Twilio can’t seem to catch a break. After enjoying the meteoric rise in SaaS stocks during the pandemic, over the past months Twilio’s stock has continued to slide as the company slowed hiring, closed offices, and limited travel in July and then announced restructuring plans that would lay off 11% of its workforce in September.
Now Twilio’s stock is down again after providing a weaker outlook than expected last week, reaching its pre-pandemic lows. The company forecast $3.80 billion to $3.81 billion revenue for the year, which falls short of its 30% annual growth target. It’s a drastic shift for a company that was growing at an explosive 50%+ over the past several years thanks to demand for its communications APIs.
Twilio is still growing, of course, but its trajectory has changed. While macroeconomic factors are partially to blame, the company also made a number of internal missteps, chief operating officer Khozema Shipchandler told Protocol in a recent interview. During Twilio’s investor day on Thursday, company executives admitted they tried to grow the company too quickly, adding excessive head count, failing to integrate sales teams properly, and struggling with the trade-offs between profitability and growth.
Now Twilio is trying to course correct, reducing sales and marketing spending, while also shifting future hiring to lower-cost geographies, closing offices, and reducing stock-based compensation. All of this restructuring is estimated to reduce operating expenses by more than $300 million, while putting the company on track to reach its goal of profitability next year.
In our conversation Shipchandler discussed some of the mistakes Twilio made in its quest for growth and how the company plans to move forward.
This conversation has been edited and condensed for clarity.
Obviously Twilio had some pretty crazy growth over the past years, and now it's slowed down. Do you think part of that is just getting bigger as a company and growing or do you think Twilio grew a little bit too fast?
I think you have a few dynamics. I think the company's always kind of prided itself on being a high-growth company. And if you think about sort of the roots of the company, right, we started in voice and then we quickly went into SMS, and SMS kind of took off at the same time that the company really took off. And I wouldn't say that was really a coincidence, right? The company promulgated a really easy-to-use SMS API capability, businesses realized that customer engagement was really important, and communications are one of the principal ways in which you achieve that. And it turns out that a combination of using voice and email and, increasingly, especially SMS, were just great ways to do that. So the company really was a beneficiary of what I would just characterize as secular growth, basically.
And then COVID came along and all of a sudden we're in various forms of lockdown and businesses basically had to figure out almost immediate ways to continue to engage with customers without the benefit of an in-person interaction, right? And if you think about it, just through the lens of your experience as someone that went through COVID and the global pandemic, here we are, we're sitting at home, but we still have to interact with physicians, we still have to interact with our banks, we still have to interact with the day-to-day stuff like getting groceries and getting deliveries from retailers, vis-a-vis ecommerce. And so [Twilio was a] big beneficiary during COVID as a result of COVID dynamics.
So fast forward then to today. Wow, tough macroeconomic backdrop, things are really happening very quickly in the landscape. I think crypto was kind of the first to go, then social media was kind of the next to go. I think now we're seeing a lot of the bigger guys, we're certainly not immune from that either, really starting to indicate that some of that growth may be coming down. But make no mistake, we're still a very high grower; we intend to be for some time. The financial priorities of the company are not really all that different. The customer engagement opportunities are no different. We're just looking at a different time.
I know you had the 30% [annual revenue target] at the beginning of the year. Are you pulling that annual revenue growth target completely?
We're pulling it for the foreseeable future. I mean, the thing is, even just 90 days ago we put up a pretty strong quarter. We published our third-quarter results and not even 90 days but 30 days ago we put up our third quarter results, and we grew 32% year-on-year organically. And [in] just 30 days in the world has really changed quite quickly. And so for us, we've been saying for a while that we can grow for a long period of time at 30%. All of a sudden you've got tons of macroeconomic forces, and it just didn't make sense in a world in which consumer-on-demand and social and retail is really feeling the effects of, hopefully not a prolonged recession, but all the same, something significant macroeconomically. It didn't make sense to keep putting out that number. What we did say was that we could continue growing at 15% to 25% over the medium term. I personally think that we could be a bit better than that, as the economy recovers. That’s the way that these things tend to go but that's the guidance that we put out there.
What about for next quarter? I think guidance is around 18% to 19% growth. What do you think accounts for that sort of muted growth?
It’s macroeconomic. I mean, it's in that strike zone of 15% to 25% that we'd sort of put out in the medium term. The thing is, we see pretty clear signals that something's happening in the macroeconomic environment right now across a number of different industries, some of which we called out in our investor day. And I think what's really tough is that when you're in a usage-based business, you don't have the benefit of a floor, if you will, that you do with a SaaS business. And so the ups that we enjoyed during COVID when usage was really taking off, we were beneficiaries of that. On the other side, it doesn't feel as great but we're still growing really fast in spite of the economic headwinds that we're facing, and I think as the economy recovers, we'll be one of the first out.
One thing that was talked about [at the investor event] a decent amount was the go-to-market strategy and how that might be shifting. And then also some of the challenges with integrating Segment and having different sales teams and different sales processes. Can you talk a little bit about what those changes will be, why it's important and what that will enable and drive for Twilio?
Sure. So if you go back, not to give you a history lesson, but if you go back several years, the company actually didn't have that many salespeople. If you go back to 2015, 2016, that seems like eons ago now, but we really didn't have that many salespeople back then. And the reason was the heritage of the company was really product-led growth. And so there was much more of a self-serve capability. We could still do this, by the way, but you and I would go to the website. We would find that we really like the APIs, we find that it's really easy to use, we swipe a credit card once we got through the free packets, and our usage would just ramp. It worked out a little bit differently for companies but pretty much the same concept.
I think what's really tough is that when you're in a usage-based business, you don't have the benefit of a floor, if you will, that you do with a SaaS business.
And then I think what we realized was, “Wow, we're probably limiting ourselves by doing it entirely self-serve, we should also have an outbound sales force.” And so we hired executives that were scaled executives in that regard. They knew how to do this sort of thing. They brought in experienced executives in sales and we grew out a big sales team. And they served a variety of segments, a variety of geographies, and in a handful of instances they served certain verticals.
And I think the gist of it is, that it just got too big too fast, and that's what you've seen happening a lot in tech recently. And so it made sense I think, a) for us given the fact that we knew the future of the company would be much more around Segment and Flex, and I'll come back to Segment in a second. And b) we felt like there was an opportunity to drive a lot more efficiency and effectiveness in the general sales force and we'd be able to better align incentives and stuff like that. So basically what we did was we went into the restructure and said, “Okay, how do we get back to our roots?” How do we drive more product-led growth, how do we still deliver a high service capacity for customers, but let them do it in a more self-serve fashion, because the experience is so great, the documentation is so great, the APIs are so easy to use, which is honestly the roots of the company to begin with.
As it relates to Segment specifically, basically what happened was, we bought the company a couple of years ago, midway through the integration we decided to integrate the sales teams [and] thought that would be a great idea. We would take a relatively small sales force with Segment, combine it with a relatively large sales force in Twilio. We felt like adding an additional product into the bag of the sellers, what could possibly go wrong? And it didn't work out so great, frankly.
And the reason in large part was that you just have a very different buying persona in one versus the other. And even in Flex for that matter. The vast majority of our selling capacity is aimed at the developer or some sort of enterprise buyer who's decided that Twilio has now become a significant cost center in their business and so they want to manage it a little bit differently, probably the CIO. In the case of Flex, it's very much customer service or the head of operations. And in the case of Segment, you're calling on the CMO and she has a different set of needs and interests than [do] those two other constituencies. And the reason it worked so well with Segment was because they had very specialized folks who could call on that CMO and meet her needs. And so basically what we decided after going through a couple quarters of it was, we weren't getting the traction that we expected, that the buying persona distinction that we initially saw was actually going to be hard to overcome in the short term. And we pivoted back to the model that was.
The unfortunate thing that happened in the middle of that is that we had some relatively high attrition within the Segment sales force. And so, as of today, we've hired back all the capacity. We've got to ramp them now, but I think we will and I think we'll continue hiring more Segment salespeople.
And how are you thinking about geography now? I know [Twilio] is shifting to remote first and they mentioned hiring in lower-cost geographies. I know some companies are doing fixed pay regardless of geography.
Well, I don't think anyone's doing fixed global pay. That would be new to me. I think you do have companies that are doing kind of fixed U.S. pay or I think most of them are doing something more akin to what we do, which is really flattening out the pay tiers within the U.S. I think it used to be that — I grew up in Indiana so I'll pick on my home state — someone that was situated in Indiana versus in California there's a pretty significant pay differential because of cost of living, basically. I think post-pandemic, what everybody said is basically, “Look, I can live and work and be effective anywhere, and why should I be penalized in my pay because of that?” I think that does make sense to a certain degree, I do think there are cost-of-living considerations. So we've operationalized that by thinning out the pay tiers, so that there's just fewer discrepancies place to place. So that's in the U.S.
I think the gist of it is, that it just got too big too fast, and that's what you've seen happening a lot in tech recently.
I'm a big supporter of remote work. We're kind of a remote-first company now. I think that's a nice move. I think it's great in terms of being able to attract diverse talent as well, which is really important to us as a company. I think, globally, we've always had sort of a global footprint, we want to grab the best talent wherever it is in the world. I think it's also helpful for continuing, especially in engineering, on a development cycle that's kind of around the clock. And then I think in certain functions like [general and administrative], customer support, stuff like that, there are just lower-cost places in the world to do certain things that just don't require the same cost footprint, and so I think you get some labor arbitrage there.