Q2 2025 Twilio Inc Earnings Call
Good day and thank you for standing by.
Welcome to the twilio second quarter. 20125 earnings conference call. 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 your session. You will need to press star 1, 1 on your telephone. You will then hear an automated message. Advising your hand is raised to withdraw your question. Please press star 1 1 again.
Please be advised that today's conference is being recorded, I would now like to hand the conference over to your first Speaker today, Brian vanaman.
Senior vice president of investor relations in corporate development. Please go ahead.
Good afternoon, everyone and thank you for joining us for twilio. Second quarter 2025 earnings conference call.
Joining me today are Kazama Ship Chandler, chief executive officer, Aiden, Vigo, Chief Financial Officer and Thomas Wyatt, Chief Revenue officer.
As a reminder, we will disclose non-gaap Financial measures on this call definitions. And reconciliations between our gaap and non-gaap results can be found in our earnings presentation posted, on our IR website at investors.gov. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements, or subject to known, and unknown risks, and uncertainties, that could cause actual results to differ materially from those descriptions.
Described many of those risks and uncertainties are described in our SEC filings including our most recent form 10K and our forthcoming form. Tim Q
Forward-looking statements represent our beliefs and assumptions. Only, as of the date, such statements are made, we disclaim any obligation to update any forward-looking statements, except as required by law. And with that, I'll hand it over to Jose, and Aiden who will discuss our Q2 results, and will, then open the call for Q&A.
Thank you, Brian. Good afternoon, everyone. And thank you for joining us today.
Twilio had a strong Q2 reaching over 1.2 billion in revenue and achieving another quarter of double-digit Revenue growth in year-over-year growth acceleration.
We also delivered, another record quarter of both non-gaap income from operations and free cash flow.
And Q2 marked an important Milestone as our segment business delivered. Non-gaap income from operations.
For the first time, surpassing our Q2 Break Even Target that we established early last year.
our strong performance, this quarter reflects our continued progress in driving greater operating efficiencies
Are focused product LED Innovation and solid commercial execution.
In Q2, we delivered a fourth consecutive quarter of accelerating messaging growth, as well as double digit voice growth.
We are demonstrating not just our market-leading scale in our core Communications Market, but also our pace of innovation which is allowing us to take share.
This is also evident across our go to market levers as self-serve, isvs International and communication software add-ons. Each delivered double-digit Revenue growth,
And our multi-product customer count. Also grew double digits.
During the quarter, we had several notable wins including Centerfield Henry Schein 1 JustFab, Manas AI Nooks AI, the Phoenix Suns and post.
We also had another great quarter of large deal, activity, with isv and Technology customers. In fact, in Communications the number of large deals, closed of dollars or more increased 57% year-over-year.
This momentum is reflected in our dollar-based net expansion rate of 108% in Q2 our best rate in over 2 years.
In self-serve, our voice channel, was a bright spot, driven by a variety of factors. Notably, The Surge invoice, AI startups, who are building on twilio?
In may we held our annual user conference signal, bringing together. Nearly a thousand attendees in San Francisco for a preview of our next Generation customer engagement platform.
During the event, I had the opportunity to engage with many of our customers and heard countless stories of how twilio continues to bring more Roi to businesses.
Signing Communications Plus contextual data plus AI through our product Innovations and platform is driving meaningful value for brands.
And that twilio is increasingly becoming the infrastructure layer for customer interactions.
twilio is not just a company of and for Builders but a company that our customers can build their businesses on for years to come as they navigate Ai and every other technological Evolution they will encounter
At signal, we also showcase new products designed to help Brands create modern intelligent, customer experiences, all built on the twilio platform and tailored to meet customers wherever they are in their Journey.
We announced the general availability of conversation relay which empowers developers to create robust natural voice AI agents using their choice of llm.
And more importantly is the first step toward realizing our vision of powering context aware virtual agents across every twilio conversation Channel.
conversation relay is generating a lot of customer interest and during its first quarter of General availability, we completed nearly 1 million calls,
as an example, in Q2, we signed a conversation relay deal with a leading fintech company that will leverage conversation relay to automate their 3, most common customer care requests
Credit limit, inquiries card, tracking and installment payments.
Within 2 weeks, they validated the solution and began scaling to production, demonstrating, both the speed and impact of twilio, AI powered automation.
We're powering Innovation for both Enterprises and the newest AI startups. With our scalable and trusted Communications infrastructure, orchestration and observability.
True to our Roots. These features are as extensible and configurable as any other part of the twilio stack, something customers value. When much of the conversational AI ecosystem is focused on blackbox Solutions, vendor lock in and extensive Professional Services Integrations.
We also announced that conversational intelligence already generally available for voice now supports messaging conversations in private beta.
And it has already seen an 86% increase in account usage year-over-year.
And messaging for human and AI agents, giving Brands a cross channel view of the customer.
It highlights the value of previously, inaccessible conversational and contextual data.
Conversational intelligence also includes built-in AI agent. Observability allowing Brands to analyze AI agent interactions customized call scoring generate competitive intelligence and detect customer intent through natural language understanding.
And we've also continued to innovate across our trusted core channels a few weeks ago, WhatsApp business calling via programmable voice became generally available enabling businesses to engage directly with consumers on WhatsApp through a single seamless conversation.
whether via messaging or voice,
We're also seeing momentum with RCS adoption currently available in select markets, with a full GA in the coming months.
RCS is already delivering strong results. Transforming standard notifications into trusted and branded Communications.
1 of twilio longtime customers, fresha. A leading booking platform for the beauty and wellness industry. That facilitates over 700,000 appointments daily adopted RCS with no code changes and saw an immediate measurable impact.
Confirmations and a 7% uplift in customer reviews.
with twilio segment, we announced event triggered Journeys at signal and the feature officially went live, just a few weeks ago,
Now Journeys will create Rich, contextual payloads, that combine information from not only the triggering events, but also from the data stored in the warehouse and everything in the segment, customer profile.
For example, when an online Shopper has abandoned their cart a business, can see exactly which items are in the cart and all their key details, like name price, size, color image. And if that customer is a loyalty member with rewards points, they can use towards their purchase.
With event trigger. Journeys twilio segment creates a complete view of the customer allowing Brands to respond, dynamically to moments that matter. Whether it's an abandoned cart a missed form submission or a key onboarding milestone.
And lastly, at signal, we welcome, Microsoft's CEO, Sacha Nadella, as part of our keynote to announced a multi-year, strategic partnership between twilio and Microsoft.
The collaboration unlocks the potential for more than 10 million twilio, developers and thousands of Microsoft managed customers to build the future of conversational AI.
All of these enhanced capabilities are Paramount for our customers.
Twilio, 2025 state of customer engagement report. Recently found that 88% of consumers are more likely to buy when engagement is personalized,
But 44% of Brands struggle with executing at this level.
This data illustrates the magnitude of the opportunity as companies are still figuring out how to evolve their customer experiences, especially given the opportunities presented by generative AI.
Twilio platform delivers the set of tools and infrastructure. Businesses need to modernize and help Brands ultimately deliver personalization at scale to drive more Roi.
Our commitment to delivering enhanced product Innovation and customer value. Is also continuing to get recognition and reinforces the power of the twilio platform and our leadership in the market.
Recently Gartner named twilio, a leader in the cpass magic quadrant for the third consecutive year. And number 1 in 3 of the 5 use cases in the cpass critical capabilities report.
And Omnia named twilio a cpass universe leader.
I'm very pleased with the hard work of our team in today's results. Underscore the strength of the twilio platform and the progress we've made as a company.
And now I'd like to turn it over to Aiden who will walk you through our financial results.
Thank you, cusma and good afternoon everyone.
Twilio had a strong second quarter, delivering our fourth consecutive quarter of double-digit revenue growth and year-over-year growth acceleration.
For Q2, we generated record revenue of 1.228 billion dollars up, 13% year-over-year both on a reported basis and an organic basis.
We also generated record non-gaap income from operations of 221 million and free cash flow of 263 million.
Revenue in our Communications business was 1.153 billion for the quarter up 14% year-over-year.
We continued to drive accelerated levels of growth as we execute against a focus set of go to market initiatives across isc's, self-serve crosselle and international expansion.
As COA mentioned, messaging Revenue growth accelerated for the fourth consecutive quarter while we generated double digit voice Revenue growth for the first time in 2 years.
Strong uptake among AI startups in our self-serve business contributed to the acceleration in voice revenue growth.
In early June, Verizon raised its top messaging fee rate, which contributed $6 million in incremental pass-through to our reported Communications and total revenue for the quarter.
We exclude the revenue from these incremental a top carrier fees, when calculating our organic Revenue growth until we have lacked the comparative period.
As a reminder, we passed BC through at 0% gross margin.
Segment revenue for the quarter was 75 million flat year-over-year.
Percent reflecting the improving growth Trends we've seen in our Communications business, over the last several quarters.
Our DNA rate for communications was 109% and the dbn rate for Segment was 95%.
Pass through revenue from incremental, carrier fees, contributed roughly 60 basis points to both Total and Communications dbn in the quarter.
We delivered non-gaap growth. Profit of 623 million up 8% year-over-year.
that a non-gaap gross margin of 50.7% down, 260 basis, points, year-over-year, and 60 basis points, quarter of a quarter,
As COA mentioned, we are taking share in our core Communications market led by accelerating messaging and voice growth.
We saw our messaging Revenue, mix increased by 260 basis points year-over-year, which was the primary driver of our gross margin decline in Q2.
The balance of the gross margin decline was driven by the 6er fees and FX given our International carrier costs are paid in local currency.
Our Revenue was not materially impacted by FX as we Bill primarily in US dollars.
We're taking steps to stabilize and improve growth, markets, including both price and cost actions.
We have announced price increases in both messaging and voice in the us. And we're also investing at the platform level to ensure we're delivering our services efficiently.
Notably, we continue to generate strong growth in both non-gaap income from operations and free cash flow.
Excluding the impact of carrier fees. We would expect our pricing and cost actions as well as our continued growth. In our higher margin products to help stabilize gross margins over the near term.
Non-gaap gross margins for communications with 49.2% and non-gaap gross, margins for segments or 74.3%.
Non-gaap income from operations. Came in ahead of expectations at a record. 221 million up to 26% year-over-year, driven by strong Revenue growth in ongoing cost discipline.
Our non-gaap operating margin of 18% was up, 180 basis points, year-over-year and down. 20 basis points, quarter over quarter.
the sequential decline was due to anticipated cost, incurred from our annual Merit, increases along with expenses for our signal conference
In addition, we generated $37 million in GAAP income from operations. This marks our third consecutive quarter of GAAP operating profitability.
Non-gaap income from operations for communications was 281 million.
Non-gaap income from operations, for Segment was $6 million. Which exceeded our break. Even Target originally introduced in March 2024.
Earlier this year, we realigned our business unit structure into a functional support model and we continue to integrate segment with our Communications capabilities. To deliver 1, trust smart, and integrated platform.
Because of this, beginning in the third quarter, we no longer plan to disclose our results by business unit.
Stock-based compensation as a percentage of Revenue was 12.1% up 30 basis points quarter over quarter and down 150 basis points year-over-year.
As we noted on our q1 earnings call, the modest sequential increase in stock-based, compensation is due to the timing of our annual refresh Brands during the second quarter.
We generated record free cash flow of 263 million in the quarter.
Additionally, we purchased 177 million of shares in the second quarter. Bringing our year-to-date share repurchases to 307 million through the end of Q2.
Moving to guidance.
For Q3 we're initiating a revenue Target of 1.245 billion to 1.255. Billion. Representing 8 to 9% organic growth and 10 to 11% reported growth.
Seriously and we're initiating a reported Revenue growth range of 10 to 11% which includes the contribution from incremental increases to carrier fees.
Our revenue guidance assumes $20 million in pass-through revenue from incremental carrier fees in both Q3 and Q4.
Turning to our profit outlook for Q3. We expect non-gaap income from operations of 205 million to 215 million.
We are maintaining our full year non-gaap income from operations, range of 850 to 875 million as we're taking the opportunity to make some accelerated R&D investments in response to strong customer demand, invoice RCS, and our AI offerings.
Based on our strong cash generation during the first half of the Year, we're raising our full year. Free cash flow guidance, to a range of 875 to 900 million up from 850 to 8705 million previously.
I'm very pleased with the accelerated Revenue growth. We delivered in the second quarter as well as our ongoing cost discipline, that is driving strong profitability and free cash flow.
We had a strong first half of the year, and we will continue to focus on what we can control as we seek to drive durable revenue growth and strong operating profit and free cash flow generation throughout 2025.
And with that we'll now open it up to questions.
Thank you. At this time. We will conduct the question and answer session. As a reminder, to ask a question, you will need for a star 1, 1 on your telephone and wait for your name to be announced to withdraw your question. Please, press star 1 1, again please, stand by while we compile the Q&A roster.
our first question comes from meta Marshall of Morgan Stanley, your line is now open
Great, thanks. This is, uh, Jamie on Forma, I guess. Maybe just to start off. You know, can you speak to the traction of of of where you're seeing the most traction with, um, isvs?
I I uh this is Thomas Wyatt. So just a comment on that we're seeing it. Across verticals Financial Services, the healthcare Professional Services. And what we're seeing is the use cases often start with messaging and from there adding second and third channels, whether it be Voice or now more importantly with RCS and by the combination of that, the twilio platform providing the orchestration capabilities across that with some of our newer products. Like conversational insights allows our
Isv customers to get a true representation of the level of Engagement, uh, consumer has with its brand. So we're really encouraged by our isv girls that continues to grow above the company averages,
Got it. Thanks. And then, just a quick follow-up, is there any impact from the, uh, price increase in the quarter?
Not Material know.
Great. Thanks again, I'll jump back from you.
Thank you.
Our next question comes from Jim fish of Piper Sandler. Your line is now, open.
Yeah, thanks for the question, guys. I I was going to start with a different 1, but just giving we brought up the price increase here, you you implemented it here in the US and the messaging side just um, can you walk us through why? Now for a price increase and just making sure um that this wasn't tied to, you know, the Verizon uh, ATP increase. And that this is actually incremental to that. So I guess why? Now and and making sure this isn't just, you know, a free race because your costs are getting raised as well.
Hey Jim, I'll start and then I'll hand it over to Thomas. I want to be clear that, um, the price increase that we did in the US. Uh, for messaging was not tied to the 8 to py increase. I came through from Verizon. Those 2, things are separate and distinct. Um, so just wanted to make that clear. I'll hand it over to Thomas to talk about timing and why we felt, uh, it was prudent to do so. Yeah, and so the
Great thing with this price. Uh particularly North America for a messaging business, really reflects mainly on our self-service business which is growing very fast and uh, a lot, you know, we think we have pricing power in that capability. We also think the pricing does help us with some of our Enterprise deals as well over time, but they're on a bit different renewal contract timeline. So we'll it'll be sort of a modest increase over time for them.
Generally.
We're seeing uh, broad strength coming in from our self-service Channel. There's been a number of innovations that we've made in terms of reducing the friction of the onboarding and the setup for our self-service, which is really dramatically increased the conversion rate of free users into paid users that upgrade. Um, in addition to that, we uh, introduced a new service for our email. Uh, customers only that moves it from free to more of a trial, free trial type service and that's added some additional. Uh, but this is 1 of the strongest quarters we've had in years related to new customer acquisition. And we really had a strong new business in our Enterprise segment, uh, a quarter as well.
Thank you. 1 moment for our next question.
Our next question comes from Michael Turan of Wells Fargo, Securities your line is open.
Hey, great. Thanks very much. Appreciate you taking the questions. I was just I was just hoping, I mean, you gave a lot of useful breadcrumbs at the investor day. Um a while back on some of these aspects but just be curious to get your updated view around the durability and drivers of of growth profile, you're delivering your guiding for double digit organic growth at the high end for the full year now and then the commentary around actions. You're taking to deliver stabilization of the gross margin side. Are those fairly immediate
For us to consider when we're kind of updating models from here, going forward, is there time to impact for some of those for us to consider? Um, as we're rolling it all forward. Thanks very much.
Sure, hey, Michael. This is Kosama. I'll, I'll take the the both answers and Aiden and Thomas can add to it as as they want. I'd say on the growth side, like we feel pretty good about it. Um, growth has been pretty durable across a number of different Industries. Obviously, it's going to be a little bit harder in the back half just because of the Compares. But I would say growth feels durable or obviously not guiding beyond the current period, but we felt pretty good about what we've experienced in the first half. I think we've seen resilience in a number of different areas. So, like there's no 1 Thing particularly to point to, in terms of where that strength has come from, um, it's industry based its customer base, its geo-based. And so that all feels pretty good. Um, in terms of gross margins is Aiden pointed to, in, in the context of the prepared remarks, we obviously are seeing a little bit of a mixed Dynamic there and and FX clipped us as well. And then of course, you've got the the Verizon fee thing. But more to your question, we are taking some action.
Um, let me start on the pricing side. We we already talked about some of the price increases that we've undertaken. Um, as Thomas said, a lot of that will be geared towards and what we experienced on the self-serve side. And so, to the extent that we have a lot more self-serve ads, you'd certainly see that faster, uh, with respect to other customers, it's going to happen more in the context of, um, their renewal cycles and stuff like that. And so that'll happen more modestly over time. I would say, uh, and then on the cost side, you know, there's also a number of actions that we're taking there as well. I would say they largely have to do with um, Optum optimization of our, our platform and and the way that the costs show up there so that we're using it more efficiently. Um, but I do think those things as well as the fact that you know we've got a number of higher margin, uh gross margin products that are growing very very nicely, all of that will allow us to in
Kind of the near-term stabilized gross margins but over you know time for that to inflict up a bit.
Maybe the 1 thing I'll add Michael just as it relates to the fees. So we had 1 month of an impact of the new or the increase, Verizon fees in Q2.
We will have a full quarter effect of that, in Q3 and Q4. So all else being equal, we would expect it to be about 20 million dollars of an impact in those quarters and roughly 50 basis, points of um a margin impact uh associated with that. But again importantly as it relates to those fees, we passed them through at 0% gross margin so it kind of grosses up our Revenue doesn't impact gross profit dollars and it has no impact on our ability to to generate our profit dollars or free cash flow dollars going forward.
Thank you. 1 moment for our next question.
Our next question comes from Mark Murphy of JP Morgan. Your line is now open
Thank you so much. Um,
Example with the uh, gbt 5, um, you know, demo session.
So, you know, since they are the ones handling, all the voice synthesis and the speech parts of the equation. Can you just help us understand which parts of this voice? Uh AI wave are. Do those companies want twilio to handle? For instance is it? The are they mostly want you to handle a phone call or they asking you to stream the audio? You know you know to and from the bot or um you know, routing calls. I mean what what what what is it that they're relying upon twilio 4?
Yeah, good question mark. So it's it's the full gamut and so it really depends a lot on the customer and and their specific use case. So, that's sort of the, the bare metal version. We're providing the voice infrastructure they'll write on our rails. We'll provide the calling capabilities and they'll provide some of the Intelligence on top of that. In the most extreme example, on the other side of it. You'd have like our conversation relay product, which incorporates, uh the The Voice activities, all of the voice intelligence that goes with that, the recording capability, the context awareness. Um and then you've got a lot of different things in between. For example, we, we talked about conversational intelligence that allows us to capture contacts from the different calls and so mark, it depends on the customer. Really. I would say, you know, for some of the, you know, uh kind of more AI forward,
AI native companies. I would say it tends to be more The Voice infrastructure side. I think when it tends to be more uh Enterprises or let's say more digitally native companies that are perhaps not AI based it t to be our Fuller stack but it really runs in between um no matter what. Obviously we're incredibly excited about taking on those volumes voice. Overall is gross margin of creative for us which I think is attractive and getting it back to double digits. I think is really important.
Okay. Thank you, man. And as a quick, um, follow up maybe, maybe for Thomas or, or Aiden, I did notice in the customer when that RCS is, is be mentioned twice. And, you know, I understand a lot of it's probably earlier or in a in a pilot phase. But are you seeing anything there? That would cause you to think that uh messaging customers are going to expand toward RCS, you know, maybe a little faster than you expected.
We're definitely encouraged with the trends that we've seen around RCS adoption, particularly this past quarter. A lot of our ISV customers are beginning to add a bit of their percentage of their traffic over to the RCS channel, and they're getting really excellent results. We talked about a little bit of that in the prepared remarks with, uh, with Fresa. So, with RCS, I think we're still in the early innings, but we believe that the holiday season coming up will be a really great proof point for RCS because the deliverability, the read receipts, and the branded capabilities stand out compared to SMS.
Thank you. Thank you.
Our next question comes from Taylor mcginness of UBS, your line is now open.
Yeah. Hi thanks so much for taking my question, just maybe on the revenue outlook for this year. So if I look at the implied organic guide, it looks like at the high end, it implies growth around 7% for 4 to you compared to the 8 to 9% and 3 Q. I know that there's, you know, a bit of a tougher compared as we get into 4 q so I guess anything to flag right? You know, in terms of potential opportunities, right? That might be incremental and poor key versus 3 q and then how to think, you know about that um upper compare and seasonality as well, too. Thanks so much.
Hey Taylor. Uh yeah, I think you hit on the key point there. So I'd say you know we're really pleased with how we started the year. We've delivered 4, consecutive quarters of accelerating double digit growth. That feels really good. I think, as we talked about, it's pretty broad-based in terms of where we're seeing it come from. In terms of the go to market channels in terms of the products in particular messaging and voice in terms of the regions Etc. Um, so in terms of that, we think about the the second half of the year, we do have tougher comparisons, um, as a reminder
um, profitable growth over the course of this year and into next year,
Great, thank you so much.
Thank you.
Our next question comes from Alex Zukin of Wolf Research. Your line is open.
Yeah. Hey guys. Um, thanks for taking the question. I just maybe a a quick 2-part for me uh because they might maybe on voice. First, kind of, how did it uh, perform relative to your expectations in the quarter when as we think about that, uh, Channel and, and the volume, uh, that you're seeing from it kind of how how do we think about the, the aspiration for, for how it can contribute to to kind of both, uh, Topline uh growth uh, over the course of maybe the next 2 quarters but even beyond that. And then maybe on the gross margin side. You we're talking about kind of a a sustainability or stability if you will if we just do kind of like a almost non-gaap adjustment for gross margins uh with from an fx and from an A to perspective, what was the actual kind of sequential degradation on that basis? And how do we think about the kind of longer trajectory when you start layering in Tailwind from from voice?
Yeah, let me start on the first and I'll let Aiden give you some of the math on on the gross margin adjustment as it relates to voice. I would say it's performing really well. I mean, I, I think, you know, we've talked a little bit about our expectations, about a voice Renaissance, particularly behind a lot of the voice, AI use cases that that you're seeing. And I think, you know, the, the early indication is, is that we're starting to see some of that. Um, a lot of the voice volumes that we're seeing are really being built on, um, demand from voice, AI type customers. But they're also coming from a lot of other customers, which is also encouraging. And then, you know, we've launched a number of products recently, as well, like conversation relay conversation intelligence. That also helped um add to the mix in terms of like why voices and important Channel and how it's being used. And then obviously, just as it relates to kind of the broader environment. You know, voice is being heavily. Utilized in a variety of uh, AI based use cases. And so I
I think that gives us a lot of encouragement, in terms of the way that, uh, it's been performing the way that it contributes. I think the hard thing for us is obviously that, the, the messaging business is still extremely large. It tends to be, you know, well, it has been forever. The largest piece of the business and it continues to grow at very, very fast rates. And so the fact that, you know, that growth relative to any product, eclipses the growth rate of any other it's always going to
Impact, our margin mix. Um, but you know, all the same, the given the, the performance invoice, that'll have some uplift. And over time, I think it'll start contributing
Hey Alex. I'll I'll comment a bit and actually just because amas point on the messaging mix. We actually included our p, a page in our presentation. That shows messaging kind of mix as a percentage of total uh, twilio revenue. And you can see how that has increased as that business has grown faster than the overall uh company. And so you can see that that would have a negative mix effect, but to enter your your question which was sequentially. How do we think about non-gaap? Uh gross margins adjusting for fees and FX? It would have been roughly flat uh quarter over quarter relative to q1 so
The fee, the fees were roughly 30 basis points of a headwind in Q2 and the balance. Um, there was some mix in there as well, but actually FX made up most of the balance so roughly flat uh, quarter over quarter.
Well, that's the new up, guys. Thank you.
Thank you, thanks.
Our next question comes from Joshua, Riley of nem. Your line is open.
All right, thanks for taking my questions. Uh, how are you thinking about the balance of market share growth for messaging and international markets? Uh, relative to the pricing considerations there and uh, the lower gross margin versus the US business and how much did uh, maybe outperformance and international messaging? Uh, impact the Q2 messaging growth margin
Uh, maybe I'll margin piece. Well, we don't break out messaging uh in particular. But the company, let me just give you a little bit more color on gross margin. So for the year uh, year-over-year in Q2 we were down
Primarily kind of what drove the, the grind. The gross margin decline year over year and I'll uh, kick back over to Thomas to talk about the international. Yeah. Just from a go to market perspective, in general, we're looking at a messaging of voice and trying to consider the full balance because in practice a lot of our customers, we're really trying to drive more of a cross-sell multi-product type of adoption and oftentimes customers land with messaging, and then add voice. And we've seen that acceleration particularly in the last couple quarters, just taking, you know, self-service globally, for example, it is voice has been the fastest Channel growth for us. And and as we talked about in investor day, you know, 63% of our, uh, Enterprise customers started in Voice or sorry started in self-service. So we see that Trend continuing, and we want to grow market, share as much as possible to continue to build that platform layer and deliver orchestration. And so, sometimes it's easier to land internationally and messaging and then add voice and other channels, uh, as we go, and we've seen really good growth in international in the last couple quarters.
Awesome. And then just a quick follow-up on the uh, product development and AI.
How are you prioritizing product Investments, uh, relative to the efficiency that you need for the, uh, 2027 Financial targets that you put out there?
Just to make sure I understand your question. You're asking how are we prioritizing R&D Investments, as it relates to our op margin targets. IE Are we more efficient on that line?
Yes, exactly. Just given that there's all these incremental opportunities for AI product development, was that factored into the uh, Financial targets.
For 207. Yeah, I mean I I say by and large yes. I mean obviously I I we we have a framework out there. I'm I'm I'm not going to necessarily provide updates on that 1 where the other. But I I think what what we talked about in the context of the current call is that in the short term, we saw an opportunity to put a little bit more emphasis on R&D dollars to be able to accelerate our growth. I think the results of which have been in the current year that we've been able to take up our, uh, cash flow and profitability guidance like pretty consistently over a period of time. Obviously Revenue has gone up as well. And so I think so long as the, the Investments that we make support our ongoing ability to generate free cash flow. We'll look at that balance very carefully, but I I don't see anything that's in there. That gives me cause for concern.
Awesome. Thank you.
Thank you.
Our next question comes from CT panigrahi.
Of Missoula. Your line is now open.
Oh, great. Uh, thank you. Uh, cosima. I have a high level question on AI. Uh, if you look at 20 uh, 2021 and 22, you know, the opportunity from Co for 2 years just like a billion dollar Revenue. You you are adding every year. But when you look at agentic AI or even voice opportunity, all that how big that could be. You know, and over what time frame do you think this is more like multiple of that opportunity but over a long longer time frame or any color would be helpful.
I think that um it's it's hard for me to kind of put like dollar figures to it specifically but I think what it is is going to be materially Tam expansive. Um I think that every single AI capability that gets added, uh it's beneficial to to twilio fundamentally. I I'll start sort of at the bottom. I think every 1 of these companies that we're seeing, uh, for the most part, like they attach themselves to twilio, just given our brand, uh, our performance and we're a very attractive entry point is Thomas alluded to a moment ago in
Frustrating contacts and we're allowing our customers to be able to really personalize interactions. And so just given the gamut of opportunities that I see, I think that it is really Tam expansive and you know, over time it'll add material dollars to the Top Line.
Um, that's a helpful color and then a quick follow-up. Your voice is around, 12% of Revenue. But if you think of sip trunking, how big is that of of the voice business?
Yeah, we don't give the breakdown there. Um, you know, we give the the kind of breakdown of of voice periodically, voice infrastructure tends to be the contributor. And obviously, it's driving. The margins of voice and so you can take some signal from that, but we don't provide a breakdown beyond that.
All right. Thank you.
Thank you.
Our next question comes from Arjun, Bhatia of William Blair. Your line is now open.
Yes, perfect. Um, thank you so much. Uh, I I think I um, the incremental R&D Investments um, certainly makes sense, right? Especially if you're seeing
Traction. I'm I'm curious though like when if you think about just breaking it down of where exactly those go is that just incremental Engineers is that some infrastructure and you know what what do you think is kind of adds
Um, from a product platform perspective that um that you don't have today.
Well, I think it's going to be predominantly an engineering. I mean, obviously, we're all experiencing this huge AI opportunity that that we spoke of, uh, just a moment ago and and, and answered some of the other questions. But I think, you know, the, the customer reactions that we got at our conference, our signal conference in the US or signal conference in Brazil. I think really speak to, um, the size of the opportunity that our customers are talking to us about. And so, you know, this is kind of a 1, in a generation technology Paradigm and you don't want to lose the step, obviously, when these things are happening, we're not going to make irresponsible Investments, we're going to continue to generate strong, operating profit dollars, strong cash flow. But I think when opportunities like this come along especially that are perhaps once in a generation it is important to make sure that you stay ahead of them so that you can capture the fullness of the opportunity. And what we're doing is not more complicated than that. And I, you know, again, we're going to make responsible Investments but it's really behind AI.
And it's going to be predominantly an engineering. If I could just add to that because Emma just from a customer's perspective, they're really pushing us. Uh continued acceleration around, RCS and voice AI capabilities and we're just seeing such a strong demand for that that any additional acceleration in the road map will benefit us over time.
Okay. Uh, perfect understood.
Um, and then, you know, one of the other things that kind of, um,
stuck out from, from from signal. I think was the just the integration of customer profiles from segment into the comps business along with the, the, the rest of your technology and, and, um, any idea of some kind of use stats on relay and and, um, uh, conversational intelligence earlier, but I'm curious. How customers are responding to that integration of of profiles is that something they're already taking advantage of? Is that something that's still up to come? And and how might it kind of enrich the broader Topix platform.
Yeah, I mean, Thomas and I can both speak to it. I I I think from my perspective, every customer conversation I've had since
The signal event that we had in the US, is probably started with a conversation about conversation relay, that's customers asking about it. Not me pitching it. Um, and so I'd say, that's pretty encouraging in terms of the, the kinds of things that they want to be able to do with our stack. Um, that is by far, you know, the most integrated version that, that, that we've got and it's kind of the the most fully featured uh capability that
Example of the Twilio architecture of being able to have a platform with multiple channels and driving personalization from segments across every channel. We think that's a unique value proposition that our customers are loving.
All right, perfect. Thank you so much.
Thank you.
Our next question comes from Patrick Walravens of Citizens Bank, your line is open.
Oh great. Thank you so much and congratulations. You guys so josia. It's been almost 5 years since twilio acquired segment. Um,
and I just I just thought you know, since you're not going to uh break it out anymore, just maybe we could do just sort of a
A, how did the evolution of this space impact this business? I mean, is it just that that um the CD Park CDP Market really shifted towards?
Data platforms, like snowflakes and Snowflake and data bricks. Or was it something else? What what what happened to that space?
Well, I think the original thesis for us when we bought Segment was that more intelligent communications were going to be the future of this company. And so I think, you know, putting aside some of the other developments that have happened in the broader CDP landscape, which are frankly in some ways less the focus for us, the opportunity to be able to drive intelligent conversations, intelligent communications, and highly personalized interactions between ...
Our customers and consumers like that was always the goal when we bought the company, and I think we're really starting to see the fruition of, you know, that original strategy. You know, we've launched a number of different products that integrate the 2 capability natively in, in singular apis, I think that's really exciting. It makes it easier for customers to adopt obviously. And then every quarter, we've added increasingly richer capabilities. So that our customers in the context of communication can use, contextual data to be able to derive, you know, richer and richer understanding of what their consumers are doing, uh, to be able to drive higher personalization. So I'd say, again, putting aside what's happened in sort of the broader CDP, the, the strategy of the company had been to fundamentally integrate a a, a CDP into the Communications business and that's what we've done. And, and I think based on the traction that we're seeing with it, uh, that's really exciting.
Awesome. Right. And then Aidan, if I could ask a follow-up, you commented in your prepared remarks that, um, for the gross margins, we are investing at the platform level to ensure we're delivering our services efficiently, so that caught my attention. What are those investments?
Yeah, let me give you an example. So for for um, our email platform, for example, or email product, we're in the process of migrating off of Legacy data centers to, uh, cloud. And so that takes a little bit of time. You know, that probably takes several quarters. And, and there's a period of time in which you have, uh, double bubble of cost. We did this with segments actually in in 2024, if you recall. And so we're in the process of doing the same thing for email, um, again a little bit of of cost and margin headwind in the short term, but it's the right long term. So that's an example of something that would fall into that bucket. The other things we're doing like on the messaging side.
You know, we're we're looking to establish, you know, more direct connections. That's something that we're kind of continuously doing as we operate around the world, we're also leveraging our bar balance sheet, where it makes sense to do so, uh, in terms of prepaying, carriers to secure better pricing. So, a number of different things, but that just gives you, uh, some examples.
Pet awesome. Thank you both.
Thank you.
Our next question comes from Jackson, ER of keybanc capital markets your line is now open.
Great. Uh, thanks for taking our questions, guys. Good evening on the AI voice piece. Um, is this a separate competitive environment from kind of the rest of your business, are you competing more on, you know, your like for like capabilities with Point Solutions in that area?
Drive context inside of those interactions. As you've got uh, voice to Voice or agent human whatever the uh, the the Paradigm is, in terms of those interactions. I think that gives us a bit of a leg up, but if a customer comes to us and says, hey look, we've already got, uh, an llm that we've got credits with. We want to be able to integrate that with you guys. Like we are open season on that and we certainly support, you know, a wide variety of different llms that we will integrate to rapidly. But if they want to go on the opposite direction, which we're seeing a lot of too like with conversation Relay, For example will support that all day long as well. So it it really kind of runs the gamut
And I'd say it's a pretty exciting time Jack and just maybe a, a stat to give you. So we have a number of different AI startups uh that were founded in just the last 3 years spending over 7 figures with us today and our top 10. Um, I'd say startups in that cohort they have a blended gross margin of over 80%. So a lot to be excited about here.
Okay, uh quick follow up on on pricing in a future state where hopefully your multi-product cuff, customers have a more cohesive contract structure. Let's say, how do you view your ability to drive pricing? Uh, maybe in that in that future. Thanks.
I would say, sorry. Yeah. I I was just going to say, look, I I think in the in the short term, what we're trying to do is really grow into multiple products, right? And I think just given the number of customers that we have today for, which that opportunity exists, that's kind of our initial um, initial approach. I think the second thing is, is that as it relates to sort of the broader AI opportunity like that. Also presents a pretty compelling opportunity. Those 2 actions alone because of the fact that their gross margin accretive I think will add you know, accretion over time you know. Again you've got this messaging mixed Dynamic so just kind of putting that aside assuming that that was at level loaded. Um you'd see gross margin accretion just as a result of those things. I think as it relates to price on sort of the core stack. The reality is actually that we raise price periodically on list uh pretty pretty regularly. It does take time especially with some of
Our larger enterprise customers have that to bleed through. But you see the more immediate impact in self-serve.
Understood, thank you.
Thank you.
Our next question comes from William power of beard. Your line is now open.
Okay, great, thanks. Um
Maybe a maybe a follow-up verse just on, you know, guidance and implications for the second half of the year. I I may have missed this but you know, the messaging price increase, um, you know, it's occurring in the US, what kind of Tailwind or impact does that have
on, on guidance, for the second half and and then
You know, COA, and you're prepared remarks, I think you, you talked about, you know, some some real improvements in large, um, you know, deal traction year-over-year. I just wondered if, you know, there was anything else, you could unpack there any, any common factors, what's, what's kind of helping? You know, drive that? Thanks.
Maybe Thomas, do you want to speak to the large deal activity? And then I can pick up. Yeah. Yeah, yeah. Yeah, no absolutely. The large deal activities have been one of the brighter spots of the business for the last few quarters, but I think this quarter in particular, it stood out with 57% growth in customers spending over $500,000 with us in the quarter. So, just in general, this speaks to the nature of a lot more of our platform selling and cross-selling motion, where oftentimes, customers are landing with messaging, increasing their volume, and then we're seeing them add more software capabilities on top of messaging. We had a really strong quarter with products like Verify and Fraud Guard, for example. And then, of course, we've talked a lot about voice today.
Um, but importantly, The Voice add-ons are doing quite well on top of the voice infrastructure components, uh, which is critical. And so those combinations together are allowing us to drive much larger deal sizes and we're seeing that whether it's in our isv business or whether it's in our Direct business globally. And then, on the the pricing question, uh, will you know, we don't anticipate it really having a material impact, uh, over the balance of the year. It's, it's North America only and it's primarily affects our self-service customers as, as Thomas mentioned. So it'll have a bit of an impact but
Nothing material at the consolidated level. We'll take some time to work its way through, kind of the renewal cycles with some of our bigger customers.
Okay, thanks.
Thank you.
Line is now open.
Great, thanks. Um, Kazama could you could you comment on the robocall market that it? It seems like, uh, volumes are growing at a decent clip in the US this year, just how, how much of robocall type use cases go through your voice business. And what's your approach to this Market longer term, especially in the age of AI.
Yeah, um, there's, you know, different kinds of robocalling. Obviously the the the fraudulent stuff. Like we take like, really, really significant compliance measures to ensure that that traffic does not run through our platform as it relates to robocalling more generally. Like, I'd say, it's not like a big piece of what we ultimately do. Like what we're doing in large part is a lot of the voice infrastructure. I think where it, if you want to call this robocalling, like there are instances in which they'll be phone call notifications that happen when their delivery scheduled or, or, or notifications required about a specific expertise. That's being delivered. I can think of a handful of examples off the top of my head that involve stuff like that. Um, and then as it relates to AI, I would say, that's not really the the thing that, um, kind of creates the AI opportunity for us and meaning, it's not robocalls. It tends to be more sophisticated, use cases that
Around customer care or service. Um, and then obviously, inside of the company, we do some customer care stuff with our voice AI stack. And we also do some, uh,
Some inbound sales, prospecting with it.
Understood if I could squeeze 1 more in there, there were a bunch of regulatory changes and a number of countries in recent months and including new sender, ID registration rules and and new kyc requirements. Just just wondering, did did things like this, have any impact on your business whether from a sales cycle or cost of sale perspective, uh just anything to flag and and, you know, potential disruption from regulatory changes like this or potential positive impact. Thank you.
Yeah, I I think that, uh, you know, over time, I would imagine that there's some positive benefits here. I, I think in the short term, uh, the short answer is no, we don't see a lot of impact as a result of different regulatory changes. We're very proactive with Regulators in, effectively every market. So we typically have pretty advanced notice. We're typically participating in the way in which a lot of this regulation, gets shaped, you know, being the, the largest provider globally. Uh, Regulators are often coming to us asking about, you know, what makes sense, what doesn't make sense? It'll be protecting the consumer. We're obviously in favor of anything that ultimately does end up protecting the consumer, just giving that it protects the ecosystem more broadly. So I would say
Short-term, no impact; longer-term, probably a mild positive impact because it reinforces compliance in the ecosystem, more broadly.
Thank you.
Thank you. This concludes the question and answer session, I would now like to turn it.
Back over.
For closing remarks, thank you for your participation. In today's conference, this does conclude the program. You may now disconnect.
goodbye.