Twilio Inc. ($TWLO)

We will get started. Thanks, everyone, for coming. Derrick Wood, senior research analyst at TD Cowen, [ IICs and Excel ]. I appreciate your support. And we've got VP of IR, Rodney Nelson of Twilio. Thanks for coming, Rodney. .

Thanks for having me.

I am going to give you kind of a softball question to start with, I think -- the -- and it may just kind of lay the predation here. But your -- I mean, the stock has had just a great performance this year. Obviously, you guys have gone through a big evolution over the last few years. But I mean, there are a lot of things. I mean there's been really impressive growth acceleration in the business. Like how would you set the table in terms of like what's really been working and kind of behind the scenes on the organic growth acceleration?

It is just that. I mean, it's been, call it, a 3-year journey to get to the point that we're at today as a business. We were -- I would argue 1 of the first software companies that "our medicine" after all everything that happened in COVID. We made a lot of really difficult decisions to inject financial discipline in the business. Headcount is down roughly 40% from the peak. It's been about flat for 2 years now. We've been operating at about 5,500 employees since the start of 2024. And so you now have a team that's largely been in place kind of from top to bottom [indiscernible] Cosma taking over as CEO at the start of '24, bringing in a couple of really polished and really outstanding senior leaders to run marketing run product on sales. [indiscernible] our CFO over the last several years has been a very dynamic deal in the business. But I think most importantly, we inject a lot of discipline focus in many different areas of the business. And a lot of that started on the P&L when looking at margins. So obviously, margins have come up considerably over the last couple of years going from a business that was roughly breakeven to now 1 that is on the doorstep of 20% operating margins and something similar on the free cash flow side. And then here recently, I think where you see the discipline and focus manifesting the businesses in the innovation velocity. We've really doubled down on the areas where we have a right to win, particularly in infrastructure. We effectively abandoned our ambitions in the app layer that we were pursuing many years ago. And the net result of that is a much more efficient and a much more productive product organization and the capstone of a lot of that work here recently came in our Signal conference a couple of weeks ago, but along the way, we've managed to reaccelerate the messaging business, which is our largest business. We've seen some emerging tailwinds in the voice business, which has catalyzed growth there and it's now growing as fast as rate in 5 years. But you're getting a much healthier, a much balanced version of Twilio today than I think you've ever seen. And we've augmented that with a pretty meaningful shift in capital allocation being much more tilted towards capital returns, which has amplified the financial performance of the business over the last few years. So it's been a lot of things, not just any 1 thing, but this is -- I would argue the strongest delay has ever been in the 10 years we've been public.

Nice. We lay it out there. So voice is -- I mean, [indiscernible] talks about this renaissance in voice and obviously, that we've seen a big acceleration there. What -- can you just give us a sense of what's behind that? It sounds like a lot of the startups there, I mean, I think we -- and I've seen other people kind of position, like you guys are like the AWS of voice for these start-ups, like you're with a platform that they're building on -- is it all just the AI natives? Is it -- what are you seeing from the ISV channel, like give us a little more bottom-up look and what's driving voice right now?

Yes. I mean I think what's so great about our business is our core platform, our longest running product is actually our Voice API when Jeff started the company 18 years ago, the very first product is our program for Voice API. So we've quite literally been in this business for almost 2 decades. And the one thing that is true for an AI native, that's also true for an enterprise, that's also true for a more traditional looking at ISP is none of them are in the communications business. And so if they want AI agents to do the bidding of what was historically served by a customer service agent in a contact center somewhere at a very minimum, you still need the connectivity layer, and that's where our super network comes back into play. If you have customers all over the world, you need the full breadth and depth of 4,800 carriers globally. You need to be compliant in all 180 different countries that we operate in. the rules and regs change constantly. You have to be on the lookout for fraud and robo calling. And all of those capabilities are things that we've been building and compounding for the last 18 years. They're also really normally and frankly, unsexy problems that nobody wants to rebuild and kind of recreate the wheel on. And so we've taken something that is absolutely critical and vital incredibly hard to do at global scale with reliability. And even though it looks undifferentiated to our customers, it's mission critical to how they solve these problems. And that's just as true for the AI initiatives is for customers that have worked with us for 10, 15, almost 20 years. And I think what's interesting with the natives in particular, et therefore is to build what's differentiated in their product stack for their customers to solve, say, customer service AI. They have to have an enterprise-grade communication stack from day 1. Do you have a shot way in that business. And what we've seen with the AI is they not only rely on Twilio, come to us through our self-serve channels. So they're voting with their feet and their dollars to use Twilio as a provider of choice. They're also been leveraging our reputation for quality and reliability in those RFPs to say you're getting best-of-breed AI capabilities up here, and you're getting best-of-breed communications capabilities down here, and that's because it's coming from Twilio. And so in just about every case, we are providing the telephony infrastructure to actually power that call back and forth between an agent and a human. But increasingly, we're also selling through many software add-ons, some of which we've sold for a very long time, some of which are newer to handle more features up the stack, if you will, while staying in the infrastructure layer. And so that could be orchestrating the models themselves, the speech to text and text to speech chain, that would be our conversation related product. That could be streaming real-time intelligence off of that call. That would be our conversational intelligence product. and a variety of other features in between. And so a lot of the momentum is happening in the voice business because customer service is such a rich opportunity, but there is an emerging opportunity in messaging as well that we can speak to a little bit if desired.

The -- when you guys talk about voice being the new kind of entry point for new customers. I mean, is that mostly from the AI natives, that's a lot of the times where they will start?

Yes. I think that's become the new front door, if you will, and self-serve and a lot of that is AI natives, but it's also for just new businesses that are building themselves in the AI era. And so the they maybe think a little bit less about how do I go and procure all these different packaged software solutions to, "Gee, I have all these tools, I have quad code, I have Kodak, I have or sell. I have all these things that allow me to just build exactly what I want with relative ease and communications is 1 of those things that I can now plug into natively whether that's coming directly to Twilio's new console, which we just launched at SIGNAL, or accessing these tools through coating platforms. It's never been easier to get up and running with Twilio stack. And so it is absolutely AI natives that are coming through the front door and that front door is voice, but it's just as much kind of the AI-enabled business, if you will, that's entering the [indiscernible] as well. .

Can you give us a sense what the conversation relay and like what that ecosystem looks like and speech to text and text to speech and -- when do you guys win? When do you guys partner? Who are the partners that may like be alternatives than using your own? .

Yes. I think it's important for us to always recognize who we are and then that dictates what we build and what we partner on and what we may leave to others. And so in our case, we don't want to be a model building company. It's -- you can see that in the Texas speech and speech to text landscape. You're starting to see that in the speech to speech landscape. You've already seen that at the kind of the LLM frontier lab level. The model layer fragments pretty quickly. And we've seen that in just about every single layer of the stack, and that creates complexity for our customers. So rather than pour a lot of CapEx dollars into the ground to consume a bunch of GPUs to train a model, we would rather partner with a variety of different ecosystem players, give our customers as much choice as possible but do it through a single product where you don't have to then go out and procure maybe 5, 6, 7 different vendors to do everything from speech to text, text to speech, the LM, the speech recognition, the term detection, the interruption handling and by the way, you can do all that through a single provider in Twilio. And then the added benefit is you get better input costs because you're not paying rack rates to the individual model providers. And then you're also getting the ability to pick and choose which models you want to leverage. So if you want to switch from Model A to Model B because Model B is maybe now just a hair faster or has a bit better speech recognition. That's a very simple configuration change on the massive rearchitecture of a software platform. So it gives our customers much greater flexibility than being overly committed to any one model provider.

So yes, I mean you play the orchestration layer into the models, whether it's an LLM or speech model and and drive the connectivity there. The use case is, I mean, do you talk about customer service, I mean, that's I think 1 everyone is familiar with. I mean -- are you seeing like outbound sales and marketing voice AI? What are you seeing in actual call centers? Like what -- where is like the strongest adoption from a use case perspective? .

I think what's interesting is like you're seeing emergent use cases in just about every industry. We've talked a lot about how in health care. It's now much more efficient and a much better experience for the patient to have an AI handling billings questions. They're often -- the bills are often very confusing. There's a lot of words on there that the average person is not going to understand myself included. And so it might require a patient to ask a question 3, 4, 5 different times, just to really fully understand the answer if the person or if the thing on the other side of that calls a human, a certain degree of frustration is going to build, and they have a cycle time they have to be managed against. With AI, none of that exists. It would be endlessly empathetic. You can be endlessly sympathetic, it will answer the same question multiple times if need be. That call actually winds up taking a little bit longer, but it still costs our customer a fraction of what it used to cost them to solve that patient's problem much more effectively, even if the call now runs 7 minutes instead of 3. But you're also seeing -- I mean, there's been a lot of service level businesses, home services companies, many of whom consume our capabilities through an ISP where they are getting inbound appointment requests in the off hours, where nobody is around to actually take that call. They're effectively finding revenue by having AI agents serve those shoulder periods where maybe a call comes into a plumber at 8 P.M. They're not monitoring their systems. They're not answering their phone, but the AI agent can take the call, that's found revenue. That's an appointment they otherwise would not have gotten. And then you're also starting to see a bit more outbound as well. I'd say it's predominantly sales a little bit less marketing. But anywhere that you could have a conversation and leverage AI and memory and intelligence to drive a more intelligent conversation, whether it's inbound or outbound, we're beginning to see experimentation in all those different dimensions.

So I mean I know you guys don't guide to this, but I mean in terms of like...

What pretax per question.

In terms of like what could be elements underneath the model that can keep like growth accelerating or just like see new catalysts into the model around AI. I mean, whether it's expanding use cases, moving more into the enterprise like just what you talked about on what sounds like increased minute usage and like -- or new so more new customers in the front door or what you announced at Signal and memory and there's upsell, cross-sell there. I mean that's a lot to throw out.

Well, I think maybe as a starting point, at least through the lens of AI, it is still exceptionally early. I've called 3 different hotels in the last, call it, 72 hours, 2 are part of a major chain. One is a boutique. I was met with 0 AI. And these were very basic customer service questions. I was literally like scraping around trying to find a bill to submit my expenses. That is tailor-made for AI. Like that all you need to do is plug into the billing system, have some understanding that my phone number is probably associated with that bill somewhere and you could trigger that instantaneously in the context of that conversation. And yet I was put on hold for 5-plus minutes in every single instance. So even there where it's a fairly rudimentary use case, we're not yet seeing like the proliferation of this technology yet. And so I think that does create some secular tailwind that I think can benefit not just the voice business, but frankly, all of the channels. Because one thing that we firmly believe is if you're going to roll out AI and have more intelligent conversations with your customers, you have to recognize that those conversations happen everywhere. Personally, I would much rather text that hotel and get my bill that way, then have to spend time on the phone, whether it's a human or otherwise. And so we do see more customers, whether it's AI natives or our direct customers increasingly looking at how they can leverage all of these channels in sync with one another, and that's where elements like conversation memory, conversation intelligence and orchestration come into play. So in the old world, if you're building with Twilio, you'd have to write blue code to staple all of these channels together. That's effectively what orchestrator now does out of the box. You would have to have some agent or some platform that's giving you that real-time insight into what's happening in that call. That's been conversation intelligence for Twilio for the last couple of years, but that product has continuously evolved to include more channels and become real time. But then you need some layer that's going to reinform the next communication of who I and to that business. So if I have a phone number on file with United, every time I call, they should have some idea of why I'm calling, what flight it's related to, what issue could be a part of that call and effectively head off the reason for calling before they even pick up the phone. That is all possible with memory because we can extract those insights off of that call in real time, reconcile it back to a profile, deduplicate observations that we see and maybe eliminate previous observations that had been filed in that profile. So you always have the most current, most informed view of who that consumer is to then deliver a relevant and contextual response to whatever the next use case may be: sales, service, marketing identity, et cetera.

I mean that sounds like a big deal. So what was new that really came out this year on memory capabilities. I mean so you kind of just said it like you had to stitch a lot together, and now you've got like much easier access to that memory to like orchestrate that? Or like what's been the big advancement?

So as I'm sure folks remember, we bought a business called segment in 2020. And the vision of what Communications plus segment capabilities we're supposed to look like is effectively what memory is now today. The challenge was, see above, if you want to use segment in concert with maybe a custom source system over here and all the disparate channels that Twilio would provide, there was custom pipeline, and that would probably have to be done to that custom system. There were stitching of the channels together. Those channels did not live in a single pane of glass. There was a separate system for SendGrid, a separate system for messaging and voice segment was a separate platform altogether. So there's a lot of maintenance code effectively that had to be written to even get to the point where you could begin streaming real-time insights and reconciling them to a profile. So we took a lot of the DNA from segment and that's what belies what's going on in the customer memory product today. But instead of going through an onerous multiweek, multimonth sales cycle to buy segment, implement it and then do all of that work, customer memory is simply an API, and it's natively integrated into all the channels in our new console so that the second you turn it on, which is literally just effectively a click of a button turned on, you can begin streaming insights into memory capturing them in a profile and going even if you're from a cold start. That's a far cry from a multi-month sales cycle, probably a multi-month implementation and some additional custom work to get to that point. So effectively, what we did was take the best components of segment, make it accessible as an API that is natively integrated into all the channels.

And these APIs into customer data sources like in around data source.

Yes, exactly. So if you want that memory -- so we have APIs to ingest enterprise knowledge. But then if you also want to take the data that lives in customer memory and pipe it back out to source systems, that is available to us. And that's frankly a feature of our platform. We wanted to build these things in such a way that you don't have to rip or replace a single system if you don't want to, to have these tools available , you can begin to point them and gaining insights from them from day 1. And that's again, that's part of the value prop is we are a neutral platform that can be interoperable and play well with any model provider, any source system, any data lag, any data warehouse, the whole idea is to make the platform accessible, and that's also where our Twilio Agent Connect SDK comes into play. You can deploy that in any ecosystem. It's self-hosted. It's a very simple SDK, and you can pipe agents into the platform from there.

So where does LLMs sit in your stack. I mean where are you actually leveraging AI internally for users to like be able to maybe execute multichannel orchestration better or build campaigns or something like that?

Yes. I mean, we're of the kind of bring your own LLM mind, like again, see above, we want to be -- we want to play well with everyone. So we don't try to funnel a customer in the direction of a single model. There's actually only a small number of products where the P&L of the product, if you will, would be burdened by an LLM. Conversation intelligence comes to mind. That product is effectively monetized on ingestion and then custom operators we have -- you would have running over the top of that call. So if you're a dealer and you have an AI agent taking inbound calls for test drives. 95% of the words on that call probably don't mean a whole lack of a lot in the context of that business. But if I say make-model trim a year, I want those insights extracted and reconciled back to my profile. If I say that I have 4 kids, and I'm talking about a midsized model, that should be a trigger to the salesperson like, hey, maybe test drive the full size with the third row. They can see seat 7 because you may need it someday. All of those things should be able to be captured in real time to inform that next engagement, whether it's the follow-up text that I'm going to get or the in-person communication that we're going to have on site with the dealership. And so that is a product where you would have some burden of an LLM that gets embedded in the cost though. And the real value to us is those generative custom operators and then the piping back to memory and the orchestration by the way, between those different communications channels. But the -- we don't actually have a lot of products where we're just creating a wrapper around NLM by design. Like that's not the value that we want to provide. We are consumers of tokens and our engineering organization but there's not a lot of that embedded in the business today.

Are there -- are you monetizing API calls and the like that memory layer?

Yes. That's effectively the pricing mechanism for memory. It's it's effectively API calls. Intelligence, again, is kind of ingestion. And then operators running over the top of it. Orchestration is again, on more of an API call basis, somewhat nominally priced. And again, the whole intention there is we don't want to preclude people from driving more volume to the platform. So if you want to send that follow-up communication via text and then engage that consumer in more of a 2-way communication, but that's orchestrated based on what was said in the service call, we don't want to preclude that from happening. So the economics are probably richest in memory and intelligence. But then if that also comes with the added benefit of more volume than you really had a home run with the customer

The new products that were announced, I mean, do you see them as being any kind of like material catalyst for the next 12 months on -- are they more enablers as opposed to like direct...

Well, I think for starters, we don't have -- we don't really have outsized expectations for them this year. I mean they went in early May. We're halfway through the year effectively, like they're not really a material contributor to the guidance that we have out there for the balance of the year. But these are products that we've been talking to our customers about for the better part of 2 years. And I do think that made this product development life cycle, particularly effective as we were constantly gathering feedback from our customers along the way of number one, where do you want us to innovate; number two, what do you want to look like. And there were some additions that we made along the way. I mean when we think about like Twilio Agent Connect or some of the innovations that we launched in partnership with the coding platforms and signal, like those were maybe not on 1 of the road map, but we had to not pivot, but make adjustments on the fly as the AI ecosystem continues to evolve around us, and those were very well received by our customers. And then on top of that, we were very intentional about bringing partners into the beta for a lot of these new products so that they would be fully enabled out of the chute to kind of talk about how you could use these products, what the prevailing use cases are which has been a point of emphasis for Thomas and his team over the last couple of years is to really lean back into that partner ecosystem.

Who were those? I mean to come on stage on the...

We had a number of them at [indiscernible] to they were there too. They actually had some incredible sessions that could basically show you in the space of a single prompting cloud, go from a cold start with Twilio, no account, no API key. And after 30 minutes of clad doing its thing, you had working Twilio product and working Twilio use cases, which is pretty incredible. I mean we've never necessarily had the GSIs as a big part of the story simply because APIs don't require a lot of heavy lifting, but there are some incredible boutique partners that we've been working with for a long time who participate in that beta and are kind of enable to deliver these new innovations, too.

So they were service partners. .

Yes. Absolutely.

Okay. Well, I think we've got to talk about the messaging business of course. But so what -- I mean, that also has accelerated. Like what -- has that been because of the synergy with voice or like what else is behind that?

I mean a little bit. Again, we try to position the platform as conversational in omnichannel by default, and that's exactly the experience you have in the new console. So there's no longer this fragmented, disparate, one channel lives over here, 1 channel lives behind this log-in over there. You now can build in a much more conversational fashion in the new console because all the channels are right there available to you. That's more on the come as the console, it was just launched a handful of weeks ago. . But look, like we've seen kind of remarkable resilience in the messaging business, and it's not coming from any one place. Our top 5 or 6 industries, which make up the bulk of the business are all seeing really healthy rates of growth, [indiscernible] services, health care, professional services, retail and e-commerce, advertising and marketing. I mean they're all performing very well. Geographically, the U.S. continues to hum along. International, even though the messaging business is going through some tough comps internationally right now, it continues to perform pretty well. And then, yes, I think we've seen pretty good resilience and durability by use case. In VERIFI, if you want to use that as a proxy for the authentication business, that continues to be one of our faster-growing add-ons. It's also one of the larger items that we sell that continues to see really healthy adoption in a variety of different industries, not just regulated verticals like FinServ and health care. The marketing use cases continue to hum along. Notifications are pretty steady Eddie. The one new thing or maybe 2 things that we saw in Q1 that stood out, we did see a much stronger seasonal recovery. And Q1 is typically a seasonally slower period for us, especially coming off that holiday shopping season. The bounce back that we saw in Q1 was a bit stronger and a bit faster than we typically see, which is great to see. And again, not necessarily isolated in any one area. But we have also begun to see the AI natives leaning into the messaging channel as well. Now that's mostly for traditional Twilio use cases, notifications to FA. Way out at the margin, there is some experimentation beginning with 2 way use cases. That's not really a growth driver today. But that is, again, if you're going to have conversational experiences with your consumers, a good number of folks want to communicate via the messaging channel, and so that's something that we think is a possibility over time, especially with these newer features that we just launched.

RCFS and WhatsApp, does that move the needle? Or are they pretty small? .

They're still pretty small. Both are growing very quickly. They both pale in comparison to the size of SMS still today. You're still making some trade-off every time you move from SMS to those channels. They're not as ubiquitous. WhatsApp in particular, you have to find markets where you have good agreement between businesses and consumers that, yes, we should all be here. In most markets, everybody wants to see WhatsApp peer to peer. In a lot of markets, businesses would love to use WhatsApp as a business messaging tool and very few markets do both of them want each other there. . Brazil is probably one of those exceptions where there's an incredible ecosystem around WhatsApp or Business Messaging and business calling. So that business has done well. RCS, it's a similar story, but it is carrier enabled. And it comes with a lot of added benefits that have been native to -- what's at for some time, branded capabilities, richer media. I do think some of those things, if you're going to scale 2-way use cases, our table stakes I'm much more likely to text back and forth with a business that recognize with a logo and a name than a random short code or RIN toll-free number. But it's still very early days. I mean, the carrier support continues to come online handset support. If you're on a variable iPhone, you still can't receive RCS messages, so there's a hardware cycle element to it. But we are beginning to see those volumes grow pretty materially, albeit off of a very small base.

Yes. And you mentioned seasonality before. I mean, just can you remind us like other seasonal factors that tend to happen throughout the year in Q2, Q3, Q4? .

I mean, Q1 and Q4 have the most pronounced ones. Q1 tends to be seasonally slower, but it's because of what happens in around the holiday shopping season, there's a lot of activity for obvious reasons. We tend to see a pretty sharp acceleration in volumes around Cyber Week, so Black Friday, Cyber Monday, you usually sustain some degree of elevation through the holiday through the Christmas holiday. And then towards the end of the year, you see volumes fall off a little bit as kind of businesses and consumers go their separate ways and then a recovery as you move through Q1. And so that's like the most consistent seasonal pattern that we see. We get asked a lot about cyclical events like political comes up very frequently -- that's been a smaller part of the business over the last several cycles. The bar that we set for customers to be on our platform is very high. We have an acceptable use policy, you have to get opt-ins. And so if you are in the business of sending political messages and you follow all the rules, you can be a Twilio customer, there just seems to be a lot of traffic that doesn't want to follow those rules. And so we made a decision years ago that we would: number one, force customers to register all their messaging traffic; and then number two, hold them to that. And so I wouldn't expect [indiscernible] to be a material factor in this particular cycle, also in part because the rest of the business continues to grow. And as a percentage of the mix, it will just get smaller over time.

We do have midterm.

We do mid Term for better or for worse.

Okay. On [indiscernible], I mean, -- the new carrier fees you guys historically haven't seen any kind of loss of demand with prices that go up that you guys pass through? Is that -- do you kind of think that the same thing is happening with this cycle? Clearly,

I mean we I think we've heard more from customers in this particular cycle than maybe in previous ones. I mean, look, nobody likes a price increase, which effectively is what this is. Now all of our customers recognize it comes from the carriers. We've heard more noise about it. We haven't actually seen any behaviors change yet though. But we're also not naive to the fact that this is a supply-demand equation. At some point, if prices go high enough businesses, in particular, small businesses may have to think about how to deploy what are pretty rigid budgets as effectively as they possibly can. That's what having the breadth of challenge that we have is so critical. So if you want to maybe deploy some of those dollars to WhatsApp or to e-mail or if it's a use case that may have some benefits in moving to voice, we can obviously help you get there, and that's been a consistent line of communication between our sales teams and our customers. So we know that, that potential is always out there, but again, see above, that's why the breadth of the platform that we have is so critical so that customers can find high ROI avenues to deploy the spend. And I'd say it's maybe a bit more focused on marketing which has more discretionary elements to it, although customers use us for performance marketing with existing customers typically. It's maybe a bit less relevant for account notifications in TFA where if that 6-digit pass code is what's staying between me and transacting, it's a trivial price to pay to get me authenticated safely. Or similarly, if United is sending me that tax meter saying, hey, you were a C100 now you're a date you better get moving and otherwise you're going to miss your flight, like they can't run the risk of that not getting delivered and messaging is still the most effective place to get there. But this is something that we hear and we're pretty adamant about educating customers about the other channels that we can provide.

And the new console should help, right?

I think the new console will help in a variety of ways. I mean, number one, the ability to experiment in all of the channels is so much simpler. We -- if you're a brand-new to Twilio customer and you've never experienced the console before, you now have an overhaul trial credit system where you can deploy trial credits across all the channels. If you so choose, you can get comfortable with how you might orchestrate conversations and workflows between various different channels. The add-ons are all right there for you. We've simplified the error codes. So if you run into a problem, an AI system is right there on the dashboard and tell you what that air code means and what the resolution steps are. So there's no more -- you are 8 clicks away from resolving your problem because you have to go to the health center, engage an assistant, maybe submit a ticket, that's all being done right there in the new console. And you also now have much better visibility into your usage telemetry in your billings, which was a frequent pain point. So the ability to get up and running in multiple channels and consumer add-ons has never been easier in self-serve and having visibility into what you're doing has also been leveled up dramatically.

All right. Great. Amazing. Great conversation. Thanks. We're out of time. .

Thanks.

Thanks, everybody.