Twilio Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 10 speakers on the call.

Operator

day and thank you for standing by. Welcome to Twilio Inc. 2nd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Brian Veeneman, SVP, Investor Relations. Please go ahead, sir.

Speaker 1

Good afternoon, everyone, and thank you for joining us for Twilio's Q2 2024 Earnings Conference Call. Joining me today are Khozema Shipchandler, Chief Executive Officer and Aidan Vigiano, Chief Financial Officer. As a reminder, we will disclose non GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors. Twilio.com.

Speaker 1

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 ks 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.

Speaker 1

With that, I'll hand it over to Khozema Nadin, who will discuss our Q2 results, and then we'll open the call for Q and A.

Speaker 2

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. Twilio delivered a good second quarter. We are driving durable profitable growth as we exceeded our Q2 guidance with $1,100,000,000 in revenue and $175,000,000 in non GAAP income from operations, both record levels. We also delivered nearly $200,000,000 of free cash flow, another strong quarter of cash generation.

Speaker 2

We're running the business with increased rigor, which we are confident will drive improved growth rates and additional operating leverage over time. The communications business is performing very well. And in our segment business, we're focused on executing on our commitments, while reducing non GAAP operating losses. In Q2, we saw continued signs that communications growth is stabilizing, including quarter over quarter improvement in international trends. And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement.

Speaker 2

What's true across the board is that in the world of AI, contextual data is paramount. According to Twilio's annual state of customer engagement report, we found 84% of businesses said they provide good or excellent customer engagement, yet only 54% of consumers agree. That disconnect is because brands need help contextualizing the data they have. By combining our leading communications capabilities, our rich and contextual data, and the power of AI, we are uniquely positioned to unlock smarter and more personalized interactions for brands that enable them to reimagine customer engagement and drive more revenue at a lower cost. Let's turn to our business highlights.

Speaker 2

Our Twilio Communications business had a strong quarter with revenue of $1,010,000,000 up 7% on an organic basis year over year on the back of solid performance in messaging, acceleration in email growth and strong ISV contributions. During the quarter, we also focused on a number of initiatives that we believe will deliver improved growth rates over time. In the near term, we expect our growth to be fueled by our expanded network of partners and ISVs, self-service enhancements and cross sell opportunities. While we have made meaningful progress in all these areas, I'm particularly pleased with our success in securing new partners and ISVs. During the quarter, we achieved an 8 figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solution.

Speaker 2

Additionally, we signed a new partnership with Omnisend, an omnichannel marketing platform targeting the SMB retail market, who will help Twilio expand its footprint into new geographies. We also extended our co sell partnerships with Airship, Bloomreach, Braze, Insider and Klaviyo into new geographical territories to power a data enriched end to end marketing experience. During the quarter, we delivered the strongest revenue growth in our self-service business since Q1 of 2023 and we continued to make enhancements to simplify the onboarding experience for customers. For example, we introduced a new console experience that helps make recommendations, guiding customers to which products they should be using based on their desired use cases and outcomes. And our new OneSignup streamlines the login process by having one login for a customer to access all of their Twilio accounts and products.

Speaker 2

In the medium term, product innovation will be an important growth lever as we deliver on our vision to unlock smarter, more personalized interactions for brands. In the quarter, we started to see success with our newer higher margin software products. These are products that leverage AI such as Verify and Voice Intelligence as well as platform innovations that natively embed AI and machine learning such as traffic optimization engine and engagement suite to drive greater deliverability and better customer engagement. These products are rapidly gaining adoption and can become meaningful growth drivers over time. 1 customer, a leading mortgage lender adopted both voice and verify in the quarter and expanded their messaging usage.

Speaker 2

Twilio won this competitive cross sell deal as our platform enabled the customer to have a single console. With both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers. Since deploying Twilio, the company is already seeing a 38% increase in SMS response rates and a 20% increase in banker productivity. More importantly, these products are gaining adoption because they are simple to use, trusted and intelligent. Verify is a great example.

Speaker 2

Not only is it growing quickly, it is saving our customers 1,000,000 of dollars by mitigating fraud at the source. And to continue to deliver better outcomes for our customers leveraging AI, our SMS pumping protection products went GA during the quarter, which can be enabled with one click and automatically detects and blocks fraudulent messages, a growing issue in certain international markets. We're continuing to deliver on our promise of natively integrating segment capabilities into our communications business. This quarter, we released personalized virtual agent into private beta, marking Twilio's 2nd product that natively embeds segment into communications. With Personalized Virtual Agent, our customers receive a truly personalized interactive voice response.

Speaker 2

Each caller receives a custom menu of options based on the recent interactions with the company, purchase history, recent support inquiries and responses to marketing emails among others. The product combines voice, virtual agent with Google Dialogflow agent, studio and unified profiles into one simple product that is guided with this wizard setup. We're excited with this release as it marks the next chapter for how IVR is evolving in the world of AI. And lastly, Twilio's communications products continue to receive recognition as we were named a leader in the Gartner Magic Quadrant for CPaaS for the 2nd year in a row, positioned highest for ability to execute and ranked number 1 in 4 of 6 use cases in the Gartner Critical Capabilities Report. Twilio is also named a leader in IDC's Marketscape Worldwide Contact Center as a Service.

Speaker 2

Turning to our Twilio segment business. Segment delivered revenue of $75,000,000 up 3% year over year as we continue to focus on delivering against the priorities that we outlined in our operational review in March. We made solid progress in improving customer time to value and executing on data warehouse interoperability. We also made significant improvements in our cost profile in Q2 and lowered our non GAAP operating losses by 25% quarter over quarter. We also continue to focus on driving efficiencies in our go to market, which yielded an increase in sales productivity.

Speaker 2

And in Q2, over 40% of our new bookings were multi year deals versus 17% in the prior year period. A key win for segment included our largest deal of the quarter, a 7 figure deal with IBM. On the product front, we delivered on new capabilities to further enhance our interoperability with data platforms and data warehouses. In Q2, we released Datagraph and Linked Audiences into public beta, which seamlessly integrate with data warehouses including Databricks and Snowflake. With Linked Audiences marketers can now activate centralized data in the warehouse and combine it with real time events and predictive AI traits to generate unified customer profiles and audience cohorts to deliver targeted personalized experiences.

Speaker 2

We've gotten a great response and we're excited to have customers like LegalZoom and TradeMe deploy and realize the benefits and efficiencies. We are also improving time to value for customers. During the quarter, our use case in product onboarding went live, guiding customers through a customized onboarding experience focused on their specific business goal. Additionally, our CDP co pilot is reducing instrumentation and development time. Customers can now deploy and get value from segment 4 times faster and we are seeing early signs that we're able to accelerate business wins for our customers.

Speaker 2

Overall, I'm very pleased with the progress we've made so far this year. We're continuing to deliver durable profitable growth while driving strong free cash flow and we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over time. I'm incredibly energized about our opportunity to become the leading customer engagement platform, combining communications, contextual data and AI to deliver intelligent engagement and outsized outcomes for our customers. And I remain very confident in our ability to deliver accelerated growth and continued improvements in our free cash flow profile over the coming quarters. And with that, I'll turn it over to Aidan.

Speaker 3

Thank you, Khozema, and good afternoon, everyone. Jumping into our results, Total Q2 revenue was $1,083,000,000 up 4% reported and 7% organically year over year. Communications revenue was $1,007,000,000 up 4% reported and 7% organically year over year. And segment revenue was $75,000,000 up 3% year over year. Our Q2 revenue growth was driven by solid performance in messaging, acceleration in email growth, as well as continued strength in our ISV business.

Speaker 3

We continue to see signs of growth stabilization in our communications business and we saw modest sequential improvements in International as well. Company organic revenue growth and Communications organic revenue growth were both roughly 100 basis points lower due to the sunsetting of the software component of our Zipwhip business. We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year. Our Q2 dollar based net expansion rate was 102%. Our dollar based net expansion rate for communications was 102% and 103% when excluding Zipwhip Software customers.

Speaker 3

Our dollar based net expansion rate for segment was 93%, driven by elevated churn and contraction. Mitigating churn and contraction remains a focus for segment and we're encouraged by the progress we made in Q2. As Khozema discussed, we are improving time to value and customers are deploying use cases 4 times faster as a result. We are also pushing for more multi year deals with customers and in Q2 over 40% of segments new bookings were multi year deals versus 17% a year ago. We delivered record non GAAP gross profit of $577,000,000 up 7% year over year.

Speaker 3

This represented a non GAAP gross margin of 53.3 percent, up 110 basis points year over year and down 70 basis points quarter over quarter. As we noted in our Q1 call, we recognized elevated cloud hosting credits that benefited Q1 gross margins by roughly 80 basis points and those credits did not recur in Q2. Non GAAP gross margins for our Communications and Segments business units were 51.8% and 73.4%, respectively. As we noted in Q1, we are migrating part of Segment's architecture to new infrastructure providers this year to recognize greater efficiencies. We began migrating data to our new provider in Q2 and during this transition, we will incur some overlapping vendor expenses.

Speaker 3

As a result, we expect reduced segment gross margins until the migration is complete, which is expected to occur by the end of 2024. Non GAAP income from operations came in well ahead of expectations at $175,000,000 up 46% year over year even after including $20,000,000 of incremental expenses associated with our new employee cash bonus program. As a reminder, we initiated this program at the start of the year to reduce stock based compensation expenses over time. The outperformance was driven by our revenue beat, improvements in segments expense profile and ongoing cost discipline. Our non GAAP operating margin of 16.2 percent was up 460 basis points year over year and 100 basis points sequentially.

Speaker 3

Non GAAP income from operations for our communications business was $250,000,000 and non GAAP loss from operations for our segment business was $16,000,000 a $5,000,000 improvement quarter over quarter. GAAP loss from operations was $19,000,000 as we continue to make solid progress on our path towards GAAP profitability. Stock based compensation as a percentage of revenue was 13.6%, excluding restructuring costs, down 130 basis points quarter over quarter and 110 basis points year over year. We generated free cash flow of $198,000,000 driven by continued operating efficiency and ongoing collection strength. This was up $126,000,000 year over year.

Speaker 3

And over the last 12 months, we generated free cash flow of 781,000,000 dollars We're making good progress on free cash flow and we believe there are significant opportunities to drive more leverage over time. Finally, we're continuing to execute on our $3,000,000,000 share repurchase programs and have repurchased over $700,000,000 since our last earnings call in May. This brings our total repurchases to date to over $2,200,000,000 We intend to complete the remaining 800,000,000 dollars of authorized repurchases by year end, which should meaningfully reduce our outstanding share count over the next two quarters. Our total shares outstanding as of June 30 was 164,000,000 down 10% year to date. Moving to guidance.

Speaker 3

For Q3, we're initiating a revenue target of $1,085,000,000,000 to 1,095,000,000,000 dollars representing year over year growth of 5% to 6% on both a reported and organic basis. We've now lapped our 2 divestitures from last year. So starting in Q3, reported and organic quarterly revenue will be equivalent. Given year to date performance, we're narrowing our full year organic revenue growth guidance range to 6% to 7%. Turning to our profit outlook.

Speaker 3

For Q3, we expect non GAAP income from operations of $160,000,000 to $170,000,000 Given our outperformance in Q2, we're raising our full year non GAAP income from operations guidance to $650,000,000 to $675,000,000 dollars Finally, we remain focused on improving our free cash flow profile and we continue to expect that full year free cash flow generation will be in line with our full year non GAAP income from operations. We're encouraged by the performance we delivered in the first half as we've stabilized revenue growth and delivered strong profitability and free cash flow. As we look ahead, we're investing in initiatives to reaccelerate growth, but we continue to plan and guide it prudently. We are progressing towards GAAP profitability and we continue to see significant opportunities for margin expansion and improved free cash flow over time. I'm excited to continue to build on the progress we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarters.

Speaker 3

And with that, we'll now open it up to questions.

Operator

Thank And our first question is going to come from the line of James Fish with Piper Sandler. Your line is open. Please go ahead.

Speaker 4

Hey, guys. This is Quintin on for Jim Fish. Thanks for taking our questions. Maybe first on the margin side, you've talked about a fair amount of incremental leverage opportunity coming from automation of back office activities like contract management or that product activation. What inning are we in for those operational improvements across the business?

Speaker 4

And as we think about the upside you've shown relative to guide so far this year, how much of the cost savings is coming from these process improvements versus just better rigor around managing spend?

Speaker 3

Great. Why don't I start and then Josema can jump in. Listen, I think we've done a lot on margins. If you just take a step back and think about the expansion that we got last year and then coming into this year, our initial guide assumed very little operating margin leverage. If you look at our current guide for the year at the midpoint, it's about 2.50 ish basis points of margin expansion.

Speaker 3

So we continue to find opportunities to, get expansion on both the OpEx line as well as the stock based compensation line and we don't think we're done. So we've talked about the fact that we're going to get the segment business to breakeven by the Q2 of next year. That business lost $16,000,000 in the 2nd quarter, $21,000,000 in the Q1. So you can see that there's an opportunity to get leverage there.

Speaker 5

And then in addition, in

Speaker 3

the broader business, I'd say in communications and G and A functions, there's a lot of work that we're doing around, you mentioned automation. We are a remote first company, so we do have the opportunity to leverage lower cost geographies as a way to continue to get efficiencies. And so we're doing all of these things and continue to do them. I would say, I'm not going to give you an exact inning, but I would say we have a lot of opportunity to continue to expand margins, both on the non GAAP side as well as the GAAP side, including stock based compensation. In terms of the profit, in terms of what's coming from improvements in process versus cost discipline, I think it's a little bit of both.

Speaker 3

It's largely cost discipline though. We continue to believe that we can run this company without having to add a lot of incremental costs. You've seen us do that now for 6 quarters in a row. And so we're really just much more disciplined in terms of how we're running the company and that's something Cosima drives pretty regularly with the team.

Speaker 4

That's helpful. And then on the revenue front, it sounds like we found stabilization here and actually quarter over quarter things sound a little bit better, which is great. But we also tightened the kind of revenue targets for the full year down slightly. Can you talk about what's embedded into the guide here? What assumptions or incremental prudence that you've incorporated relative to the kind of last guide that we got last quarter?

Speaker 4

Thank you.

Speaker 3

Yes. Thanks for the question. I'll take it again. So we grew year to date through the first half 7%. We're guiding to 5% to 6% in Q3.

Speaker 3

We think the 6% to 7% that we gave for the year is a reasonable range based on what we're seeing today. I will say that in the Q2, we did see a number of very encouraging trends in the business. In particular, we saw strength in messaging. As you know, that's our biggest business. Solid performance both in the U.

Speaker 3

S, which we've seen majority of this year, but also we saw modestly improving trends internationally. We also saw growth in our email business accelerate and really and Khozema kind of talked about it in his prepared remarks as well, really strong performance in both our ISV and self serve businesses. So we saw a number of encouraging trends. We guided to 5% to 6% in the 3rd quarter. And if you think about how we guided in Q1 and Q2, that was 4% to 5%.

Speaker 3

So you are seeing some of these trends kind of flow through to the guidance. But we are still a usage based business. So there is inherent variability that comes along with that. And so we'll continue to plan, we'll continue to guide prudently just given that and given the dynamic market that we're operating in.

Speaker 2

I'll just add one thing maybe, which is we're not really planning for any kind of like macroeconomic environment, like whether it's good or bad. I think we're just planning to run the company well. As we've alluded to a number of times, running it with better discipline, better rigor, and it's obviously a dynamic global market with a lot of different kind of geo things going on, macro things going on. I think irrespective of however any of that plays, we feel really good about the guidance that we've given. And as Aidan said, we'll continue to be prudent about the way that we guide.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Mark Murphy with JPMorgan. Your line is open. Please go ahead.

Speaker 6

Thank you very much. So, Khozema, you mentioned an acceleration in email. And I'm curious to what you might attribute that whether it's more marketing emails, transactional emails, notification emails. Is there anything there that makes you think companies are finally starting to lean back in to outbound marketing activities or on customer engagement initiatives in a way that maybe they weren't a couple

Speaker 7

of quarters ago? And then I have

Speaker 4

a quick follow-up.

Speaker 2

Yes. Hey, Mark. Thanks for the question. I wouldn't say that it necessarily breaks down exactly the way that you said it. I think in general, we are seeing just kind of elevated trends in that product and that part of the business.

Speaker 2

I think maybe to just sort of build on your question through the Twilio lens a little bit more. I think where we continue to see a lot of opportunity and I think email and the other channels be beneficiaries is as communications become more targeted, as they start to leverage more contextual data as we kind of talked about, especially through vis a vis segment. I think there is an opportunity to grow the email channel and because what you and I will receive as consumers will be much more specified, much more targeted, much richer communication. And I think we're seeing a little bit of that. And I think a lot of that is kind of really more on the comp.

Speaker 2

But in the quarter, I wouldn't necessarily point to one thing or the other. I'd just say kind of elevated trends on the product.

Speaker 6

Okay. And then thank you for that, Co. And then, Aidan, I wanted to ask you I'm going to try to combine 2 quick thoughts, but you generated, I think, $1.25 a share of free cash flow in Q2, right? So, it arguably puts you on a $5 per share run rate, which is a lot. And just is anything one time in nature or could we roll that kind of free cash flow margin into 20 25?

Speaker 6

And then I did just relating back to that question of the narrowing of the range, we're trying to I think we're trying to reconcile, there's a lot of positive comments and then that got narrowed just a hair below the midpoint. And I'm just wondering, we've had Starbucks, Nike, McDonald's, Tesla, there's been a lot of consumer slowdown. Is there anything there So,

Speaker 4

I

Speaker 2

So I think from an industry perspective, I mean, kind of the good news for Twilio is, I mean, you know the company really well, you've been following us for a long time. Like we have a very, very distributed consumer or customer base, right? So over 300,000 customers, we're spread across a wide variety of industries. And so we're always quite frankly looking at like some up, some down in a variety of these different areas. I would say, as it relates to some of the kind of areas that you pointed to, like let's maybe just categorize those as retail e commerce.

Speaker 2

I would say that that was an area that was particularly good for us. I wouldn't necessarily point to a seasonal or holiday trend. I'm not necessarily forecasting like a strong like Thanksgiving or Christmas season. Like again, we're kind of planning for like whatever the period is. We just want to run the company well and guide prudently through all that.

Speaker 2

So that's kind of how we're thinking about the way that we're running the company 1st and foremost and then how that ends up translating into some of our revenue guidance. And then on cash, Aiden, do you

Speaker 4

want to take that?

Speaker 3

Yes. So thanks, Mark. And if you look at our cash performance kind of through the first half or at least in the second quarter, you can see that cash is kind of outpacing our non GAAP profit. It was about 18% free cash flow margin in the 2nd quarter. What we saw there is it's largely a function of the profit generation and continued leverage that we're getting on OpEx, but we did see collections improvement in the quarter by about 2 days.

Speaker 3

Now on the flip side, AP kind of went the other way. So net net working capital really wasn't a help. So I wouldn't call out anything specifically. What we said for the year is you should expect free cash flow generation to be in line with non GAAP profit. I think that's a good framework in terms of how to think about it for the time being.

Speaker 6

Thank you very

Speaker 2

much. Thank

Operator

you. And one moment as we move on to our next question. And our next question is going to come from the line of Arjun Bhatia with William Blair. Your line is open. Please go ahead.

Speaker 8

Great. Thank you. This is Chris on for Arjun. I was hoping to get a little extra color on segment NRR in the quarter. It's Great to see the improvement there.

Speaker 8

And I was wondering if you think that we're starting to stabilize and kind of sound the bottom and how we should think about the trends going forward?

Speaker 3

Yes. I think as it relates to segments, dollar based net expansion, it was 93% this quarter, it was 92% last quarter, the business grew 3%. What we said for this year is you should expect that business to the growth in that business to be muted. I think that continues to be our expectation for the year. I'd say 93% DVNE per segment was kind of in line with what we were expecting.

Speaker 3

And really there, we're focused on a number of different initiatives that we laid out in March kind of at our operational review, readout. And we're focused on a couple of things. Number 1, we're improving our customers' onboarding experience. Historically, it took way too long for customers to get to value. And now Thomas and the team have implemented a number of different things that get customers to value on their first use case in a matter of weeks versus historically in a matter of months.

Speaker 3

In addition to that, we're making a concerted effort to sign more multiyear deals and that will help with churn and contraction, that will help with dollar based net expansion as a result. And this quarter, of the bookings that we signed, 40% of them were multiyear deals versus just 17% a year ago. And then the last thing we committed to at the Investor Day or one of the other things I should say, it's not the only thing. We are making progress on our data warehouse interoperability, which is important for our customers. And in Q2, we introduced linked audiences.

Speaker 3

And what that does is it allows customers to combine their segment CDP data with data in their warehouses. And that's again an important thing for our customer base. So all of those things combined, we think over time help DBNE. It won't be immediate. DBNE is a trailing 12 month metric.

Speaker 3

So it's not going to reflect immediately. But as these things start to get traction, we think that, it will send that metric in the right direction kind of over time.

Speaker 8

Great. Thank you. That's very helpful color. And the second question for me was the personalized agent sounds like way to kind of combine the communications platform with segment. I was curious what kind of reception this is getting from customers so far?

Speaker 8

And what other kinds of products are on the road map that can incorporate Segment into telecommunications? Thanks.

Speaker 2

Yes. I don't want to get too far ahead of the roadmap. So maybe I'll park that for an upcoming period when we report. I think in terms of the launch that we just did, I'd say it's pretty early. I mean, we like just launched the thing a few weeks ago.

Speaker 2

I think based on the customer conversations that I've had, people are really, really excited about it. I think the whole notion of being able to leverage like a detailed profile about a customer in the context of a conversation is incredibly important. I think it also has the benefit of like creating a feedback loop. So customers that I've spoken with very, very excited. I know our team is very excited based on the customers they've spoken with as well.

Speaker 2

But in terms of financials, it's just early days and we'll have to kind of report back on that later.

Speaker 8

Got it. Thanks and congrats on the quarter. Thanks.

Operator

Thanks. Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Taylor McGinnis with UBS. Your line is open.

Operator

Please go ahead.

Speaker 5

So maybe going back to the full year revenue outlook and some of the assumptions. You talked about an improvement in trends with international and e mail segment growth improved slightly and then you talked about some of the ISV and co sell opportunities. So I know you have some initiatives in place to accelerate growth that could be additive to stabilization in the macro in the second half. So when you think about like those playing out and what might be embedded into the guide, it looks like the revenue guide just assumes trends remain status quo and maybe doesn't assume much upside from some of these initiatives that you have in place. So could you just provide a little bit more color there and what those opportunities could look like?

Speaker 5

Thanks.

Speaker 3

Yes. I think we I'll start to add the head. I think we believe that the Q4 implied math gets you to kind of a reasonable range of outcomes based on kind of what we're seeing in the business today. As we said, you kind of called them out. A number of different trends that we're seeing that have been encouraging over the last 3 months.

Speaker 3

I think the thing to remember is it's very dynamic and we are usage based. And so we continue to just plan prudently in that light. And so we just want to make sure that we're not getting ahead of ourselves. We're not reading into too much in terms of what we're seeing over 3 months. And that's just the right thing to do just given how dynamic market is.

Speaker 6

Yes. Taylor, the only thing I'd add is,

Speaker 2

I mean, again, just to maybe reinforce a few points that Aidan made, I think we see encouraging signs like we good about the guidance that we provided today. I think as these things start to materialize, like we'll feel better obviously, but there are a number of things that are happening inside the business today that certainly feel like they could be choose for growth down the road and we're optimistic about it. But we're going to continue guiding prudently just given that it's a dynamic environment.

Speaker 5

Perfect. And then just maybe as a follow-up.

Speaker 3

So when you talked about some

Speaker 5

of the improvement in trends that you saw in 2Q, maybe you could just talk about like linearity a little bit in the quarter. And as we start 3Q, would you say that a lot of those trends have remained similar or any notable changes to flag? Thanks.

Speaker 4

Yes. I mean, we're not going

Speaker 2

to get ahead of that. Obviously, Taylor, like I think our orders don't have sort of the linearity dynamics maybe of what you see in some other companies. I think, again, we saw pretty positive trends as a result of the 3 month period that we're talking about today. I certainly don't want to get into July or anything like that. But based on what we've seen, we're encouraged and we'll play through Q3.

Speaker 5

Great. Thank you so much.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Meta Marshall with Morgan Stanley. Your line is open. Please go ahead.

Speaker 9

Great. Thanks. Just wanted to kind of confirm on political traffic. I know in the past you guys have said that that was going to be an area that you weren't going to invest in. But just as we head into a political season, should we still be thinking about political traffic either to email or text message or something that's kind of more limited contribution to Twilio?

Speaker 9

Thanks.

Speaker 3

Yes. I think as it relates to political, we always have some political traffic kind of rolling through our business, but I wouldn't expect outsized revenue impact as a result of the upcoming election. We have registration requirements. We talked about them before with you and an acceptable use policy. And if customers don't meet those policies, we won't take the traffic.

Speaker 3

So it ensures a level of quality on our networks and on our platform and it protects consumers. We think that's the right thing to do. So there might be a little bit of a bump, but it won't be anything outsized as we get closer to the U. S. Elections.

Speaker 9

Great. Thanks. And then just I noted you guys said international improvement. Is that some end market improvement or do you kind of attribute that to some of the ISV relationships growing? Just how do you think about kind of some of that improvement that you're seeing in our ISV traction?

Speaker 9

Thanks.

Speaker 3

Yes. So we did see this kind of improving trend with international. It's international when we say international, just to be clear, it's internationally terminating messaging traffic. I'd say it was a bit broad based. It wasn't one group of customers or the other.

Speaker 3

So that was encouraging in a way to see that it was a bit broader versus just an ISV group or another group of customers. But beyond that, I wouldn't call out anything specific. It wasn't a certain industry. It wasn't a certain market where traffic was terminating that spiked or jumped out to us. It was broader.

Speaker 9

Great. Thanks.

Operator

Thank you. One moment for our next question. Our next question is going to come from the line of Ryan Kountze with Needham and Co. Your line is open. Please go ahead.

Speaker 7

Hi, thanks for the question. I wanted to

Speaker 2

ask about any of the changes you're making in go to market and these sort of changes that are driving the strength you're able to reduce costs and any progress in automation that you've had on the comp side of business? Yes. I mean, just to maybe go back a little bit, like we made a number of changes, obviously, that unfortunately resulted in a whole series of layoffs towards the earlier part of last year. So now we're kind of back into 2023 and we're starting to see some of those well, a lot of those changes, frankly, especially in our cost profile ripple through the business. In terms of some of the rationale behind what we did at the time and what we were kind of expecting going forward, like we did want to orient many more of our customers towards self serve.

Speaker 2

And I think we pointed to a couple of things in the quarter around self serve like it was definitely one of the better quarters for that kind of cohort segment of customers. It's a very, very kind of broad set like you can have customers spending small amounts of money up to kind of decently large size amounts of money. And so it's a kind of broad category that has seen strength. There's a number of things that we did from a technology perspective as well to make sure that we were able to onboard on ramp customers in a way that they could kind of activate with Twilio fairly quickly as well. So I'd say very good progress quite frankly in terms of self serve as it relates to communications.

Speaker 2

Maybe just the other thing that you didn't ask, but just to kind of touch on is also with as Aidan kind of talked about some of her comments, also good progress, I wouldn't call per se self serve, but in terms of just accelerating customers to value on the segment side as well, like we have done a lot of work from a technology perspective there too, to increase just the velocity with which customers get to value. And then I think more broadly, there is work that we're doing on automation, but we still think that, our ability to drive cost leverage here that there is a lot of opportunity going forward and we'll continue doing that.

Speaker 4

That's helpful, Samba. Thank you.

Speaker 8

Thanks.

Operator

Thank you. One moment for our next question. Our next question is going to come from the line of Alex Zukin with Wolfe. Your line is open. Please go ahead.

Speaker 4

Hey guys, this is Rich Magnus on for Alex Zukin. I just wanted to double click again on that segment onboarding process you've been speaking about. I know in the past, you mentioned leveraging AI to help reduce friction in that process and drive that faster TTV through the self serve process. But can you sort of help us think through any impacts there that might drive segment growth this year and next year? Thanks.

Speaker 2

Yes. Maybe I'll just touch on the technology and I think Aidan kind of answered the growth dynamics earlier. Like just to reiterate that last point, I think growth will continue to be muted for the kind of foreseeable future. We've been kind of saying that for a while. And I think while there are improvements in the business, like just given the nature of it, that will take a little bit of time to show up in growth.

Speaker 2

That said, I'd say there's a handful of things that have been really encouraging for us in the segment business. I think one is that time to value work. It's a combination of AI work that we've done to help customers get through the process faster. There's also, a use case onboarding wizard that's also allowed customers to kind of get to their specified use case a lot faster. And then I'd say also a really concerted effort by our customer success team.

Speaker 2

And so the combination of those things I think has been pretty powerful frankly in really accelerating what Aiden characterized as what was months in the past down to weeks and what we've kind of quantified as a ForEx improvement from where we were.

Operator

Thank you. And we'll move on to our next question. One moment please. Our next question is going to come from the line of Pat Walravens with CitizensJMP. Your line is open.

Operator

Please go ahead.

Speaker 4

Hi. Thanks for taking my question. This is Austin Cole on for Pat. You touched on a 8 figure renewal during the quarter and Twilio voice being a part of that. Can you just talk about how you view your opportunity with respect to AI at this point and the opportunity with these products?

Speaker 4

Thank you.

Speaker 2

Yes. I mean, I think that our opportunity around AI is everything to do with data. And I think as it relates to data, in particular, contextual data. And I think the reason that we feel such deep conviction about that is, is that all of our customers are sitting on proprietary data sets that will never be turned over to an LLM, right? Like that is the part of their business and our ability to work with them visavissegment, and ingest that data, use it as part of an overall profile that we have for every single unique consumer to be able to drive a personalization experience back to them.

Speaker 2

I think that is like a really, really significant unlock. It's going to be able to drive business more drive growth excuse me more broadly for the overall business. But it's that combination of communications plus contextual data plus AI in the mix as well. Now just to go back to voice for a second since that's where you started. I think what's interesting about voice as it relates to all of that is, is that AI is the most conversation in that way.

Speaker 2

And I think that the AI capabilities are becoming so sophisticated in their ability to process natural language in this way that when paired with contextual data, I think that is going to be a heck of an opportunity. And I think a lot of that value will end up accruing, not just the messaging and email, which we feel optimistic about, but certainly voice as well.

Speaker 4

Great. Thanks a lot of sense. Thank you.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Nick Altman with Scotiabank. Your line is open. Please go ahead.

Speaker 2

Awesome. Thanks guys. You

Speaker 3

guys sort

Speaker 2

of have a reenergized focus on your ISVs. You named a handful of new partnerships in the prepared remarks. I guess when you look at sort of the other potential ISV partnerships out there, how much runway is there left in terms of acquiring new ISVs? And then just any sense of what percentage of the business is coming from those partners and any goalposts in terms of how fast that part of the business is growing? Yes.

Speaker 2

We're not going to break out the kind of percentage of revenue per se, but I'll just maybe provide a little bit of color based on your question. Obviously, there's been strong growth there and we feel very positive about it as you probably ascertain from our remarks. It is a sizable portion of the communications revenue today and it's also growing faster than our total organic growth rate and it's got quite frankly compelling gross margins as well. So that all feels pretty good. As you alluded to, we did sign a number of large ISV deals in the quarter, including wins with payment processors, customer experience companies, marketing automation platforms and more.

Speaker 2

I'd say those businesses have been growing pretty well too. And so I think we'll accrue some benefits as a result of their growth. I think too, it's not just domestic, which kind of speaks to like how much runway is there here. We're also seeing good growth in EMEA and APJ as well. And I think what's kind of important from our standpoint is that these relationships are evolving beyond just being like software providers using our channels to kind of real relationships where we have an opportunity to kind of deepen what we do with the likes of Abrasive, Klaviyo, Insider, Bloomreach, Airship, because we've got like these strong integrations within the ecosystem.

Speaker 2

We're engaged in co sell and resell with a lot of these partners. And I think that also allows us to get some go to market leverage in terms of expanding our own go to market footprint. So yes, I mean, we do feel pretty good about where we are. We do feel pretty good about the growth trajectory and we're excited. Awesome.

Speaker 1

Thanks guys.

Operator

Thank you. And one moment for our next question. And our next question is going to come from the line of William Powers with Baird. Your line is open. Please go ahead.

Speaker 4

Great. Thanks for taking the question. This is Yannis Simolas on for Will. I know you mentioned earlier in the call that retail and e commerce was pretty good this past quarter and it seems like things are pretty stable overall across the business. But I guess outside of retail and e commerce, are there any other verticals out there that are standing out right now or maybe even showing signs of upward inflection?

Speaker 3

So when we look at our top industries, I'd say most of them are actually up and growing. I'd say for us social and messaging continues to be one that's a little bit softer, though it's relatively smaller portion of our business right now. So financial services is one that has been strong. You called out retail, e commerce, and a couple of others that have been pretty strong as well. But broadly, I'd say most of the industries that we operate in, our top industries are growing.

Speaker 4

And just to be clear, growing, but not necessarily growing above the company average or?

Speaker 3

In some cases, they are. In some cases, it's more in line with company average.

Speaker 4

Okay. Thank you.

Operator

Thank you. One moment for our next question. And our next question is going to come from the line of Derrick Wood with TD Cowen. Your line is open. Please go ahead.

Speaker 2

Great. Thanks. Just on AI, I guess, stepping back a bit from a high level, Kazeemah, how would you describe the generative AI monetization strategy for Twilio whether via direct monetization or just indirect implications? Yes, I think there's a couple angles there. So let me just I'll spend a moment on it.

Speaker 2

So I think, first of all, where we kind of started with AI with some of the earliest use cases was really around fraud and trust, right? So we embedded AI capabilities to help protect the consumer just given that we want to at all costs protect the vitality of the ecosystem. And so there were a number of things that we introduced to basically protect the consumer, fraud guard, verify. These are different products we've announced over the course of the last year or so. As we talked about in the remarks today, like we're seeing good activity there.

Speaker 2

I think as we go, it's really going to be maybe AI centered predominantly around contextual data. I think where we see the big unlock here, certainly for our business and as it relates to what we've referred to for a long time and others do too is customer engagement. Like the real unlock there is like through personalization at scale. And so the way that you get there is having this like really rich contextual data about every single one of us as consumers that comes through segment, being able to relay that back to a consumer visavisome sort of communication channel and then obviously using AI to supercharge that. So one example might be like we have a voice intelligence product, we talked about that today too, where we're able to extract insights as a result of the context of that call, use it both inside of that call that's taking place at the time, but also feed it back into a profile so that that data can be reused for the next time that that brand ends up interacting with the consumer.

Speaker 2

Similarly, I think where that will increasingly go is you'll end up without perhaps even realizing it, although I think we'll probably disclose it, interacting with an automated agent where all of that is taking place seamlessly. They're able to process natural language. Like I don't think that's per se like our strategic advantage in AI. There are a number of companies that can do that. We'll partner with those organizations.

Speaker 2

What they don't have though, which I think is our secret sauce is going to be how do you get to that specific consumer and thousands of others at exactly the same moment in time to deliver each of them a unique and personalized experience That comes from contextual data and that's why we're so bent on ensuring that we deliver segment natively inside of communications

Speaker 6

so that we

Speaker 4

can deliver that entire workload.

Speaker 6

Does that make sense, Derek?

Speaker 2

Yes. That's great color. Thanks. Helpful. Thank you.

Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Samad Samana with Jefferies. Your line is open. Please go ahead.

Speaker 7

Hi. Thanks for taking my question. This is actually Billy Fitzsimmons on for Samad. Terms of a short one, stock based comp is down year over year in both dollar terms and in percentage terms. Just how should we think about where that can kind of go from here and kind of what inning we're in on that front?

Speaker 7

Obviously, you guys have highlighted changes to the bonus structure, but should it kind of bottom? Is there more work to be done? Can you continue to decline the way it has been? Thank you.

Speaker 3

Yes. Thanks for the question. There is more leverage here in terms of the opportunity ahead. So, we were 13.6 percent SBC in the quarter. That was down 110 basis points year over year.

Speaker 3

It was down 130 quarter over quarter. It's on the back of the things that you've talked about. We've reduced obviously the size of the employee base. We've made a shift in terms of compensation mix away from equity and towards cash. And we've also been more selective in terms of which employees get equity in the company.

Speaker 3

And those changes have already been made. In terms of looking forward, we think that there's still opportunity here for leverage. We had originally several years ago committed to 10% to 12% SBC as a percentage of revenue by 2027. So we're still marching our way down the cost curve to get to that kind of range.

Speaker 7

And then if I can ask a second one. Can we just double click on communications gross margins in the quarter? Any changes there positive or negative both domestically and or internationally? And then how should we kind of think about the comps gross margins going forward given some of the new initiatives and given the mix of growth and new products going forward?

Speaker 3

Yes. In the quarter, you'll see that comps gross margins were up year over year, but down quarter over quarter. The quarter over quarter dynamic was just really driven by the hosting credits that we saw come through in the Q1. They were about 80 basis points of a help in the Q1. That didn't repeat quarter over quarter.

Speaker 3

So that's kind of the headwind. Year over year, they were up, as 160 basis points or so. And that was driven by 2 things, product mix. So one, we talked about email growing or accelerating that obviously helps margins

Speaker 2

because it's higher margin

Speaker 3

than the comps average. The other dynamic in that year over year growth was the fact that we had the dispositions last year that we did them in July's timeframe, they were at a gross margin rate that was dilutive to the company. And so not having those the Value First and IoT businesses actually helps margins. As we think about going forward, margins in the communications business tend to be driven really by mix. That's product mix between messaging or voice or email, etcetera, or termination mix within the messaging business.

Speaker 3

So if you're terminating more internationally or domestically, that will drive different gross margins. I think the framework we think about and kind of look at is we look at the unit economics. And so long as the unit economics remain attractive, we'll continue to do the business. So you should expect, I'd say, in the near term some level of variability in the communication

Speaker 7

gross margins. Super helpful. Thank you very much.

Operator

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Mike Funk with Bank of America. Your line is open. Please go ahead.

Speaker 4

Great. Hi, yes. This is

Speaker 2

Matt on for Mike Bunk. Appreciate taking the question. Can you help us think about the second half revenue guidance in the context of new customer additions versus uplift from expansion? And then looking beyond even this year from a high level, how you might expect the growth that growth to shake out in the medium term? Thanks.

Speaker 3

I missed the second part. No, we're not going to get into the splits in terms of how to think about the revenue guidance. That's not something we've ever really done in terms of splitting the guide between new customers and expansion. I think we feel good about the 5% to 6% range we gave you for Q3, the 6% to 7% for the year. And we talked about the dynamic market, the fact that we're usage based and the fact that we will continue to plan prudently just given those dynamics.

Speaker 3

Can you just repeat your second question? I missed it.

Speaker 2

Yes. It was just high level about how the growth algorithm could shake out over the next couple of years, but it seems like that's not something you're going to comment on.

Speaker 3

Yes, not today, at a later time. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And I'm showing no further questions. So this is going to conclude today's question and answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating and you may all disconnect.

Operator

Everyone have a great day.

Speaker 3

Goodbye.

Powered by Quartr

Key Takeaways

  • Twilio delivered record Q2 performance with $1.1 billion in revenue (+4% reported, +7% organic), $175 million in non-GAAP operating income, and nearly $200 million in free cash flow.
  • Communications business generated $1.01 billion in revenue (+7% organic), driven by messaging strength, accelerated email growth, and expanded ISV and partner networks including new deals with Omnisend and leading CX providers.
  • Segment business revenue rose to $75 million (+3% Y/Y) while non-GAAP operating losses narrowed 25% Q/Q, aided by faster onboarding, warehouse interoperability features like Datagraph and Linked Audiences, and a shift to more multi-year contracts (40% vs. 17%).
  • Twilio is embedding AI and contextual data into its platform—launching products like Verify, Voice Intelligence, Traffic Optimization Engine, and Personalized Virtual Agent—to drive smarter, more personalized customer engagement and higher-margin software usage.
  • Financial discipline drove margin expansion (non-GAAP gross margin 53.3%, operating margin 16.2% up 460 bp Y/Y), progress toward GAAP profitability, and $2.2 billion of share repurchases, with $800 million remaining under authorization to be completed by year-end.
AI Generated. May Contain Errors.
Earnings Conference Call
Twilio Q2 2024
00:00 / 00:00