Earnings call transcript: Twilio Q2 2025 beats earnings, stock drops

Twilio Inc. (TWLO) reported strong financial results for the second quarter of 2025, with earnings per share (EPS) of $1.19, surpassing the forecasted $1.05 by 13.33%. The company’s revenue also exceeded expectations, reaching $1.23 billion compared to the $1.19 billion forecast. According to InvestingPro data, Twilio maintains a strong financial position with more cash than debt on its balance sheet and a healthy current ratio of 4.78x. Despite these positive results, Twilio’s stock fell by 13.8% in premarket trading, reflecting investor concerns beyond the quarterly performance.

Key Takeaways

• Twilio reported a 13% year-over-year revenue increase, marking its fourth consecutive quarter of double-digit growth.
• The company achieved record non-GAAP income from operations and free cash flow.
• Despite strong earnings, Twilio’s stock dropped 13.8% in premarket trading.
• Twilio raised its full-year revenue and cash flow guidance.

Company Performance

Twilio’s overall performance in Q2 2025 was robust, with a 13% increase in revenue year-over-year. The communications business, a significant revenue driver, grew by 14%, while the segment revenue remained flat. The company achieved a dollar-based net expansion rate of 108%, its best in two years, reflecting successful customer retention and expansion strategies. This performance aligns with Twilio’s recent trend of strong growth, driven by innovations in AI and strategic partnerships.

Financial Highlights

• Revenue: $1.23 billion, up 13% year-over-year
• Earnings per share: $1.19, exceeding forecast by 13.33%
• Non-GAAP income from operations: $221 million, up 26% year-over-year
• Free cash flow: $263 million

Earnings vs. Forecast

Twilio’s Q2 2025 results surpassed analyst expectations, with an EPS of $1.19 against a forecast of $1.05, and a revenue surprise of 3.36%. This marks a significant earnings beat, continuing the company’s streak of exceeding market predictions.

Market Reaction

Despite the positive earnings surprise, Twilio’s stock fell by 13.8% in premarket trading, closing at $105.5. This decline suggests investor concerns over broader market conditions or potential future challenges, overshadowing the strong quarterly performance.

Outlook & Guidance

Twilio raised its full-year 2025 organic revenue growth guidance to 9-10% and increased its free cash flow guidance to $875-$900 million. The company plans to accelerate R&D investments in AI, voice, and RCS, indicating a focus on innovation and long-term growth.

Executive Commentary

CEO Khozema Shipchandler emphasized the role of AI in the company’s growth, stating, "AI has been a contributor in terms of the way that we’ve been growing the company over the last several quarters." Chief Revenue Officer Thomas Wyatt highlighted the strength of Twilio’s self-service channel, noting, "We’re seeing broad strength coming in from our self-service channel."

Risks and Challenges

• Competitive pressures in the CPaaS market could impact future growth.
• Macroeconomic uncertainties may affect customer spending.
• The sustainability of recent growth rates in communications and messaging segments.
• Potential regulatory changes impacting the tech sector.

Q&A

Analysts showed strong interest in Twilio’s AI voice capabilities and large deal activity. The company addressed concerns about regulatory changes, which are expected to have minimal short-term impact, and emphasized its focus on expanding multi-product customer relationships.

Full transcript - Twilio Inc A (TWLO) Q2 2025:

Conference Operator: Good day, and thank you for standing by. Welcome to the Twilio Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during your session, you will need to press 11 on your telephone.

You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Vanaman, senior vice president of investor relations and corporate development. Please go ahead.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio: Good afternoon, everyone, and thank you for joining us for Twilio’s second quarter twenty twenty five earnings conference call. Joining me today are Kazama Shipchandler, Chief Executive Officer Hayden Migiano, Chief Financial Officer and Thomas Wyatt, Chief Revenue Officer. As a reminder, we will disclose non GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non GAAP results can be found in our earnings presentation posted on our IR website at investors.cleo.com. 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 ks and our forthcoming 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. And with that, I’ll hand it over to Khozema and Aiden, who will discuss our Q2 results, and we’ll then open the call for Q and A.

Khozema Shipchandler, Chief Executive Officer, Twilio: Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. Twilio had a strong Q2, reaching over $1,200,000,000 in revenue and achieving another quarter of double digit revenue growth and year over year growth acceleration. We also delivered another record quarter of both non GAAP income from operations and free cash flow. And Q2 marked an important milestone as our segment business delivered non GAAP income from operations for the first time, surpassing our Q2 breakeven target that we established early last year.

Our strong performance this quarter reflects our continued progress in driving greater operating efficiencies, our focused product led innovation and solid commercial execution. In Q2, we delivered a fourth consecutive quarter of accelerating messaging growth as well as double digit voice growth. We are demonstrating not just our market leading scale in our core communications market, but also our pace of innovation, which is allowing us to take share. This is also evident across our go to market levers as self serve ISVs, international, and communications software add ons each delivered double digit revenue growth, and our multi product customer count also grew double digits. During the quarter, we had several notable wins, including Centerfield, Henry Schein One, JustFab, Manus AI, Nooks AI, The Phoenix Suns, and Postscript.

We also had another great quarter of large deal activity with ISV and technology customers. In fact, in communications, the number of large deals closed of $500,000 or more increased 57% year over year. This momentum is reflected in our dollar based net expansion rate of 108% in Q2, our best rate in over two years. In self serve, our voice channel was a bright spot driven by a variety of factors, notably the surge in voice AI startups who are building on Twilio. In May, we held our annual user conference, SIGNAL, bringing together nearly a thousand attendees in San Francisco for a preview of our next generation customer engagement platform.

During the event, I had the opportunity to engage with many of our customers and heard countless stories of how Twilio continues to bring more ROI to businesses. It was evident that the power of combining communications plus contextual data plus AI through our product innovations and platform is driving meaningful value for brands and that Twilio is increasingly becoming the infrastructure layer for customer interactions. Twilio is not just a company of and for builders, but a company that our customers can build their businesses on for years to come as they navigate AI and every other technological evolution they will encounter. At SIGNAL, we also showcase new products designed to help brands create modern, intelligent customer experiences all built on the Twilio platform and tailored to meet customers wherever they are in their journey. We announced the general availability of conversation relay, which empowers developers to create robust natural voice AI agents using their choice of LLM.

And more importantly, is the first step toward realizing our vision of powering context aware virtual agents across every Twilio conversation channel. Conversation Relay is generating a lot of customer interest. And during its first quarter of general availability, we completed nearly 1,000,000 calls. As an example, in q two, we signed a conversation relay deal with a leading fintech company that will leverage conversation relay to automate their three most common customer care requests, credit limit inquiries, card tracking, and installment payments. Within two weeks, they validated the solution and began scaling to production, demonstrating both the speed and impact of Twilio’s AI powered automation.

We’re powering innovation for both enterprises and the newest AI startups with our scalable and trusted communications infrastructure, orchestration, and observability. True to our roots, these features are as extensible and configurable as any other part of the Twilio stack, something customers value when much of the conversational AI ecosystem is focused on black box solutions, vendor lock in, and extensive professional services integrations. We also announced that conversational intelligence, already generally available for voice, now supports messaging conversations in private beta, and it has already seen an 86% increase in account usage year over year. This powerful feature unifies conversational data across voice and messaging for human and AI agents, giving brands a cross channel view of the customer. It highlights the value of previously inaccessible conversational and contextual data by equipping sales and CX teams with holistic insights from every touch point, allowing them to deliver seamless, personalized experiences which lead to a better relationship with brands.

Conversational intelligence also includes built in AI agent observability, allowing brands to analyze AI agent interactions, customize call scoring, generate competitive intelligence, and detect customer intent through natural language understanding. And we’ve also continued to innovate across our trusted core channels. A few weeks ago, WhatsApp business calling via programmable voice became generally available, enabling businesses to engage directly with consumers on WhatsApp through a single seamless conversation, whether via messaging or voice. We’re also seeing momentum with RCS adoption currently available in select markets with a full GA in the coming months. RCS is already delivering strong results, transforming standard notifications into trusted and branded communications.

One of Twilio’s longtime customers, Fresha, a leading booking platform for the beauty and wellness industry that facilitates over 700,000 appointments daily adopted RCS with no code changes and saw an immediate measurable impact. With Twilio, Fresha achieved 99.2% message delivery rate and saw a 41% read rate with RCS messages achieving a 6% increase in appointment confirmations and a 7% uplift in customer reviews. With Twilio segment, we announced event triggered journeys at SIGNAL, and the feature officially went live just a few weeks ago. Now journeys will create rich contextual payloads that combine information from not only the triggering events, but also from the data stored in the warehouse and everything in the segment customer profile. For example, when an online shopper has abandoned their cart, a business can see exactly which items are in the cart and all their key details, like name, price, size, color, image, and if that customer is a loyalty member with rewards points they can use towards their purchase.

With event trigger journeys, Twilio segment creates a complete view of the customer, allowing brands to respond dynamically to moments that matter, whether it’s an abandoned cart, a missed form submission, or a key onboarding milestone. And lastly, at SIGNAL, we welcomed Microsoft CEO, Satya Nadella, as part of our keynote to announce a multiyear strategic partnership between Twilio and Microsoft. The collaboration unlocks the potential for more than 10,000,000 Twilio developers and thousands of Microsoft managed customers to build the future of conversational AI. All of these enhanced capabilities are paramount for our customers. Twilio’s 2025 State of Customer Engagement report recently found that 88% of consumers are more likely to buy when engagement is personalized, but 44% of brands struggle with executing at this level.

This data illustrates the magnitude of the opportunity as companies are still figuring out how to evolve their customer experiences, especially given the opportunities presented by generative AI. Twilio’s platform delivers the set of tools and infrastructure businesses need to modernize and help brands ultimately deliver personalization at scale to drive more ROI. Our commitment to delivering enhanced product innovation and customer value is also continuing to get recognition and reinforces the power of the Twilio platform and our leadership in the market. Recently, Gartner named Twilio a leader in the CPaaS Magic Quadrant for the third consecutive year and number one in three of the five use cases in the CPaaS critical capabilities report. And Omnia named Twilio a CPaaS universe leader.

I’m very pleased with the hard work of our team, and today’s results underscore the strength of the Twilio platform and the progress we’ve made as a company. And now I’d like to turn it over to Aiden, who will walk you through our financial results.

Hayden Migiano, Chief Financial Officer, Twilio: Thank you, Khozema, and good afternoon, everyone. Twilio had a strong second quarter, delivering our fourth consecutive quarter of double digit revenue growth and year over year growth acceleration. For Q2, we generated record revenue of $1,228,000,000 up 13% year over year both on a reported basis and an organic basis. We also generated record non GAAP income from operations of $221,000,000 and free cash flow of $263,000,000 Revenue in our Communications business was $1,153,000,000 for the quarter, up 14% year over year. We’ve continued to drive accelerated levels of growth as we execute against a focused set of go to market initiatives across ISVs, self serve, cross sell and international expansion.

As Khozema mentioned, messaging revenue growth accelerated for the fourth consecutive quarter, while we generated double digit voice revenue growth for the first time in two years. Strong uptake among AI startups in our self serve business contributed to the acceleration in voice revenue growth. In early June, Verizon raised its A2P messaging fee rate, which contributed $6,000,000 in incremental pass through rate to our reported communications and total revenue for the quarter. Consistent with how we handled A2P messaging fees when they were first instituted by U. S.

Carriers, in order to provide a consistent comparison of the business’ underlying growth exclude the revenue from these incremental A2P carrier fees when calculating our organic revenue growth until we have lapped the comparative period. As a reminder, we passed these fees through at 0% gross margin. Segment revenue for the quarter was $75,000,000 flat year over year. Our Q2 dollar based net expansion rate was 108%, reflecting the improving growth trends we’ve seen in our communications business over the last several quarters. Our DBNE rate for Communications was 109 and the DBNE rate for segment was 95%.

Pass through revenue from incremental carrier fees contributed roughly 60 basis points to both total and communications DBNE in the quarter. We delivered non GAAP gross profit of $623,000,000 up 8% year over year. This represented a non GAAP gross margin of 50.7%, down two sixty basis points year over year and 60 basis points quarter over quarter. As Khozema mentioned, we are taking share in our core communications market, led by accelerating messaging and voice growth. We saw our messaging revenue mix increase by two sixty basis points year over year, which was the primary driver of our gross margin decline in Q2.

The balance of the gross margin decline was driven by the $6,000,000 of increased carrier fees and FX, given our international carrier costs are paid in local currency. Our revenue was not materially impacted by FX as we bill primarily in U. S. Dollars. We’re taking steps to stabilize and improve gross margins, including both price and cost actions.

We have announced price increases in both messaging and voice in The U. S, and we’re also investing at the platform level to ensure we’re delivering our services efficiently. Notably, we continue to generate strong growth in both non GAAP income from operations and free cash flow. Excluding the impact of carrier fees, we would expect our pricing and cost actions as well as our continued growth in our higher margin products to help stabilize gross margins over the near term. Non GAAP gross margin for Communications was 49.2%, and non GAAP gross margins for segment were 74.3%.

Non GAAP income from operations came in ahead of expectations at a record $221,000,000 up 26% year over year, driven by strong revenue growth and ongoing cost discipline. Our non GAAP operating margin of 18% was up 180 basis points year over year and down 20 basis points quarter over quarter. The sequential decline was due to anticipated costs incurred from our annual merit increases along with expenses for our SIGNAL conference. In addition, we generated $37,000,000 in GAAP income from operations, our third consecutive quarter of GAAP operating profitability. Non GAAP income from operations for Communications was $281,000,000 Non GAAP income from operations for segment was $6,000,000 which exceeded our breakeven target originally introduced in March 2024.

Earlier this year, we realigned our business unit structure into a functional support model, and we continue to integrate segment with our communications capabilities to deliver one trusted, smart and integrated platform. Because of this, beginning in the third quarter, we no longer plan to disclose our results by business unit. Stock based compensation as a percentage of revenue was 12.1%, up 30 basis points quarter over quarter and down 150 basis points year over year. As we noted on our Q1 earnings call, the modest sequential increase in stock based compensation is due to the timing of our annual refresh brands during the second quarter. We generated record free cash flow of $263,000,000 in the quarter.

Additionally, we purchased $177,000,000 of shares in the second quarter, bringing our year to date share repurchases to $3.00 $7,000,000 through the end of Q2. Moving to guidance. For Q3, we’re initiating a revenue target of 1,245,000,000.000 to $1,255,000,000 representing 8% to 9% organic growth and 10% to 11% reported growth. Based on our first half performance and Q3 guidance, we’re raising our full year 2025 organic revenue growth guidance to a range of 9% to 10%, up from 7.5% to 8.5% previously. And we’re initiating a reported revenue growth range of 10% to 11%, which includes the contribution from incremental increases to carrier fees.

Our revenue guidance assumes $20,000,000 in pass through revenue from incremental carrier fees in both Q3 and Q4. Turning to our profit outlook. For Q3, we expect non GAAP income from operations of $2.00 $5,000,000 to $215,000,000 We are maintaining our full year non GAAP income from operations range of $850,000,000 to $875,000,000 as we’re taking the opportunity to make some accelerated R and D investments in response to strong customer demand in voice, RCS and our AI offerings. Based on our strong cash generation during the first half of the year, we’re raising our full year free cash flow guidance to a range of $875,000,000 to $900,000,000 up from $850,000,000 to $875,000,000 previously. I’m very pleased with the accelerated revenue growth we delivered in the second quarter as well as our ongoing cost discipline that is driving strong profitability and free cash flow.

We had a strong first half of the year, and we will continue to focus on what we can control as we seek to drive durable revenue growth and strong operating profit and free cash flow generation throughout 2025. And with that, we’ll now open it up to questions.

Conference Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press Our first question comes from Meta Marshall of Morgan Stanley. Great.

Jamie, Analyst, Morgan Stanley: This is Jamie on for Meta. I guess maybe just to start off, can you speak to the traction where you’re seeing the most traction with ISVs?

Thomas Wyatt, Chief Revenue Officer, Twilio: I I this is Thomas Wyatt. So just to comment on that, we’re seeing it across verticals, financial services, health care, professional services. And what we’re seeing is the use cases often start with messaging and from there adding second and third channels, whether it be voice or now more importantly with RCS. And by the combination of that, the Twilio platform providing orchestration capabilities across that with some of our newer products like conversational insights allows our ISV customers to get a true representation of the level of engagement a consumer has with its brand. So we’re really encouraged by our ISV growth.

It continues to grow above the company averages.

Jamie, Analyst, Morgan Stanley: Got it. And then just as a quick follow-up. Is there any impact from the price increase in the quarter?

Hayden Migiano, Chief Financial Officer, Twilio: Not material. No.

Conference Operator: Our next question comes from Jim Fish of Piper Sandler. Your line is now open.

Jim Fish, Analyst, Piper Sandler: Yeah. Thanks for the question, guys. I I was gonna start with a different one, but just given we brought up the price increase here, you you implemented it here in The US on the messaging side. Just can you walk us through why now for a price increase? And just making sure that this wasn’t tied to, you know, the Verizon a to p increase and that this is actually incremental to that.

So I I guess why now and and making sure this isn’t just, you know, a fee raise because your costs are getting raised as well.

Hayden Migiano, Chief Financial Officer, Twilio: Hey, Jim. I’ll start, and then I’ll hand it over to Thomas. I wanna be clear that the price increase that we did in The US for messaging was not tied to the ADP fee increase that came through from Verizon. Those two things are separate and distinct. So just wanted to make that clear.

I’ll hand it over to Thomas to talk about timing and why we felt it was prudent to do so.

Thomas Wyatt, Chief Revenue Officer, Twilio: Yeah. And so raising the list price, particularly in North America for our messaging business, really reflects mainly on our self-service business, which is growing very fast. And our you know, we think we have pricing power in that capability. We also think the pricing does help us with some of our enterprise deals as well over time, but they’re on a bit different renewal contract timeline. So we’ll it’ll be sort of a modest increase over time for them.

Jim Fish, Analyst, Piper Sandler: Got it. And then, look. Your customer additions have been really strong and even stronger than last quarter. I guess, where are these customers coming from? Though they seem to be coming in at a smaller rate, and how much how much of it is tied towards that voice AI opportunity or AI opportunity generally?

Thomas Wyatt, Chief Revenue Officer, Twilio: We’re seeing broad strength coming in from our self-service channel. There’s been a number of innovations that we’ve made in terms of reducing the friction of the onboarding and the setup for our self-service, which has really dramatically increased the conversion rate of free users into paid users that upgrade. In addition to that, we introduced a new service for our email customers only that moves it from free to more of a trial, free trial type service, and that’s added some additional. But this is one of the strongest quarters we’ve had in years related to new customer acquisition, and we really had a strong new business in our Enterprise segment quarter as well.

Conference Operator: Our next question comes from Michael Turrin of Wells Fargo Securities.

Michael Turrin, Analyst, Wells Fargo Securities: I was just hoping, I mean, you gave a lot of useful breadcrumbs at the Investor Day a while back on some of these aspects. But I’d just be curious to get your updated view around the durability and drivers of growth profile you’re delivering. You’re guiding for double digit organic growth at the high end for the full year now. And then the commentary around actions you’re taking to deliver stabilization on the gross margin side, are those fairly immediate for us to consider when we’re kind of updating models from here going forward? Is there time to impact for some of those for us to consider as we’re rolling it all forward?

Khozema Shipchandler, Chief Executive Officer, Twilio: Michael, this is Khozema. I’ll take both answers, and Aiden and Thomas can add to it they want. I’d say on the growth side, like we feel pretty good about it. Growth has been pretty durable across a number of different industries. Obviously, it’s going to be a little bit harder in the back half just because of the compares.

But I would say growth feels durable. We’re obviously not guiding beyond the current period, but we felt pretty good about what we’ve experienced in the first half. I think we’ve seen resilience in a number of different areas. So, like, there’s no one thing particularly to point to in terms of where that strength has come from. It’s industry based.

It’s customer based. It’s geo based. And so that all feels pretty good. In terms of gross margins, as Eiden pointed to in the context of the prepared remarks, we obviously are seeing a little bit of a mix dynamic there, and FX clipped us as well. And then, of course, you’ve got the Verizon fee thing.

But more to your question, we are taking some actions. Let me start on the pricing side. We already talked about some of the price increases that we’ve undertaken. As Thomas said, a lot of that will be geared towards what we experience on the self serve side. And so to the extent that we have a lot more self serve ads, you’d certainly see that faster.

With respect to other customers, it’s gonna happen more in the context of their renewal cycles and stuff like that. And so that’ll happen more modestly over time, I would say. And then on the cost side, you know, there’s also a number of actions that we’re taking there as well. I would say they largely have to do with optimization of our platform and the way that the costs show up there so that we’re using it more efficiently. But I do think those things as well as the fact that we’ve got a number of higher margin gross margin products that are growing very, very nicely, all of that will allow us to, in kind of the near term, stabilize gross margins, but over time for that to inflect up a bit.

Hayden Migiano, Chief Financial Officer, Twilio: Maybe the one thing I’ll add, Michael, just as it relates to the fees. So we had one month of an impact of the new or the increased Verizon fees in Q2. We will have a full quarter effect of that in Q3 and Q4. So all else being we’d expect it to be about $20,000,000 of an impact in those quarters and roughly 50 basis points of a margin impact associated with that. But again, importantly, as it relates to those fees, we pass them through at 0% gross margin.

So it kind of grosses up our revenue, doesn’t impact gross profit dollars, and it has no impact on our ability to generate profit dollars or free cash flow dollars going forward.

Conference Operator: Thank you. One moment for our next question. Our next question comes from Mark Murphy of JPMorgan. Your line is now open.

Mark Murphy, Analyst, JPMorgan: Thank you so much. Because, Zama, we’re we’re witnessing some pretty incredible advancements in voice from the foundational AI model providers, and, you know, today was a good example with the GPT-five demo session. Since they are the ones handling all the voice synthesis and the speech parts of the equation, can you just help us understand which parts of this voice AI wave are do those companies want Twilio to handle? For instance, is it the they mostly want you to handle a phone call, or are they asking you to stream the audio, you know, you know, to and from the bot or, you know, routing calls? I mean, what what what is it that they’re relying upon Twilio for?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. Good question, Mark. So it’s it’s the full gamut, and so it really depends a lot on the customer and and their specific use case. So at sort of the the bare metal version, we’re providing the voice infrastructure. They’ll write on our rails.

We’ll provide the calling capabilities, and they’ll provide some of the intelligence on top of that. In the most extreme example, on the other side of it, you’d have, like, our conversation relay product, which incorporates the the voice activities, all of the voice intelligence that goes with that, the recording capability, the context awareness. And then you’ve got a lot of different things in between. For example, we we talked about conversational intelligence that allows us to capture context from the different calls. And so, Mark, it depends on the customer, really.

I would say, you know, for some of the, you know, kinda more AI forward or AI native companies, I would say it tends to be more the voice infrastructure side. I think when it tends to be more, enterprises or, let let’s say, more digitally native companies that are perhaps not AI based, It tends to be our fuller stack, but it really runs in between. No matter what, obviously, we’re incredibly excited about taking on those volumes. Voice overall is gross margin accretive for us, which I think is attractive, and getting it back to double digits, I think, is really important.

Mark Murphy, Analyst, JPMorgan: Okay. Thank you, Guzimed. And as a quick follow-up, maybe for Thomas or Aiden. I did notice in the customer wins that RCF is being mentioned twice. And I understand a lot of probably earlier or in a in a pilot phase.

But are you seeing anything there that would cause you to think that messaging customers are gonna expand toward RCS, you know, maybe a little faster than you expected?

Thomas Wyatt, Chief Revenue Officer, Twilio: We’re definitely encouraged with the trends that we’ve seen around RCS adoption, particularly this past quarter. A lot of our ISV customers are beginning to add a bit of their percentage of their traffic over to the RCS channel, and they’re getting really excellent results. We talked about a little bit of that in the prepared remarks with with Fresa with Fresa. So I think we’re we’re still in the early innings of but I we believe that the holiday season coming up will be a really great proof point for RCS because the deliverability, the read receipts, the branded capabilities stand out compared to SMS.

Siti Panigrahi, Analyst, Mizuho: Thank you.

Conference Operator: Thank you. Our next question comes from Taylor McGinnis of UBS. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio0: Yes. Hi. Thanks so much for taking my question. Just maybe on the revenue outlook for this year. So if I look at the implied organic guide, it looks like at the high end, it implies growth around 7% for 4Q compared to the 8% to 9% in 3Q.

I know that there’s a bit of a tougher compare as we get into 4Q. So I guess anything to flag, right, in terms of potential opportunities, right, that might be incremental in 4Q versus 3Q? And then how to think about that tougher compare and seasonality as well, too?

Hayden Migiano, Chief Financial Officer, Twilio: Taylor, yes, I think you hit on the key point there. So I’d say we’re really pleased with how we started the year. We’ve delivered four consecutive quarters of accelerating double digit growth. That feels really good. I think as we talked about, it’s pretty broad based in terms of where we’re seeing it come from in terms of the go to market channels, in terms of the products, in particular, messaging and voice, in terms of the regions, etcetera.

So in terms of as we think about the second half of the year, we do have tougher comparisons. As a reminder, we did have some messaging headwinds, in particular political traffic in the third quarter and fourth quarter of last year. And we also had some improving go to market performance along with the new platform innovations that we introduced last year, like the deliverability dashboard that kind of helped customers remediate messaging errors. So those two things kind of create a bit of a tougher comparison for messaging as we face into the second half of the year. But we feel really good about the momentum we’ve had to date, again, around self serve, cross sell, ISVs, international.

And we think that we believe that, that will help us generate durable profitable growth over the course of this year and into next year.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio0: Great. Thank you so much.

Conference Operator: Thank you. Our next question comes from Alex Zukin of Wolfe Research. Your line is open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio1: Yeah. Hey, guys. Thanks for taking the question. Just maybe a quick two parter for me. Khozema, maybe on voice first, kind of how did it perform relative to your expectations in the quarter?

When as we think about that channel and and the volume that you’re seeing from it, kinda how do how do we think about the the aspiration for for how it can contribute to to kinda both top line growth over the course of maybe the next two quarters, but even beyond that? And then maybe on the gross margin side, you you we’re talking about kinda sustainability, or stability,

Khozema Shipchandler, Chief Executive Officer, Twilio: if

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio1: you will. If we just do kind of like a almost non GAAP adjustment for gross margins, with from an FX and from an a to p perspective, what was the actual kind of sequential degradation on that basis? And how do we think about the kind of longer trajectory when you start layering in tailwinds from voice?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yes. Let me start on the first, and I’ll let Aiden give you some of the math on the gross margin adjustment. As it relates to voice, I would say it’s performing really well. I mean I think, you know, we’ve talked a little bit about our expectations about a voice renaissance, particularly behind a lot of the voice AI use cases that that you’re seeing. And I think, you know, the the early indication is is that we’re starting to see some of that.

A lot of the voice volumes that we’re seeing are really being built on demand from voice AI type customers, but they’re also coming from a lot of other customers, which is also encouraging. And then, you know, we’ve launched a number of products recently as well, like conversation relay, conversation intelligence that also help add to the mix in terms of, like, why voice is an important channel and how it’s being used. And then, obviously, just as it relates to kind of the broader environment, you know, voice is being heavily utilized in a variety of AI based use cases. And so I think that gives us a lot of encouragement in terms of the way that it’s been performing, the way that it contributes. I think the hard thing for us is obviously that the messaging business is still extremely large.

It tends to be well, it has been forever the largest piece of the business, and it continues to grow at very, very fast rates. And so the fact that that growth relative to any product eclipses the growth rate of any other, it’s always going to impact our margin mix. But all the same, given the performance in voice, that will have some uplift. And over time, I think it will start contributing.

Hayden Migiano, Chief Financial Officer, Twilio: Hey, Alex. I’ll comment a bit. And actually, just to Khozema’s point on the messaging mix, we actually included a page in our presentation that shows messaging’s kind of mix as a percentage of total Twilio revenue. And you can see how that has increased as that business has grown faster than the overall company. And so you can see that, that would have a negative mix effect.

But to answer your question, which was sequentially, how do we think about non GAAP gross margins adjusting for fees and FX, it would have been roughly flat quarter over quarter relative to Q1. So the fees were roughly 30 basis points of a headwind in Q2, and the balance there was some mix in there as well, but actually, FX made up most of the balance, so roughly flat quarter over quarter.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio1: Flat to new up, guys. Thank you.

Conference Operator: Thank you. Thanks. Our next question comes from Joshua Riley of Needham. Your line is open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio2: All right. Thanks for taking my questions. How are you thinking about the balance of market share growth for messaging in international markets relative to the pricing considerations there and the lower gross margin versus The U. S. Business?

And how much did maybe outperformance in international messaging impact the q two messaging gross margin?

Hayden Migiano, Chief Financial Officer, Twilio: Maybe I’ll it’s kinda wanna start the gross margin piece. Well, we don’t break out messaging in particular, but the company let me just give you a little bit more color on gross margin. So for the year, year over year in Q2, we were down two sixty basis points. Now messaging increased almost three points year over year as a percentage of our total revenue. That alone had 150 basis point impact on the company, just the fact that it mixed higher.

And then you had, if you listen to my prior answer, the fees and the FX, which really made up the difference in terms of the year over year walk. So those were primarily kind of what drove the gross margin decline year over year. And I’ll kick it back over to Thomas to talk about the international.

Jamie, Analyst, Morgan Stanley: Yeah. Just from a go

Thomas Wyatt, Chief Revenue Officer, Twilio: to market perspective in general, we’re looking at messaging and voice and trying to consider the full balance. Because in practice, a lot of our customers, we’re really trying to drive more of a cross sell, multiproduct type of adoption. And oftentimes, customers land with messaging and then add voice, and we’ve seen that acceleration, particularly in the last couple of quarters. Just taking self-service globally, for example, it is voice has been the fastest channel of growth for us. And as we talked about in Investor Day, you know, 63% of our enterprise customers started in voice or sorry, started in self-service.

So we see that trend continuing, and we wanna grow market share as much as possible to continue to build that platform layer and deliver orchestration. And so sometimes it’s easier to land internationally in messaging and then add voice in other channels, as we go, and we’ve seen really good growth in international in the last couple quarters.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio2: Awesome. And then just a quick follow-up on the, product development in AI. How are you prioritizing product investments, relative to the efficiency that you need for the, twenty twenty seven financial targets that you put out there?

Khozema Shipchandler, Chief Executive Officer, Twilio: Just to make sure I understand your question, you’re asking how are we prioritizing r and d investments as it relates to our op margin targets? I are we be more efficient on that line?

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio2: Yes. Exactly. Just given that there’s all these incremental opportunities for AI product development, was that factored into the, financial targets for 2027?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. I mean, I I say by and large, yes. I mean, obviously, obviously, we have a framework out there. I’m not going to necessarily provide updates on that one way or the other. But I think what we talked about in the context of the current call is that in the short term, we saw an opportunity to put a little bit more emphasis on R and D dollars to be able to accelerate our growth.

I think the results of which have been in the current year that we’ve been able to take up our cash flow and profitability guidance like pretty consistently over a period of time. Obviously, revenue has gone up as well. And so I think so long as the the investments that we make support our ongoing ability to generate free cash flow, we’ll look at that balance very carefully. But I I don’t see anything that’s in there that gives me cause for concern.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: Awesome. Thank you.

Conference Operator: Thank you. Our next question comes from Siti Panigrahi of Mizuho. Your line is now open.

Siti Panigrahi, Analyst, Mizuho: Oh, great. Thank you. Kojima, I have a high level question on AI. If you look at twenty twenty twenty one and ’22, you know, the opportunity from COVID for two years, there’s like a billion dollar revenue you you’re adding every year. But when you look at AgenTeq AI or even voice AI opportunity, all that, how big that could be, you know, and over what time frame?

Do you think this is more like multiple of that opportunity but over a long longer time frame? Or any color would be helpful.

Khozema Shipchandler, Chief Executive Officer, Twilio: I think that it’s hard for me to kinda put, like, dollar figures to it specifically, but I think what it is is gonna be materially TAM expansive. I think that every single AI capability that gets added, it’s beneficial to to Twilio fundamentally. I I’ll I’ll start sort of at the bottom. I think every one of these companies that we’re seeing, for the most part, like, they attach themselves to Twilio just given our brand, our performance, and we’re a very attractive entry point, as Thomas alluded to a moment ago, in terms of self serve, which is where a a lot of these, if not the majority of these customers end up starting. I think then if you look at the opposite end of the spectrum, so perhaps enterprises, I think enterprises as well as they start to figure out, like, what it is that they’re gonna do with AI, you know, in in so many different cases, they’re either turning to Twilio or or turning to partners at Twilio, which is also additive ultimately to Twilio in terms of the size of the opportunity that we see going forward.

I certainly think that AI has been a contributor in terms of the way that we’ve been growing the company over the last several quarters. I think it’s been a tailwind for us. But I think more importantly, it really positions us in the center of the AI value chain ultimately because we can be both an infrastructure provider as well as a full stack solutions provider at the platform in which we’re orchestrating channels, we’re orchestrating context, and we’re allowing our customers to be able to really personalize interactions. And so just given the gamut of opportunities that I see, I think that it is really TAM expansive. And, you know, over time, it’ll add material dollars to the top line.

Siti Panigrahi, Analyst, Mizuho: That’s helpful color. And then a quick follow-up. Your voice is around 12% of revenue. But if you think of SIP trunking, how big is that of of the voice business?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. We don’t give the breakdown there. You know, we give the the kind of breakdown of of voice periodically. Voice infrastructure tends to be the contributor, and obviously, it’s driving the margins of voice. And so you can take some signal from that, but we don’t provide a breakdown beyond that.

Siti Panigrahi, Analyst, Mizuho: All right. Thank you.

Conference Operator: Thank you. Our next question comes from Arjun Bhatia of William Blair. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio4: Yes. Perfect. Thank you so much. Because then I I I think I the incremental r and d investments certainly makes sense, right, especially if you’re seeing traction. I’m curious, though, like, when if if you think about just breaking it down of where exactly those go.

Is that just incremental engineers? Is that some infrastructure? And, you know, what what do you think it kind of adds from a product platform perspective that, that you don’t have today?

Khozema Shipchandler, Chief Executive Officer, Twilio: Well, I think it’s gonna be predominantly in engineering. I mean, obviously, we’re all experiencing this huge AI opportunity that that we spoke of just a moment ago answered some of the other questions. But I think the customer reactions that we got at our conference, our SIGNAL conference in The U. S, our SIGNAL conference in Brazil, I think, really speak to the size of the opportunity that our customers are talking to us about. And so this is kind of a once in a generation technology paradigm, and you don’t want to lose a step, obviously, when these things are happening.

We’re not gonna make irresponsible investments. We’re gonna continue to generate strong operating profit dollars, strong cash flow. But I think when opportunities like this come along, especially that are perhaps once in a generation, it is important to make sure that you stay ahead of them so that you can capture the fullness of the opportunity. And what we’re doing is not more complicated than that. And again, we’re going to make responsible investments, but it’s really behind AI, and it’s going to be predominantly in engineering.

If I could

Thomas Wyatt, Chief Revenue Officer, Twilio: just add to that, Khozema, just from a customer’s perspective, they’re really pushing us, continued acceleration around RCS and voice AI capabilities, and we’re just seeing such a strong demand for that that any additional acceleration in the road map will benefit us over time.

Jim Fish, Analyst, Piper Sandler: Okay. Perfect. Understood. And then, you know, one of

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio4: the other things that kind of stuck out from from from Signal, I think, was the just the integration of customer profiles from segment into the comps business along with the the the rest of your technology. And and I need to give some kind of use steps on relay and and conversational intelligence earlier. But I’m I’m curious how customers are responding to that integration of of profiles. Is that something they’re already taking advantage of? Is that something that’s still to come, and and how might it kind of enrich the broader Thomas platform?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. I mean, Thomas and I can both speak to it. I I I think from my perspective, every customer conversation I’ve had since the signal event that we had in The US has probably started with a conversation about conversation relay that’s customers asking about it, not me pitching it. And so I’d say that’s pretty encouraging in terms of the the kinds of things that they wanna be able to do with our stack. That is by far, you know, the most integrated version that that that we’ve got, and it’s kind of the the most fully featured capability that we offer.

But equally, we’re seeing a lot of uptake with conversational intelligence, for example, different kinds of software add ons that fundamentally utilize segment capabilities, data capabilities that integrate with our communications, those are in very high demand as well. Those are growing very nicely. So I would say, in general, the combination of our data business with our communications business has been extremely well received by customers and more importantly is driving a lot of ROI for them. Don’t

Mark Murphy, Analyst, JPMorgan: know Just if Tom said

Thomas Wyatt, Chief Revenue Officer, Twilio: to add an example, this particular quarter, we had a leading fashion retailer that was expanding with us using agent Copilot, and it’s really the use cases enhancing agent productivity, reducing customer wait times, and ultimately reducing the number of seasonal hires the customer needed to bring on to handle peak periods. So just this is just an example of the Twilio architecture of being able to have a platform with multiple channels and driving personalization from segment across every channel. We think that’s a unique value proposition,

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: and our customers are loving that. Our

Conference Operator: next question comes from Patrick Walravens of Citizens Bank.

Mark Murphy, Analyst, JPMorgan: Oh, great. Thank you so much, and congratulations, you guys. So, Josema, it’s been almost five years since Twilio acquired Segment. And I just I just thought, you know, since you’re not gonna break it out anymore, just maybe we could do just sort of a how did the evolution of this space impact this business? I mean, is it just that that the CDP market really shifted towards data platforms like Snowflakes and Snowflake and Databricks, or was it something else?

What what what happened to that space?

Khozema Shipchandler, Chief Executive Officer, Twilio: Well, I think the original thesis for us when we bought Segment was that more intelligent communications were gonna be the future of this company. And so I think, you know, putting aside some of the other developments that have happened in the broader CDP landscape, which are, frankly, in some ways less the focus for us, the opportunity to be able to drive intelligent conversations, intelligent communications, highly personalized interactions between our customers and consumers, like, that was always the goal when we bought the company. And I think we’re really starting to see the fruition of, you know, that original strategy. You know, we’ve launched a number of different products that integrate the two capabilities natively in in singular APIs. I think that’s really exciting.

It makes it easier for customers to adopt, obviously. And then every quarter, we’ve added increasingly richer capabilities so that our customers in the context of communications can use contextual data to be able to derive richer and richer understanding of what their consumers are doing to be able to drive higher personalization. So I’d say, again, putting aside what’s happened in sort of the broader CDP, the strategy of the company had been to fundamentally integrate a a a CDP into the communications business, and that’s what we’ve done. And and I think based on the traction that we’re seeing with it, that’s really exciting.

Mark Murphy, Analyst, JPMorgan: Awesome. Right. And then, Aidan, if could ask a follow-up. You commented in your prepared remarks that, for the gross margins, we are investing at the platform level to ensure we’re delivering our services efficiently. So that caught my attention.

What what are those investments?

Hayden Migiano, Chief Financial Officer, Twilio: Yeah. Let me give you an example. So for for our email platform, for example, our email product, we’re in the process of migrating off of legacy data centers to cloud. And so that takes a little bit of time. That probably takes several quarters, and there’s a period of time in which you have a double bubble of cost.

We did this as Segment actually in 2024, if you recall. And so we’re in the process of doing the same thing for email. Again, a little bit of cost and margin headwind in the short term, but it’s the right long term play. So that’s an example of something that would fall into that bucket. The other things we’re doing, like on the messaging side, we’re looking to establish more direct connections.

That’s something that we’re kinda continuously doing as we operate around the world. We’re also leveraging our balance sheet where it makes sense to do so in terms of prepaying carriers to secure better pricing. So a number of different things, but that just gives you some examples, Pat.

Mark Murphy, Analyst, JPMorgan: Awesome. Thank you both. Thank

Conference Operator: you. Our next question comes from Jackson Ader of KeyBanc Capital Markets. Your line is now open.

Jamie, Analyst, Morgan Stanley: Great. Thanks for taking our questions, guys. Good evening. On the AI voice piece, is this a separate competitive environment from kind of the rest of your business? Are you competing more on, you know, your like for like capabilities with point solutions in that area?

Khozema Shipchandler, Chief Executive Officer, Twilio: Not as much as you might think. I mean, clearly, there are a ton of voice AI vertical companies that are out there. I’d say in so many of those instances, you know, we shared some stats at our Investor Day, like, really, really compellingly high stats that so many of those companies are are building on our infrastructure. And so in the first instance, like, that’s pretty compelling. I think the tricky thing is is that for a lot of companies that you you might think we would end up competing with, I think our ability to use our CDP this kinda goes to the prior question as well.

Our ability to use our CDP to be able to drive context inside of those interactions as you’ve got voice to voice or agent to human, whatever the paradigm is, in terms of those interactions, I think that gives us a bit of a leg up. But if a customer comes to us and says, hey. Look. We’ve already got, an LLM that we’ve got credits with. We wanna be able to integrate that with you guys.

Like, we are open season on that, and we certainly support, you know, a wide variety of different LLMs that we will integrate to rapidly. But if they wanna go in the opposite direction, which we’re seeing a lot of too, like, with conversation relay, for example, we’ll support that all day long as well. So it it really kinda runs the gamut.

Hayden Migiano, Chief Financial Officer, Twilio: And I’d say it’s a pretty exciting time, Jackson. Just maybe a stat to give you. So we have a number of different AI startups that were founded in just the last three years, spending over 7 figures with us today. And our top 10, I’d say, startups in that cohort, they have a blended gross margin of over 80%. So a lot to be excited about here.

Jamie, Analyst, Morgan Stanley: Nice. Okay. Quick follow-up on on pricing. In a future state where, hopefully, your multiproduct cuff customers have a more cohesive contract structure, let’s say, how do you view your ability to drive pricing, maybe in that in that future? Thanks.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: Would say Sorry.

Khozema Shipchandler, Chief Executive Officer, Twilio: Go ahead. I I was just gonna say, look. I I think in the in the short term, what we’re trying to do is really grow into multiple products. Right? And I think just given the number of customers that we have today for which that opportunity exists, that’s kind of our initial approach.

I think the second thing is that as it relates to sort of the broader AI opportunity, like that also presents a pretty compelling opportunity. Those two actions alone, because of the fact that they’re gross margin accretive, I think, will add, you know, accretion over time. You know, again, you’ve got this messaging mix dynamics. So just kind of putting that aside, assuming that that was at level loaded, you’d see gross margin accretion just as a result of those things. I think as it relates to price on sort of the core stack, the reality is actually that we raise price periodically on list, pretty regularly.

It does take time, especially with some of our larger enterprise customers, for that to bleed through, but you see the more immediate impact in in self serve. Understood. Thank you.

Conference Operator: Thank you. Our next question comes from William Power of Baird. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio5: Okay. Great. Thanks. Maybe follow-up first just on guidance and implications for the second half of the year. I may have missed this, but the messaging price increase that’s occurring in The U.

S, what kind of tailwind or impact does that have on guidance for the second half? And then, Josema, in your prepared remarks, I think you talked about some real improvements in large deal traction year over year. I just wondered if, you know, there’s anything else you could unpack there. Any any common factors? What’s what’s kinda helping, you know, drive that?

Thanks. Maybe,

Khozema Shipchandler, Chief Executive Officer, Twilio: Thomas, do you wanna speak to the large deal activity, and then I can pick up. Yeah.

Thomas Wyatt, Chief Revenue Officer, Twilio: Yeah. Yeah. No. Absolutely. The large deal activity has been one of the brighter spots of the business for the last few quarters, but I think this quarter in particular, it stood out with 57% growth in customers spending over $500,000 with us in the quarter.

So just in general, this speaks to the nature of a lot more of our platform selling, cross selling motion, where oftentimes customers are landing with messaging, increasing their volume, and then we’re seeing them add more software capabilities on top of messaging. We had really strong quarter with products like Verifi and FraudGuard, for example. And then, of course, we’ve talked a lot about voice today. But importantly, the voice add ons are doing quite well on top of the voice infrastructure components, which is critical. And so those combinations together are allowing us to drive much larger deal sizes, and we’re seeing that whether it’s in our ISP business or whether it’s in our direct business globally.

Hayden Migiano, Chief Financial Officer, Twilio: And then on the pricing question, Will, we don’t anticipate it really having a material impact over the balance of the year. It’s North America only, and it primarily affects our self-service customers, as Thomas mentioned. So it will have a bit of an impact, but nothing material at the consolidated level. It will take some time to work its way through kind of the renewal cycles with some of our bigger customers.

Conference Operator: Last question comes from Derrick Wood of TD Cowen.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio6: Great. Thanks. Khozema, could you could you comment on the robocall market? It it seems like volumes are growing at a decent clip in The US this year. Just how how much of robocall type use cases go through your voice business?

And what’s your approach to this market longer term, especially in the age of AI?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. There’s, you know, different kinds of robocalling, obviously. The the the fraudulent stuff, like, we take, like, really, really significant compliance measures to ensure that that traffic does not run through our platform. As it relates to robocalling more generally, like, I’d say it’s not like a big piece of what we ultimately do. Like, what we’re doing in large part is a lot of the voice infrastructure.

I think where if you wanna call this robocalling, like, there are instances in which there’ll be phone call notifications that happen when their delivery is scheduled or or or notifications required about a specific expertise that’s being delivered. I can think of a handful of examples off the top of my head that involve stuff like that. And then as it relates to AI, I would say that’s not really the the thing that kinda creates the AI opportunity for us, meaning it’s not robocalls. It tends to be more sophisticated use cases that are around customer care or service. And then, obviously, inside of the company, we do some customer care stuff with our Voice AI stack, and we we we also do some some inbound sales prospecting with it.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio6: Understood. And if I could squeeze one more in. There there were a bunch of regulatory changes in a number of countries in recent months and including new sender ID registration rules and and new KYC requirements. Just just wondering, did did things like this have any impact on your business, whether from a sales cycle or cost of sale perspective? Just anything to flag and and the, know, potential disruption from regulatory changes like this or potential positive impact.

Thank you. Yeah.

Khozema Shipchandler, Chief Executive Officer, Twilio: I I think that, you know, over time, I would imagine that there’s positive benefits here. I think in the short term, the short answer is no. We don’t see a lot of impact as a result of different regulatory changes. We’re very proactive with regulators in effectively every market. So we typically have pretty advanced notice.

We’re typically participating in the way in which a lot of this regulation gets shaped. Being the largest provider globally, regulators are often coming to us asking about what makes sense, what doesn’t make sense, how do we protect the consumer. We’re obviously in favor of anything that ultimately does end up protecting the consumer just given that it protects the ecosystem more broadly. So I would say short term, no impact. Longer term, probably a mild positive impact because it reinforces compliance in the ecosystem more broadly.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: Thank you.

Conference Operator: Thank you. This concludes the question and answer session. I would now like to turn it back over for closing remarks. You for your participation in today’s conference. This does conclude the program.

You may now disconnect.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio0: Goodbye.

Conference Operator: Good day, and thank you for standing by. Welcome to the Twilio Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during your session, you will need to press 11 on your telephone.

You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development. Please go ahead.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio: Good afternoon, everyone, and thank you for joining us for Twilio’s second quarter twenty twenty five earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer Hayden Migiano, Chief Financial Officer and Thomas Wyatt, Chief Revenue Officer. As a reminder, we will disclose non GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non GAAP results can be found in our earnings presentation posted on our IR website at investors.cleo.com. 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 ks and our forthcoming 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. And with that, I’ll hand it over to Khozema and Aiden, who will discuss our Q2 results, and we’ll then open the call for Q and A.

Khozema Shipchandler, Chief Executive Officer, Twilio: Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. Twilio had a strong Q2, reaching over $1,200,000,000 in revenue and achieving another quarter of double digit revenue growth and year over year growth acceleration. We also delivered another record quarter of both non GAAP income from operations and free cash flow. And Q2 marked an important milestone as our segment business delivered non GAAP income from operations for the first time, surpassing our Q2 breakeven target that we established early last year.

Our strong performance this quarter reflects our continued progress in driving greater operating efficiencies, our focused product led innovation, and solid commercial execution. In Q2, we delivered a fourth consecutive quarter of accelerating messaging growth as well as double digit voice growth. We are demonstrating not just our market leading scale in our core communications market, but also our pace of innovation, which is allowing us to take share. This is also evident across our go to market levers as self serve ISVs, international, and communications software add ons each delivered double digit revenue growth, and our multi product customer count also grew double digits. During the quarter, we had several notable wins, including Centerfield, Henry Schein One, JustFab, Manus AI, Nooks AI, The Phoenix Suns, and Postscript.

We also had another great quarter of large deal activity with ISV and technology customers. In fact, in communications, the number of large deals closed of $500,000 or more increased 57% year over year. This momentum is reflected in our dollar based net expansion rate of 108% in Q2, our best rate in over two years. In self serve, our voice channel was a bright spot driven by a variety of factors, notably the surge in voice AI startups who are building on Twilio. In May, we held our annual user conference, SIGNAL, bringing together nearly a thousand attendees in San Francisco for a preview of our next generation customer engagement platform.

During the event, I had the opportunity to engage with many of our customers and heard countless stories of how Twilio continues to bring more ROI to businesses. It was evident that the power of combining communications plus contextual data plus AI through our product innovations and platform is driving meaningful value for brands and that Twilio is increasingly becoming the infrastructure layer for customer interactions. Twilio is not just a company of and for builders, but a company that our customers can build their businesses on for years to come as they navigate AI and every other technological evolution they will encounter. At SIGNAL, we also showcase new products designed to help brands create modern, intelligent customer experiences all built on the Twilio platform and tailored to meet customers wherever they are in their journey. We announced the general availability of conversation relay, which empowers developers to create robust natural voice AI agents using their choice of LLM.

And more importantly, is the first step toward realizing our vision of powering context aware virtual agents across every Twilio conversation channel. Conversation Relay is generating a lot of customer interest. And during its first quarter of general availability, we completed nearly 1,000,000 calls. As an example, in q two, we signed a conversation relay deal with a leading fintech company that will leverage conversation relay to automate their three most common customer care requests, credit limit inquiries, card tracking, and installment payments. Within two weeks, they validated the solution and began scaling to production, demonstrating both the speed and impact of Twilio’s AI powered automation.

We’re powering innovation for both enterprises and the newest AI startups with our scalable and trusted communications infrastructure, orchestration, and observability. True to our roots, these features are as extensible and configurable as any other part of the Twilio stack, something customers value when much of the conversational AI ecosystem is focused on black box solutions, vendor lock in, and extensive professional services integrations. We also announced that conversational intelligence, already generally available for voice, now supports messaging conversations in private beta, and it has already seen an 86% increase in account usage year over year. This powerful feature unifies conversational data across voice and messaging for human and AI agents, giving brands a cross channel view of the customer. It highlights the value of previously inaccessible conversational and contextual data by equipping sales and CX teams with holistic insights from every touch point, allowing them to deliver seamless, personalized experiences which lead to a better relationship with brands.

Conversational intelligence also includes built in AI agent observability, allowing brands to analyze AI agent interactions, customize call scoring, generate competitive intelligence, and detect customer intent through natural language understanding. And we’ve also continued to innovate across our trusted core channels. A few weeks ago, WhatsApp business calling via programmable voice became generally available, enabling businesses to engage directly with consumers on WhatsApp through a single seamless conversation, whether via messaging or voice. We’re also seeing momentum with RCS adoption currently available in select markets with a full GA in the coming months. RCS is already delivering strong results, transforming standard notifications into trusted and branded communications.

One of Twilio’s longtime customers, Fresha, a leading booking platform for the beauty and wellness industry that facilitates over 700,000 appointments daily adopted RCS with no code changes and saw an immediate measurable impact. With Twilio, Fresha achieved 99.2% message delivery rate and saw a 41% read rate with RCS messages achieving a 6% increase in appointment confirmations and a 7% uplift in customer reviews. With Twilio segment, we announced event triggered journeys at SIGNAL, and the feature officially went live just a few weeks ago. Now journeys will create rich contextual payloads that combine information from not only the triggering events, but also from the data stored in the warehouse and everything in the segment customer profile. For example, when an online shopper has abandoned their cart, a business can see exactly which items are in the cart and all their key details, like name, price, size, color, image, and if that customer is a loyalty member with rewards points they can use towards their purchase.

With event trigger journeys, Twilio segment creates a complete view of the customer, allowing brands to respond dynamically to moments that matter, whether it’s an abandoned cart, a missed form submission, or a key onboarding milestone. And lastly, at SIGNAL, we welcomed Microsoft CEO, Satya Nadella, as part of our keynote to announce a multiyear strategic partnership between Twilio and Microsoft. The collaboration unlocks the potential for more than 10,000,000 Twilio developers and thousands of Microsoft managed customers to build the future of conversational AI. All of these enhanced capabilities are paramount for our customers. Twilio’s 2025 state of customer engagement report recently found that 88% of consumers are more likely to buy when engagement is personalized, but 44 of brands struggle with executing at this level.

This data illustrates the magnitude of the opportunity as companies are still figuring out how to evolve their customer experiences, especially given the opportunities presented by generative AI. Twilio’s platform delivers the set of tools and infrastructure businesses need to modernize and help brands ultimately deliver personalization at scale to drive more ROI. Our commitment to delivering enhanced product innovation and customer value is also continuing to get recognition and reinforces the power of the Twilio platform and our leadership in the market. Recently, Gartner named Twilio a leader in the CPaaS Magic Quadrant for the third consecutive year and number one in three of the five use cases in the CPaaS critical capabilities report. And Omnia named Twilio a CPaaS universe leader.

I’m very pleased with the hard work of our team, and today’s results underscore the strength of the Twilio platform and the progress we’ve made as a company. And now I’d like to turn it over to Aiden, who will walk you through our financial results.

Hayden Migiano, Chief Financial Officer, Twilio: Thank you, Khozema, and good afternoon, everyone. Twilio had a strong second quarter, delivering our fourth consecutive quarter of double digit revenue growth and year over year growth acceleration. For Q2, we generated record revenue of $1,228,000,000 up 13% year over year both on a reported basis and an organic basis. We also generated record non GAAP income from operations of two twenty one million dollars and free cash flow of $263,000,000 Revenue in our Communications business was $1,153,000,000 for the quarter, up 14% year over year. We’ve continued to drive accelerated levels of growth as we execute against a focused set of go to market initiatives across ISVs, self serve, cross sell and international expansion.

As Khozema mentioned, messaging revenue growth accelerated for the fourth consecutive quarter, while we generated double digit voice revenue growth for the first time in two years. Strong uptake among AI startups in our self serve business contributed to the acceleration in voice revenue growth. In early June, Verizon raised its A2P messaging fee rate, which contributed $6,000,000 in incremental pass through to our reported communications and total revenue for the quarter. Consistent with how we handled A2P messaging fees when they were first instituted by U. S.

Carriers, in order to provide a consistent comparison of the business’ underlying growth rate, we exclude the revenue from these incremental A2P carrier fees when calculating our organic revenue growth until we have lapped the comparative period. As a reminder, we passed these fees through at zero percent gross margin. Segment revenue for the quarter was $75,000,000 flat year over year. Our Q2 dollar based net expansion rate was 108%, reflecting the improving growth trends we’ve seen in our communications business over the last several quarters. Our DBNE rate for Communications was 109% and the DBNE rate for segment was 95%.

Pass through revenue from incremental carrier fees contributed roughly 60 basis points to both total and communications DBNE in the quarter. We delivered non GAAP gross profit of $623,000,000 up 8% year over year. This represented a non GAAP gross margin of 50.7%, down two sixty basis points year over year and 60 basis points quarter over quarter. As Khozema mentioned, we are taking share in our core communications market, led by accelerating messaging and voice growth. We saw our messaging revenue mix increase by two sixty basis points year over year, which was the primary driver of our gross margin decline in Q2.

The balance of the gross margin decline was driven by the $6,000,000 of increased carrier fees and FX, given our international carrier costs are paid in local currency. Our revenue was not materially impacted by FX as we bill primarily in U. S. Dollars. We’re taking steps to stabilize and improve gross margins, including both price and cost actions.

We have announced price increases in both messaging and voice in The U. S, and we’re also investing at the platform level to ensure we’re delivering our services efficiently. Notably, we continue to generate strong growth in both non GAAP income from operations and free cash flow. Excluding the impact of carrier fees, we would expect our pricing and cost actions as well as our continued growth in our higher margin products to help stabilize gross margins over the near term. Non GAAP gross margin for Communications was 49.2% and non GAAP gross margins for segment were 74.3%.

Non GAAP income from operations came in ahead of expectations at a record $221,000,000 up 26% year over year, driven by strong revenue growth and ongoing cost discipline. Our non GAAP operating margin of 18% was up 180 basis points year over year and down 20 basis points quarter over quarter. The sequential decline was due to anticipated costs incurred from our annual merit increases along with expenses for our SIGNAL conference. In addition, we generated $37,000,000 in GAAP income from operations, our third consecutive quarter of GAAP operating profitability. Non GAAP income from operations for Communications was $281,000,000 Non GAAP income from operations for segment was $6,000,000 which exceeded our breakeven target originally introduced in March 2024.

Earlier this year, we realigned our business unit structure into a functional support model, and we continue to integrate segment with our communications capabilities to deliver one trusted, smart and integrated platform. Because of this, beginning in the third quarter, we no longer plan to disclose our results by business unit. Stock based compensation as a percentage of revenue was 12.1%, up 30 basis points quarter over quarter and down 150 basis points year over year. As we noted on our Q1 earnings call, the modest sequential increase in stock based compensation is due to the timing of our annual refresh brands during the second quarter. We generated record free cash flow of $263,000,000 in the quarter.

Additionally, we purchased $177,000,000 of shares in the second quarter, bringing our year to date share repurchases to $3.00 $7,000,000 through the end of Q2. Moving to guidance. For Q3, we’re initiating a revenue target of 1,245,000,000.000 to $1,255,000,000 representing 8% to 9% organic growth and 10% to 11% reported growth. Based on our first half performance and Q3 guidance, we’re raising our full year 2025 organic revenue growth guidance to a range of nine to 10%, up from 7.5% to 8.5% previously. And we’re initiating a reported revenue growth range of 10% to 11%, which includes the contribution from incremental increases to carrier fees.

Our revenue guidance assumes $20,000,000 in pass through revenue from incremental carrier fees in both Q3 and Q4. Turning to our profit outlook. For Q3, we expect non GAAP income from operations of $2.00 $5,000,000 to $215,000,000 We are maintaining our full year non GAAP income from operations range of $850,000,000 to $875,000,000 as we’re taking the opportunity to make some accelerated R and D investments in response to strong customer demand in voice, RCS and our AI offerings. Based on our strong cash generation during the first half of the year, we’re raising our full year free cash flow guidance to a range of $875,000,000 to $900,000,000 up from $850,000,000 to $875,000,000 previously. I’m very pleased with the accelerated revenue growth we delivered in the second quarter as well as our ongoing cost discipline that is driving strong profitability and free cash flow.

We had a strong first half of the year, and we will continue to focus on what we can control as we seek to drive durable revenue growth and strong operating profit and free cash flow generation throughout 2025. And with that, we’ll now open it up to questions.

Conference Operator: Thank you. At this time, we will conduct a question and answer session. A reminder, to ask a question, you will need to press Our first question comes from Meta Marshall of Morgan Stanley. Great.

Jamie, Analyst, Morgan Stanley: This is Jamie on for Meta. I guess maybe just to start off, can you speak to the traction of where you’re seeing the most traction with ISVs?

Thomas Wyatt, Chief Revenue Officer, Twilio: Hi. Hi. This is Thomas Wyatt. So just to comment on that, we’re seeing it across verticals, financial services, the health care, professional services. And what we’re seeing is the use cases often start with messaging and from there adding second and third channels, whether it be voice or now more importantly with RCS.

And by the combination of that, the Twilio platform providing orchestration capabilities across that with some of our newer products like conversational insights allows our ISV customers to get a true representation of the level of engagement consumer has with its brand. So we’re really encouraged by our ISV growth. It continues to grow above the company averages.

Jamie, Analyst, Morgan Stanley: Got it. And then just as a quick follow-up. Is there any impact from the price increase in the quarter?

Hayden Migiano, Chief Financial Officer, Twilio: Not material. No.

Jamie, Analyst, Morgan Stanley: Great. Thanks again. I’ll jump back in the queue.

Conference Operator: Thank you. Our next question comes from Jim Fish of Piper Sandler. Your line is now open.

Jim Fish, Analyst, Piper Sandler: Yeah. Thanks for the question, guys. I I was gonna start with a different one, but just given we brought up a price increase here, you you implemented it here in The US on the messaging side. Just can you walk us through why now for a price increase? And just making sure that this wasn’t tied to, you know, the Verizon a to p increase and that this is actually incremental to that.

So I I guess why now and and making sure this isn’t just, you know, a fee raise because your costs are getting raised as well.

Hayden Migiano, Chief Financial Officer, Twilio: Hey, Jim. I’ll start, and then I’ll hand it over to Thomas. I wanna be clear that the price increase that we did in The US for messaging was not tied to the A2P fee increase that came through from Verizon. Those two things are separate and distinct. So just wanted to make that clear.

I’ll hand it over to Thomas to talk about timing and why we felt it was prudent to do so.

Thomas Wyatt, Chief Revenue Officer, Twilio: Yeah. And so raising the list price, particularly in North America for our messaging business, really reflects mainly on our self-service business, which is growing very fast. And our you know, we think we have pricing power in that capability. We also think the pricing does help us with some of our enterprise deals as well over time, but they’re on a bit different renewal contract timeline. So we’ll it’ll be sort of a modest increase over time for them.

Jim Fish, Analyst, Piper Sandler: Got it. And then, look. Your customer additions have been really strong and even stronger than last quarter. I guess, where are these customers coming from? Though they seem to be coming in at a smaller rate, and how much how much of it is tied towards that voice AI opportunity or AI opportunity generally?

Thomas Wyatt, Chief Revenue Officer, Twilio: We’re seeing broad strength coming in from our self-service channel. There’s been a number of innovations that we’ve made in terms of reducing the friction of the onboarding and the setup for our self-service, which has really dramatically increased the conversion rate of free users into paid users that upgrade. In addition to that, we introduced a new service for our email customers only that moves it from free to more of a trial, free trial type service, and that’s added some additional. But this is one of the strongest quarters we’ve had in years related to new customer acquisition, and we really had a strong new business in our Enterprise segment quarter as well.

Conference Operator: Our Our next question comes from Michael Turrin of Wells Fargo Securities.

Michael Turrin, Analyst, Wells Fargo Securities: I was just hoping, I mean, you gave a lot of useful breadcrumbs at the Investor Day a while back on some of these aspects. But I’d just be curious to get your updated view around the durability and drivers of growth profile you’re delivering. You’re guiding for double digit organic growth at the high end for the full year now. And then the commentary around actions you’re taking to deliver stabilization on the gross margin side, are those fairly immediate for us to consider when we’re kind of updating models from here going forward? Is there time to impact for some of those for us to consider as we’re rolling it all forward?

Sure.

Khozema Shipchandler, Chief Executive Officer, Twilio: Michael, this is Khozema. I’ll take both answers, and Aiden and Thomas can add to it as they want. I’d say on the growth side, like we feel pretty good about it. Growth has been pretty durable across a number of different industries. Obviously, it’s gonna be a little bit harder in the back half just because of the compares.

But I would say growth feels durable. We’re obviously not guiding beyond the current period, but we felt pretty good about what we’ve experienced in the first half. I think we’ve seen resilience in a number of different areas. So like there’s no one thing particularly to point to in terms of where that strength has come from. It’s industry based, it’s customer based, it’s geo based.

And so that all feels pretty good. In terms of gross margins, as Eiden pointed to in the context of the prepared remarks, we obviously are seeing a little bit of a mix dynamic there, and FX clipped us as well. And then, of course, you’ve got the Verizon fee thing. But more to your question, we are taking some actions. Let me start on the pricing side.

We already talked about some of the price increases that we’ve undertaken. As Thomas said, a lot of that will be geared towards what we experience on the self serve side. And so to the extent that we have a lot more self serve ads, you’d certainly see that faster. With respect to other customers, it’s gonna happen more in the context of their renewal cycles and stuff like that. And so that’ll happen more modestly over time, I would say.

And then on the cost side, you know, there’s also a number of actions that we’re taking there as well. I would say they largely have to do with optimization of our our platform and and the way that the costs show up there so that we’re using it more efficiently. But I do think those things as well as the fact that we’ve got a number of higher margin gross margin products that are growing very, very nicely, all of that will allow us to, in kind of the near term, stabilize gross margins, but over time for that to inflect up a bit.

Hayden Migiano, Chief Financial Officer, Twilio: Maybe the one thing I’ll add, Michael, just as it relates to the fees. So we had one month of an impact of the new or the increased Verizon fees in Q2. We will have a full quarter effect of that in Q3 and Q4. So all else being equal, we’d expect it to be about $20,000,000 of an impact in those quarters and roughly 50 basis points of a margin impact associated with that. But again, importantly, as it relates to those fees, we pass them through at 0% gross margin, so it kind of grosses up our revenue, doesn’t impact gross profit dollars, and it has no impact on our ability to generate profit dollars or free cash flow dollars going forward.

Conference Operator: Our Our next question comes from Mark Murphy of JPMorgan. Your line is now open.

Mark Murphy, Analyst, JPMorgan: Thank you so much. Because, Zama, we’re we’re witnessing some pretty incredible advancements in voice from the foundational AI model providers, and today was a good example with the GBT five demo session. Since they are the ones handling all the voice synthesis and the speech parts of the equation, can you just help us understand which parts of this VoiceAI wave are do those companies want Twilio to handle, for instance, is it the they mostly want you to handle a phone call, or are they asking you to stream the audio, you know, you know, to and from the bot or, you know, routing calls? I mean, what what what is it that they’re relying upon Twilio for?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. Good question, Mark. So it’s it’s the full gamut, and so it really depends a lot on the customer and and their specific use case. So at sort of the the bare metal version, we’re providing the voice infrastructure. They’ll ride on our rails.

We’ll provide the calling capabilities, and they’ll provide some of the intelligence on top of that. In the most extreme example, on the other side of it, you’d have, like, our conversation relay product, which incorporates the the voice activities, all of the voice intelligence that goes with that, the recording capability, the context awareness. And then you’ve got a lot of different things in between. For example, we we talked about conversational intelligence that allows us to capture context from the different calls. And so, Mark, it depends on the customer, really.

I would say, you know, for some of the, you know, kinda more AI forward or AI native companies, I would say it tends to be more the voice infrastructure side. I think when it tends to be more enterprises or, let let’s say, more digitally native companies that are perhaps not AI based, it tends to be our fuller stack, but it really runs in between. No matter what, obviously, we’re incredibly excited about taking on those volumes. Voice overall is gross margin accretive for us, which I think is attractive. And getting it back to double digits, I think, is really important.

Mark Murphy, Analyst, JPMorgan: Okay. Thank you, Guzimah. And as a quick follow-up, maybe maybe for Thomas or Aiden, I did notice in the customer wins that RCS maybe mentioned twice. And I understand a lot of it’s probably earlier in a pilot phase, but are you seeing anything there that would cause you to think that messaging customers are gonna expand toward RCS, you know, maybe a little faster than you expected?

Thomas Wyatt, Chief Revenue Officer, Twilio: We’re definitely encouraged with the trends that we’ve seen around RCS adoption, particularly this past quarter. A lot of our ISV customers are beginning to add a bit of their percentage of their traffic over to the RCS channel, and they’re getting really excellent results. We talked about a little bit that in the prepared remarks with with Frescia with Fresa. So I think we’re we’re still in the early innings of but I we believe that the holiday season coming up will be a really great proof point for RCS because the deliverability, the read receipts, the branded capabilities stand out compared to SMS.

Mark Murphy, Analyst, JPMorgan: Thank you.

Conference Operator: Thank you. Our next question comes from Taylor McGinnis of UBS. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio0: Yes. Hi. Thanks so much for taking my question. Just maybe on the revenue outlook for this year. So if I look at the implied organic guide, it looks like at the high end, it implies growth around 7% for 4Q compared to the 8% to 9% in 3Q.

I know that there’s a bit of a tougher compare as we get into 4Q. So I guess anything to flag, right, in terms of potential opportunities, right, that might be incremental in 4Q versus 3Q? And then how to think about that tougher compare and seasonality as well, too?

Hayden Migiano, Chief Financial Officer, Twilio: Taylor, yes, I think you hit on the key point there. So I’d say we’re really pleased with how we started the year. We’ve delivered four consecutive quarters of accelerating double digit growth. That feels really good. I think as we talked about, it’s pretty broad based in terms of where we’re seeing it come from in terms of the go to market channels, in terms of the products, in particular, messaging and voice, in terms of the regions, etcetera.

So in terms of as we think about the second half of the year, we do have tougher comparisons. As a reminder, we did have some messaging headwinds, in particular political traffic in the third quarter and fourth quarter of last year. And we also had some improving go to market performance along with the new platform innovations that we introduced last year, like the deliverability dashboard that kind of helped customers remediate messaging errors. So those two things kind of create a bit of a tougher comparison for messaging as we face into the second half of the year. But we feel really good about the momentum we’ve had to date, again, around self serve, cross sell, ISVs, international.

And we think that we believe that, that will help us generate durable profitable growth over the course of this year and into next year.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio0: Great. Thank you so much.

Conference Operator: Thank you. Our next question comes from Alex Zukin of Wolfe Research. Your line is open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio1: Yeah. Hey, guys. Thanks for taking the question. Just maybe a a quick two parter for me. Khozema, maybe on voice first, kinda how did it perform relative to your expectations in the quarter?

When as we think about that channel and and the volume that you’re seeing from it, kind of how do how do we think about the the aspiration for for how it can contribute to to kind of both top line growth over the course of maybe the next two quarters, but even beyond that? And then maybe on the gross margin side, you you we’re talking about kind of sustainability or stability, if you will. If we just do kind of like a almost non GAAP adjustment for gross margins with from an FX and from an a to p perspective, what was the actual kind of sequential degradation on that basis? And how do we think about the kind of longer trajectory when you start layering in tailwinds from voice?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yes. Let me start on the first, and I’ll let Aiden give you some of the math on the gross margin adjustment. As it relates to voice, I would say it’s performing really well. I mean I think, you know, we’ve talked a little bit about our expectations about a voice renaissance, particularly behind a lot of the voice AI use cases that that you’re seeing. And I think, you know, the the early indication is is that we’re starting to see some of that.

A lot of the voice volumes that we’re seeing are really being built on demand from voice AI type customers, but they’re also coming from a lot of other customers, which is also encouraging. And then, you know, we’ve launched a number of products recently as well, like conversation relay, conversation intelligence that also help add to the mix in terms of, like, why voice is an important channel and how it’s being used. And then obviously, just as it relates to kind of the broader environment, you know, voice is being heavily utilized in a variety of AI based use cases. And so I think that gives us a lot of encouragement in terms of the way that it’s been performing, the way that it contributes. I think the hard thing for us is obviously that the messaging business is still extremely large.

It tends to be well, it has been forever the largest piece of the business, and it continues to grow at very, very fast rates. And so the fact that that growth relative to any product eclipses the growth rate of any other, it’s always going to impact our margin mix. But all the same, given the performance in voice, that will have some uplift. And over time, I think it will start contributing.

Hayden Migiano, Chief Financial Officer, Twilio: Hey, Alex. I’ll comment a bit. And actually, just to Khozema’s point on the messaging mix, we actually included a page in our presentation that shows messaging’s kind of mix as a percentage of total Twilio revenue. And you can see how that has increased as that business has grown faster than the overall company. And so you can see that, that would have a negative mix effect.

But to answer your question, which was sequentially, how do we think about non GAAP gross margins adjusting for fees and FX, it would have been roughly flat quarter over quarter relative to Q1. So the fees were roughly 30 basis points of a headwind in Q2, and the balance there was some mix in there as well, but actually, FX made up most of the balance, so roughly flat quarter over quarter.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio1: Well, that’s the new up, guys. Thank you.

Conference Operator: Thank you. Thanks. Our next question comes from Joshua Riley of Needham. Your line is open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio2: All right. Thanks for taking my questions. How are you of market share growth for messaging in international markets relative to the pricing considerations there and the lower gross margin versus The US business? How much did maybe outperformance in international messaging impact the q two, messaging gross margin?

Hayden Migiano, Chief Financial Officer, Twilio: Maybe I’ll it’s kinda wanna start the gross margin piece. Well, we don’t break out messaging, in particular, but the company let me just give you a little bit more color on gross margin. So for the year, year over year in Q2, we were down two sixty basis points. Now messaging increased almost three points year over year as a percentage of our total revenue. That alone had 150 basis point impact on the company, just the fact that it mixed higher.

And then you had, if you listen to my prior answer, the fees and the FX, which really made up the difference in terms of the year over year walk. So those were primarily kind of what drove the gross margin decline year over year. And I’ll kick it back over to Thomas to talk about the international.

Jamie, Analyst, Morgan Stanley: Yeah. Just from a go

Thomas Wyatt, Chief Revenue Officer, Twilio: to market perspective in general, we’re looking at messaging and voice and trying to consider the full balance. Because in practice, a lot of our customers, we’re really trying to drive more of a cross sell, multiproduct type of adoption. And oftentimes, customers land with messaging and then add voice, and we’ve seen that acceleration, particularly in the last couple of quarters. Just taking self-service globally, for example, voice has been the fastest channel of growth for us. And as we talked about in Investor Day, you know, 63% of our enterprise customers started in voice or sorry, started in self-service.

So we see that trend continuing, and we wanna grow market share as much as possible to continue to build that platform layer and deliver orchestration. And so sometimes it’s easier to land internationally in messaging and then add voice in other channels, as we go, and we’ve seen really good growth in international in the last couple quarters.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio2: Awesome. And then just a quick follow-up on the, product development in AI. How are you prioritizing product investments, relative to the efficiency that you need for the, twenty twenty seven financial targets that you put out there?

Khozema Shipchandler, Chief Executive Officer, Twilio: Just to make sure I understand your question, you’re asking how are we prioritizing r and d investments as it relates to our op margin targets? I are we be more efficient on that line?

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio2: Yes. Exactly. Just given that there’s all these incremental opportunities for AI product development, was that factored into the, financial targets for 2027?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. I mean, I I’d say by and large, yes. I mean, obviously, we have a framework out there. I’m not going to necessarily provide updates on that one way or the other. But I think what we talked about in the context of the current call is that in the short term, we saw an opportunity to put a little bit more emphasis on R and D dollars to be able to accelerate our growth.

I think the results of which have been in the current year that we’ve been able to take up our cash flow and profitability guidance like pretty consistently over a period of time. Obviously, revenue has gone up as well. And so I think so long as the the investments that we make support our ongoing ability to generate free cash flow, we’ll look at that balance very carefully. But I I don’t see anything that’s in there that gives me cause for concern.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: Awesome. Thank you.

Conference Operator: Thank you. Our next question comes from Siti Panigrahi of Mizuho. Your line is now open.

Siti Panigrahi, Analyst, Mizuho: Oh, great. Thank you. Kosema, I have a high level question on AI. If you look at twenty twenty twenty one and ’22, you know, the opportunity from COVID for Twilio, just like a billion dollar revenue you you’re adding every year. But when you look at AgenTeq AI or even voice AI opportunity, all that, how big that could be, you know, and over what time frame?

Do you think this is more like multiple of that opportunity but over a long longer time frame? Or any color would be helpful.

Khozema Shipchandler, Chief Executive Officer, Twilio: I think that it’s hard for me to kinda put, like, dollar figures to it specifically, but I think what it is is gonna be materially TAM expansive. I think that every single AI capability that gets added, it’s beneficial to to Twilio fundamentally. I I’ll I’ll start sort of at the bottom. I think every one of these companies that we’re seeing, for the most part, like, they attach themselves to Twilio just given our brand, our performance, and we’re a very attractive entry point, as Thomas alluded to a moment ago, in terms of self serve, which is where a lot of these, if not the majority of these customers end up starting. I think then if you look at the opposite end of the spectrum, so perhaps enterprises, I think enterprises as well as they start to figure out, like, what it is that they’re gonna do with AI, you know, in in so many different cases, they’re either turning to Twilio or turning to partners of Twilio, which is also additive ultimately to Twilio in terms of the size of the opportunity that that we see going forward.

I certainly think that AI has been a contributor in terms of the way that we’ve been growing the company over the last several quarters. I think it’s been a tailwind for us. But I think more importantly, it really positions us in the center of the AI value chain ultimately because we can be both an infrastructure provider as well as a full stack solutions provider at the platform in which we’re orchestrating channels, we’re orchestrating context, and we’re allowing our customers to be able to really personalize interactions. And so just given the gamut of opportunities that I see, I think that it is really TAM expansive. And, you know, over time, it’ll add material dollars to the top line.

Siti Panigrahi, Analyst, Mizuho: That’s helpful color. And then a quick follow-up. Your voice is around 12% of revenue. But if you think of SIP trunking, how big is that of of the voice business?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. We don’t give the breakdown there. You know, we give the the kind of breakdown of of voice periodically. Voice infrastructure tends to be the contributor, and obviously, it’s driving the margins of voice. And so you can take some signal from that, but we don’t provide a breakdown beyond that.

Siti Panigrahi, Analyst, Mizuho: All right. Thank you.

Conference Operator: Thank you. Our next question comes from Arjun Bhatia of William Blair. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio4: Yes. Perfect. Thank you so much. Because then I I I think I the incremental r and d investments certainly makes sense, right, especially if you’re seeing traction. I’m curious, though, like, when if if you think about just breaking it down of where exactly those go.

Is that just incremental engineers? Is that some infrastructure? And, you know, what what do you think it kind of adds from a product platform perspective that that you don’t have today?

Khozema Shipchandler, Chief Executive Officer, Twilio: Well, I think it’s gonna be predominantly in engineering. I mean, obviously, we’re all experiencing this huge AI opportunity that that we spoke of just a moment ago and answered some of the other questions. But I think the customer reactions that we got at our conference, our SIGNAL conference in The U. S, our SIGNAL conference in Brazil, I think, really speak to the size of the opportunity that our customers are talking to us about. And so this is kind of a once in a generation technology paradigm, and you don’t want to lose a step, obviously, when these things are happening.

We’re not gonna make irresponsible investments. We’re gonna continue to generate strong operating profit dollars, strong cash flow. But I think when opportunities like this come along, especially that are perhaps once in a generation, it is important to make sure that you stay ahead of them so that you can capture the fullness of the opportunity. And what we’re doing is not more complicated than that. And again, we’re going make responsible investments, but it’s really behind AI, and it’s going be predominantly in engineering.

If I could

Thomas Wyatt, Chief Revenue Officer, Twilio: just add to that, Khozema, just from a customer’s perspective, they’re really pushing us, continued acceleration around RCS and voice AI capabilities, and we’re just seeing such a strong demand for that that any additional acceleration in the road map will benefit us over time.

Jim Fish, Analyst, Piper Sandler: Okay. Perfect. Understood. And then, you know, one of the other

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio4: things that kind of, stuck out from from from Signal, I think, was the just the integration of customer profiles from segment into the comms business along with the the the rest of your technology. And and I need to give some kind of use steps on relay and and conversational intelligence earlier. But I’m I’m curious how customers are responding to that integration of of profiles. Is that something they’re already taking advantage of? Is that something that’s still to come, and and how might it kind of enrich the broader Thomas platform?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. I mean, Thomas and I can both speak to it. I I I think from my perspective, every customer conversation I’ve had since the signal event that we had in The US has probably started with a conversation about conversation relay that’s customers asking about it, not me pitching it. And so I’d say that’s pretty encouraging in terms of the the kinds of things that they wanna be able to do with our stack. That is by far, you know, the most integrated version that that that we’ve got, and it’s kind of the the most fully featured capability that we offer.

But equally, we’re seeing a lot of uptake with conversational intelligence, for example, different kinds of software add ons that fundamentally utilize segment capabilities, data capabilities that integrate with our communications, those are in very high demand as well. Those are growing very nicely. So I would say, in general, the combination of our data business with our communications business has been extremely well received by customers and more importantly is driving a lot of ROI for them. Don’t know Just it’s something

Thomas Wyatt, Chief Revenue Officer, Twilio: to add an example, this particular quarter, we had a leading fashion retailer that was expanding with us using agent copilot, and it’s really the use cases enhancing agent productivity, reducing customer wait times, and ultimately reducing the number of seasonal hires the customer needed to bring on to handle peak periods. So just this is just an example of the Twilio architecture of being able to have a platform with multiple channels and driving personalization from segment across every channel. We think that’s a unique value proposition, and our customers are loving that.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio4: Alright. Perfect. Thank you so much.

Conference Operator: Thank you. Our next question comes from Patrick Walravens of Citizens Bank. Your line is open.

Mark Murphy, Analyst, JPMorgan: Oh, great. Thank you so much, and congratulations, you guys. So, Josema, it’s been almost five years since Twilio acquired Segment. And I just I just thought, you know, since you’re not gonna break it out anymore, just maybe we could do just sort of a how did the evolution of this space impact this business? I mean, is it just that that the CDP market really shifted towards data platforms like Snowflakes and Snowflake and Databricks, or was it something else?

What what what happened to that space?

Khozema Shipchandler, Chief Executive Officer, Twilio: Well, I think the original thesis for us when we bought Segment was that more intelligent communications were gonna be the future of this company. And so I think, you know, putting aside some of the other developments that have happened in the broader CDP landscape, which are, frankly, in some ways less the focus for us, the opportunity to be able to drive intelligent conversations, intelligent communications, highly personalized interactions between our customers and consumers, like, that was always the goal when we bought the company. And I think we’re really starting to see the fruition of, you know, that original strategy. You know, we’ve launched a number of different products that integrate the two capabilities natively in in singular APIs. I think that’s really exciting.

Makes it easier for customers to adopt, obviously. And then every quarter, we’ve added increasingly richer capabilities so that our customers in the context of communications can use contextual data to be able to derive richer and richer understanding of what their consumers are doing to be able to drive higher personalization. So I’d say, again, putting aside what’s happened in sort of the broader CDP, the strategy of the company had been to fundamentally integrate a a a CDP into the communications business, and that’s what we’ve done. And and I think based on the traction that we’re seeing with it, that’s really exciting.

Mark Murphy, Analyst, JPMorgan: Awesome. Right. And then, Aidan, if I could ask a follow-up. You commented in your prepared remarks that, for the gross margins, we are investing at the platform level to ensure we’re delivering our services efficiently. So that caught my attention.

What what are those investments?

Hayden Migiano, Chief Financial Officer, Twilio: Yeah. Let me give you an example. So for for our email platform, for example, our email product, we’re in the process of migrating off of legacy data centers to cloud. And so that takes a little bit of time. That probably takes several quarters, and there’s a period of time in which you have a double bubble of cost.

We did this as Segment actually in 2024, if you recall. And so we’re in the process of doing the same thing for email. Again, a little bit of cost and margin headwind in the short term, but it’s the right long term play. So that’s an example of something that would fall into that bucket. The other things we’re doing, like on the messaging side, we’re looking to establish more direct connections.

That’s something that we’re kinda continuously doing as we operate around the world. We’re also leveraging our balance sheet where it makes sense to do so in terms of prepaying carriers to secure better pricing. So a number of different things, but that just gives you some examples, Pat.

Mark Murphy, Analyst, JPMorgan: Awesome. Thank you both. Thank

Conference Operator: you. Our next question comes from Jackson Ader of KeyBanc Capital Markets. Your line is now open.

Jamie, Analyst, Morgan Stanley: Great. Thanks for taking our questions, guys. Good evening. On the AI voice piece, is this a separate competitive environment from kind of the rest of your business? Are you competing more on, you know, your like for like capabilities with point solutions in that area?

Khozema Shipchandler, Chief Executive Officer, Twilio: Not as much as you might think. I mean, clearly, there are a ton of voice AI vertical companies that are out there. I’d say in so many of those instances, you know, we shared some stats at our Investor Day, like, some really, really compellingly high stats that so many of those companies are are building on our infrastructure. And so in the first instance, like, that’s pretty compelling. I think the tricky thing is is that for a lot of companies that you you might think we would end up competing with, I think our ability to use our CDP this kinda goes to the prior question as well.

Our ability to use our CDP to be able to drive context inside of those interactions as you’ve got voice to voice or agent to human, whatever the paradigm is, in terms of those interactions, I think that gives us a bit of a leg up. But if a customer comes to us and says, hey. Look. We’ve already got, an LLM that we’ve got credits with. We wanna be able to integrate that with you guys.

Like, we are open season on that, and we certainly support, you know, a wide variety of different LLMs that we will integrate to rapidly. But if they wanna go in the opposite direction, which we’re seeing a lot of too, like, with conversation relay, for example, we’ll support that all day long as well. So it it really kinda runs the gamut.

Hayden Migiano, Chief Financial Officer, Twilio: And I’d say it’s a pretty exciting time, Jackson, just maybe a a stat to give you. So we have a number of different AI startups that were founded in just the last three years, spending over 7 figures with us today. And our top 10, I’d say, startups in that cohort, they have a blended gross margin of over 80%. So a lot to be excited about here.

Jamie, Analyst, Morgan Stanley: Nice. Okay. Quick follow-up on on pricing. In a future state where, hopefully, your multiproduct cuff customers have a more cohesive contract structure, let’s say, how do you view your ability to drive pricing, maybe in that in that future? Thanks.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: Would say Sorry. Go ahead.

Khozema Shipchandler, Chief Executive Officer, Twilio: I I was just gonna say, look. I I think in the in the short term, what we’re trying to do is really grow into multiple products. Right? And I think just given the number of customers that we have today for which that opportunity exists, that’s kind of our initial approach. I think the second thing is that as it relates to sort of the broader AI opportunity, like that also presents a pretty compelling opportunity.

Those two actions alone, because of the fact that they’re gross margin accretive, I think, will add, you know, accretion over time. You know, again, you’ve got this messaging mix dynamics. So just kind of putting that aside, assuming that that was at level loaded, you’d see gross margin accretion just as a result of those things. I think as it relates to price on sort of the core stack, the reality is actually that we raise price periodically on list, pretty regularly. It does take time, especially with some of our larger enterprise customers, for that to bleed through, but you see the more immediate impact in in self serve.

Understood. Thank you.

Conference Operator: Thank you. Our next question comes from William Power of Baird. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio5: Okay. Great. Thanks. Maybe follow-up first just guidance and implications for the second half of the year. I may have missed this, but the messaging price increase that’s occurring in The U.

S, what kind of tailwind or impact does that have on guidance for the second half? And then, Josema, in your prepared remarks, I think you talked about some real improvements in large deal traction year over year. I just wondered if, you know, there’s anything else you could unpack there. Any any common factors? What’s what’s kinda helping, you know, drive that?

Thanks. Maybe,

Khozema Shipchandler, Chief Executive Officer, Twilio: Thomas, do you wanna speak to the large deal activity, and then I can pick up. Yeah.

Thomas Wyatt, Chief Revenue Officer, Twilio: Yeah. No. Absolutely. The large deal activity has been one of the brighter spots of the business for the last few quarters, but I think this quarter in particular, it stood out with 57% growth in customers spending over $500,000 with us in the quarter. So just in general, this speaks to the nature of a lot more of our platform selling, cross selling motion, where oftentimes customers are landing with messaging, increasing their volume, and then we’re seeing them add more software capabilities on top of messaging.

We had really strong quarter with products like Verifi and FraudGuard, for example. And then, of course, we’ve talked a lot about voice today. But importantly, the voice add ons are doing quite well on top of the voice infrastructure components, which is critical. And so those combinations together are allowing us to drive much larger deal sizes, and we’re seeing that whether it’s in our ISP business or whether it’s in our direct business globally.

Hayden Migiano, Chief Financial Officer, Twilio: And then on the pricing question, Will, we don’t anticipate it really having a material impact over the balance of the year. It’s North America only, and it primarily affects our self-service customers, as Thomas mentioned. So it will have a bit of an impact, but nothing material consolidated level. It will take some time to work its way through kind of the renewal cycles with some of our bigger customers.

Conference Operator: Our last question comes from Derrick Wood of TD Cowen. Your line is now open.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio6: Thanks. Khozema, could you comment on the robocall market? It seems like volumes are growing at a decent clip in The US this year. Just how how much of robocall type use cases go through your voice business, and what’s your approach to this market longer term, especially in the age of AI?

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. There’s, you know, different kinds of robocalling, obviously. The the the fraudulent stuff, like, we take, like, really, really significant compliance measures to ensure that that traffic does not run through our platform. As it relates to robocalling more generally, like, I’d say it’s not like a big piece of what we ultimately do. Like, what we’re doing in large part is a lot of the voice infrastructure.

I think where if you wanna call this robocalling, like, there are instances in which there’ll be phone call notifications that happen when their delivery is scheduled or or or notifications required about a specific expertise that’s being delivered. I can think of a handful of examples off the top of my head that involve stuff like that. And then as it relates to AI, I would say that’s not really the the thing that, kinda creates the AI opportunity for us, meaning it’s not robocalls. It tends to be more sophisticated use cases that are around customer care or service. And then, obviously, inside of the company, we do some customer care stuff with our Voice AI stack, and we we we also do some some inbound sales prospecting with it.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio6: Understood. And if I could squeeze one more in. There there were a bunch of regulatory changes in a number of countries in recent months, including new sender ID registration rules and and new KYC requirements. Just just wondering, did did things like this have any impact on your business, whether from a sales cycle or cost of sale perspective? Just anything to flag and and the, you know, potential disruption from regulatory changes like this or potential positive impact?

Thank you.

Khozema Shipchandler, Chief Executive Officer, Twilio: Yeah. I think that over time, I would imagine that there’s some positive benefits here. I think in the short term, the short answer is no. We don’t see a lot of impact as a result of different regulatory changes. We’re very proactive with regulators in effectively every market.

So we typically have pretty advanced notice. We’re typically participating in the way in which a lot of this regulation gets shaped. Being the largest provider globally, regulators are often coming to us asking about what makes sense, what doesn’t make sense, how we protect the consumer. We’re obviously in favor of anything that ultimately does end up protecting the consumer just given that it protects the ecosystem more broadly. So I would say short term, no impact.

Longer term, probably a mild positive impact because it reinforces compliance in the ecosystem more broadly.

Brian Vanaman, Senior Vice President of Investor Relations and Corporate Development, Twilio3: Thank you.

Conference Operator: Thank you. This concludes the question and answer session. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.

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