Twilio Inc.

Good day and thank you for standing by. Welcome to the Twilio Second Quarter 2025 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, one, one on your telephone. You will then hear an automated message advising your hand is raised. 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 first speaker today, Brian Vanneman, Senior Vice President of Investor Relations and 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 Shipchandler, Chief Executive Officer, Hayden Mijiano, 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 .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. 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. And with that, I'll hand it over to Kazama and Hayden 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 and -over-year growth acceleration. We also delivered another record quarter of both non-GAAP income from operations and free cashflow. And Q2 marked an important milestone as our segment business delivered non-GAAP income from operations for the first time, surpassing our Q2 breakeven target that we established early last year. Our strong performance this quarter reflects our continued progress in driving greater operating efficiencies, our focused product-led innovation, and solid commercial execution. In Q2, we delivered a fourth consecutive quarter of accelerating messaging growth as well as double-digit voice growth. We are demonstrating not just our market-leading scale in our core communications market, but also our pace of innovation, which is allowing us to take share. This is also evident across our -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 Shine One, JustFab, Manus AI, Nooks AI, the Phoenix Suns, and PostScript. We also had another great quarter of large deal activity with ISV and technology customers. In fact, in communications, the number of large deals closed of $500,000 or more increased 57% -over-year. This momentum is reflected in our dollar-based net expansion rate of 108% in Q2, our best rate in over two years. In self-serve, our voice channel was a bright spot, driven by a variety of factors, notably the surge in voice AI startups who are building on Twilio. In May, we held our annual user conference, Signal, bringing together nearly a thousand attendees in San Francisco for a preview of our next generation customer engagement platform. During the event, I had the opportunity to engage with many of our customers and heard countless stories of how Twilio continues to bring more ROI to businesses. It was evident that the power of combining communications plus contextual data plus AI through our product innovations and platform is driving meaningful value for brands and that Twilio is increasingly becoming the infrastructure layer for customer interactions. Twilio is not just a company of and for builders, but a company that our customers can build their businesses on for years to come as they navigate AI and every other technological evolution they will encounter. At Signal, we also showcase new products designed to help brands create modern, intelligent customer experiences all built on the Twilio platform and tailored to meet customers wherever they are in their journey. We announced the general availability of Conversation Relay which empowers developers to create robust natural voice AI agents using their choice of LLM. And more importantly is the first step toward realizing our vision of powering context aware virtual agents across every Twilio conversation channel. Conversation Relay is generating a lot of customer interest and during its first quarter of general availability we completed nearly 1 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 three most common customer care requests, credit limit inquiries, card tracking and installment payments. Within two weeks, they validated the solution and began scaling to production demonstrating both the speed and impact of Twilio's AI powered automation. We're powering innovation for both enterprises and the newest AI startups with our scalable and trusted communications infrastructure, orchestration and observability. True to our roots, these features are as extensible and configurable as any other part of the Twilio stack. Something customers value when much of the conversational AI ecosystem is focused on black box solutions, vendor lock-in and extensive professional services integrations. We also announced that conversational intelligence already generally available for voice now supports messaging conversations in private beta and it has already seen an 86% increase in account usage year over year. This powerful feature unifies conversational data across voice and messaging for human and AI agents, giving brands a cross channel view of the customer. It highlights the value of previously inaccessible conversational and contextual data by equipping sales and CX teams with holistic insights from every touch point, allowing them to deliver seamless, personalized experiences which lead to a better relationship with brands. Conversational intelligence also includes built-in AI agent observability, allowing brands to analyze AI agent interactions, customize call scoring, generate competitive intelligence and detect customer intent through natural language understanding. And we've also continued to innovate across our trusted core channels. A few weeks ago, WhatsApp business calling via programmable voice became generally available, enabling businesses to engage directly with consumers on WhatsApp through a single seamless conversation, whether via messaging or voice. We're also seeing momentum with RCS adoption currently available in select markets with a full GA in the coming months. RCS is already delivering strong results, transforming standard notifications into trusted and branded communications. One of Twilio's longtime customers, Fresha, a leading booking platform for the beauty and wellness industry that facilitates over 700,000 appointments daily, adopted RCS with no code changes and saw an immediate measurable impact. With Twilio, Fresha achieved .2% message delivery rate and saw a 41% read rate with RCS messages achieving a 6% increase in appointment confirmations and a 7% uplift in customer reviews. With Twilio Segment, we announced event-triggered journeys at Signal and the feature officially went live just a few weeks ago. Now, journeys will create rich contextual payloads that combine information from not only the triggering events but also from the data stored in the warehouse and everything in the Segment customer profile. For example, when an online shopper has abandoned their cart, a business can see exactly which items are in the cart and all their key details like name, price, size, color, image, and if that customer is a loyalty member with rewards points, they can use towards their purchase. With event-triggered journeys, Twilio Segment creates a complete view of the customer, allowing brands to respond dynamically to moments that matter, whether it's an abandoned cart, a missed form submission, or a key onboarding milestone. And lastly, at Signal, we welcomed Microsoft CEO, Sacha Nadella, as part of our keynote to announce 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's 2025 State of Customer Engagement Report recently found that 88% of consumers are more likely to buy when engagement is personalized, but 44% of brands struggle with executing at this level. This data illustrates the magnitude of the opportunity as companies are still figuring out how to evolve their customer experiences, especially given the opportunities presented by generative AI. Twilio's platform delivers the set of tools and infrastructure businesses need to modernize and help brands ultimately deliver personalization at scale to drive more ROI. Our commitment to delivering enhanced product innovation and customer value is also continuing to get recognition and reinforces the power of the Twilio platform and our leadership in the market. Recently, Gartner named Twilio a leader in the CPAS Magic Quadrant for the third consecutive year and number one in three of the five use cases in the CPAS Critical Capabilities Report and Omdia named Twilio a CPAS Universe leader. I'm very pleased with the hard work of our team and today's results underscore the strength of the Twilio platform and the progress we've made as a company. And now I'd like to turn it over to Aidan who will walk you through our financial results.

Thank you, Kozima, 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 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've continued to drive accelerated levels of growth as we execute against a focused set of -to-market initiatives across ISVs, self-serve, cross-sell and international expansion. As Kozima mentioned, messaging revenue growth accelerated for the fourth consecutive quarter while we generated double digit voice revenue growth for the first time in two years. Strong uptake among AI startups in our self-serve business contributed to the acceleration in voice revenue growth. In early June, Verizon raised its A to P messaging fee rate, which contributed $6 million in incremental pass-through to our reported communications and total revenue for the quarter. Consistent with how we handled A to P messaging fees when they were first instituted by US carriers, in order to provide a consistent comparison of the business's underlying growth rate, we exclude the revenue from these incremental A to P carrier fees when calculating our organic revenue growth until we have lapped the comparative period. As a reminder, we passed these fees through at 0% gross margin. Segment revenue for the quarter was $75 million flat year over year. Our Q2 dollar-based net expansion rate was 108%, reflecting the improving growth trends we've seen in our communications business over the last several quarters. Our DB&E rate for communications was 109%, and the DB&E rate for segment was 95%. Pass-through revenue from incremental carrier fees contributed roughly 60 basis points to both total and communications DB&E in the quarter. We delivered non-GAAP gross profit of $623 million, up 8% year over year. This represented a non-GAAP gross margin of 50.7%, down 260 basis points year over year, and 60 basis points quarter over quarter. As Kozama mentioned, we are taking share in our core communications market, led by accelerating messaging and voice growth. We saw our messaging revenue mix increase by 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 $6 million of increased carrier fees and FX, given our international carrier costs are paid in local currency. Our revenue was not materially impacted by FX as we bill primarily in US dollars. We're taking steps to stabilize and improve gross margins, including both price and cost actions. We have announced price increases in both messaging and voice in the 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 margin for communications was 49.2%, and non-GAAP gross margins per segment was 74.3%. Non-GAAP income from operations came in ahead of expectations at a record $221 million, up 26% year over year, driven by strong revenue growth and ongoing cost discipline. Our non-GAAP operating margin of 18% was up 180 basis points year over year, and down 20 basis points quarter over quarter. The sequential decline was due to anticipated 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, 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 one trusted, smart, and integrated platform. Because of this, beginning in the third quarter, we no longer plan to disclose our results by business unit. Stock-based compensation as a percentage of revenue was 12.1%, up 30 basis points quarter over quarter, and down 150 basis points year over year. As we noted on our Q1 earnings call, the modest sequential increase in stock-based compensation is due to the timing of our annual refresh brands during the second quarter. We generated record free cash flow of $263 million in the quarter. Additionally, we purchased $177 million of shares in the second quarter, bringing our -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. Based on our first half performance in Q3 guidance, we're raising our full year 2025 organic revenue growth guidance to a range of 9% to 10%, up from .5% to .5% previously. And we're initiating a reported revenue growth range of 10% to 11%, which includes the contribution from incremental increases to carrier fees. Our revenue guidance assumes $20 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 in voice, RCS, and our AI offerings. Based on our strong cash generation during the first half of the year, we're raising our full year free cash flow guidance to a range of $875 to $900 million, up from $850 to $875 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 to press star, one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one, one 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 Jamie on from META. I guess maybe just to start off, can you speak to the traction of where you're seeing the most traction with ISVs?

I, this is Thomas Wyatt. So just to 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 orchestration capabilities across that with some of our newer products like Conversational Insights allows our ISV customers to get a true representation of the level of engagement consumer has with its brand. So we're really encouraged by our ISV growth. It continues to grow above the company averages.

Got it, thanks. And then just as a quick follow-up, is there any impact from the price increase in the quarter?

Not material, no.

Great, thanks again. I'll jump back, Marquee.

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

Yeah, thanks for the question, guys. I was gonna start with a different one, but just given we brought up the price increase here, you implemented it here in the US on the messaging side. Just can you walk us through why now for a price increase and just making sure that this wasn't tied to the Verizon A to P increase and that this is actually incremental to that, so I guess why now and making sure this isn't just a fee raise because your costs are getting raised as well?

Hey, Jim, I'll start and then I'll hand it over to Thomas. I wanna be clear that the price increase that we did in the US for messaging was not tied to the A to P fee increase that came through from Verizon. Those two things are separate and distinct. So just wanted to make that clear. I'll hand it over to Thomas to talk about timing and why we felt it was prudent to do so.

Yeah, so raising the list price, particularly North America for a messaging business really reflects mainly on our self-service business, which is growing very fast and 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 it'll be sort of a modest increase over time for them.

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

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

quarter as well. Thank you. One moment

for our next question. Our next question comes from Michael Turin of Wells Fargo Securities. Your line is open.

Hey, great, thanks very much. I appreciate you taking the questions. I was just hoping, I mean, you gave a lot of useful breadcrumbs at the Investor Day a while back on some of these aspects, but just be curious to get your updated view on the durability and drivers 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 on the gross margin side, are those fairly immediate for us to consider when we're kind of updating models from here going forward? Or is there time to impact for some of those for us to consider as we're rolling it all forward? Thanks very much.

Sure, hey, Michael, this is Kazama. I'll take both answers, and Aiden and Thomas can add to it as they want. I'd say on the growth side, like we feel pretty good about it. Growth has been pretty durable across a number of different industries. Obviously, it's gonna be a little bit harder in the back half just because of the compares, but I would say growth feels durable, we're obviously not guiding beyond the current period, but we felt pretty good about what we've experienced in the first half. I think we've seen resilience in a number of different areas. So like there's no one thing particularly to point to in terms of where that strength has come from. It's industry-based, it's customer-based, it's geo-based, and so that all feels pretty good. In terms of gross margins, as Aiden pointed to in the context of the prepared remarks, we obviously are seeing a little bit of a mixed dynamic there and FX clipped us as well. And then of course, you've got the Verizon fee thing. But more to your question, we are taking some actions. Let me start on the pricing side. We already talked about some of the price increases that we've undertaken. As Thomas said, a lot of that will be geared towards what we experience on the self-serve side. And so to the extent that we have a lot more self-serve ads, you'd certainly see that faster. With respect to other customers, it's gonna happen more in the context of their renewal cycles and stuff like that. And so that'll happen more modestly over time, I would say. And then on the cost side, there's also a number of actions that we're taking there as well. I would say they largely have to do with optimization of our platform and the way that the costs show up there so that we're using it more efficiently. But I do think those things, as well as the fact that we've got a number of higher margin, gross margin products that are growing very, very nicely, all of that will allow us to, in kind of the near term, stabilize gross margins, but over time for that to inflect up a bit.

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

forward. Thank you. One moment for our next

question. Our next question comes from Mark Murphy of JP Morgan. Your line is now open.

Thank you so much. Kazima, we're witnessing some pretty incredible advancements in voice from the foundational AI model providers. And today was a good example with the GBT-5 demo session. So since they are the ones handling all

the voice synthesis and the speech parts of the equation, can you just help us understand

which

parts

of this voice AI wave, do those companies want Tulio to handle, for instance, is it the, they mostly want you to handle a phone call or are they asking you to stream the audio to and from the bot or routing calls? I mean, what is it that they're relying upon Tulio for? Yeah, good question, Mark. So it's the full gamut. And so it really depends a lot on the customer and their specific use case. So at sort of the bare metal version, we're providing the voice infrastructure that'll ride on our rails, we'll provide the calling capabilities, and they'll provide some of the intelligence on top of that. In the most extreme example on the other side of it, you'd have like our conversation relay product, which incorporates the voice activities, all of the voice intelligence that goes with that, the recording capability, the context awareness. And then you've got a lot of different things in between. For example, we 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 for some of the kind of more AI forward or AI native companies, I would say it tends to be more the voice infrastructure side. I think when it tends to be more enterprises or let's say more digitally native companies that are perhaps not AI based, it tends to be our fuller stack, but it really runs in between. No matter what, obviously we're incredibly excited about taking on those volumes. Voice overall is gross margin to creative for us, which I think is attractive, and getting it back to double digits, I think is really important.

Okay, thank you, Guzay. And

as a quick follow up, maybe for Thomas or Aiden, I did notice in the customer wins that RCS is being mentioned twice. And I understand a lot of it's probably earlier in a pilot phase, but are you seeing anything there that would cause you to think that messaging customers are gonna expand toward RCS 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 Fresha. So 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, the branded capabilities stand out compared to SMS.

Thank

you.

Thank you. Our next question comes from Taylor McGinnis 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 4Q compared to the 8 to 9% in 3Q. I know that there's a bit of a tougher compare as we get into 4Q. So I guess anything to flag, right, in terms of potential opportunities, right, that might be incremental in 4Q versus 3Q and then how to think about that tougher compare and seasonality as well too. Thanks so much.

Hey, Taylor. 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 four consecutive quarters of accelerating double digit growth. That feels really good. I think as we talked about, it's pretty broad based in terms of where we're seeing it come from in terms of the -to-market channels, in terms of the products, in particular messaging and voice, in terms of the regions, et cetera. So in terms of, as we think about the second half of the year, we do have tougher comparisons. As a reminder, we did have some messaging headwinds in particular, political traffic in the third quarter and fourth quarter of last year. And we also had some improving -to-market performance along with the new platform innovations that we introduced last year, like the deliverability dashboard that kind of helped customers remediate messaging errors. So those two things kind of create a bit of a tougher comparison for messaging as we face into the second half of the year. But we feel really good about the momentum we've had to date again around self-serve, cross-sell, ISDs, international. And we think that, we believe that that'll help us generate durable, 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 Zucan of Wolf Research. Your line is open.

Yeah, hey guys, thanks for taking the question. Just maybe a quick two-parter for me. Kazema, maybe on voice first, kind of how did it perform relative to your expectations in the quarter? As we think about that channel and the volume that you're seeing from it, kind of how do we think about the aspiration for how it can contribute to kind of both top line growth over the course of maybe the next two quarters, but even beyond that. And then maybe on the gross margin side, we're talking about kind of sustainability or stability, if you will. If we just do kind of like a almost non-GAAP adjustment for gross margins from an FX and from an A to P perspective, what was the actual kind of sequential degradation on that basis? And how do we think about the kind of longer trajectory when you start layering in tailwinds from voice?

Yeah, let me start on the first and I'll let Aiden give you some of the math on the gross margin adjustment. As it relates to voice, I would say it's performing really well. I mean, I think we've talked a little bit about our expectations about a voice renaissance, particularly behind a lot of the voice AI use cases that you're seeing. And I think the early indication is that we're starting to see some of that. A lot of the voice volumes that we're seeing are really being built on demand from voice AI type customers, but they're also coming from a lot of other customers, which is also encouraging. And then we've launched a number of products recently as well, like Conversation Relay, Conversation Intelligence, that also help add to the mix in terms of like why voice is an important channel and how it's being used. And then obviously, just as it relates to kind of the broader environment, voice is being heavily utilized in a variety of AI based use cases. And so I think that gives us a lot of encouragement in terms of the way that it's been performing, the way that it contributes. I think the hard thing for us is obviously that the messaging business is still extremely large. It tends to be, well, it has been forever the largest piece of the business and it continues to grow at very, very fast rates. And so the fact that that growth, it relative to any product, eclipses the growth rate of any other, it's always gonna impact our margin mix. But all the same, given the performance in voice, that'll have some uplift and over time, I think it'll start contributing.

Hey, Alex, I'll comment a bit. And actually just to Kusama's point on the messaging mix, we actually included a page in our presentation that shows messaging kind of mix as a percentage of total Twilio revenue. And you can see how that has increased as that business has grown faster than the overall company. And so you can see that that would have a negative mix effect. But to answer your question, which was sequentially, how do we think about non-GAAP gross margins adjusting for fees and effects? It would have been roughly flat quarter over quarter relative to Q1. So the fees were roughly 30 basis points of a headwind in Q2 and the balance, there was some mix in there as well, but actually FX made up most of the balance, so roughly flat quarter over quarter.

Blast the new up guys, thank you.

Thank you. Thanks.

Our next question comes from Joshua Riley of Needham. Your line is open.

All right, thanks for taking my questions. How are you thinking about the balance of market share growth for messaging and international markets relative to the pricing considerations there and the lower gross margin versus the US business? And how much did maybe outperformance and international messaging impact the Q2 messaging gross margin?

Maybe I'll, can I start with the gross margin piece? Well, we don't break out messaging in particular, but the company, let me just give you a little bit more color on gross margin. So for the year, year over year in Q2, we were down 260 basis points. Now messaging increased almost three points year over year as a percentage of our total revenue. That alone had 150 basis point impact on the company, just the fact that it mixed higher. And then you had, if you listened to my prior answer, the fees and the FX, which really made up the difference in terms of the year over year walk. So those were primarily kind of what drove the gross margin decline year over year. And I'll kick back over to Thomas to talk about the internationals.

Yeah, just from a -to-market perspective in general, we're looking at messaging at 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 of quarters, just taking self-service globally, for example, it is voice has been the fastest channel of growth for us. And as we talked about in investor day, 63% of our enterprise customers started in voice, or sorry, started in self-service. So we see that trend continuing and we wanna grow market share as much as possible to continue to build that platform layer and deliver orchestration. And so sometimes it's easier to land internationally in messaging and then add voice in other channels as we go. And we've seen really good growth in international in the last couple of quarters.

Awesome, and then just a quick follow-up on the product development and AI. How are you prioritizing product investments relative to the efficiency that you need for the 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 up-margin targets? I.e. 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 financial target for 2027?

Yeah, I mean, I'd say by and large, yes. I mean, obviously we have a framework out there. I'm not gonna necessarily provide updates on that one way or the other, but I think what we talked about in the context of the current call is that in the short term, we saw an opportunity to put a little bit more emphasis on R&D dollars to be able to accelerate our growth. I think the results of which have been in the current year that we've been able to take up our cash flow and profitability guidance pretty consistently over a period of time. Obviously, revenue has gone up as well. And so I think so long as the investments that we make support our ongoing ability to generate free cash flow, we'll look at that balance very carefully, but 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 C.T. Penegrahi of Mizzou. Your line is now open.

Oh, great, thank you. Kozima, I have a high level question on AI. If you look at 2021 and 22, the opportunity from COVID for two years does like a billion dollar revenue you're adding every year. But when you look at agentic AI or even voice AI opportunity, all that, how big that could be and over what timeframe? Do you think this is more like multiple of that opportunity but over a longer timeframe or any color would be helpful?

I think that it's hard for me to kind of put like dollar figures to it specifically, but I think what it is is gonna be materially TAM expansive. I think that every single AI capability that gets added, it's beneficial to Twilio fundamentally. I'll start sort of at the bottom. I think every one of these companies that we're seeing for the most part, like they attach themselves to Twilio, just given our brand, our performance, and we're a very attractive entry point, as Thomas alluded to a moment ago, in terms of self-serve, which is where a lot of these, if not the majority of these customers end up starting. I think then if you look at the opposite end of the spectrum, so perhaps enterprises, I think enterprises as well, as they start to figure out like what it is that they're gonna do with AI, in so many different cases, they're either turning to Twilio or turning to partners of Twilio, which is also additive ultimately to Twilio in terms of the size of the opportunity that we see going forward. I certainly think that AI has been a contributor in terms of the way that we've been growing the company over the last several quarters. I think it's been a tailwind for us, but I think more importantly, it really positions us in the center of the AI value chain ultimately, because we can be both an infrastructure provider as well as a full stack solutions provider at the platform in which we're orchestrating channels, we're orchestrating context, and we're allowing our customers to be able to really personalize interactions. And so just given the gamut of opportunities that I see, I think that it is really TAM expansive, and over time it'll add material dollars to the top line.

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 the voice business?

Yeah, we don't give the breakdown there. We give the kind of breakdown 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, thank you so much. I think the incremental R&D investments certainly make sense, right, especially if you're seeing traction. I'm curious though, if you think about just breaking it down of where exactly those go, is that just incremental engineers? Is that some infrastructure? And what do you think it kind of adds from a product platform perspective that you don't have today?

Well, I think it's gonna be predominantly in engineering. I mean, obviously we're all experiencing this huge AI opportunity that we spoke of just a moment ago in answer to some of the other questions, but I think the customer reactions that we got at our conference, our signal conference in the US, our signal conference in Brazil, I think really speak to the size of the opportunity that our customers are talking to us about. And so, this is kind of a once in a generation technology paradigm, and you don't wanna lose a step, obviously, when these things are happening. We're not gonna make irresponsible investments. We're gonna continue to generate strong operating profit dollars, strong cashflow, but I think when opportunities like this come along, especially that are perhaps once in a generation, it is important to make sure that you stay ahead of them so that you can capture the fullness of the opportunity. And what we're doing is not more complicated than that. And again, we're gonna make responsible investments, but it's really behind AI, and it's gonna be predominantly in engineering.

If I could just add to that, Cosima, just from a customer's perspective, they're really pushing us continued acceleration around RCS and voice AI capabilities, and we're just seeing such a strong demand for that that any additional acceleration in the roadmap will benefit us over time.

Okay, perfect, understood. And then, one of the other things that kind of stuck out from Signal, I think, was just the integration of customer profiles from Segment into the comms business along with the rest of your technology, and you gave some kind of use steps on relay and conversational intelligence earlier, but I'm curious how customers are responding to that integration of profiles. Is that something they're already taking advantage of? Is that something that's still to come, and how might it kind of enrich the broader Thomas platform?

Yeah, I mean, Thomas and I can both speak to it. I think from my perspective, every customer conversation I've had since the Signal event that we had in the US has probably started with a conversation about conversation relay that the customer's asking about it, not me pitching it. And so I'd say that's pretty encouraging in terms of the kinds of things that they wanna be able to do with our stack. That is by far the most integrated version that we've got, and it's kind of the most fully featured capability that we offer, but equally, we're seeing a lot of uptake with conversational intelligence, for example, different kinds of software add-ons that fundamentally utilize segment capabilities, data capabilities that integrate with our communications. Those are in very high demand as well. Those are growing very nicely. So I would say in general, the combination of our data business with our communications business has been extremely well received by customers, and more importantly, is driving a lot of ROI for them. I don't know if that's something. Just to add

an example, this particular quarter, we had a leading fashion retailer that was expanding with us using agent co-pilot, and it's really the use cases enhancing agent productivity, reducing customer wait times, and ultimately reducing the number of seasonal hires the customer needed to bring on to handle peak periods. So this is just an example of the Twilio architecture of being able to have a platform with multiple channels and driving personalization from segment across every channel. We think that's a unique value proposition, and our customers are loving that. All right, perfect. Thank you so

much.

Thank you. Our next question comes from Patrick Walrivens of Citizens Bank. Your line is open.

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

Well, I think the original thesis for us when we bought Segman was that more intelligent communications were gonna be the future of this company. And so I think, you know, putting aside some of the other developments that have happened in the broader CDP landscape, which are, frankly, in some ways, less the focus for us, the opportunity to be able to drive intelligent conversations, intelligent communications, highly personalized interactions between our customers and consumers, like that was always the goal when we bought the company. And I think we're really starting to see the fruition of that original strategy. We've launched a number of different products that integrate the two capabilities natively in singular APIs. I think that's really exciting. It makes it easier for customers to adopt, obviously. And then every quarter, we've added increasingly richer capabilities so that our customers in the context of communications can use contextual data to be able to derive richer and richer understanding of what their consumers are doing to be able to drive higher personalization. So I'd say, again, putting aside what's happened in sort of the broader CDP, the strategy of the company had been to fundamentally integrate a CDP into the communications business, and that's what we've done. And I think based on the traction that we're seeing with it, that's really exciting. Awesome, right.

And then, Aidan, if I could ask a follow-up. You commented in your prepared remarks that for the gross margins, we are investing at the platform level to ensure we're delivering our services officially. So that caught my attention. What are those investments?

Yeah, let me give you an example. So for our email platform, for example, or email product, we're in the process of migrating off of legacy data centers to cloud. And so that takes a little bit of time. That probably takes several quarters, and there's a period of time in which you have double bubble of costs. We did this with Segment, actually, in 2024, if you recall. And so we're in the process of doing the same thing for email. Again, a little bit of cost and margin headwind in the short term, but it's the right long-term play. So that's an example of something that would fall into that bucket. The other things we're doing, like on the messaging side, we're looking to establish more direct connections. That's something that we're kind of continuously doing as we operate around the world. We're also leveraging our balance sheet, where it makes sense to do so in terms of prepaying carriers to secure better pricing. So a number of different things, but that just gives you some examples,

Pat. Awesome, thank you both.

Thank you. Our next question comes from Jackson Ader of KeyBank Capital Markets. Your line is now open.

Great, thanks for taking our questions, guys. Good evening. On the AI voice

piece, is this a separate competitive environment from kind of the rest of your business? Are you competing more on your -for-like capabilities with point solutions in that area? Not as much as you might think. I mean, clearly there are a ton of voice AI vertical companies that are out there. I'd say in so many of those instances, we shared some stats that are investor day, like some really, really compellingly high stats that so many of those companies are building on our infrastructure. And so in the first instance, like that's pretty compelling. I think the tricky thing is, is that for a lot of companies that you might think we would end up competing with, I think our ability to use our CDP, this kind of goes to the prior question as well, our ability to use our CDP to be able to drive context inside of those interactions, as you've got -to-voice or agent, human, whatever the paradigm is, in terms of those interactions, I think that gives us a bit of a leg up. But if a customer comes to us and says, hey, look, we've already got an LLM that we've got credits with, we wanna be able to integrate that with you guys, like we are open season on that, and we certainly support a wide variety of different LLMs that we will integrate to rapidly. But if they wanna go in the opposite direction, which we're seeing a lot of too, like with Conversation Relay, for example, we'll support that all day long as well. So it really kind of runs the gamut.

And I'd say it's a pretty exciting time, Jack, and just maybe a stat to give you. So we have a number of different AI startups that were founded in just the last three years, spending over seven figures with us today. And our top 10, I'd say, startups in that cohort, they have a blended gross margin of over 80%. So a lot to be excited about here.

Nice, okay, quick follow-up on pricing. In a future state where hopefully your multi-product customers have a more cohesive contract structure, let's say, how do you view your ability to drive pricing maybe in that future? I would say,

yeah,

I was just gonna say, look, I think in the short term, what we're trying to do is really grow into multiple products, right? And I think just given the number of customers that we have today for which that opportunity exists, that's kind of our initial approach. I think the second thing is, is that as it relates to sort of the broader AI opportunity, like that also presents a pretty compelling opportunity. Those two actions alone, because of the fact that they're gross margin accretive, I think will add accretion over time. Again, you've got this messaging mix dynamics and just kind of putting that aside, assuming that that was at level loaded, you'd see gross margin accretion just as a result of those things. I think as it relates to price on sort of the core stack, the reality is actually that we raise price periodically on list pretty regularly. It does take time, especially with some of our larger enterprise customers for that to bleed through, but you see the more immediate impact in self-serve. Understood, thank you.

Thank you. Our next question comes from William Power of Bayard. Your line is now open.

Okay, great, thanks. Maybe a follow up first just on guidance and implications for the second half of the year. I may have missed this, but the messaging price increase that's occurring in the US, what could it tailwind for the second half of the year? What kind of impact does that have on guidance for the second half? And then, Kozama, your prepared remarks, I think you talked about some real improvements in large deal traction year over year. I just wondered if there was anything else you could unpack there, any common factors, what's kind of helping drive that?

Maybe Thomas, do you wanna speak to the large deal activity and then I can pick up?

Yeah, yeah, no, absolutely. The large deal activity has been one of the brighter spots of the business for the last few quarters, but I think this quarter in particular, it stood out with 57% growth in customers spending over $500,000 with us in the quarter. So just in general, this speaks to the nature of a lot more of our platform selling, cross selling motion, where oftentimes customers are landing with messaging, increasing their volume, and then we're seeing them add more software capabilities on top of messaging. We had really strong quarter with products like Verify and FraudGuard, for example, and then of course, we've talked a lot about voice today, but importantly, the voice add-ons are doing quite well on top of the voice infrastructure components, which is critical. And so those combinations together are allowing us to drive much larger deal sizes, and we're seeing that whether it's in our ISV business or whether it's in our direct business globally.

And then on the pricing question, we don't anticipate it really having a material impact over the balance of the year. It's North America only, and it's primarily affects our self-service customers 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. Our last question comes from Derek Wood of TD Cohen. Your line is now open.

Great, thanks. Kazima, could you comment on the robocall market? It seems like volumes are growing at a decent clip in the US this year. Just 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, there's different kinds of robocalling. Obviously, the fraudulent stuff, like we take really, really significant compliance measures to ensure that that traffic does not run through our platform. As it relates to robocalling more generally, I'd say it's not a big piece of what we ultimately do. What we're doing in large part is a lot of the voice infrastructure. I think if you wanna call this robocalling, there are instances in which there'll be phone call notifications that happen when they're delivery scheduled, or notifications required about a specific expertise that's being delivered. I can think of a handful of examples off the top of my head that involve stuff like that. And then as it relates to AI, I would say that's not really the thing that creates the AI opportunity for us, meaning it's not robocalls. It tends to be more sophisticated use cases that are around customer care or service. And then obviously inside of the company, we do some customer care stuff with our voice AI stack. And we also do some inbound sales prospecting with it.

Understood, if I could squeeze one more in. There were a bunch of regulatory changes in a number of countries in recent months, and including new center ID registration rules and new KYC requirements. Just wondering, did things like this have any impact on your business, whether from a sales cycle or cost of sale perspective, just anything to flag and potential disruption from regulatory changes like this, or potential positive impact? Thank you.

Yeah, I think that over time, I would imagine that there's some positive benefits here. I think in the short term, the short answer is no, we don't see a lot of impact as a result of different regulatory changes. We're very proactive with regulators in effectively every market. So we typically have pretty advanced notice. We're typically participating in the way in which a lot of this regulation gets shaped. Being the largest provider globally, regulators are often coming to us asking about, what makes sense, what doesn't make sense, how do we protect the consumer? We're obviously in favor of anything that ultimately does end up protecting the consumer, just given that it protects the ecosystem more broadly. So I would say short term, no impact, longer term, probably a mild positive impact because it reinforces compliance in the ecosystem more broadly. 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.