Q2 2024 Twilio Inc Earnings Call
Good day and thank you for standing by. Welcome to Twilio Inc's second quarter 2024 earnings conference call.
Operator: All participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star-one-one on your telephone. You will then hear an automated message advising you that your hand is raised.
Speaker Change: At this time, all participants are in a listen-only mode.
After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again.
Operator: To withdraw your question, please press star-one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ryan Vaniman, SVP, Investor Relations. Please go ahead, sir.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bryan Vaniman, SVP, Investor Relations. Please go ahead, sir.
Bryan Vaniman: Good afternoon, everyone, and thank you for joining us for Twilio's second quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors.twilio.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.
Speaker Change: Good afternoon, everyone, and thank you for joining us for Twilio's second quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer.
Speaker Change: 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 release and our earnings presentation posted on our IR website at investors.twilio.com.
Speaker Change: 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.
Speaker Change: Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K and our forthcoming Form 10-Q .
Speaker Change: 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.
Bryan Vaniman: Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K 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. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A. Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today.
Speaker Change: With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A.
Speaker Change: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today.
Khozema Shipchandler: Twilio delivered a good second quarter. We are driving durable, profitable growth as we exceeded our Q2 guidance with $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels. We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation. We're running the business with increased rigor, which we are confident will drive improved growth rates and additional operating leverage. The communications business is performing very well, and in our segment business, we're focused on executing on our commitment. While reducing non-gap operating losses.
Speaker Change: Twilio delivered a good second quarter. We are driving durable, profitable growth as we exceeded our Q2 guidance with $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels.
Speaker Change: We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation.
Speaker Change: The communications business is performing very well, and in our segment business, we're focused on executing on our commitments while reducing non-GAAP operating losses.
Khozema Shipchandler: In Q2, we saw continued signs that communications growth is stabilizing, including quarter-over-quarter improvement in international trends. And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement. What's true across the board is that in the world of AI, contextual data is paramount.
Speaker Change: And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement.
Khozema Shipchandler: According to Twilio's annual State of Customer Engagement report, we found 84% of businesses said they provided good or excellent customer engagement. Yet only 54% of consumers agree. That disconnect is because brands need help contextualizing the data they have. By combining our leading communications capabilities, our rich and contextual data, and the power of AI, we are uniquely positioned to unlock smarter and more personalized interactions for brands that enable them to reimagine customer engagement and drive more revenue at a lower cost.
Speaker Change: What's true across the board is that in the world of AI, contextual data is paramount. According to Twilio's annual State of Customer Engagement report, we found 84% of businesses said they provide good or excellent customer engagement.
Speaker Change: That disconnect is because brands need help contextualizing the data they have.
Speaker Change: By combining our leading communications capabilities, our rich and contextual data, and the power of AI, we are uniquely positioned to unlock smarter and more personalized interactions for brands that enable them to reimagine customer engagement,
Khozema Shipchandler: Let's turn to our business highlights. Our Twilio communications business had a strong quarter, with revenue of $1.01 billion, up 7% on an organic basis year-over-year on the back of solid performance in messaging, acceleration in email growth, and strong ISV contributions.
Speaker Change: and drive more revenue at a lower cost.
Khozema Shipchandler: During the quarter, we also focused on a number of initiatives that we believe will deliver improved growth rates over time. In the near term, we expect our growth to be fueled by our expanded network of partners and ISPs. Self-Service Enhancements and Cross-Sale Opportunities. While we have made meaningful progress in all these areas, I'm particularly pleased with our success in securing new partners and ISPs. During the quarter, we achieved an eight-figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solutions. Additionally, we signed a new partnership with OmniSend, an omni-channel marketing platform targeting the SMB retail market, which will help Twilio expand its footprint into new geographies.
Speaker Change: Self-Service Enhancements and Cross-Sale Opportunities.
Speaker Change: During the quarter, we achieved an eight-figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solution.
Speaker Change: Additionally, we signed a new partnership with OmniSend, an omni-channel marketing platform targeting the SMB retail market, who will help Twilio expand its footprint into new geographies.
Khozema Shipchandler: We also extended our CoSell partnerships with Airship, Bloom Reach, Braze, Insider, and Clavio into new geographical territories to power a data-enriched, end-to-end marketing experience. During the quarter, we delivered the strongest revenue growth in our self-service business since Q1 of 2023. And we continue to make enhancements to simplify the onboarding experience for customers. For example, we introduced a new console experience that helps make recommendations to guide customers to which products they should be using based on their desired use cases and outcomes. And our new one sign up streamlines the login process by having one login for a customer to access all of their Twilio accounts and products.
Speaker Change: We also extended our CoSell partnerships with Airship, Bloomreach, Braze, Insider, and Klaviyo into new geographical territories to power a data-enriched, end-to-end marketing experience.
Speaker Change: And we continue to make enhancements to simplify the onboarding experience for customers.
Speaker Change: And our new OneSignUp streamlines the login process by having one login for a customer to access all of their Twilio accounts and products.
Khozema Shipchandler: In the medium term, product innovation will be an important growth lever as we deliver on our vision to unlock smarter, more personalized interactions for brands. In this quarter, we've started to see success with our newer, higher-margin software products. These are products that leverage AI, such as Verify and Voice Intelligence, as well as platform innovations that natively embed AI and machine learning, such as the traffic optimization engine and engagement, to drive greater deliverability and better customer engagement.
Speaker Change: These are products that leverage AI, such as Verify and Voice Intelligence.
Khozema Shipchandler: These products are rapidly gaining adoption and can become meaningful growth drivers over time. One customer, a leading mortgage lender, adopted both Voice and Verify in the quarter and expanded their messaging use. Twilio won this competitive cross-sell deal as our platform enabled the customer to have a single console with both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers. Since deploying Twilio, the company is already seeing a 38% increase in SMS response rates and a 20% increase in banker productivity. More importantly, these products are gaining adoption because they are simple to use, trusted, and intelligent. Verify is a great example.
Speaker Change: These products are rapidly gaining adoption and can become meaningful growth drivers over time.
Speaker Change: Twilio won this competitive cross-sell deal as our platform enabled the customer to have a single console.
Speaker Change: With both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers.
Speaker Change: More importantly, these products are gaining adoption because they are simple to use, trusted, and intelligent.
Khozema Shipchandler: Not only is it growing quickly, but it is saving our customers millions of dollars by mitigating fraud at the source. And to continue to deliver better outcomes for our customers leveraging AI, our SMS pumping protection product went GA during the quarter, which can be enabled with one click and automatically detects and blocks fraudulent messages, a growing issue in certain international markets. We're continuing to deliver on our promise of natively integrating segment capabilities into our communications business.
Speaker Change: And, to continue to deliver better outcomes for our customers leveraging AI,
Speaker Change: We're continuing to deliver on our promise of natively integrating segment capabilities into our communications business.
Khozema Shipchandler: This quarter, we released Personalized Virtual Agent into Private Beta, marking Twilio's second product that natively embeds segmentation into communication. With Personalized Virtual Agent, our customers receive a truly personalized interactive voice response. Each caller receives a custom menu of options based on their recent interactions with the company, including purchase history, recent support inquiries, and responses to marketing emails, among others. The product combines voice, virtual agent with Google Dialogflow agent, studio, and unified profiles into one simple product that is guided with a wizard setup.
Speaker Change: This quarter, we released Personalized Virtual Agent into Private Beta, marking Twilio's second product that natively embeds Segment into communications.
Speaker Change: With Personalized Virtual Agent, our customers receive a truly personalized, interactive voice response.
Speaker Change: Each caller receives a custom menu of options based on their recent interactions with the company.
Speaker Change: Purchase history, recent support inquiries, and responses to marketing emails, among others.
Speaker Change: The product combines voice, virtual agent with Google Dialogflow agent, studio and unified profiles into one simple product that is guided with a wizard setup.
Khozema Shipchandler: We're excited about this release as it marks the next chapter for how IVR is evolving in the world of AI. And lastly, Twilio's communications products continue to receive recognition. As we were named a leader in the Gartner Magic Quadrant for CPAS for the second year in a row, positioned highest for ability to execute, and ranked number one in four of six use cases in the Gartner Critical Capabilities Report. Twilio was also named a leader in IDC's Marketscape Worldwide Contact Center as a service.
Speaker Change: We're excited with this release as it marks the next chapter for how IBR is evolving in the world of AI.
Speaker Change: Lastly, Twilio's communications products continue to receive recognition.
Speaker Change: As we were named a leader in the Gartner Magic Quadrant for CPAS for the second year in a row, positioned highest for ability to execute,
Speaker Change: and ranked number one in four of six use cases in the Gartner Critical Capabilities Report.
Speaker Change: Twilio is also named a leader in IDC's Marketscape worldwide contact center as a service.
Khozema Shipchandler: Turning to our Twilio segment business, the Twilio segment delivered revenue of $75 million, up 3% year over year, as we continued to focus on delivering against the priorities that we outlined in our operational review in March. We made solid progress in improving customer time to value and executing on data warehouse interoperability. We also made significant improvements in our cost profile in Q2 and lowered our non-GAAP operating losses by 25% quarter over quarter. We also continue to focus on driving efficiencies in our go-to-market strategy, which has yielded an increase in sales productivity.
Khozema Shipchandler: And in Q2, over 40% of our new bookings were multi-year deals versus 17% in the prior year period. A key win for Segment included our largest deal of the quarter, a seven-figure deal with IBM. On the product front, we delivered new capabilities to further enhance our interoperability with data platforms and data warehouses. In Q2, we released Datagraph and linked audiences into public beta, which seamlessly integrate with data warehouses, including Databricks and Snowflake.
Speaker Change: Turning to our Twilio segment business.
Speaker Change: Segment delivered revenue of $75 million, up 3% year-over-year, as we continued to focus on delivering against the priorities that we outlined in our operational review in March.
Speaker Change: We made solid progress in improving customer time-to-value and executing on data warehouse interoperability.
Speaker Change: We also made significant improvements in our cost profile in Q2 and lowered our non-GAAP operating losses by 25% quarter over quarter.
Speaker Change: We also continued to focus on driving efficiencies in our go-to-market, which yielded an increase in sales productivity, and in Q2, over 40% of our new bookings were multi-year deals versus 17% in the prior year period.
Speaker Change: On the product front, we delivered on new capabilities to further enhance our interoperability with data platforms and data warehouses.
Khozema Shipchandler: With linked audiences, marketers can now activate centralized data in the warehouse and combine it with real-time events and Predictive AI Traits to Generate Unified Customer Profiles and Audience Cohorts to deliver targeted, personalized experiences. We've gotten a great response, and we're excited to have customers like LegalZoom, and TradeMe deploy and realize the benefits and efficiencies. We are also improving time to value for customers. During the quarter, our use case, in-product onboarding, went live, guiding customers through a customized onboarding experience focused on their specific business goals. Additionally, our CDP co-pilot is reducing instrumentation and development.
Speaker Change: With linked audiences, marketers can now activate centralized data in the warehouse and combine it with real-time events.
Speaker Change: and Predictive AI Traits to generate unified customer profiles and audience cohorts to deliver targeted personalized experiences.
Speaker Change: We've gotten a great response, and we're excited to have customers like you.
Speaker Change: LegalZoom and TradeMe deploy and realize the benefits and efficiencies.
Speaker Change: Additionally, our CDP co-pilot is reducing instrumentation and development time.
Khozema Shipchandler: Customers can now deploy and get value from segments four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers. Overall, I'm very pleased with the progress we've made so far this year. We're continuing to deliver durable, profitable growth while driving strong free cash flow. And we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over the next few quarters. I'm incredibly energized about our opportunity to become the leading customer engagement platform, combining communications, contextual data, and AI to deliver intelligent engagement and outsized outcomes for our customers, and I remain very confident in our ability to deliver accelerated growth and continued And with that, I'll turn it over to Aidan. Thank you, Khozema. And good afternoon, everyone.
Speaker Change: Customers can now deploy and get value from segments four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers.
Speaker Change: Overall, I'm very pleased with the progress we've made so far this year.
Speaker Change: We're continuing to deliver durable, profitable growth while driving strong, free cash flow, and we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over time.
Speaker Change: I'm incredibly energized about our opportunity to become the leading customer engagement platform, combining communications, contextual data, and AI to deliver intelligent engagement and outsized outcomes for our customers.
Aidan Viggiano: Jumping into our results, total Q2 revenue was $1.083 billion, up 4% reported and 7% organically year over year. Communications revenue was $1.007 billion, up 4% reported and 7% organically year-over-year, and segment revenue was $75 million, up 3% year-over-year. Our Q2 revenue growth was driven by solid performance in messaging, acceleration in email growth, as well as continued strength in our ISV business. We continue to see signs of growth stabilization in our communications business, and we saw modest sequential improvements in international as well.
Speaker Change: And with that, I'll turn it over to Aidan.
Aidan Viggiano: Our Q2 revenue growth was driven by solid performance in messaging, acceleration in email growth, as well as continued strength in our ISD business.
Aidan Viggiano: We continue to see signs of growth stabilization in our communications business, and we saw modest sequential improvements in international as well.
Aidan Viggiano: Company organic revenue growth and communications organic revenue growth were both roughly 100 basis points lower due to the sunsetting of the software component of our Zipwhip business. We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year. Our Q2 dollar-based net expansion rate was 102 percent.
Speaker Change: Company organic revenue growth and communications organic revenue growth were both roughly a hundred basis points lower due to the sun setting of the software component of our Zipwit business.
Speaker Change: We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year.
Speaker Change: Our Q2 dollar-based net expansion rate was 102%.
Aidan Viggiano: Our dollar-based net expansion rate for communications was 102% and 103% when excluding ZipWhip software customers. Our dollar-based net expansion rate for the segment was 93%, driven by elevated churn and contraction. Mitigating churn and contraction remains a focus for the segment, and we're encouraged by the progress we made in Q2. As Khozema discussed, we are improving time to value, and customers are deploying use cases four times faster as a result. We are also pushing for more multi-year deals with customers, and in Q2, over 40% of Segment's new bookings were multi-year deals versus 17% a year ago. We delivered a record non-gap gross profit of $577 million, up 7% year-over-year.
Speaker Change: Our dollar-based net expansion rate for communications was 102% and 103% when excluding ZipWhip software customers.
Speaker Change: Our dollar-based net expansion rate for segment was 93%, driven by elevated churn and contraction.
Speaker Change: Mitigating churning contraction remains a focus for segment and we're encouraged by the progress we made in Q2. As Khozema discussed, we are improving time to value and customers are deploying use cases four times faster as a result.
Khozema Shipchandler: We are also pushing for more multi-year deals with customers, and in Q2, over 40% of Segment's new bookings were multi-year deals versus 17% a year ago.
Speaker Change: We delivered record non-gap gross profit of $577 million, up 7% year-over-year.
Aidan Viggiano: This represented a non-GAAP gross margin of 53.3%, up 110 basis points year-over-year and down 70 basis points quarter-over-quarter. As we noted in our Q1 call, we recognized elevated cloud hosting credits that benefited Q1 gross margins by roughly 80 basis points, and those credits did not recur in Q2. Non-GAAP growth margins for our communications and segments business units were 51.8% and 73.4%, respectively
Speaker Change: This represented a non-GAAP gross margin of 53.3%, up 110 basis points year-over-year, and down 70 basis points quarter-over-quarter.
Speaker Change: As we noted in our Q1 call, we recognized elevated cloud hosting credits that benefited Q1 gross margins by roughly 80 basis points, and those credits did not recur in Q2.
Speaker Change: non-GAAP growth margins for our communications and segments business units were 51.8% and 73.4% respectively.
Aidan Viggiano: As we noted in Q1, we are migrating part of Segment's architecture to new infrastructure providers this year to achieve greater efficiency. We began migrating data to our new provider in Q2, and during this transition, we will incur some overlapping vendor expenses. As a result, we expect reduced segment growth margins until the migration is complete, which is expected to occur by the end of 2024. Non-GAAP income from operations came in well ahead of expectations at $175 million, up 46% year-over-year even after including $20 million of incremental expenses associated with our new employee cash bonus program.
Speaker Change: We began migrating data to our new provider in Q2, and during this transition, we will incur some overlapping vendor expenses.
Speaker Change: As a result, we expect reduced segment growth margins until the migration is complete, which is expected to occur by the end of 2024.
Speaker Change: non-GAAP income from operations came in well ahead of expectations at $175 million, up 46% year-over-year even after including $20 million of incremental expenses associated with our new employee cash bonus program.
Aidan Viggiano: As a reminder, we initiated this program at the start of the year to reduce stock-based compensation expenses over time. The outperformance was driven by our revenue beat, improvements in segments expense profiles, and ongoing costs. Our non-GAAP operating margin of 16.2% was up 460 basis points year-over-year and 100 basis points sequentially. Non-GAAP income from operations for our communications business was $250 million.
Speaker Change: The outperformance was driven by our revenue beat, improvements in segments' expense profile, and ongoing cost discipline.
Speaker Change: Our non-GAAP operating margin of 16.2% was up 460 basis points year-over-year and 100 basis points sequentially.
Speaker Change: non-GAAP income from operations for our communications business was $250 million.
Aidan Viggiano: And non-GAAP loss from operations for our segment business was $16 million, a $5 million improvement quarter over quarter. Gap loss from operations was $19 million as we continue to make solid progress on our path towards gap profitability. Stock-based compensation as a percentage of revenue was 13.6%, excluding restructuring costs, down 130 basis points quarter over quarter and 110 basis points year over year.
Speaker Change: And non-GAAP loss from operations for our segment business was $16 million, a $5 million improvement quarter over quarter.
Speaker Change: Gap loss from operations was $19 million as we continue to make solid progress on our path towards gap profitability.
Speaker Change: Stock-based compensation as a percentage of revenue was 13.6%, excluding restructuring costs, down 130 basis points quarter-over-quarter and 110 basis points year-over-year.
Aidan Viggiano: We generated free cash flow of $198 million, driven by continued operating efficiency and ongoing collection strength. This was up $126 million year-over-year, and over the last 12 months, we generated free cash flow of $781 million. We're making good progress on free cash flow, and we believe there are significant opportunities to drive more leverage over time. Finally, we're continuing to execute on our $3 billion share repurchase programs and have repurchased over $700 million since our last earnings call in May.
Speaker Change: We generated free cash flow of $198 million, driven by continued operating efficiency and ongoing collection strength.
Speaker Change: This was up $126 million dollars year over year, and over the last 12 months we generated free cash flow of $781 million.
Speaker Change: Finally, we're continuing to execute on our $3 billion share repurchase programs and have repurchased over $700 million since our last earnings call in May.
Aidan Viggiano: This brings our total repurchases to date to over 2.2 billion dollars. We intend to complete the remaining $800 million of authorized repurchases by year-end, which should meaningfully reduce our outstanding share count over the next two quarters. Our total shares outstanding as of June 30th were $164 million, down 10% year-to-date.
Speaker Change: This brings our total repurchases to date to over $2.2 billion.
Speaker Change: We intend to complete the remaining $800 million of authorized repurchases by year-end, which should meaningfully reduce our outstanding share count over the next two quarters.
Speaker Change: Our total shares outstanding as of June 30th was $164 million, down 10% year-to-date.
Aidan Viggiano: Moving to guidance. For Q3, we're initiating a revenue target of $1.085 billion to $1.095 billion, representing year-over-year growth of 5% to 6% on both a reported and organic basis. We've now lapped our two divestitures from last year, so starting in Q3, reported and organic quarterly revenue will be equivalent. Given year-to-date performance, we're narrowing our full-year organic revenue growth guidance range to 6 to 7 percent.
Speaker Change: We've now lapped our two divestitures from last year, so starting in Q3, reported and organic quarterly revenue will be equivalent.
Speaker Change: Given year-to-day performance, we're narrowing our full-year organic revenue growth guidance range to 6 to 7 percent.
Aidan Viggiano: Turning to our profit outlook, for Q3, we expect non-GAAP income from operations of $160 to $170 million. Given our outperformance in Q2, we're raising our full-year non-GAAP income from operations guidance to $650 to $675 million. Finally, we remain focused on improving our free cash flow profile, and we continue to expect that full-year free cash flow generation will be in line with our full-year non-GAAP income from operations. We're encouraged by the performance we delivered in the first half, as we stabilized revenue growth and delivered strong profitability and free cash flow.
Speaker Change: Turning to our profit outlook, for Q3 we expect non-GAAP income from operations of $160-$170 million.
Speaker Change: Given our outperformance in Q2, we're raising our full-year non-GAAP income from operations guidance to $650 to $675 million.
Speaker Change: Finally, we remain focused on improving our free cash flow profile, and we continue to expect that full-year free cash flow generation will be in line with our full-year non-GAAP income from operations.
Speaker Change: We're encouraged by the performance we delivered in the first half, as we've stabilized revenue growth and delivered strong profitability and free cash flow.
Aidan Viggiano: As we look ahead, we're investing in initiatives to reaccelerate growth, but we continue to plan and guide with prudence. We are progressing toward gap profitability, and we continue to see significant opportunities for margin expansion and improved free cash flow over time. I'm excited to continue to build on the progress we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarter. And with that, we'll now open it up to questions. Thank you. As a reminder to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again.
Speaker Change: As we look ahead, we're investing in initiatives to re-accelerate growth, but we continue to plan and guide prudently.
Speaker Change: I'm excited to continue to build on the progress we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarters.
Speaker Change: And with that, we'll now open it up to questions.
Operator: One moment while we compile our Q&A roster. And our first question is going to come from the line of James Fish with Piper Sandler. Your line is open. Please go ahead. Hey guys, this is Quinton for James Fish.
Speaker Change: Thank you. As a reminder, to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment while we compile our Q&A roster.
Quinton Gabrielli: Thanks for taking our question. Maybe first on the margin side, you know, you've talked about a fair amount of incremental leverage opportunity coming from the automation of back office activities like contract management or product activation. What inning are we in for those operational improvements across the business? And as we think about the upside you've shown relative to guide so far this year, how much of the cost savings is coming from these process improvements versus just better rigor around management? Great, why don't I start and then Khozema can jump in?
Aidan Viggiano: Listen, I think, you know, we've done a lot on margins. If you just take a step back and think about the expansion that we got last year and then coming into this year, our initial guidance assumed very little operating margin leverage. If you look at our current guide for the year, at the midpoint, it's about 250-ish basis points of margin expansion. So we continue to find opportunities to get to expansion on both the OpEx line as well as the stock-based compensation line.
Speaker Change: So we continue to find opportunities to get expansion on both the OpEx line as well as the stock-based compensation line, and we don't think we're done.
Aidan Viggiano: And we don't think we're done. So we've talked about the fact that we're gonna get the segment business to break even by the second quarter of next year. That business lost $16 million in the second quarter, and $21 million in the first quarter.
Aidan Viggiano: So you can see that there's an opportunity to get leverage there. And then in addition, in the broader business, I'd say in communications and the GNA function. There's a lot of work that we're doing around, you mentioned automation. We are a remote-first company, so we do have the opportunity to leverage lower-cost geographies as a way to continue to get efficiencies, and so we're doing all of these things and will continue to do them.
Aidan Viggiano: I would say, I'm not going to give you an exact number, but I would say we have a lot of opportunity to continue to expand margins, both on the non-GAAP side, as well as on the GAAP side, including stock-based companies. In terms of profit, in terms of what's coming from improvements in process versus cost discipline, I think it's a little bit of both. It's largely cost discipline, though. We continue to believe that we can run this company without having to add a lot of incremental costs. You've seen us do that now for six quarters in a row.
Speaker Change: What's coming from improvements in process versus cost discipline? I think it's a little bit of both. It's largely cost discipline now.
Aidan Viggiano: And so we're really just much more disciplined in terms of how we're running the company, and that's something Khozema drives pretty regularly. That's helpful. And then, you know, on the revenue front, it sounds like we've found stabilization here and actually, quarter over quarter, things sound a little bit better, which is great. But we also tighten the revenue targets for the full year down slightly. Can you talk about what's embedded in the guide here?
Speaker Change: That's helpful. And then, you know, on the revenue front, it sounds like we found stabilization here and actually quarter over quarter things sound a little bit better, which is great. But we also tighten the kind of revenue targets for the full year down slightly. Can you talk about what's embedded into the guide here? What assumptions or incremental prudence that you've incorporated relative to the kind of last guide that we got last quarter? Thank you.
Aidan Viggiano: What assumptions or incremental prudence have you incorporated relative to the kind of last guide that we got last quarter? Thank you. Yeah, thanks for the question. I'll take it again.
Aidan Viggiano: So we grew year-to-date to the first half, you know, 7%. We're guiding to 5-6% in Q3. We think the 6-7% that we gave for the year is a reasonable range, based on what we're seeing today.
Speaker Change: Yeah, thanks for the question. I'll take it again. So we grew year-to-date to the first half, you know, 7%. We're guiding to 5-6% in Q3. We think the 6-7% that we gave for the year is a reasonable range.
Speaker Change: I will say that, you know, in the second quarter, we did see a number of very encouraging trends.
Aidan Viggiano: I will say that, you know, in the second quarter, we did see a number of very encouraging trends. In the business, in particular, we saw strength in messaging. As you know, that's our biggest business. So, we saw a lot of solid performance both in the U.S., which we've seen for the majority of this year, but we also saw modestly improving trends internationally. We also saw growth in our email business accelerate and really, and Khozema kind of talked about it in his prepared remarks as well, really strong performance in both our ISD and self-serve businesses. So, we saw a number of encouraging trends. We got into 5% to 6% in the third quarter.
Speaker Change: In the business, in particular, we saw a strength in messaging. As you know, that's our biggest business.
Speaker Change: Solid performance both in the U.S., which we've seen for the majority of this year, but also we saw modestly improving trends internationally.
Speaker Change: We also saw growth in our email business accelerate, and Khozema kind of talked about it in his prepared remarks as well, really strong performance in both our ISD and self-serve businesses. So we saw a number of encouraging trends.
Aidan Viggiano: I mean, if you think about how we guided in Q1 and Q2, that was 4% to 5%. So, you are seeing some of these trends kind of flow through to the guidance, but we are still a usage-based business. So, there is inherent variability that comes along with that.
Speaker Change: We got it to 5-6% in the third quarter, and if you think about how we got it in Q1 and Q2, that was 4-5%. So you are seeing some of these trends kind of flow through to the guidance.
Aidan Viggiano: And so, we'll continue to plan, we'll continue to guide prudently just given that and given the dynamic market that we're operating in. I'll just add one thing, maybe, which is we're not really planning for any kind of macroeconomic environment, like whether it's good or bad; I think we're just planning to run the company well. As we've alluded to a number of times, running it with better discipline and better rigor.
Aidan Viggiano: And it's obviously a dynamic global market with a lot of different kinds of geo things going on, macro things going on. I think, irrespective of how any of that plays, we feel really good about the guidance that we've given. And as Aiden said, we'll continue to be prudent about the way that we do things. Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Mark Murphy with J.P. Morgan. Your line is open. Please go ahead.
Speaker Change: And it's obviously a dynamic global market with a lot of different kind of geo things going on, macro things going on. I think irrespective of however any of that plays, we feel really good about the guidance that we've given. And as Aidan said, we'll continue to be prudent about the way that we guide.
Speaker Change: Thank you and one moment as we move on to our next question.
Operator: Thank you very much. So, Khozema, you mentioned an acceleration in email. And I'm curious about what you might attribute that to, whether it's more marketing emails, transactional emails, notification emails, is there anything there that makes you think companies are finally starting to lean back in to outbound marketing activities or customer engagement initiatives in a way that maybe they weren't a couple quarters ago? We'll have a quick follow-up. Yeah, hey, Mark.
Speaker Change: Thank you very much. So, Khozema, you mentioned an acceleration in email, and I'm curious to what you might attribute that, whether it's more
Speaker Change: It makes you think companies are finally starting to lean back in to outbound marketing activities or on customer engagement initiatives in a way that maybe they weren't a couple quarters ago.
Khozema Shipchandler: Thanks for the question. I wouldn't say that it necessarily breaks down exactly the way you say it. I think, in general, we are seeing just kind of elevated trends in that product and that part of the business. I think maybe to sort of build on your question through our Twilio lens a little bit more, I think where we continue to see a lot of opportunity, and I think email and the other channels will be beneficiaries, is that as communications become more targeted, as they start to leverage, you know, more contextual data, as we kind of talked about, especially through the vis-a-vis segment, I think there is an opportunity to grow the email channel.
Khozema Shipchandler: Yeah, hey Mark, thanks for the question. I wouldn't say that it necessarily breaks down exactly the way that you said it.
Speaker Change: I think in general, we are seeing just kind of elevated trends in that product and that part of the business.
Khozema Shipchandler: Maybe to sort of build on your question through the Twilio lens a little bit more, I think where we continue to see a lot of opportunity, and I think email and the other channels be beneficiaries, is
Khozema Shipchandler: And because what you and I will receive as consumers will be much more specified, much more targeted, much richer communication, and I think we're seeing a little bit of that. And I think, you know, a lot of that is kind of really more on the horizon, but in the quarter, I wouldn't necessarily point to one thing or the other.
Khozema Shipchandler: And I think we're seeing a little bit of that, and I think, you know, a lot of that is kind of really more on the come, but in the quarter, I wouldn't necessarily point to one thing or the other. I'd just say kind of elevated trends on the product.
Khozema Shipchandler: I just say kind of elevated trends on that. Okay, and then, thank you for that, and then, um... Aidan, I wanted to ask you two quick thoughts, but but you generated I think $1.25 a share of free cash flow in Q2, right? So it arguably puts you on a $5 per share run rate, which is a lot. And just is anything one-time in nature?
Aidan Viggiano: Or could we roll that kind of free cash flow margin into 2025? And then I did just, you know, relating back to that question of the narrowing of the range. We're trying to, I think we're trying to reconcile, you know, there are a lot of positive comments. And then that got narrowed, you know, just a hair below the midpoint.
Speaker Change: Okay, and then, thank you for that, and then...
Speaker Change: Aidan, I wanted to ask you, I'm going to try to combine two quick thoughts, but you generated I think a $1.25 a share of free cash flow.
Speaker Change: Thank you too. Right.
Speaker Change: And just, is anything one time in nature, or...
Speaker Change: Could we roll that kind of free cash flow margin into 2025? And then I did just, you know, relating back to that question of the narrowing of the range.
Aidan Viggiano: And I'm just wondering, you know, we've had Starbucks, Nike, McDonald, Tesla, there's been a lot of consumer slowdown. Is there anything they're factoring in, maybe, to how you're thinking about the holiday season? Yeah, so Mark, let me start on the back end of the question, and then I'll let Aidan pick up on the cash flow side. So I think from an industry perspective, I mean, you know, the kind of good news for Twilio is, I mean, you know, the company really well; you've been following us for a long time.
Speaker Change: We're trying to, I think we're trying to reconcile, you know, there's a lot of positive comments.
Speaker Change: And then that got narrowed, you know, just a hair below the midpoint. And I'm just wondering, you know, we've had Starbucks, Nike, McDonald's, Tesla. There's been a lot of consumer slowdown. Is there anything there factoring in maybe to how you're thinking about the holiday season?
Aidan Viggiano: Like, we have a very, very distributed consumer or customer base, right? So, over 300,000 customers, we're spread across a wide variety of industries. And so we're always, quite frankly, looking at some ups and some downs in a variety of these different areas. I would say, as it relates to some of the kind of areas that you pointed out, let's maybe just categorize those as retail e-commerce. I would say that that was an area that was particularly good for us. But I wouldn't necessarily point to a seasonal or holiday trend. I'm not necessarily forecasting a strong Thanksgiving or Christmas season.
Khozema Shipchandler: Yeah, so Mark, let me start on the back end of the question and then I'll let Aidan pick up on the cash flow side.
Aidan Viggiano: Like, we have a very, very distributed customer base, right? So, over 300,000 customers, we're spread across a wide variety of industries. And so, we're always, quite frankly, looking at some up, some down in a variety of these different areas.
Aidan Viggiano: I would say as it relates to some of the kind of areas that you pointed to, like let's maybe just categorize those as
Aidan Viggiano: Retail e-commerce, I would say that that was...
Aidan Viggiano: I would not necessarily point to a seasonal or holiday trend. I'm not necessarily forecasting a strong Thanksgiving or Christmas season. Again, we're kind of planning for whatever the period is. We just want to run the company well and guide prudently through all that. So that's kind of how we're thinking about the way that we're running the company, first and foremost.
Khozema Shipchandler: Again, we're kind of planning for whatever the period is. We just want to run the company well and guide prudently through all that. So that's kind of how we're thinking about the way that we're running the company first and foremost, and then how that ends up translating into some of our revenue guidance and then cash. Yeah, so Mark. And if you look at our cash performance kind of through the first half, or at least in the second quarter, you can see that cash is kind of outpacing our non-GAAP profit.
Aidan Viggiano: And then how that ends up translating into some of our revenue guidance.
Khozema Shipchandler: It was about 18% free cash flow margin in the second quarter. What we saw there was largely a function of the profit generation and the continued leverage that we're getting on OffX, but we did see collections improvement in the quarter by about two days. Now, on the flip side, AP kind of went the other way. So net net working capital really wasn't a help.
Speaker Change: And then on Kash, Aidan, do you want to take that? Yeah, so...
Aidan Viggiano: Thanks, Mark. And if you look at our cash performance kind of through the first half, or at least in the second quarter, you can see that cash is kind of outpacing our non-GAAP profit. It was about 18% free cash flow margin in the second quarter.
Aidan Viggiano: What we saw there is largely a function of the profit generation and the continued leverage that we're getting on OffX, but we did see collections improvement in the quarter by about two days.
Aidan Viggiano: So I wouldn't call out anything specifically. What we said for the year is that you should expect free cash flow generation to be in line with non-GAAP profit. I think that's a good framework in terms of how to think about it for the time being. Thank you very much.
Aidan Viggiano: Now on the flip side, AP kind of went the other way, so net-net working capital really wasn't a help. So I wouldn't call out anything specifically. What we said for the year is you should expect free cash flow generation to be in line with non-GAAP .
Aidan Viggiano: Profit, I think that's a good framework in terms of how to think about it for the time being.
Operator: Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Arjun Bhatia with William Blair. Your line is open, please go ahead. Great, thank you. This is Chris on behalf of Arjun.
Speaker Change: Thank you very much.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: And our next question is going to come from the line of Arjun Bhatia with William Blair. Your line is open. Please go ahead.
Chris: I was hoping to get a little extra color on segment NRR in the quarter. It was great to see the improvement there, and I was wondering if you think that, you know, we're starting to stabilize and kind of sound the bottom and, you know, how we should think about the trends going forward. Yeah, I think as it relates to segments, dollar-based net expansion was 93%. This quarter was 92%.
Chris: Great, thank you. This is Chris on for Arjun. I was hoping to get a little extra color on segment NRR in the quarter. It was great to see the improvement there, and I was wondering if you think that, you know, we're starting to stabilize and kind of sound the bottom and, you know, how we should think about the trends going forward.
Aidan Viggiano: Last quarter, the business grew at 3%. What we said for this year is that you should expect that business to grow muted. I think that continues to be our expectation for the year. I'd say 93% DV&E per segment was kind of in line with what we were expecting.
Speaker Change: Yeah, I think as it relates to segments, um...
Speaker Change: Dollar-based net expansion was 93%, this quarter was 92%, last quarter the business grew 3%.
Speaker Change: What we said for this year is you should expect the growth in that business to be muted. I think that continues to be our expectation for the year. I'd say 93% DV&E per segment was kind of in line with what we were expecting.
Aidan Viggiano: And really, we're focused on a number of different initiatives that we laid out in March kind of at our operational review readout. And we're focused on a couple of things. Number one, we're improving our customers' onboarding experience. Historically, it took way too long for customers to get to value.
Speaker Change: And really there, we're focused on a number of different initiatives that we laid out in March kind of at our operational review readout.
Aidan Viggiano: And now Thomas and the team have implemented a number of different things that get customers to value on their first use case in a matter of weeks, versus historically in a matter of months. In addition to that, we're making a concerted effort to sign more multi-year deals, and that will help with churn and contraction, and that will help with dollar-based net expansion as a result. And this quarter, of the bookings that we signed, 40% of them were multi-year deals versus just 17% a year ago.
Speaker Change: And we're focused on a couple of things. Number one, we're improving our customers' onboarding experience. Historically, it took way too long for customers to get to value. And now, Thomas and the team have implemented a number of different things that get customers to value on their first use case in a matter of weeks.
Speaker Change: Versus historically in a matter of months.
Speaker Change: In addition to that, we're making a concerted effort to sign more multi-year deals, and that will help with churn and contraction, that will help with dollar-based net expansion as a result. In this quarter, of the bookings that we signed, 40% of them were multi-year deals versus just 17% a year ago.
Aidan Viggiano: And then the last thing we committed to at Investor Day, or one of the other things I should say, it's not the only thing, we are making progress on our data warehouse interoperability, which is important for our customers. And in Q2, we introduced linked audiences. And what that does is it allows customers to combine their segment CDP data with data in their warehouses. And that's, again, important.
Speaker Change: And then the last thing we committed to at the Investor Day, or one of the other things I should say, it's not the only thing.
Speaker Change: We are making progress on our data warehouse interoperability, which is important for our customers, and in Q2, we introduced linked audiences, and what that does is it allows customers to combine their segment CDP data with data in their warehouses, and that's, again, an important
Aidan Viggiano: Thanks to our customer base. So all of those things combined, we think, over time, will help DB&E. It won't be immediate.
Speaker Change: Thanks for our customer base.
Speaker Change: So all of those things combined, we think, over time, help DB&E. It won't be immediate. DB&E is a trailing 12-month metric, so it's not going to reflect immediately, but as these things start to get traction, we think that it'll send that metric in the right direction kind of over time.
Chris: DB&E is a trailing 12-month metric, so it's not going to reflect immediately. But as these things start to get traction, we think that it'll send that metric in the right direction, kind of. Great, thank you. That's very helpful, Kala.
Operator: And the second question for me was, the personalized agent sounds like an interesting way to kind of combine the communications platform with Segment. I was curious what kind of feedback it's getting from customers so far and what other kinds of products are on the roadmap that can incorporate Segment employees. Yeah, I don't want to get too far ahead of the roadmap. So maybe I'll park that for an upcoming period when we report.
Khozema Shipchandler: I think in terms of the launch that we just did, I'd say it's pretty early. I mean, we just launched the thing a few weeks ago. But I think, based on the customer conversations that I've had, people are really, really excited about it. I think the whole notion of being able to leverage a detailed profile about a customer in the context of a conversation is incredibly important. I think it also has the benefit of creating a feedback loop.
Khozema Shipchandler: So the customers I've spoken with are very, very excited. I know our team is very excited based on the customers they've spoken with as well. But in terms of finances, it's just early days, and we'll have to kind of report back on that. Okay.
Operator: Thanks and congratulations on the quarter. Thanks. Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Taylor.
Speaker Change: Got it. Thanks and congrats on the quarter.
Taylor McGinnis: With UBS, your line is open; please go ahead. Hi, thanks so much for taking my question. So maybe going back to the full year revenue outlook and some of the assumptions, you talked about an improvement in trends with the international and email segment growth improving slightly. And then you talked about some of the ISB and co-sell opportunities. So I know you have some initiatives in place to accelerate growth that could be additive to a stabilization in macroeconomics in the second half.
Taylor McGinnis: So when you think about those playing out and what might be embedded into the guide, it looks like the revenue guide just assumes that trends remain status quo and maybe doesn't assume much upside from some of these initiatives that you have in place. So could you just provide a little bit more color there and, you know, what those opportunities could look like? Thanks. Yeah, I think, you know, we all started.
Speaker Change: So I know you have some initiatives in place to accelerate growth that could be additive to stabilization in the macro in the second half.
Speaker Change: Yeah, I think, you know, we all started to add again.
Aidan Viggiano: Thank you. I think, you know, we believe that the implied math for Q4 gets you to kind of a reasonable range of outcomes based on kind of what we're seeing in the business today. As we said, you kind of called them out.
Aidan Viggiano: A number of different trends that we're seeing that have been encouraging over the last three months, I think the thing to remember is it's very dynamic and we are usage-based and so we continue to just plan prudently in that light and so we just want to make sure that you know we're not getting ahead of ourselves we're not reading into too much in terms of what we're seeing over three months and that's just the right thing to do just given how dynamic, Yeah, Taylor, the only thing I'd add is, I mean, again, just to maybe reinforce a few points that Aidan made, I think we see encouraging signs, like we feel good about the guidance that we provided today. I think as these things start to materialize, like, we'll feel better, obviously, but there are a number of things that are happening inside the business today that certainly feel like they could be juice for growth down the road, and we're optimistic about it.
Speaker Change: I think the thing to remember is it's very dynamic, and we are usage-based. And so we continue to just plan prudently in that light. And so we just want to make sure that, you know, we're not getting ahead of ourselves. We're not reading into too much in terms of what we're seeing over three months. And that's just the right thing to do, just given how dynamic the market is.
Speaker Change: Yeah, Taylor, the only thing I'd add is, I mean, I, again, just to maybe reinforce a few points that Aidan made, I think,
Taylor: We see encouraging signs, like we feel good about the guidance that we provided today. I think as these things start to materialize, we'll feel better, obviously, but there are a number of things that are happening inside the business today that certainly feel like
Speaker Change: They could be juice for growth down the road, and we're optimistic about it, but we're going to continue guiding prudently, just given that it's a dynamic environment.
Aidan Viggiano: But we're going to continue guiding prudently, just given that it's a dynamic environment. And then just maybe as a follow-up, so when you talked about some of the improvement in trends that you saw in 2Q, maybe you could just talk about linearity a little bit in the quarter and, you know, as we start 3Q, would you say that a lot of those trends have remained similar or any, you know, notable changes to FLAG? Thanks. Yeah, I mean, we're not going to get ahead of that.
Speaker Change: Perfect. And then just maybe as a follow-up, so when you talked about some of the improvement in trends that you saw in 2Q, maybe you could just talk about, like, linearity a little bit in the quarter and, you know, as we start 3Q, would you say that a lot of those trends have remained similar or any, you know, notable changes to FLAG? Thanks.
Aidan Viggiano: Obviously, Taylor, like I think, you know, our quarters don't have sort of the linearity dynamics maybe of what you see in some other companies. I think, you know, again, we saw pretty positive trends as a result of the three months. [inaudible] Great, thank you so much. Thank you, and one moment for our next question. Our next question is going to come from the line of Meta Marshall with Morgan Stanley. Your line is open; please go ahead.
Speaker Change: Yeah, I mean, we're not going to get ahead of that, obviously, Taylor, like, I think, you know, our orders don't have sort of the linearity dynamics, maybe of what you see in some other companies, I think, you know, again, we saw pretty positive trends as a result of the three month
Speaker Change: This is a period that we're talking about today. I certainly don't want to get into July or anything like that, but based on what we've seen we're encouraged and we'll play through Q3.
Aidan Viggiano: Great, thanks. Just wanted to kind of confirm on political traffic. I know in the past you guys have kind of said that that was going to be an area that you weren't going to invest in, but just as we kind of head into a political season, should we still be thinking about kind of political traffic, either by email or by text message, as something that's kind of a more limited contribution? Yeah, I think it relates to politics.
Speaker Change: I just wanted to kind of confirm on political traffic, I know in the past you guys have kind of said that that was going to be an area that you weren't going to invest in but just as we
Operator: You know, we always have some political traffic kind of rolling through our business, but I wouldn't expect an outsized revenue impact as a result of the upcoming election. We have registration requirements. We talked about them before with you in an acceptable use policy. And, you know, if customers don't meet those policies, we, we won't take the traffic.
Speaker Change: Yeah, I think as it relates to political, um...
Speaker Change: We have registration requirements. We've talked about them before with you in an acceptable use policy.
Speaker Change: You know, if customers don't meet those policies, you know, we won't take the traffic. So, it ensures a level of quality on our networks and on our platform and it protects consumers. We think that's the right thing to do. So, there might be a little bit of a bump, but it won't be anything outsized as we get closer to the U.S. elections.
Aidan Viggiano: So, it ensures a level of quality on our networks and on our platform, and it protects consumers. We think that's the right thing to do. So there might be a little bit of a bump, but it won't be anything outsized as we get closer to the US.
Aidan Viggiano: Great, thanks. And then just, you know, I noticed you guys said international improvement. Is that some end market improvement? Or do you kind of attribute that to some of the ISV relationships growing? Just how do you think about some of that improvement that you're seeing on the ISV track? Yeah, so we did see this kind of improving trend with the international, it's international, when we say international, just to be clear, it's international terminating messaging traffic, as it was a bit broad-based; it wasn't one group of customers or the other.
Speaker Change: Great, thanks. And then just, you know, I noted you guys said international improvement, you know, is that some end market improvement or do you kind of attribute that to some of the ISV relationships growing? Just how do you think about kind of some of that improvement that you're seeing or ISV traction? Thanks.
Aidan Viggiano: So that was encouraging in a way to see that it was a bit broader versus just an ISV group or another group. But beyond that, I wouldn't call out anything specific. It wasn't a certain industry.
Aidan Viggiano: It wasn't a certain market where traffic was terminating that spiked or jumped out at us. It was broader. Thank you.
Speaker Change: But beyond that I wouldn't call out anything specific. It wasn't a certain industry, it wasn't a certain market where traffic was terminating that spiked or jumped out to us. It was broader.
Operator: One moment for our next question. Our next question is going to come from the line of Ryan Koontz with Needham & Co. Your line is open. Please go ahead.
Speaker Change: Great, thanks.
Speaker Change: Thank you. One moment for our next question.
Ryan Koontz: Hi, thanks for the question. I wanted to ask about any of the changes you're making in going to market and these sort of changes that are, you know, driving the strength; you're able to reduce costs and any progress in automation that you've made on the comp side of the business. Yeah, I mean, just to maybe go back a little bit, like, we made a number of changes, obviously, that unfortunately resulted in a whole series of layoffs towards the earlier part of last year. So now we're kind of back into 2023.
Speaker Change: Hi, thanks for the question. I wanted to ask about any of the changes you're making in go-to-market and these sort of changes that are, you know, driving the strength, you're able to reduce costs, and any progress in automation that you've had on the comp side of the business?
Speaker Change: Yeah, I mean, just to maybe go back a little bit, like, we made a number of changes, obviously, that unfortunately resulted in a whole series of layoffs.
Khozema Shipchandler: And, you know, we're starting to see some of those, well, a lot of those changes, frankly, especially in our cost profile, ripple through the business. In terms of, you know, some of the rationale behind what we did at the time and what we were kind of expecting going forward, like, we did want to orient many more of our customers towards self-serve. And I think, you know, we pointed to a couple things in the quarter around self-serve, like it was definitely one of the better quarters for that kind of cohort segment of customers.
Speaker Change: We're starting to see some of those, well a lot of those changes frankly, especially in our cost profile, ripple through the business. In terms of
Speaker Change: You know, some of the rationale behind what we did at the time and what we were kind of expecting going forward.
Speaker Change: Like, we did want to orient many more of our customers towards self-serve, and I think, you know, we pointed to a couple things in the quarter around self-serve, like it was definitely one of the better quarters for that kind of cohort segment of customers.
Khozema Shipchandler: It's a very, very kind of broad set, like you can have customers spending small amounts of money up to, you know, kind of decently large amounts of money. And so it's a, it's a kind of broad category that has seen strength.
Speaker Change: It's a very, very kind of broad set, like you could have customer spending.
Khozema Shipchandler: There's a number of things that we did from a technology perspective as well, to make sure that we were able to onboard new customers in a way that they could kind of activate with Twilio fairly quickly as well. So I'd say very good progress, quite frankly, in terms of self-serve as it relates to communications. Maybe just the other thing that you didn't ask, but just to kind of touch on is also with, as Aiden kind of talked about in some of her comments, also good progress.
Speaker Change: Small amounts of money up to, you know, kind of decently large size amounts of money and so
Speaker Change: It's a kind of broad category that has seen strength. There's a number of things that we did from a technology perspective as well.
Speaker Change: to make sure that we were able to onboard on-ramp customers in a way that they could kind of activate with Twilio fairly quickly as well. So I'd say very good progress, quite frankly, in terms of self-serve.
Speaker Change: As it relates to communications, maybe just the other thing that you didn't ask, but just to kind of touch on is...
Speaker Change: Also, as Aidan kind of talked about in some of her comments...
Khozema Shipchandler: I wouldn't call it per se self-serve, but in terms of just accelerating customers to value on the segment side, we have done a lot of work from a technology perspective there, too, to increase just the velocity with which customers get to value.
Speaker Change: Also good progress. I wouldn't call it per se self-serve, but in terms of just accelerating customers to value on the segment side as well, like we have done a lot of work from a technology perspective there too.
Khozema Shipchandler: And then I think more broadly, there is work that we're doing on automation. Like, we still think that our ability to drive cost leverage here is a lot of opportunity going forward, and we'll continue. That's helpful, Khozema.
Speaker Change: to increase just the velocity with which customers get to value. And then I think more broadly, there is work that we're doing on automation. We still think that our ability to drive cost leverage here, that there is a lot of opportunity going forward, and we'll continue doing that.
Khozema Shipchandler: Thank you. Thank you. One moment for our next question. Our next question is going to come from the line of Aleksandr Zukin with Wolf. Your line is open, please go ahead. Hey guys, this is Rich Magnuson for Aleksandr Zukin.
Speaker Change: That's helpful, Ksema. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question is going to come from the line of Aleksandr Zukin with Wolf. Your line is open, please go ahead.
Operator: I just wanted to double-click again on that segment onboarding process you've been speaking about. I know in the past you mentioned leveraging AI to help reduce friction in that process and drive that faster TTV through the self-serve process. But can you sort of help us think through any impacts there that might drive segment growth this year and next year? Thanks.
Rich Magnuson: Hey guys, this is Rich Magnuson for Aleksandr Zukin. I just wanted to double click again on that segment onboarding process you've been speaking about. I know in the past you mentioned leveraging AI to help reduce friction in that process and drive that faster TTV through the self-serve process, but can you sort of help us think through any impacts there that might
Speaker Change: Drive segment growth this year and next year. Thanks.
Rich Magnuson: Yeah, maybe I'll just touch on the technology. And I think Aidan kind of answered the growth dynamics earlier. Like, just to reiterate that last point, I think growth will continue to be muted for the foreseeable future. You know, we've been kind of saying that for a while.
Speaker Change: Yeah, maybe I'll just touch on the technology, and I think Aidan kind of answered the growth dynamics earlier. Like, just to reiterate that last point, I think growth...
Speaker Change: We'll continue to be muted for the foreseeable future.
Khozema Shipchandler: And I think while there are improvements in the business, just given the nature of them, that'll take a little bit of time to show up in growth. That said, I'd say there are a handful of things that have been really encouraging for us in the segment business. I think one is that time to value work. It's a combination of AI work that we've done to help customers get through the process faster.
Speaker Change: We've been kind of saying that for a while, and I think while there are improvements in the business, just given the nature of it, that'll take a little bit of time to show up in growth. That said, I'd say there's a handful of things that have been really encouraging for us in the segment business. I think one is...
Speaker Change: That type of value work, it's a combination of...
Khozema Shipchandler: There's also a use case onboarding wizard that's allowed customers to kind of get to their specified use case a lot faster. And then I'd also say a really concerted effort by our customer success team. And so the combination of those things, I think, has been pretty powerful, frankly, in really accelerating what Aidan characterized as what was months in the past down to weeks.
Speaker Change: A.I. work that we've done to help customers get through the process faster. There's also
Speaker Change: The use case onboarding wizard that's also allowed customers to kind of get to their specified use case a lot faster and then I'd say also a really concerted effort by our customer success team. And so the combination of those things, I think, has been pretty powerful, frankly, and really accelerating.
Speaker Change: You know, what Aidan characterized as what was months in the past down to weeks and, you know, what we've kind of quantified as a 4x improvement from where we were.
Khozema Shipchandler: And, you know, what we've kind of quantified as a Forex improvement from where we were. Thank you, and we'll move on to our next question. One moment, please.
Speaker Change: Thank you and we'll move on to our next question. One moment please.
Operator: Our next question is going to come from the line of Pat Walravens with Citizens JMP. Your line is open. Please go ahead. Thanks for taking my question. This is Austin Cole. I'm for Pat.
Speaker Change: Our next question is going to come from the line of Pat Walravens with Citizens JMP. Your line is open, please go ahead.
Austin Cole: You touched on an eight-figure renewal during the quarter, and Twilio Voice being a part of that. Can you just talk about how you view your opportunity with respect to AI at this point and the opportunity with these products? Thank you. Yeah, I mean, I think that our opportunity around AI is everything to do with data.
Austin Cole: All right, thanks for taking my question. This is Austin Cole. I'm for Pat. You touched on an eight-figure renewal during the quarter and Twilio Voice being a part of that. Can you just talk about how you view your opportunity with respect to AI at this point and the opportunity with these products? Thank you.
Khozema Shipchandler: And I think as it relates to data, in particular contextual data, and I think the reason that we feel such deep conviction about that is that all of our customers are sitting on proprietary data sets that will never be turned over to an LLM, right? Like, that is the heart of their business, and our ability to work with them vis-Ã -vis segment and ingest that data, use it as part of an overall profile that we have for every single unique consumer to be able to drive a personalization experience back to them, I think that is, like, a really, really significant unlock that's going to be able to drive business more, drive growth, excuse me, more broadly for the overall business
Speaker Change: Yeah, I mean, I think that our opportunity around AI is everything to do with data, and I think as it relates to data, in particular contextual data, and I think the reason that we feel such deep conviction about that is, is that
Speaker Change: All of our customers are sitting on proprietary data sets that will never be turned over to an LLM, right? Like, that is the heart of their business.
Austin Cole: and our ability to work with them vis-a-vis segment.
Speaker Change: and ingest that data, use it as part of an overall profile that we have for every single unique consumer to be able to drive a personalization experience back to them. I think that is like a really, really significant unlock.
Speaker Change: So it's going to be able to drive business more, drive growth, excuse me, more broadly for the overall business, but it's that combination of communications.
Khozema Shipchandler: But it's that combination of communications, plus contextual data, plus AI in the mix as well. Now, just to go back to voice for a second, since that's where you started, I think what's interesting about voice as it relates to all of that is that AI is most natural in voice, right? Like, in the same way that you and I are interacting right now, like, it's just very normal to kind of have a conversation that way.
Speaker Change: plus contextual data, plus AI in the mix as well.
Speaker Change: Now, just to go back to voice for a second, since that's where you started.
Speaker Change: I think what's interesting about voice as it relates to all of that is, is that
Speaker Change: A.I. is the most natural in voice, right, like in the same way that you and I are interacting right now, like it's just very normal to kind of have a conversation in that way, and I think that the A.I. capabilities are becoming so sophisticated in their ability to process
Khozema Shipchandler: And I think that AI capabilities are becoming so sophisticated in their ability to process natural language in this way that, when paired with contextual data, I think that is going to be a heck of an opportunity. And I think a lot of that value will end up accruing, not just in messaging and email, which we feel optimistic about, but certainly in voice as well. Great, that makes a lot of sense. Thank you.
Speaker Change: natural language in this way, that when paired with contextual data, I think that is going to be a heck of an opportunity, and I think a lot of that value will end up accruing not just to messaging and email, which we feel optimistic about, but certainly voice as well.
Operator: Thank you, and one moment for our next question. Our next question is going to come from the line of Nick Altmann with Scotiabank. Your line is open, please go ahead.
Speaker Change: Great. Thanks a lot of sense. Thank you.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Nick Altmann with Scotiabank. Your line is open, please go ahead.
Nicholas Altmann: Awesome. Thanks, guys. Um, you guys sort of have a re-energized focus on your ISVs. You named a handful of new partnerships in your prepared remarks. I guess when you look at sort of the other potential ISV partnerships out there, how much runway is there left in terms of acquiring new ISVs? And then just any sense of what percentage of the business is coming from those partners and any goalposts in terms of how fast that part of the business is growing?
Nick Altmann: Awesome. Thanks, guys. You guys sort of have a re-energized focus on your ISVs. You named a handful of new partnerships in the prepared remarks.
Nick Altmann: I guess when you look at sort of the other potential ISV partnerships out there, how much runway is there left in terms of acquiring new ISVs, and then just any sense of what percentage of the business is coming from those partners and any goal posts in terms of how fast that part of the business is growing?
Nicholas Altmann: Yeah, we're not going to break out the kind of percentage of revenue per se, but I'll just maybe provide a little bit of color based on your question. Obviously, there's been strong growth there, and we feel very positive about it, as you probably ascertained from our remarks. It is a sizable portion of our communications revenue today, and it's also growing faster than our total organic growth rate, and it's got, quite frankly, compelling gross margins as well. So, that all feels pretty good.
Speaker Change: Yeah, we're not going to break out the kind of percentage of revenue per se, but I'll just maybe provide a little bit of color based on your question. Obviously, there's been strong growth there, and we feel very positive about it, as you probably ascertained from our remarks.
Speaker Change: It is a sizable portion of the communications revenue today, and it's also growing faster than our total organic growth rate, and it's got, you know, quite frankly, compelling gross margins as well.
Khozema Shipchandler: As you alluded to, we did sign a number of large ISV deals in the quarter, including wins with payment processors, customer experience companies, marketing automation platforms, and more. I'd say those businesses have been growing pretty well, too, and so I think we'll accrue some benefits as a result of their growth. And I think, too, it's not just domestic, which kind of speaks to how much runway there is here.
Nick Altmann: That all feels pretty good. As you alluded to, we did sign a number of large ISV deals in the quarter, including wins with payment processors, customer experience companies, marketing automation platforms,
Nick Altmann: and more. I'd say those businesses have been growing pretty well, too, and so I think we'll accrue some benefits as a result of their growth. I think, too,
Nick Altmann: It's not just domestic, which kind of speaks to, like, how much runway is there here. We're also seeing good growth in EMEA and APJ as well. And I think what's kind of important from our standpoint is, is that
Khozema Shipchandler: We're also seeing good growth in AMIA and APJ as well, and I think what's kind of important from our standpoint is that these relationships are evolving beyond just being like software providers using our channels into kind of real relationships where we have an opportunity to kind of deepen what we do with the likes of, you know, Braze, Klaviyo, Insider, Bloom, Reach, Airship, because we've got these strong integrations within the We're engaged in CoSell and Reseller with a lot of these partners, and I think that also allows us to get some go-to-market leverage in terms of expanding our own go-to-market footprint. So, yeah, I mean, we do feel pretty good about where we are. We do feel pretty good about the growth trajectory, and we're excited. It was awesome. Thanks, guys.
Nick Altmann: These relationships are evolving beyond just being like software providers.
Nick Altmann: using our channels to kind of real relationships.
Speaker Change: Where we have an opportunity to kind of deepen what we do with the likes of, you know, a Braze, a Klaviyo, Insider, Bloom Reach, Airship.
Speaker Change: Because we've got, like, these strong integrations within the ecosystem, we're engaged in CoCell.
Speaker Change: and Resell with a lot of these partners and I think that also allows us
Speaker Change: to get some go-to-market leverage in terms of expanding our own go-to-market footprint. So yeah, I mean, we do feel pretty good about where we are. We do feel pretty good about the growth trajectory and we're excited.
Operator: Thank you, and one moment for our next question. And our next question is going to come from the line of William Powers with Baird. Your line is open. Please go ahead. Great, thanks for taking the question. This is Yanni Samolisan for Will.
Speaker Change: Awesome. Thanks, guys.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: And our next question is going to come from the line of William Powers with Baird. Your line is open. Please go ahead.
Yanni Samolisan: I know you mentioned earlier in the call that retail and e-commerce was pretty good this past quarter, and it seems like things are pretty stable overall across the business. But I guess, outside of retail and e-commerce, are there any other verticals out there that are standing out right now or maybe even showing signs of upward inflection?
Speaker Change: Great, thanks for taking the question. This is Yanni Samolitan for Will. I know you mentioned earlier in the call that retail and e-commerce was pretty good this past quarter, and it seems like things are pretty stable overall across the business, but I guess outside of retail and e-commerce,
Speaker Change: Are there any other verticals out there that are standing out right now or maybe even showing signs of upward inflection?
Aidan Viggiano: So when we look at our top industries, I'd say most of them are actually up and growing. I'd say for us, social and messaging continues to be one that's a little bit softer, though it's relatively small portion of our business right now. So, you know, financial services is one that has been strong; you called out retail, eCommerce, and a couple of others that have been pretty strong as well. But broadly, I'd say most of the industries that we operate in are strong. And just to be clear, growing but not necessarily growing above the company average, or? In some cases, they are.
Speaker Change: When we look at our top industries, I'd say most of them are actually up and growing. I'd say for us, social and messaging continues to be one that's a little bit softer, though it's a relatively smaller portion of our business right now.
Speaker Change: So, you know, financial services is one that has been strong. You called out retail, e-commerce, and a couple of others that have been pretty strong as well. But broadly, I'd say most of the industries that we operated in, our top industries, are growing.
Speaker Change: And just to be clear, growing, but not necessarily growing above the company average, or?
Speaker Change: In some cases they are, in some cases it's more in line with company average.
Aidan Viggiano: In some cases, it's more in line with the company. Okay, thank you. Thank you. One moment for our next question. And our next question is going to come from the line of Derek Wood with TD Cowan.
Speaker Change: Okay, thank you.
Speaker Change: Thank you. One moment for our next question.
Operator: Your line is open, please go ahead. Oh, great. Thanks. Just on AI, I guess stepping back a bit from a high level, Khozema, how would you describe The Generative AI Modernization Strategy for Twilio, whether, you know, it's a direct modernization or just an indirect implication? Yeah, I think there's a couple angles there.
Speaker Change: And our next question is going to come from the line of Derek Wood with TD Cowen. Your line is open. Please go ahead.
Derek Wood: Great, thanks. Just on AI, I guess stepping back a bit from a high level, Khozema, how would you describe
Derek Wood: The generative AI modernization strategy for Twilio, whether, you know, be a direct modernization or just indirect implications.
Khozema Shipchandler: Yeah, I think there's a couple angles there, so let me just, I'll spend a moment on it.
Derek Wood: So let me just, I'll spend a moment on it. So I think, first of all, you know, where we kind of started with AI with some of the earliest use cases was really around fraud and trust, right? So we embedded AI capabilities to help protect the consumer, just given that we want to, at all costs, protect the vitality of the ecosystem. And so there were a number of things that we introduced to basically protect the consumer, you know, fraud guard, verify, these are different products we've announced over the course of the last year or so.
Khozema Shipchandler: So I think, first of all, you know, where we kind of started with AI with some of the earliest use cases was really around
Khozema Shipchandler: Fraud and trust, right? So we embedded AI capabilities to help protect the consumer just given that we want to, at all costs, protect the vitality of the ecosystem. And so there were a number of things that we introduced to basically protect the consumer, go fraud guard, verify these are different products we've announced over the course of the last year or so, you know, as we talked about in the remarks today, like we're seeing good activity there.
Derek Wood: You know, as we talked about in the remarks today, like we're seeing good activity there. I think as we go, it's really going to be AI centered predominantly around contextual data. I think where we see the big unlock here, certainly for our business, and as it relates to, you know, what we've referred to for a long time, and others do too, is customer engagement. The real unlock there is, through personalization and scale.
Khozema Shipchandler: I think as we go, it's really going to be maybe AI centered predominantly around contextual data. I think where we see the big unlock here, certainly for our business and as it relates to
Khozema Shipchandler: And so the way that you get there is by having this, like, really rich contextual data about every single one of us as consumers. That comes through Segment, being able to relay that back to a consumer via some sort of communication channel, and then obviously using AI to supercharge that. So, one example might be, like, we have a voice intelligence product, and we talked about that today too, where we're able to extract insights as a result of the context of that call, use them both inside of that call that's taking place at the time, but also feed them back into a profile so that that data can be reused for the next time that that brand ends up interacting with the consumer.
Khozema Shipchandler: You know, what we've referred to for a long time and others do, too, is customer engagement. Like, the real unlock there is, like, through personalization and scale. And so, the way that you get there is having this, like, really rich, contextual data about every single one of us as consumers.
Khozema Shipchandler: That comes through segment. Being able to relay that back to a consumer vis-a-vis some sort of communication channel.
Khozema Shipchandler: and then obviously using AI to supercharge that. So one example might be like we have a voice intelligence product, we talked about that today too.
Khozema Shipchandler: where we're able to extract insights as a result of the context of that call, use it both inside of that call that's taking place at the time, but also feed it back into a profile so that that data can be reused for the next time that that brand ends up interacting with
Khozema Shipchandler: Similarly, I think where that will increasingly go is you'll end up, without perhaps even realizing it, although I think we'll probably disclose it, interacting with an automated agent, where all of that is taking place seamlessly. They're able to process natural language, like, I don't think that's, like, our strategic advantage in AI.
Khozema Shipchandler: Consumer.
Khozema Shipchandler: Similarly, I think where that will increasingly go is you'll end up, without perhaps even realizing it, although I think we'll probably disclose it,
Khozema Shipchandler: interacting with an automated agent, where all of that is taking place seamlessly, they're able to process
Khozema Shipchandler: You know, there are a number of companies that can do that. We'll partner with those organizations. What they don't have, though, which I think is our secret sauce, is going to be how do you get to that specific consumer and thousands of others at exactly the same moment in time to deliver each of them a unique and personalized experience? That comes from contextual data, and that's why we're so bent on ensuring that we deliver segments natively inside of communications so that we can deliver that entire workflow. Does that make sense, Derek? Yeah, that's a great color.
Khozema Shipchandler: I don't think that's per say our strategic advantage in AI. There are a number of companies that can do that and we'll partner with those organizations. What they don't have though, which I think is our secret sauce, is going to be
Khozema Shipchandler: How do you get to that specific consumer and thousands of others at exactly the same moment in time to deliver each of them a unique and personalized experience?
Khozema Shipchandler: That comes from contextual data, and that's why we're so bent on ensuring that we deliver segment natively inside of communications so that we can deliver that entire workload. Does that make sense, Derek? Yeah, that's great, Keller. Thanks. Helpful. Thank you.
Derek Wood: Thanks. Helpful. Thank you. Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Samad Samana with Jeffrey's. Your line is open. Please go ahead. All right, thanks for taking my question. This is actually Billy.
Operator: Amad, in terms of a short one, stock-based comp is down year-over-year in both dollar terms and percentage terms. How should we think about where that can kind of go from here and kind of what inning we're in on that front? Obviously, you guys have highlighted changes, uh... the bonus structure. But should it kind of bottom out? Is there more work to be done? you decline the way it has. Yeah, thanks for the question.
Billy: There's more, there's more leverage here in terms of the opportunity ahead. So, you know, we were 13.6% SBC in the quarter, that was down 110 basis points year over year, and it was down 130 quarter over quarter. It's on the back of the things that you've talked about.
Derek Wood: Yeah, thanks for the question. There's more, there's more leverage here in terms of the opportunity ahead. So.
Aidan Viggiano: We've reduced, obviously, the size of the employee base. We've made a shift in terms of the compensation mix away from equity and towards cash, and we've also been more selective in terms of which employees get equity. Those changes have already been made.
Aidan Viggiano: In terms of looking forward, you know, we think that there's still opportunity here for leverage. We had originally committed to 10 to 12 percent SBC as a percentage of revenue by 2027, so we're still marching down. The cost curve to get to that, and then if I can ask a second... And just double-click on Communications Gross Margins for the quarter. Any changes there, positive or negative, book them.
Khozema Shipchandler: The cost curve to to get to that kind of range.
Speaker Change: And then if I can ask a second one, can we just double click on communications gross margins in the quarter? Any changes there, positive or negative, both domestically and or internationally? And then how should we kind of think about the comms gross margins going forward given some of the new initiatives and given the mix of growth and new products going forward?
Aidan Viggiano: Internationally, and then how should we kind of think about the comms gross margins going forward? Given some of the new initiatives and given the mix of, In the quarter, you'll see that comms gross margins were up year over year but down quarter over quarter. The quarter over quarter dynamic was just really driven by the hosting credits that we saw come through in the first quarter. They were about 80 basis points of a help in the first quarter.
Speaker Change: In the query, you'll see that comms gross margins were up year over year, but down quarter over quarter.
Speaker Change: The quarter-over-quarter dynamic was just really driven by the hosting credits that we saw come through in the first quarter. They were about 80 basis points of a help in the first quarter. That didn't repeat quarter-over-quarter, so that's kind of the headwind. Year-over-year, they were up as 160 basis points or so.
Aidan Viggiano: That didn't repeat quarter over quarter, so that's kind of the headwind. Year over year, they were up by 160 basis points or so, and that was driven by two things. Product mix, so when we talked about email growing or accelerating, that obviously helps margins because it's higher-margin than comms average. The other dynamic in that year-over-year growth was the fact that we had the dispositions last year and that we did that in July's timeframe. They were at a gross margin rate that was diluted to the company, and so not having the value first in IoT businesses actually helps margins.
Speaker Change: And that was driven by two things, product mix, so when, you know, we talked about email.
Khozema Shipchandler: growing or accelerating. That obviously helps margins because it's higher margin than the comps average.
Khozema Shipchandler: The other dynamic in that year-over-year growth was the fact that we had the dispositions last year that we did them in.
Khozema Shipchandler: July's time frame, they were at a gross margin rate that was diluted to the company, and so not having those, the value first and IOT businesses actually helps margins. As we think about going forward,
Aidan Viggiano: As we think about going forward, margins in the communications business tend to be driven really by mix. That's product mix between messaging or voice or email, et cetera, or termination mix within the messaging business. If you're terminating more internationally or domestically, that would drive different gross margins. I think the framework we think about and kind of look at is we look at unit economics.
Speaker Change: Margins in the communications business tend to be driven really by mix, that's product mix between messaging or voice or email, et cetera, or termination mix within the messaging business, so if you're terminating more internationally or domestically, that will drive different gross margins. I think the framework we think about and kind of look at is, we look at the unit economics, and so long as the unit economics remain attractive, we'll continue to do the business.
Aidan Viggiano: So long as the unit economics remain attractive, we'll continue to do so. So you should expect, I'd say, in the near term, some level of variability. Thank you very much.
Speaker Change: So you should expect, I'd say, in the near term, some level of variability in the communications for SMART.
Speaker Change: Super helpful. Thank you very much.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: And our next question comes from the line of Mike Funk with Bank of America. Your line is open, please go ahead.
Matt: Hi, this is Matt on for Mike Funk. Appreciate you taking the question. Can you help us think about the second half revenue guidance?
Speaker Change: in the context of new customer additions versus uplift from expansion, and then looking beyond even this year from a high level, how you might expect the growth algorithm to shake out in the medium term. Thanks.
Speaker Change: I missed the second part. No, we're not going to get into the splits in terms of how to think about the revenue guidance. That's not something we've ever really done in terms of splitting the guide between new customers and expansion.
Speaker Change: I think we feel good about the 5-6% range we gave you for Q3, the 6-7% for the year, and we talked about the dynamic market, the fact that we're usage-based, and the fact that we will continue to plan prudently just given those dynamics.
Speaker Change: Can you just repeat your second question? I missed it.
Speaker Change: Yeah, it was just high level about how the growth algorithm could shake out over the next couple of years, but it seems like...
Speaker Change: You know, that's not something you're going to comment on.
Speaker Change: Yeah, not today. At a later time. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. And I'm showing no further questions, so this is going to conclude today's question and answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating, and you may all disconnect. Everyone, have a great day.
Speaker Change: Goodbye!
Speaker Change: and many more.
Operator: Thank you, and one moment as we move on to our next question. And our next question comes from the line of Mike Funk with Bank of America. Your line is open. Please go ahead.
Speaker Change: Good day and thank you for standing by. Welcome to Twilio Inc's second quarter 2024 earnings conference call.
Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.
Speaker Change: To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again.
Speaker Change: Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker, Bryan Vaniman, SVP, Investor Relations. Please go ahead, sir.
Matt: Great. Hi. Yeah, this is Matt. I'm from iFunk.
Bryan Vaniman: Good afternoon, everyone, and thank you for joining us for Twilio's second quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer.
Speaker Change: 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 release and our earnings presentation posted on our IR website at investors.twilio.com.
Aidan Viggiano: Appreciate you taking the question. Can you help us think about the second half revenue guidance in the context of new customer additions versus uplift from expansion? And then, looking beyond even this year from a high level, how might you expect the growth algorithm to shake out in the medium term? Thanks.
Bryan Vaniman: 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.
Speaker Change: Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K and our forthcoming Form 10-Q .
Speaker Change: 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.
Speaker Change: With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A.
Aidan Viggiano: We're not going to get into the splits in terms of how to think about revenue guidance. That's not something we've ever really done in terms of splitting the guide between new customers and expansion. I think we feel good about the 5 to 6% range we gave you for Q3, and the 6 to 7% for the year. We talked about the dynamic market, the fact that we're usage-based, and the fact that we will. Can you just repeat your second question? Yeah, it was just high-level about how the growth algorithm could shake out over the next couple of years, but it seems like... That's not something you're going to comment on. Yeah, not today.
Aidan Viggiano: At a later time. Thank you. Thank you. Thank you, and I'm showing no further questions, so this is going to conclude today's question and answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating, and you may all disconnect. Everyone have a great day. Goodbye.
Speaker Change: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today.
Operator: Good day, and thank you for standing by. Welcome to Twilio Inc.'s second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Twilio delivered a good second quarter.
Speaker Change: We are driving durable, profitable growth as we exceeded our Q2 guidance with $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels.
Speaker Change: We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation.
Speaker Change: We're running the business with increased rigor, which we are confident will drive improved growth rates and additional operating leverage over time.
Speaker Change: The communications business is performing very well, and in our segment business, we're focused on executing on our commitments while reducing non-GAAP operating losses.
Speaker Change: In Q2, we saw continued signs that communications growth is stabilizing, including quarter-over-quarter improvement in international trends.
Speaker Change: And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement.
Speaker Change: What's true across the board is that in the world of AI, contextual data is paramount. According to Twilio's annual State of Customer Engagement report, we found 84% of businesses said they provide good or excellent customer engagement.
Speaker Change: By combining our leading communications capabilities, our rich and contextual data, and the power of AI, we are uniquely positioned to unlock smarter and more personalized interactions for brands that enable them to reimagine customer engagement,
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again.
Operator: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bryan Vanaman, SVP, Investor Relations. Please go ahead, sir.
Bryan Vaniman: Good afternoon, everyone, and thank you for joining us for Twilio's second quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer, and Aidan Viggiano, Chief Financial Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our Investor Relations website at investors.twilio.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.
Speaker Change: Let's turn to our business highlights.
Speaker Change: Our Twilio communications business had a strong quarter, with revenue of $1.01 billion, up 7% on an organic basis year-over-year, on the back of solid performance in messaging, acceleration in email growth, and strong ISV contributions.
Bryan Vaniman: Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K 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. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A. Thank you, Bryan.
Speaker Change: During the quarter, we also focused on a number of initiatives that we believe will deliver improved growth rates over time.
Khozema Shipchandler: Good afternoon, everyone, and thank you for joining us today. Twilio delivered a good second quarter. We are driving durable, profitable growth as we exceeded our Q2 guidance with $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels. We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation.
Speaker Change: In the near term, we expect our growth to be fueled by our expanded network of partners and ISVs.
Khozema Shipchandler: We're running the business with increased rigor, which we are confident will drive improved growth rates and additional operating leverage. The communications business is performing very well, and in our segment business, we're focused on executing on our commitment while reducing non-gap operating losses. In Q2, we saw continued signs that communications growth is stabilizing, including quarter-over-quarter improvement in international trends. And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement. What's true across the board is that in the world of AI, contextual data is paramount.
Speaker Change: Self-Service Enhancements and Cross-Sale Opportunities.
Khozema Shipchandler: According to Twilio's annual State of Customer Engagement report, we found 84% of businesses said they provided good or excellent customer engagement. Yet only 54% of consumers agree. That disconnect is because brands need help contextualizing the data they have. By combining our leading communications capabilities, our rich and contextual data, and the power of AI, we are uniquely positioned to unlock smarter and more personalized interactions for brands that enable them to reimagine customer engagement and drive more revenue at a lower cost.
Speaker Change: While we have made meaningful progress in all these areas, I'm particularly pleased with our success in securing new partners and ISVs.
Khozema Shipchandler: Let's turn to our business highlights. Our Twilio communications business had a strong quarter, with revenue of $1.01 billion, up 7% on an organic basis year-over-year, on the back of solid performance in messaging, acceleration in email growth, and strong ISV contributions.
Khozema Shipchandler: During the quarter, we also focused on a number of initiatives that we believe will deliver improved growth rates over time. In the near term, we expect our growth to be fueled by our expanded network of partners, Self-Service Enhancements, and Cross-Sell Opportunities. While we have made meaningful progress in all these areas, I'm particularly pleased with our success in securing new partners and ISPs. During the quarter, we achieved an eight-figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solutions. Additionally, we signed a new partnership with OmniSend, an omni-channel marketing platform targeting the SMB retail market, which will help Twilio expand its footprint into new geographies.
Khozema Shipchandler: We also extended our CoSell partnerships with Airship, Bloom Reach, Braze, Insider, and Clavio into new geographical territories to power a data-enriched, end-to-end marketing experience. During the quarter, we delivered the strongest revenue growth in our self-service business since Q1 of 2022. And we continue to make enhancements to simplify the onboarding experience for customers. For example, we introduced a new console experience that helps make recommendations to guide customers to which products they should be using based on their desired use cases and outcomes. And our new one sign up streamlines the login process by having one login for a customer to access all of their Twilio accounts and products.
Speaker Change: During the quarter, we delivered the strongest revenue growth in our self-service business since Q1 of 2023.
Speaker Change: For example, we introduced a new console experience that helps make recommendations guiding customers to which products they should be using based on their desired use cases and outcomes.
Speaker Change: And our new OneSignUp streamlines the login process by having one login for a customer to access all of their Twilio accounts and products.
Khozema Shipchandler: In the medium term, product innovation will be an important growth lever as we deliver on our vision to unlock smarter, more personalized interactions for brands. In this quarter, we've started to see success with our newer, higher-margin software products. These are products that leverage AI, such as Verify and Voice Intelligence, as well as platform innovations that natively embed AI and machine learning, such as the traffic optimization engine and engagement, to drive greater deliverability and better customer engagement.
Speaker Change: In the medium term, product innovation will be an important growth lever as we deliver on our vision to unlock smarter, more personalized interactions for brands.
Speaker Change: In the quarter, we've started to see success with our newer, higher-margin software products.
Speaker Change: These are products that leverage AI, such as Verify and Voice Intelligence, as well as platform innovations that natively embed AI and machine learning, such as Traffic Optimization Engine and Engagement Suite.
Speaker Change: to drive greater deliverability and better customer engagement.
Khozema Shipchandler: These products are rapidly gaining adoption and can become meaningful growth drivers over time. For example, one customer, a leading mortgage lender, adopted both Voice and Verify in the quarter and expanded its messaging use. Twilio won this competitive cross-sell deal as our platform enabled the customer to have a single console with both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers. Since deploying Twilio, the company is already seeing a 38% increase in the SMS response rate and a 20% increase in banker productivity. More importantly, these products are gaining adoption because they are simple to use, trusted, and intelligent. Verify is a great example.
Speaker Change: These products are rapidly gaining adoption and can become meaningful growth drivers over time.
Speaker Change: One customer, a leading mortgage lender, adopted both Voice and Verify in the quarter and expanded their messaging usage.
Speaker Change: Twilio won this competitive cross-sell deal as our platform enabled the customer to have a single console.
Speaker Change: With both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers.
Speaker Change: Since deploying Twilio, the company is already seeing a 38% increase in SMS response rates.
Speaker Change: and a 20% increase in banker productivity.
Speaker Change: More importantly, these products are gaining adoption because they are simple to use, trusted, and intelligent.
Khozema Shipchandler: Not only is it growing quickly, but it is saving our customers millions of dollars by mitigating fraud at the source. And to continue to deliver better outcomes for our customers leveraging AI, our SMS pumping protection product went GA during the quarter, which can be enabled with one click and automatically detects and blocks fraudulent messages, a growing issue in certain international markets. We're continuing to deliver on our promise of natively integrating segment capabilities into our communications business.
Speaker Change: Verify is a great example. Not only is it growing quickly, it is saving our customers millions of dollars by mitigating fraud at the source.
Speaker Change: and to continue to deliver better outcomes for our customers leveraging AI
Speaker Change: Our SMS pumping protection products went GA during the quarter.
Speaker Change: which can be enabled with one click and automatically detects and blocks fraudulent messages, a growing issue in certain international markets.
Speaker Change: We're continuing to deliver on our promise of natively integrating segment capabilities into our communications business.
Khozema Shipchandler: This quarter, we released Personalized Virtual Agent into Private Beta, marking Twilio's second product that natively embeds segmentation in the communication. With Personalized Virtual Agent, our customers receive a truly personalized interactive voice response. Each caller receives a custom menu of options based on their recent interactions with the company, including purchase history, recent support inquiries, and responses to marketing emails, among others. The product combines voice, virtual agent with Google Dialogflow agent, studio, and unified profiles into one simple product that is guided with a wizard setup.
Speaker Change: This quarter, we released Personalized Virtual Agent into Private Beta, marking Twilio's second product that natively embeds Segment into communications.
Speaker Change: With Personalized Virtual Agent, our customers receive a truly personalized, interactive voice response.
Speaker Change: Each caller receives a custom menu of options based on the recent interactions with the company, purchase history, recent support inquiries, and responses to marketing emails, among others.
Speaker Change: The product combines voice, virtual agent with Google Dialogflow agent, studio and unified profiles into one simple product that is guided with a wizard setup.
Khozema Shipchandler: We're excited about this release as it marks the next chapter for how IBR is evolving in the world of AI. And lastly, Twilio's communications products continue to receive recognition. As we were named a leader in the Gartner Magic Quadrant for CPAS for the second year in a row, positioned highest for ability to execute, and ranked number one in four of six use cases in the Gartner Critical Capabilities Report. Twilio was also named a leader in IDC's Marketscape Worldwide Contact Center as a service.
Speaker Change: We're excited with this release as it marks the next chapter for how IVR is evolving in the world of AI.
Speaker Change: And lastly, Twilio's communications products continue to receive recognition.
Speaker Change: As we were named a leader in the Gartner Magic Quadrant for CPAS for the second year in a row, positioned highest for ability to execute,
Speaker Change: and ranked number one in four of six use cases in the Gartner Critical Capabilities Report.
Speaker Change: Twilio is also named a leader in IDC's Marketscape Worldwide Contact Center as a Service.
Khozema Shipchandler: Turning to our Twilio segment business, the Twilio segment delivered revenue of $75 million, up 3% year over year, as we continued to focus on delivering against the priorities that we outlined in our operational review in March. We made solid progress in improving customer time to value and executing on data warehouse interoperability. We also made significant improvements in our cost profile in Q2 and lowered our non-GAAP operating losses by 25% quarter over quarter. We also continue to focus on driving efficiencies in our go-to-market, which yielded an increase in sales productivity, and in Q2, over 40% of our new bookings were multi-year deals versus 17% in the prior year period.
Speaker Change: Turning to a Twilio segment business.
Speaker Change: Segment delivered revenue of $75 million, up 3% year-over-year, as we continued to focus on delivering against the priorities that we outlined in our operational review in March.
Speaker Change: We made solid progress in improving customer time-to-value and executing on data warehouse interoperability.
Speaker Change: We also made significant improvements in our cost profile in Q2 and lowered our non-GAAP operating losses by 25% quarter over quarter.
Speaker Change: We also continued to focus on driving efficiencies in our go-to-market, which yielded an increase in sales productivity, and in Q2, over 40% of our new bookings were multi-year deals versus 17% in the prior year period.
Khozema Shipchandler: A key win for Segment included our largest deal of the quarter, a seven-figure deal with IBM. On the product front, we delivered on new capabilities to further enhance our interoperability with data platforms and data warehouses. In Q2, we released Datagraph and linked audiences into public beta, which seamlessly integrate with data warehouses, including Databricks and Snowflake. With linked audiences, marketers can now activate centralized data in the warehouse and combine it with real-time events and Predictive AI Traits to Generate Unified Customer Profiles and Audience Cohorts to deliver targeted, personalized experiences.
Speaker Change: A key win for Segment included our largest deal of the quarter, a seven-figure deal with IBM.
Speaker Change: On the product front, we delivered on new capabilities to further enhance our interoperability with data platforms and data warehouses.
Speaker Change: In Q2, we released Datagraph and linked audiences into public beta, which seamlessly integrate with data warehouses, including Databricks and Snowflake.
Speaker Change: With linked audiences, marketers can now activate centralized data in the warehouse and combine it with real-time events,
Speaker Change: and Predictive AI Traits to generate unified customer profiles and audience cohorts to deliver targeted personalized experiences.
Khozema Shipchandler: We've gotten a great response, and we're excited to have customers like LegalZoom and TradeMe deploy and realize the benefits and efficiencies. We are also improving time to value for customers. During the quarter, our use case, in-product onboarding, went live, guiding customers through a customized onboarding experience focused on their specific business goals. Additionally, our CDP co-pilot is reducing instrumentation and development.
Speaker Change: We've gotten a great response, and we're excited to have customers like you.
Speaker Change: LegalZoom and TradeMe deploy and realize the benefits and efficiencies.
Speaker Change: We are also improving time-to-value for customers.
Speaker Change: During the quarter, our use case in-product onboarding went live, guiding customers through a customized onboarding experience focused on their specific business goals.
Speaker Change: Additionally, our CDP co-pilot is reducing instrumentation and development time.
Khozema Shipchandler: Customers can now deploy and get value from segments four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers. Overall, I'm very pleased with the progress we've made so far this year. We're continuing to deliver durable, profitable growth while driving strong free cash flow. And we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over the next few quarters. I'm incredibly energized about our opportunity to become the leading customer engagement platform, combining communications, contextual data, and AI to deliver intelligent engagement and outsized outcomes for our customers, and I remain very confident in our ability to deliver accelerated growth and continued And with that, I'll turn it over to Aidan. Thank you, Khozema. And good afternoon, everyone.
Speaker Change: Customers can now deploy and get value from segments four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers.
Speaker Change: Overall, I'm very pleased with the progress we've made so far this year. We're continuing to deliver durable, profitable growth while driving strong free cash flow, and we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over time.
Speaker Change: I'm incredibly energized about our opportunity to become the leading customer engagement platform, combining communications, contextual data, and AI to deliver intelligent engagement and outsized outcomes for our customers.
Speaker Change: And, I remain very confident in our ability to deliver accelerated growth and continued improvements in our free cash flow profile over the coming quarters.
Aidan Viggiano: Jumping into our results, total Q2 revenue was $1.083 billion, up 4% reported and 7% organically year over year. Communications revenue was $1.007 billion, up 4% reported and 7% organically year over year. And segment revenue was $75 million, up 3% year-over-year. Our Q2 revenue growth was driven by solid performance in messaging, acceleration in email growth, as well as continued strength in our ISV business. We continue to see signs of growth stabilization in our communications business, and we saw modest sequential improvements in international as well.
Speaker Change: And with that, I'll turn it over to Aidan.
Aidan Viggiano: Thank you, Khozema, and good afternoon everyone. Jumping into our results, total Q2 revenue was $1.083 billion, up 4% reported and 7% organically year-over-year.
Aidan Viggiano: Communications revenue was $1.007 billion, up 4% reported and 7% organically year-over-year, and segment revenue was $75 million, up 3% year-over-year.
Speaker Change: Our Q2 revenue growth was driven by solid performance in messaging, acceleration in email growth, as well as continued strength in our ISD business.
Speaker Change: We continue to see signs of growth stabilization in our communications business, and we saw modest sequential improvements in international as well.
Aidan Viggiano: Company organic revenue growth and communications organic revenue growth were both roughly 100 basis points lower due to the sunsetting of the software component of our Zipwit business. We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year. Our Q2 dollar-based net expansion rate was 102%.
Speaker Change: Company organic revenue growth and communications organic revenue growth were both roughly a hundred basis points lower due to the sun setting of the software component of our Zipwit business.
Speaker Change: We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year.