Hello and welcome to the Twilio fourth quarter 2023 earnings conference call. After the speaker's remarks, there will be a question-and-answer session, and if you would like to ask a question during this time, simply press star 1 on your telephone keypad. I will now turn the conference over to Bryan Vaniman, Senior Vice President of Investor Relations. Please go ahead. Good afternoon, everyone, and thank you for joining us for Twilio's fourth quarter 2023 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 are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliation between our GAAP and non-GAAP results can be found in our earnings release and our prepared remarks posted on our IR website. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements except as required by law. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q4 and full-year results, and then we'll open the call for Q&A. Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. Twilio had a terrific fourth quarter to close out a strong 2023. We exceeded our revenue and non-GAAP income from operations targets for the quarter, delivering nearly $1.1 billion in revenue, $173 million in non-GAAP income from operations, and $211 million in free cash flow. Before jumping into the results of the quarter, I wanted to start this call, my first as Twilio CEO, by sharing that it is a privilege to be leading this company into its next chapter. I believe there is an incredible opportunity to unlock increased value for customers and shareholders. As we continue to innovate, we're focused on combining the power of communications, data, and AI to make every interaction more personalized and intelligent. Our vision to become the leading Customer Engagement Platform is unchanged, and we are executing on this from a solid operational foundation and a fundamentally strong competitive and financial position. We have a great set of products and hundreds of thousands of customers who are committed to Twilio because we are bringing tremendous value to their businesses. Over the last year, we took significant steps to enhance our focus and execution while optimizing our capital allocation strategy. We also took meaningful actions to streamline our cost structure, accelerate our path to profitability, and deliver durable growth. Our teams delivered on these objectives in 2023, and the numbers underscore this. During 2023, we generated $4.2 billion in revenue, improved our non-GAAP operating results from a non-GAAP operating loss of $4 million in 2022 to non-GAAP operating income of $533 million, delivered $364 million in free cash flow, and reduced our stock-based compensation, excluding restructuring expense, as a percent of revenue by 450 basis points year over year. All of this hard work enabled us to take significant strides on our path to GAAP profitability. Our product teams have worked to infuse AI capabilities into our Customer AI solutions, enabling us to continue on our promise of more intelligent communications for our customers. Our Twilio Communications business continues to demonstrate meaningful leverage, which helped to drive the impressive financial performance that Twilio delivered for the year, and we will build upon this momentum in 2024. At the same time, Twilio's Segment is not performing at the level it needs to, and I've already begun to take a closer look at this business to see how we can deliver improved performance. I'll touch on this a bit later. Our Twilio Communications business, which drove 93% of Twilio's revenue in 2023, had a very strong fourth quarter with revenue of just over $1 billion. For the full year, it generated revenue of $3.859 billion and grew 11% year-over-year on an organic basis. I had the privilege of leading Twilio Communications over the last year, and I am extremely proud of what the team accomplished in terms of increasing both operational efficiency and product innovation. Throughout the year, we undertook a number of actions to drive increased operating leverage and further streamline our go-to-market activity. We continued these efforts in Q4 by moving both Flex and Marketing Campaigns into Communications, and the results we are reporting today reflect this shift. With these changes, we're better aligning how our customers want to buy our products and are also taking advantage of natural upsell and cross-sell opportunities. We also delivered aggressive product roadmaps and saw early signs of success with Customer AI. In Q4, Twilio Voice Intelligence, an AI-powered capability that enables our customers to extract data insights from their call recordings, was released in beta, and customers have already used it to analyze over 42 million call minutes. Our traffic optimization engine and the traffic shaping algorithm are examples of innovations we introduced to drive greater flexibility and increased performance in our messaging products. Our products also set new records by sending over 4 billion messages and 64 billion emails during Cyber Week, with 100% uptime across core messaging and email, a testament to the scale and reliability of our platform. Our innovations are also getting recognized externally as we maintain our position in the CPaaS industry, as evidenced by the fact that Twilio is named a leader in the 2023 Gartner Magic Quadrant for CPaaS and a leader in the Omdia Universe Customer E ngagement Platforms 2023 to 2024. We're continuing to deliver impressive customer wins. In Q4, we signed our largest messaging deal to date, a nine-figure commitment with a leading cloud communications software company. We're also leveraging our network of ISVs and partners to accelerate our ability to reach new customers and expand our geographic footprint. For example, we signed a three-year, eight-figure deal with Airship. Airship's mobile app experience platform powers trillions of interactions for thousands of global brands, and they will become an important partner where our customers will be able to leverage a fully integrated cross-channel orchestration solution for both messaging and email channels. Our partner channel is certainly proving to be an area of opportunity for us and one we will continue to focus on this year. Our Twilio Segment business, formerly Twilio Data and Applications, while still strategically important to Twilio, continues to underperform. Although we drove sequential bookings improvement in Q4, growth is not yet accelerating up to our expectations. We need to execute better, and I believe that we can. Over the past five weeks, I've been working with the team to conduct an extensive operational review of Segment, and this work is ongoing. We plan to do a readout of these results in March, at which time I'll be ready to share our findings, path forward, and any changes to Twilio's financial framework as a result. That said, the Segment product teams are laser-focused on shipping updates to customers, and we're seeing a great response to our Customer AI Innovations. Since becoming publicly available in Q3 2023, Customer AI Predictions have been adopted by over 150 customers, and our Customer AI Recommendations tool, which helps determine the products that are most likely to drive purchases and engagement for each unique customer, went live in a private beta in Q4. Staples Canada, a leading provider of services, tech, and other merchandise solutions for work and school life, was able to leverage Customer AI Recommendations in its effort to provide more personalized recommendations to sell excess inventory and improve their cross-selling efforts. It's abundantly clear that Segment is a powerful product that is driving meaningful value for customers and demonstrating market leadership, as evidenced by IDC's most recent reports, where Twilio is in the Leaders category in the 2023 IDC MarketScape on customer data platforms for the financial services industry and the number one CDP for 2022 market share. We continue to see strong traction with customers recognizing the unique value proposition of combining our communications and data capabilities. In the fourth quarter, we signed a competitive multi-year, eight-figure deal with a leading U.S. financial services company whose usage of our platform spans both Communications and Segment. They chose Twilio to meet their needs both internally and externally with their customers. Internally, they're deploying Segment so they can get a real-time and personalized view of their end users across multiple business units. They will leverage Segment's Zero Copy Architecture to query their data warehouse directly to efficiently and securely enrich Segment profiles. Externally, they're deploying Verify so that the millions of customers who rely on them can get a seamless and secure authentication process when logging in. We also signed a seven-figure deal with an international salon management software company. With Twilio, this company moved away from the incumbent providers and now relies solely on Twilio Messaging for all of its one-to-one messaging with customers. And the company already deployed Segment for its B2B business so that they are able to have a better customer view of those purchasing beauty products directly from them. These customers are leveraging Twilio to not just bring their communications and data together but to help them personalize and build lasting loyalty with their customers. Our team enters 2024 focused on making balanced and intentional decisions that will help us to deliver durable, profitable growth. Our priorities for the year are clear. First, we need to continue running our business with better sales execution, and we will continue to look for areas where we can accelerate growth. Second, we need to wrap up our business review of Segment and determine the best path forward that will position Twilio for long-term success while advancing our objective of optimizing profitable growth. And third, we remain extremely bullish on AI and our ability to innovate across our portfolio with several incredible examples in both our product roadmaps and in private beta. For the past 15 years, our co-founder, Jeff Lawson, did a remarkable job of leading this company from a disruptive startup to the admired company that it is today. I truly believe that we're set up for success to build for the next phase of our journey, and I'm grateful to follow in Jeff's footsteps. I also want to express my gratitude for the thousands of Twilians who make this company such a special place. Our employees have undergone a lot of change this past year, yet through it all, they've remained committed to building a great company that's focused on delivering for our customers. We will continue to run a financially sound and extremely innovative business. I'm continually impressed with the progress the team has made and how we've positioned the business to optimize for profitable growth moving forward. That said, we have more work to do, and I look forward to leading Twilio in this next phase. With that, I'll turn it over to Aidan. Thank you, Khozema. Twilio finished the year with a strong fourth quarter. We exceeded our guidance and delivered another record quarter of revenue, Non-GAAP income from operations, and free cash flow. For the full year, we generated $4.154 billion in revenue, 10% organic revenue growth, $533 million in Non-GAAP income from operations, and $364 million in free cash flow. These results demonstrate the significant progress we've made over the last year, from a business that was roughly break-even on a Non-GAAP basis and generated negative free cash flow in 2022 to one that is now generating meaningful levels of Non-GAAP income from operations and free cash flow while delivering double-digit organic growth. We came into 2023 committed to this outcome, and we exceeded what we said we were going to do. Fourth quarter revenue was $1.076 billion, up 5% reported and 8% organic year-over-year. Communications revenue was $1 billion, up 5% reported and 8% organic year over year. Segment revenue was $75 million, up 4% year over year. As a result of the operational changes Khozema highlighted regarding Flex and Marketing Campaigns, these products are now reported as part of our communications business. For Q4, this represented $54 million of revenue that would have previously been allocated to data and applications. We have also renamed data and applications to Twilio Segment, which includes both our Segment and Engage products. As a result of these changes, all segment-level results and metrics have been recast accordingly. We continue to see stabilization in volumes across our usage-based products throughout the quarter, as well as strong seasonal activity around the holidays, which helped to drive our revenue beat in Q4. Similar to the last two quarters, our Q4 revenue growth rate was negatively impacted by headwinds from customers in the crypto industry. Total Q4 organic revenue growth excluding crypto customers was 10% year over year, and for the full year 2023, total organic revenue growth excluding crypto customers was 13% year over year. We expect Q1 headwinds from crypto to be roughly in line with Q4, after which we will have lapped the vast majority of the crypto impact. Our Q4 dollar-based net expansion rate was 102%. Our dollar-based net expansion rate for Communications was 102%, or 104% excluding crypto customers. Dollar-based net expansion rate for Segment was 96%, driven primarily by elevated churn and contraction, though we did see a modest improvement in churn and contraction versus Q3. We delivered Q4 non-GAAP gross profit of $564 million, growing 9% year over year and representing a non-GAAP gross margin of 52.4%. This was up 180 basis points year over year and down 110 basis points quarter over quarter. The decline quarter over quarter was primarily driven by lower 10DLC campaign registration fees and international messaging. Q4 non-GAAP gross margins for our Communications and Segment business units were 50.7% and 74.4%, respectively. Q4 non-GAAP income from operations came immediately ahead of expectations at $173 million, representing a non-GAAP operating margin of 16%. This is primarily driven by better-than-expected revenue and ongoing cost discipline, though we also benefited from savings related to our December restructuring and recognized a one-time $6 million gain for our settlement with the City of San Francisco. As we continue to evolve our disclosures in support of our commitment to provide greater transparency on business performance and in response to investor feedback, going forward, we intend to report quarterly Non-GAAP income and loss from operations by business unit. Q4 Non-GAAP income from operations for our Communications business was $248 million, and Q4 Non-GAAP loss from operations for our Segment business was $18 million. As Khozema mentioned, we are undergoing an operational review of the Segment business in order to identify the appropriate path forward for improved execution and profitable growth. We'll provide more details on the outcome of this review upon its completion in March. As a result of Segment's business performance, we completed an impairment test on the intangible assets we acquired as part of our Segment acquisition. The test resulted in a $286 million impairment of our developed technology and customer relationship intangible assets. No impairment of our Segment reporting unit goodwill was identified. Segment carried approximately $300 million in goodwill at year-end. Q4 non-GAAP loss from operations was $362 million, which includes $25 million of expenses associated with restructuring charges and the aforementioned $286 million intangible asset impairment charge related to Segment. Stock-based compensation as a percentage of revenue was 15.3% in Q4, excluding approximately $1.9 million of restructuring costs, down 260 basis points quarter-over-quarter and 360 basis points year-over-year. In Q4, we generated free cash flow of $211 million, driven primarily by strong non-GAAP profitability as well as heightened collections and an $18 million one-time cash benefit related to our settlement with the City of San Francisco. While we expect free cash flow to vary quarter-over-quarter, free cash flow remains a focus for us as we drive greater profitability in the business. Lastly, we continue to execute against the $1 billion share repurchase program that we announced in February 2023 and have now completed over $730 million of repurchases to date. Moving to guidance, for Q1, we're initiating a revenue target of $1.025 billion-$1.035 billion, representing year-over-year growth of 2%-3% on a reported basis and 5%-6% on an organic basis. The expected sequential decline in revenue is due in part to elevated seasonal activity on our platform in Q4, which we do not expect to recur in Q1. This is a similar dynamic to what we saw last year. We continue to see volume stabilization across our communications products, though we're planning prudently given the usage-based nature of our business. We do expect year-over-year growth through the balance of the year. Turning to our profitability outlook for Q1, we expect non-GAAP income from operations of $120 million-$130 million, down sequentially quarter-over-quarter, primarily due to our lower revenue guide and an estimated $20 million of incremental expenses associated with a new cash bonus program. This new program will allow us to reduce go-forward equity grants as a proportion of total compensation and is part of our continued efforts to transition employee compensation from equity towards cash in order to reduce stock-based compensation expenses. We're continuing to focus on driving operating leverage, and we remain committed to reducing stock-based compensation on our path to GAAP profitability. Given the segment operational review currently underway, it's premature to provide full year 2024 non-GAAP income from operations guidance at this stage, but at a minimum, we expect to exceed our 2023 non-GAAP income from operations even after taking into account an estimated $90 million of incremental annual expenses for the new cash bonus program. We intend to provide a full year 2024 non-GAAP income from operations outlook and any updates to our financial frameworks following the completion of the segment operational review in March. We've made significant strides over the last year in driving meaningful non-GAAP profitability and free cash flow generation in our business. We have strengthened our financial foundation and set ourselves up well to deliver durable, efficient growth in 2024 and beyond. I'm proud of everything our teams have accomplished in 2023, and I'm excited for the opportunities ahead. With that, we'll open it up for questions. Thank you. If you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. Your first question comes from the line of Meta Marshall with Morgan Stanley. Your line is open. Great. Thanks. Maybe first question, just what are you looking at to see traction in the Segment business? I know in the past you had said kind of improving pipelines or sales efficiency growing. You didn't kind of give some of those same statistics. So just what can we use to kind of benchmark improving performance there? And then just maybe a second question on generally, we see a pickup in gross margins in Q4 on the communications side of the business, just given a little bit more of that traffic ends up being North America-focused. Notice the kind of step down sequentially. So just any commentary on gross margins would be helpful. Thanks. Yeah, sure, Meta. I'll start with the segment part of it, and then Aidan can answer the gross margin part of it. So on segment, I mean, some of the indicators that we're looking at is sequential bookings, and we did see improvement in Q4, but as we alluded to, it's not exactly where we'd like it to be. And I think just the overall pace of the improvements that we were anticipating and that we would expect of ourselves, they're just kind of not meeting our expectations. I think we've also seen consistent win rates over the course of the year. And again, we did see a modest improvement in the win rate in Q4. And notably, Q4 was sort of our best new logo bookings performance as well, actually, since 2021. So we feel pretty good about that, at least in terms of trajectory, but again, have work to do. Then just finally, it's the number one CDP, at least based on the most recent report by market share as determined by IDC. And we think that just based on what we've been able to do with it and Customer AI and how we can expand it across our Segment product portfolio, that there's just more that we can do there. But as we said, it's strategically important, but we definitely do think we can do a better job in terms of running that part of the business. Meta, I'll take the gross margin question on comms. So it was down quarter over quarter. We did see Q3 bump up quite a bit, so Q4 still higher than what we saw the first half of the year. The drop quarter over quarter was driven by lower U.S. 10DLC registration fees quarter over quarter. If you remember last quarter, we made a push to get customers using 10DLC in the U.S. registered. That resulted in additional fees, and we are seeing some of that margin pressure kind of quarter over quarter driven by that. And in addition to that, within international messaging, we saw a little bit of margin pressure as well, primarily a function of just where messages are going within different countries in the international bucket. So those are the two big drivers. But when you look at margins overall for the business, pretty good performance year-over-year. Communications is up 230 basis points quarter-over-quarter in Q4 for the year, up 190 basis points. So generally, a positive margin trend in the year, although down a bit versus Q3. Great. Thanks. Your next question comes from the line of Mark Murphy with JP Morgan. Your line is open. Thank you, Khozema. I believe you mentioned a nine-figure messaging win and largest messaging deal that you've won today. Can you just shed any light on how that came together? Anything on contract durations so we can annualize it? And then just perhaps when you think that might start contributing revenue. It's not clear to me whether that could click in immediately or perhaps sometime later in the year. Then have a quick follow-up. Yeah. I mean, I can't get too far into it because we can't disclose the customer names, but we're certainly proud of the fact that we're able to score both of those deals. Each is a little bit unique just based on kind of the customer type that's involved in each one. I think that those are both kind of multi-year arrangements, and so there's an opportunity for that revenue to continue over a period of time. That's kind of the typical contract duration length that we typically see, and we should see that revenue over the next quarter or two. Okay. Got it. And Aidan, as a quick follow-up, what is it that drives a little different spread for Q1 where I believe you're guiding fairly consistently or even a little better on the organic growth compared to how you guided Q4, but it translates to slightly less in the kind of the revenue growth rate that we actually have to model? Is it possible to step us through that? Is it something relating to crypto impact or something else? Yeah. Let me just take it, Mark, here. So there's a couple of things that are happening. So we're guiding to 5%-6% organic growth. We were 8% in Q4. And so there's a couple of things to consider. So on the growth side, we did talk about crypto, right? That was a 200-basis-point headwind in Q4. We expect it to be a similar headwind in Q1. When you look at the rest of the business, the other thing to remember is we didn't mention this in our prepared remarks, so I'll mention it here. We continue to streamline our product portfolio, really to focus on doing fewer things better. We are deprecating our video product as well as our software component of our Zipwhip business this year. Both are planned wind-downs of those products, but they will result in a roughly 150-basis-point headwind to growth in Q1, and I would say roughly similar impact on total year 2024 growth. So you have about 200 basis points from crypto. You have about another 150 basis points from the end of life of the video and the software business within Zipwhip. And then the last thing I'll just say is, again, we'll continue to plan prudently, just given the usage-based nature of our business, much different than a subscription business, which is more predictable. So we'll plan prudently. We do expect year-over-year revenue growth throughout the balance of the year. Okay. Understood. Very clear. Thank you. Your next question comes from the line of Jim Fish with Piper Sandler. Your line is open. Hey, guys. This is Quinton on for Jim Fish. Thanks for taking our question. Maybe first, a narrative that's been out in the market has been competitors potentially getting more aggressive from a pricing standpoint, specifically in the core messaging segment. Is that something you're seeing already here in Q1 or anything you saw in Q4, and then anything you can point to in terms of changes from a competitive landscape positioning? Thank you. Yeah. This is Khozema. I'll take the question. In short, no. The way that I would characterize it is that the success of the company is really built on the innovation and quality of our offering. And so I'm aware of what you're kind of referring to, and we never really comment on any specific competitor. I think the reality of what we do is that we deliver a really broad and innovative set of solutions for our communications customers, and we charge a fair price for it. And so whether it's the breadth of our channels, the reliability of our Super Network, or the global scale, all of those factors are in the mix in terms of the way that we serve customers and serve them very, very well. We've made a lot of investments in compliance and fraud mitigation as well to ensure users aren't stuck paying for fraudulent messages either. And we just want to ensure that we deliver great experiences. And fundamentally, we think that that's a better setup for Twilio and our customers. And we've had a long history, really, of maintaining price discipline. And so we've been able to compete very, very successfully with folks that are on the lower end of the market and maintain, if not grow, our market share over time. Makes sense. Thank you. And then maybe just as a quick follow-up, understand the crypto headwinds here, but I think one interesting point is you've seen kind of a rebound in kind of the crypto pricing. And so maybe are you seeing any sort of improvement from a quarter-over-quarter basis of the crypto specific activity? And how do you expect that to trend in 2024 as we see a potential kind of increase in the pricing landscape? Do we still see that relationship of as crypto pricing increases, we see activity increase on Twilio? Thank you. Yeah. So from a crypto perspective, a couple of things. Last year, in the second and third quarter, we talked about those periods kind of being the peak of the crypto volume on our platform. So we played through the last several quarters with that headwind. We expect the headwind in Q1 to be roughly in line with the headwind that we saw in Q4, after which we expect crypto kind of pressures or headwinds on growth to kind of abate a little bit. Beyond that, I'm not going to provide any kind of outlook in terms of the specific industry, but we are kind of starting to lap those higher periods of crypto volume. Your next question comes from the line of Michael Turrin with Wells Fargo Securities. Your line is open. Great. Thanks. Appreciate you taking the question. Just on that, I understand there are a number of moving pieces as you're fine-tuning the organization and just the underlying customer profile. But when we're looking at the customer metrics, I think the Communications segment is not one where we've seen that metric down. So maybe you can just add some detail on what's driving the customer metrics currently. And then in terms of the Segment evaluation as just the second part, I think we've often viewed that as maybe a strategic opportunity to add more data-driven intelligence to the Communications portfolio, if at all possible. Is that something you can address independently or Segment to go a different route? I'm just wondering if you can just add more on kind of the data enablement piece of what Twilio has in its portfolio across the communications segment as it's currently built as well. Thank you. Why don't I start? I'll start on the customer question, then I'll hand it over to Khozema. So just to start with the numbers, so customer count was 305,000 at the company level, down 30 basis points quarter-over-quarter, up 5% year-over-year. Really, what we're seeing is on the communications side, we saw a reduction in customer count really driven by smaller dollar self-serve customers. And maybe just to take a step back and a reminder on the metric itself, customers are only included in our customer count if they generated at least $5 of revenue in the final month of a quarter. And so what we saw was customers that might have been slightly above $5 slip below $5. And so that's really what drove the change kind of quarter-over-quarter. Importantly, when we look at revenue churn, which is kind of how we look at that metric, that's the more relevant metric, that remains very low. We're seeing customer count growth in our largest spending cohorts. ARPU actually increased quarter-over-quarter. With revenue up, but customer count down, you can see that that metric would naturally go up. Overall, it's really driven by just small dollar self-serve customers on the communications side, but revenue churn remains low as it has historically been in this business. Yeah. As it relates to Segment and kind of CDP more broadly, and I think your question was really towards its connection with communications, I think that we do see a lot of opportunity there in terms of our ability to combine our data offering with our communications offering. We've started to launch a handful of products that do exactly that, bring together kind of all of the best capabilities of Twilio within single offerings. You see that today, for example, in our Flex Unify offering, which has been announced relatively recently. I think as it relates to the need and value of a CDP, we're certainly open-minded about the way that we want to create value for the company. I think first and foremost, we're very, very focused on durable and profitable growth. We alluded to the fact that we are undergoing an operational review of Segment and with an eye towards value creation, again, demonstrated through durable, profitable growth. I think that Segment happens to be a pretty unique asset that we think remains strategically important. We do think that having first-party data combined with communications has a lot more inherent value than just a standalone CDP. All that said, I think there are a lot of opportunities for us to be able to improve the way in which we're doing things. We talked about some of the executional things that we want to get better on. I think having Segment deeply embedded with others in the data ecosystem, we have opportunities to do that. Then also pursuing partnerships with other ISVs, I think there's an opportunity there too. And so we're not taking anything off the table per se, but we do think that we have a really interesting asset. We'll have a lot more to share in March when we complete our operational review. All helpful. Thank you. Your next question comes from the line of Ryan Koontz with Needham & Company. Your line is open. Thanks for the question. Appreciate Aidan unpacked kind of the revenue guide down sequentially here with some compares. I wonder if you could do the same thing on the operating income guide, which seems even like a bigger move down percentage-wise. Is that mainly the new comp plan, or are there any other kind of impacts on the operating income line we should think about? I have one follow-up. Sure. Yeah. I'll start. So you're right. We're stepping down on profit, $173 million in Q4, Q1 guide of $120 million-$130 million. So there's really three things that come into play, Ryan. So first, lower revenue. And the step down is really primarily driven by revenue seasonality in Q4, right? We talked about in our prepared remarks, we had record volumes during Cyber Week. We had a very strong holiday season. We expect revenue to kind of step down quarter-over-quarter as a result of that. So that's a driver. The other drivers are on the OpEx line. The first is, as you mentioned, the new bonus program. We'll begin accruing expenses in Q1 associated with that program. We noted in the prepared remarks that it's roughly $20 million in Q1 and $90 million for the full year of 2024. Those are net new incremental expenses that will hit the non-GAAP line. Importantly, this new cash bonus program will allow us to reduce our stock-based compensation expenses over time. So that's one item on the OpEx line. And then the second is actually related to payroll taxes that are just higher in Q1 than they are in Q4, really due to resetting of tax contributions. That's about a $10 million-$12 million headwind in Q1. That starts to abate as you move throughout the year, just based on how payroll taxes work. That's great. Perfectly clear. And what if you also kind of unpack the 10DLC, kind of where we are in that cycle? I'm sure it's a complex issue, but maybe just the 30-second version of kind of where we are in this 10DLC registration fees and onboarding and churn you saw. It's been a bit of a journey. Thank you. Yeah. I mean, it's effectively over is the short answer. The fees are abating, and Aidan kind of alluded to that being one of the reasons for the margin step down Q3 to Q4. There were accelerated fees in Q3 as a result of an acceleration in registrations to be able to meet the deadline. That deadline since passed, I think we alluded to in prior remarks, that 99%+ of our customers were able to get through that process. And so the balance of those, we wouldn't anticipate ending up there for a variety of reasons. And there's actually nothing to talk about anymore about that. So that's kind of where we are, and it's behind us. Those fees were expedite-type fees, you're saying? No. They were one-time registration fees associated with that process. And so they were ephemeral in that regard. Perfect. All right. Great. Thanks a lot. I'll pass it on. Your next question comes from the line of Pat Walravens with Citizens JMP. Your line is open. Oh, great. Thank you. And I'll just say it because congrats on getting a lot done so far. So I know there's still a lot to do. But so look, Twilio has over $4 billion in cash and less than $1 billion in debt. So I guess two questions there. Why not increase the stock purchase, and what are some of the possibilities in terms of what you could do with that cash? Yeah. Thanks, Pat. I'll take the question, Khozema Shipchandler, if you'd like. Yes, we recognize we're sitting on a lot of cash. That's the combination of our emerging free cash flow profile kind of affords us a lot of flexibility. We're focused right now on executing against the existing authorization, of which we have about $270 million remaining. And I'd just say that any updates to our capital allocation strategy or our financial framework will come upon the completion of our Segment operational review in March. Your next question comes from the line of Taylor McGinnis with UBS. Your line is open. Yeah. Hi. Thanks so much for taking my question. Maybe just to touch on what you saw in Q4. So it looks like the sequential growth in the communications business was slightly softer than last year. And the upside to total revenue growth compared to the guide was a bit softer as well. So can you just maybe talk about what drove that? Were there any areas that became more challenged in the quarter? And it's tough, I guess, to disaggregate what you're seeing with SMS and some of the core API businesses versus Flex and others given the change. So maybe you can just talk about the difference between performance between those. Thanks. Yeah. I don't think I think the one thing I'd call out is we came in about, I don't know, 4% ahead of the midpoint of the guidance range that we provided for Q4. It was really just driven by record volumes during Cyber Week. We really saw elevated holiday traffic throughout the quarter. Again, so I would say largely a seasonal lift relative to kind of the beat and kind of what drove that. Is that kind of your question? I just want to make sure I'm understanding what you're asking, Taylor. Yeah. Yeah. That and just when you look at, I guess, sequential growth, so quarter-over-quarter in the communications business, it looks like last year might have been a little bit stronger at the same time. So I'm just wondering if there was anything that maybe deteriorated in the macro or anything that maybe came in a little bit softer, just to be mindful of. Well, I mean, I think it was largely in line. Last year, we were up 4.5% in Q4 relative to Q3. And this year, we're up a little bit over 4%. So it's roughly similar to what we saw last year. Great. Thank you so much. Your next question comes from the line of William Power with Baird. Your line is open. Okay. Great. Yeah. Thanks. Maybe the first question or primary question for Khozema. I know you were obviously already running the communications business, but I guess now that you were in the CEO hat, so to speak, maybe you just update us on how you're thinking about kind of key strategic priorities for the communications business in 2024, kind of across revenue, margins, etc. Maybe just as kind of part of that, the communications operating margins now approaching 25%. Any color on how to think about levers you can maybe still pull there? Yeah. Both good questions. So I'd say just kind of just to maybe start with at sort of the strategy and vision level, I wouldn't really anticipate a material diversion there. I think at the end of the day, we want to build out the world's leading Customer Engagement Platform. And I think that we pointed out a few opportunities in which we can improve our execution. But I think you've already seen really, really strong progress on the communications side, and we certainly intend to continue that. I'd say secondly, we're very focused on profitable growth. And as you said, I mean, we have made a lot of strides there. The margin rates have uplifted quite a lot. I think that we definitely do have an opportunity to improve our sales execution across the business and grow the company faster. I think we can do it from a structurally more profitable position. I think we have an opportunity, for example, with ISV relationships. We have an opportunity to improve in self-serve. We can continue to build off of some of our cross-sell opportunities as well in our product portfolio to deliver faster growth. As well, I mean, I think innovation's always kind of been at the heart of what we've tried to do at Twilio. I think sticking just to communications, I think that we have a number of AI-related products that we've been able to put into our roadmap, examples being Voice Intelligence, Fraud Guard, Flex. We've got a lot of other products and features still to come. I'd say there's a kind of close cousin to that, which is inside the company, there's a lot of automation of internal processes that I think are a big opportunity that'll help us become more efficient, also allow us to serve our customers better. That could be in the back office. That could be the resiliency of our platforms. Could be increasing developer productivity, for example, with Copilots and the like. And so I do think that there's opportunity for additional volume leverage in that business. And it's really a combination of both focusing on increased profits while also delivering increased growth. Thank you. Your next question comes from the line of Ryan McWilliams with Barclays. Your line is open. Thanks for taking the question. First one for me. Pleased to see the stabilization, the dollar-based net retention rate from both the Communication and Segment pieces. Do you feel like you have found a floor here from a net retention standpoint, assuming stable macro and you have more visibility from both of those divisions? Yeah. I think that's another way of asking for a revenue guide beyond the next quarter. So we're not going to provide an outlook to DBNE. What I would say is we guided to 5%-6% on Q1 revenue. We are obviously working on a number of initiatives, as Khozema just mentioned, to grow these businesses faster. The dynamics that we saw in the quarter, I'm happy to talk about those. Really, on the communication side with regards to DBNE, it has kind of leveled off, as you mentioned. We are seeing low churn in that business, but relative to historical levels kind of pre-2023, just higher contraction and more muted expansion. And then on the segment side, again, has leveled off. It was up 200 basis points versus last quarter, still below 100%. That's really just driven by the higher churn and contraction that we've talked about in previous periods. Thanks. And then for Khozema, I know RCS messaging for a long time has been something that could be a thing but has never really showed up. But with RCS messaging coming to the iPhone in 2024, do you think this could change things at all for the communications business going forward, or are customers even asking about it, or is this still kind of wait and see? Yeah. Good question. I think it's an opportunity. I think in the short term, we don't really see a significant impact from the adoption of RCS on the business. I think we see peer-to-peer messaging as having the greatest impact in terms of improving the messaging experience between iOS and Android, probably less so in the near term on A 2 P. I think we do support RCS and A 2 P business messaging, and we do think it can ultimately help customers deliver richer, more engaging messages. I don't think it's necessarily a near-term dynamic, but I think over the medium to long term, it is an opportunity for the business. Appreciate the color. Thank you. Thanks. Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is open. Hey, guys. This is Ethan Reppon for Alex Zukin. As we think for 2024, I just wonder if you could just decompose how we should think about what the main growth drivers are and kind of get back to that. What you allude to is kind of the year-over-year growth through the back half of the or remainder of the year after 1Q. And then also just kind of touching again on how we should think about the capital allocation strategy going forward. And just similar to the comment you made around the FY2024 operating margin or the operating income to be better than 2023, I mean, is it also fair to think that this would apply to your free cash flow as well? Why don't I start on the last question? I think Khozema can talk about some of the growth drivers in the businesses. So I would say just generally on free cash flow, we would expect, we're not going to provide a specific guide on it. I will say there will be variability quarter to quarter. We're really pleased with the performance that we've delivered in 2023. In general, I would expect as income becomes better, that free cash flow would follow. Yeah. And then in terms of the growth drivers, let me just kind of split it between Communications and Segment. So in Communications, what we're really focused on is use-case-based selling, streamlining our customer self-serve process, and Customer AI. And we're obviously not providing guidance for 2024, but we do have a number of initiatives across the business. And I think where we've really been focused is in partnering in those areas that I just alluded to a moment ago. I think AI, in particular, allows us an opportunity to deliver really innovative solutions. We're already starting to see that in Verify, for example, for omnichannel authentication. We see it in Unify for more personalized customer engagement on the front lines. And then also Voice Intelligence for richer, very actionable insights from customer conversations. Then as well, we're leaning into our ISV partnerships where we are seeing strong growth as we help them scale their businesses, and we think there's an opportunity to partner better there. Then finally, we're continuing to improve on our self-serve capacity, streamlining onboarding, billing, compliance, stuff like that. In terms of Segment, our first priority is really just in mitigating churn and contraction. In customer conversations, what we're leading with is core use cases around personalization, ad spend optimization, and driving cross-sell. We do think we have an opportunity to help our customers kind of streamline their implementations and enable faster time to value. And then, just maybe, crystal ball, you're touching again on how should we think about just capital allocation broadly going forward. And thank you. Yeah. I can maybe just follow up again. I think Aidan alluded to it earlier that we certainly do have some optionality given our balance sheet as well as the cash flow characteristics of the company. We're not providing any guidance as it relates to capital allocation. We're going to do some work as a part of our kind of ongoing operational review. In March, we'll provide any updates around capital allocation as well as the other elements of our financial framework. Awesome. Thank you. Yes. Your next question comes from the line of Michael Funk with Bank of America. Your line is open. Yeah. Thank you for taking the question. So the first one for the comms business, aside from creating the best possible product there, what should we expect or what do you expect to drive better revenue growth? Is it the Olympics later in the year, the election? Is it macro? What are your expectations for revenue growth drivers? Yeah. I wouldn't point to any one of those events as being items that we're looking at to provide a driver of growth. I also wouldn't point to kind of macro dynamics. I would say we're really in a position in which we want to be able to produce our own kind of durable growth. As I mentioned earlier, some of the areas that we're really focused on is use-case-based selling, self-serve, and Customer AI. I think one of the ways in which we've really tried to approach our customers through the lens of the problems that they're trying to solve versus just necessarily the products that we have in our bag. I mentioned a few examples of that a moment ago in terms of Verify as it relates to omnichannel authentication, Unify for personalized customer engagement, and then Voice Intelligence for richer customer conversations. Those are all areas where we do anticipate that we'll be able to lift growth. I think AI, in particular, is a really exciting opportunity in which we have an opportunity to enrich communications, also combine our data capabilities with communications. Then finally, as it relates to Segment, again, as I mentioned a moment ago, I think it's really the priority is to mitigate churn and contraction. And I think if we can do all those things, then it's really much more around our control and doesn't actually have much to do with the election or the Olympics. Then one more if I could, Khozema. Earlier, you said that nothing is off the table for the strategic review of Segment. Does that include a sale? And then you mentioned change in financial framework. I apologize. Not exactly sure what that means. Does that potentially mean mothballing that business until the market comes to you with demands for CDP? Maybe some more clarity would be helpful. Yeah. I wouldn't necessarily read any of those things into it. However, what I will say is that on the one hand, Segment is strategically important to the company. But on the other hand, we are approaching the review that we talked about with an open mind. We know the business is underperforming. We definitely do believe that we can execute better. And we're just approaching the operational review with an open mind so that we can determine the best path forward. Our overall priority as a company, whether it's comms or Segment, is durable, profitable growth. As it relates to the March framework, what we said is that beyond the guidance that we obviously provided today, any other elements of our financials, whether it be capital allocation or kind of medium-term targets, etc., we would provide in March in addition to any operational changes that we would make with respect to Segment. Great. And March means at earnings, or would that come out prior to earnings? We're kind of targeting early March. Earnings would be much later in April. Early May, I believe. No, I appreciate the clarity. Yeah. No, I appreciate the clarity. I wanted to show you meant with the quarterly earnings. So thank you so much. Your next question comes from the line of Derrick Wood with TD Cowen. Your line is open. Oh, great. Thanks. Khozema, I just wanted to touch on the Flex side of the business. You guys made some cuts in Q4. You shifted that go-to-market to the Communications side. Just kind of curious how you're feeling about the level of growth capacity and Flex and if there's potentially some disruption in the first half because of the changes? And then just kind of what levers you're looking to lean into to drive more cross-selling with the new go-to-market structure? Yeah. I mean, I think more broadly speaking, I'll take the second question perhaps first. I think that there is an opportunity to do more cross-selling across the company. We've talked about the opportunity, for example, in the way that we can do a communications deal and transform that, for example, into a Verify deal where we can do omnichannel authentication. We talked a little bit about Unify, for example, which allows for personalized customer engagement on the front lines. That combines the best of Flex with sort of the best of Segment. And then Voice Intelligence is sort of another area where we've got a lot of existing voice customers. We have an opportunity to use AI as a means to add to their existing capabilities, richer, much more actionable insights. And so we think those are all really interesting ways in which, sort of writ large, we can add a lot of value in terms of the way that we cross-sell into our existing business. As it relates to Flex, I would say, I mean, not a lot of changes, honestly, in the first half or even the balance of the year. Excuse me. I don't think we've really seen much change. I think when we made some of the actions in December, what was clear to us was that the buying personas for voice, IVR, and Flex were pretty similar. We wanted to make sure that we were simplifying the experience for our customers while also being able to extract some efficiencies in the business. So we consolidated some of those capabilities. Now our account executives in communications can sell Flex and/or kind of the composable offerings of contact center capabilities to everyone of our customers aligned in a way in which our customers actually want to buy. So no real negative impacts as a result. I think that we see possibilities and opportunities in the future based upon that realignment. Great. Thank you. Thanks. Your final question will come from the line of Matt Van Vliet of BTIG. Your line is open. Yeah. Hi. Thanks for taking the question. Maybe just following up on not only the Flex opportunity, but across communications. I mean, how are you thinking about partner engagement and sort of reengaging with the channel, building that team back out, and using that as a leverage point and additional distribution into larger enterprises? Yeah. So I think there's a few opportunities there. And I wouldn't actually just limit it to Flex necessarily. I think that what we see sort of more broadly is that in Flex, well, maybe I'll start there. With Flex itself, we do have a partner ecosystem. They've been building alongside us. They've developed a number of innovative capabilities that sort of augment what we do inside of Flex and provide the overall kind of enhanced experience to a customer. And we're very excited about continuing the progress there. I think based on some of the changes that we've made inside the business, and sort of to echo the answers to the prior question as well, we do have an opportunity to both decompose or make composable the aspects of Flex to be able to suit whatever the customer buying need is in a way that I think is a little bit different than just selling kind of a fully instantiated contact center solution. I think the other part of it is for the overall business, we do see a really significant opportunity with our ISVs. We alluded to a large deal, for example, that we signed with a partner. We do see partners becoming an increasingly more important part of the business. Our ability to both help them grow with their own customers as well as partner with them to be able to bring solutions to market, I do think, presents a really interesting opportunity for the business and will certainly be an area of focus for us. Great. Thank you. Thanks. Thank you. That will conclude today's conference call. 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