Twilio Inc. (TWLO) Earnings Call Transcript & Summary

All right. Let's go ahead and get started. Thank you so much, Aidan and Inbal, for making it.

And yes, let's go ahead. So I'll start with just a broader question, and then we'll kind of dive into some specific questions for each of you. But Twilio has historically helped customers connect communications across a fragmented carrier ecosystem. As you increasingly connect context across different channels, applications, AI agents, where do you feel like Twilio can create the most value? Is that delivering on the communication, managing a conversation or kind of increasingly helping customers act on those things?

I think it's all of those things. I think our bread and butter is the channels, right, connecting our customers to the end consumer. But we're increasingly trying to make those communications more valuable. I'll let Inbal talk about it or I'm sure you'll get to it, but we've launched a suite of conversations products from memory to orchestration to intelligence in the last 6 months or so. And that's where we kind of see the future going in terms of Agentic as well as human communications.

And I think the uniqueness for Twilio is if you think about Twilio as 3 layers, we have all the communication channels where the conversation is happening and then you have the contextual layer, which is the data. And then you make the AI agents that are operating across all these channels with the context layer, so much better, more effective, more productive, more accurate, which is what you're trying to achieve. So it kind of operates, as Aidan said, across all of them.

Yes. And then, Aidan, as the product has broadened, how has Twilio been able to balance kind of investing ahead of these new product cycles while maintaining operating discipline, particularly given that newer products can have a wide range of different financial profiles.

Yes. I mean I think we've actually done that pretty well. So like as growth has kind of reaccelerated, if you think about '24, '25 into '26, like we've been quite disciplined on costs. I mean we're flat to down in '23 or '24 and '25, up a little bit this year as we launch some new products. But I think we've kind of -- we run the company differently, right? Like I think with Khozema, who's our CEO, since both of us kind of took our roles, we really introduced a lot of financial discipline and operating rigor into how we run the company. I'd say how that manifests itself in innovation and investments on the R&D side, like I'd say, if you look back over years ago, a couple of years ago, I'd say we just tried to invest in too many different things, right? Like we tried to place a lot of bets in different areas. We're much more focused now. We're much more focused on platform efficiency to help us drive kind of innovation velocity. Inbal's actually been person driving that for all of us. And we're very ROI focused. I'm fortunate in that I have a CEO that has a very strong financial background, right? So he's very ROI focused as well. I think a great example of that in terms of an area where we've invested recently is our self-serve platform. Twilio has always been developer-first, PLG. The reality of it is we let that process get too complicated for our customers over time. And so over the last couple of years, we've really taken -- undertaken an effort in product and engineering and go-to-market to simplify that experience. And most recently, we launched what we call one console, which we can get into, which makes it even easier for customers to come in and adopt multiple products on Twilio. So that's one example where the return was just obvious, right? And we put a lot of investment behind it. And maybe just on your last point around different financial profiles. Like what I would say is from a pricing model perspective, all of our products are usage-based for the most part. So in that sense, they're very similar. Where I'd say they're actually different is in the gross margin profile. So aside from messaging, most of our products are quite high margin. I think this new conversations layer that we just launched, I put in more of the high-margin bucket.

And then Inbal, one of Twilio's historical strengths has been giving developers these like module building blocks. At the same time, customers increasingly want Twilio to solve more complexity for them. So how do you balance kind of remaining flexible and being developer first with moving higher in the stack and owning more of that layer?

Yes. So I think the first thing that we should anchor on is that the concept of developer is changing. It used to be that developers where we were able to segmentize them as like it's a software developer. They're here to solve a complex problem. You expect them to solve the end-to-end. But the cost of building is going down. And as part of that, what we're seeing from the different enterprises and the different ISVs and businesses is they want to be able to control full customization. So also remember, we're coming from kind of the era of SaaS that businesses got like a black box and they needed to customize it to a specific level. We see that what our customers are asking is to get more flexibility. They want to be able to create these use cases that really solve their problems. They want to be able to build some of these bespoke solutions. And because of the cost is going down, then suddenly, the developer is getting a different context. And why does that matter? Because Twilio serve both. So we're serving the existing developers, which is the software developer that want all these bits and pieces, but we're also introducing new interfaces that enable the new builders to be able to build the solutions they want on top of Twilio in the fullness of time. Like Conversation Memory is a good example for that because when you're looking into how are we making conversation better, conversation in order to last a lifetime, it needs to have some sort of a memory. So a [ true customer 360 ], a true journey that is happening throughout the lifetime. And you can customize it and build it by yourself or you can use a Twilio component of that. You can introduce it to your conversation. And you can also build a brand-new business like an AI native that is building AI agents that are using our conversation memory on that.

And you've delivered 5% plus organic revenue beats over the last 2 quarters. It's obviously kind of like been very well received by investors recently, but what drove that specific upside? And how should we think about that level of performance persisting over the next couple of quarters?

Yes. I mean it was pretty broad-based, which is kind of what we've said. So when you look at it across product, when you look at it across sales channel or industry vertical that our customers play in, it's actually quite broad-based. Now messaging is 60% of our revenue, right? So that tends to be the biggest driver of variability in any period. And when you look at that business, it grew like 18% in the first half of this year. It's a large part of why we outperformed relative to our guide. But with that said, like we're usage-based, which is why we tend to guide and plan a bit more prudently. And if you look back maybe a little bit further last couple of years, we've really beaten in the range of our guide in the range of like 2% to 4% on the top line. I'd say that's more the norm, right? 5% plus hasn't -- nothing has changed in our guidance philosophy in that sense. So I'd say we're not expecting 5% plus to be the new normal. Now when you look at gross profit and you look at our other products like voice or software add-ons, those are all very high gross margin or for every dollar of revenue, they carry more gross profit than messaging does. And so when you think about like the -- what drives the gross profit strength, it's really much more balanced across the portfolio where I'd say in any given period, messaging can drive revenue one way or the other.

Voice AI is something that's been top of mind, I'd say, for everyone recently, but it's something that can work really well in a controlled setting, but when you introduce it into production, can face challenges with latency, interruptions, accents, background noises, network variability. So how do you think about the relative importance of those issues and how Twilio kind of helps solve those?

So I think we all need to remember, these are very early days in the voice AI journey. We're just at the beginning. So the models are still evolving. The infrastructure is still evolving, how we build AI agents that are voice first is still evolving. This is a problem that the industry has been trying to solve for years, but with the introduction of LLMs and AI agents, we're now in a point in time that we can solve it, but the infrastructure has not yet kind of built towards that world. It was built for human engagement. Now where it starts playing a role is where we see adoption and we see enterprises and different businesses taking these AI agents into production, there are not many of them. And if they do that, they do this on like a low-hanging fruit use case that they feel confident delegating to AI agents or they do that in a specific or a small amount of customers that they are taking through that flow. Now what are the barriers to take some of these into production? Accuracy is number one. And accuracy, it's a combination of the infrastructure. It's a combination of the ability of the model to really interpret what's happening in the conversation and all of them together are playing a role. Now where accuracy is critical is in the infrastructure layer when we're talking about latency, when we're talking about quality, when we're talking about all the ability to do proper turn detection. And this is where Twilio is playing a significant role. The second part and the trust. So trust today is a big blocker from taking these AI workloads into production because suddenly, you have an entity that is there to complete a task. It is very task-driven. It doesn't have judgment. It's there to complete the task. So how are you enabling that AI agent to do that work unsupervised? So we're missing a lot of that layer of supervision, if it's the identity verification or it's the government or it's the kill switch the way that Kho likes to call it, which is really about how are we monitoring what's happening in the conversation itself. I think the third part is like we need to understand that the regulation will evolve, and they will change. So there will need to be new policies that are introduced. And as part of that, it goes to data storage, what is happening in the conversation and how we monitor these conversations, where is the data stored, what data you're allowed to store and not allowed to store. And the way we're thinking about it is really across all these facets. And the other part is thinking about a conversation. And the conversation rarely happens on a single channel. It tends to be, by nature, a multichannel engagement. You start on a voice, then you work to messaging. As I said, it's early days, so we see mainly the voice use case, but all the messaging and e-mail is coming and Twilio is uniquely positioned to be able to host through our orchestration a multichannel conversation.

And then you support multiple speech and model providers today. How do you think about eventually becoming more of a layer that helps customers select amongst these providers in real time based on maybe quality, latency, cost versus kind of continuing to put that in the court of maybe other platforms?

So we already are doing some of that with our Conversation Relay product. Our conversation Relay products enable customers to pick and choose and bring the models, if it's the STT or TTS model or their LLMs to be able to customize and create their own AI agents. And the premise of Twilio and why we're very adamant is about being a neutral platform. We do not think there's going to be only one. We see customers choosing different models, different AI agents, different use cases of implementation of AI agents based on their specific needs. they don't want to roll them all. They believe that there's going to be a multi-agent type of a world. And we're giving customers the flexibility to bring these agents into production by building on top of the Conversation Memory that basically keeps the contextual on a conversation even if there are multiple agents that are involved or being able to have a conversation across multiple channels, even if it starts on voice and then goes to messaging or throughout the lifetime of a customer, which is maybe you start with a marketing engagement and then it goes to a sales and then there's a support issue and then it goes back to kind of a marketing opportunity. So really connecting all these together and giving the customers the flexibility to pick and choose the workload they want to bring to Twilio, we're giving them the rails to run on top of.

And in voice, AI can benefit Twilio, it feels like in a lot of different ways. Maybe it's more minutes at existing customers, greater software attachment or just overall growth in the number of customers that are leveraging Twilio. Which one of those are you think having the biggest impact on Twilio's gross profit growth right now?

Yes. I'd say the 2 primary drivers of the gross profit growth or the revenue growth in voice is increased minutes. So just more volume on the channel and then the software add-ons. And when we look at Q2, the voice product grew 20% plus. And when you look at the year-over-year growth in dollars, 50% of it came from the channels and 50% of it came from the software add-ons. So pretty evenly distributed between those 2 things. We used an example -- the AI natives you kind of referenced as well. Some of that is driven by the AI natives coming into our self-serve channel, kind of building on our platform, still a relatively smaller part of the business. But what we see, as an example, we have a horizontal agentic builder customer -- when we look back about 1.5 years ago, they came on to Twilio's platform. They were spending kind of low hundreds of thousands of dollars per quarter. All of it was voice connectivity. Last quarter, that's a $1.5 million revenue per quarter customer. 1/3 of it is actually the software add-ons, 2/3 of it is the connectivity. So as they grow, we scale with them. And they're starting to add these software add-ons, whether that's conferencing or media streams or answering machine detection, things like that, that make their product and their agents smarter and more valuable.

Yes. And then it feels like a lot of people are increasingly using voice as kind of a channel to communicate with these LLMs. How do you think about that as a growth driver going forward?

Yes. I think that today, I'd say not a big driver. We have had a little bit of it here and there. But to the extent that they're using a channel, whether that's voice or in some cases, it might be like an over-the-top channel where they're using WhatsApp voice or whatever it might be, they can definitely leverage Twilio's rails. Like where we see some of the model companies today tends to be a bit more of a traditional use case, which is verification, authentication coming to our platform. As customers come to their platform, they need to verify who they are. And so they'll leverage Twilio to do that, whether that's through 2FA or something like that.

Yes. And then we touched on this a little bit when we talked about the outperformance on revenue over the past couple of quarters. But when we look at it from a gross profit perspective, how do you think about the different drivers of gross profit being kind of above your expectations over the last few quarters? And how do you think about that momentum continuing to the back half of the year?

Yes. I'd say the biggest driver is obviously revenue, right? So yes, revenue outperformed gross profit followed. But when I think about the fact that in Q2, gross profit grew faster than revenue, I'd say there was 2 primary drivers. One is product mix. So voice, the software add-ons, our self-serve channel, those are all high margin, right? So as they grow faster and in particular, as they grow faster than messaging, we have what we call favorable mix, right? So that's helpful. They just carry more -- for every dollar of revenue, they have more gross profit. The other is cost actions that we're taking. So there's a lot that we're doing to actually reduce our COGS or cost of goods sold. So that's things like establishing more direct connections with carriers around the world. So there's no middleman or aggregator in between. We've taken a lot of initiatives between my team and Inbal's team on our hosting costs. We've also shifted some of our products that were still on-prem to the cloud, and we're seeing some benefits from that. So we're trying to come at it from a couple of different angles. Growing gross profit dollars sustainably has been a big focus for us as a company, and I think you're kind of seeing that play out in the numbers.

Yes. And then another thing you brought up when we were talking about the revenue outperformance that messaging, I think, has been a big contributor to the first half of the year. And I think that's where people have a little bit less understanding of exactly what's been driving the relative strength there. So I would love to get a little bit deeper into what the most important drivers of that inflection have been and how to think of even just the mix between maybe new customers adopting messaging versus increasing volumes and those different things.

Yes. So messaging is about 60% of our revenue. So it's a big business, right? It grew 18%. So in any given period, just given the size of the installed base or the existing customer base, volume with our existing customers is the biggest driver. So new customers are growing quite well, actually very well, but it's just off a smaller base. So now why is our new -- our existing customer volume growing? It's actually not one thing, which I know is like a very unsatisfying answer. It's a lot of things. It's -- when we look at it across industry verticals, like our top 5 industries where our customers play are growing really well. When we look at it across sales channel, whether it's self-serve or enterprises or ISVs, again, all growing quite well. So it's not one thing. So some of it's macro, it could be like our competitive positioning. It's a number of different things that are driving it.