, we see requirements to start with a use case where literally, they need to be able to connect a couple of real-time data sources to be able to have an understanding of the customer and then provide whatever interaction that's going to take place to progress customer relationships. So, imagine, if you will, connecting to a CRM, connecting to a point-of-sale system, connecting to whatever the app is that the company runs their business on, to be able to get to that understanding and then be able to respond in the channels of the customer's choice in order to have that interaction. And that -- it can be across the entire arc of the customer relationship.

What we see happen is that we can move from that use case orientation to strategically more and more of their customer requirements and be able to address a greater set of commercial requirements that position CDP as a strategic part of the way that they think about building and expanding their relationships. So, like as an example, we shared today the Vertu Motors example, where they have implemented Segment in order to understand the caller that's calling in to be able to look up and see that they're, in fact, customers that bought from them in the past. They're able to see what car they bought to know what the residual value is and then prepare the agent to be able to have the right conversation with that customer and be able to more than likely sell them another car. We're seeing that kind of opportunity from use case to expanded, strategic, full customer life cycle requirement.

Matt VanVliet -- BTIG -- Analyst

Great. And then I guess on the Flex side of the business, are you still traditionally going in and replacing or sort of augmenting and building on top of legacy on-prem solutions that have just maybe run their course of functionality? Or are you increasingly seeing opportunities where customers rush to get anything that was supposedly cloud or hosted at the beginning of the pandemic but now realize that it's -- they can't configure it, they can't do actually what they wanted or what they thought it could and are now looking at what Flex and Twilio more holistically can mean as a five-, 10-, 15-year partner from a technology perspective?

Marc Boroditsky -- Chief Revenue Officer

In smaller customers, so think of this as like digital disruptors up to like the mid-market size account, we do have a fairly healthy portion of the business that is their first real implementation of a contact center type solution. They may not call it contact center, by the way. They may call it their support solution or their customer engagement solution. Then as you move up to large organizations, more legacy implementation, you actually see a lot more of the installed base.

We have a fairly healthy augmentation business, as we called out in our remarks, that people are adding new channels and new capabilities in parallel with their legacy implementation. But we're also winning more and more replacement of legacy implementation. The example that we shared in our prepared remarks regarding Align, which is a great customer example, a very digital-oriented business that have a legacy supplier that actually faced some challenges. And the customer was able to rapidly spin up a replacement implementation on Twilio that is now their standard for their requirements going forward.

Now, that's not the way that you're necessarily going to win the business overall. We're not going to wait for people to fail. We're showing that in helping customers recognize that the next generation of engagement can't be satisfied with the legacy player in the way that Flex can. And we have many examples that range from Fortune 100 banks to Fortune 100 -- Global 2000 automotive manufacturers that have successfully implemented Flex to meet their full requirements.

Jeff Lawson -- Co-Founder and Chief Executive Officer

You know, Matt, this is Jeff. And I just thought I'd add one thing, which I thought was interesting. When I was first getting into Segment before we did the acquisition, I was really struck by their penetration into the enterprise. And we've had a number of great enterprise customers speaking about their implementation of Flex.

Just at SIGNAL, we had Procter & Gamble, who's a great customer. We had Intuit, the CTO of Intuit, Marianna Tessel, on stage talking about their use of Segment across all their properties. We have a Fortune 100 financial services company that we just announced in this quarter that we signed in Q4. Nike is one of customers, right? So, we've got great enterprise customers who are using Segment already.

And so, I was struck by how early the need in the enterprises has been apparent. And when you think about the more complex businesses, the more subsidiaries there are, the more brands they run, the more systems they implement, the more the need is for a customer data platform to help them make sense of all of it. And so, I'd been really pleasantly surprised on the track even before the acquisition that Segment already had in the market, and that's what we need for CDP.

Matt VanVliet -- BTIG -- Analyst

Very Helpful. Thank you. Very helpful.

Khozema Shipchandler -- Chief Operating Officer

Great. We are out of time. I know there's a lot of folks that still have questions in the queue. We will catch up with you this afternoon.

So, otherwise, thank you, everybody, for joining, and look forward to catching up over the rest of the quarter.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Andrew Zilli -- Vice President of Investor Relations

Jeff Lawson -- Co-Founder and Chief Executive Officer

Samad Samana -- Jefferies -- Analyst

Khozema Shipchandler -- Chief Operating Officer

Derrick Wood -- Cowen and Company -- Analyst

Marc Boroditsky -- Chief Revenue Officer

Michael Turrin -- Wells Fargo Securities -- Analyst

Mark Murphy -- JPMorgan Chase & Co. -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Alex Zukin -- Wolfe Research -- Analyst

Will Power -- Robert W. Baird & Co. -- Analyst

Ryan MacWilliams -- Barclays -- Analyst

Fred Havemeyer -- Macquarie Group -- Analyst

Matt VanVliet -- BTIG -- Analyst

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