Twilio Inc. (TWLO) Earnings Call Transcript
August 12, 2026
Earnings Call Speaker Segments
All right. I think we're ready to kick things off. I'm DJ Hynes. I'm the senior software analyst here at Canaccord. This is the 46th year that Canaccord hosted this conference. We couldn't do it without the support of the corporates to come and bring all the great content and the investors that show up and fill the rooms and eat the food and ask the smart questions. So thank you for everyone for being here. Delighted to have the Twilio team. We have Rodney Nelson, who runs IR. We're going to do this as a fireside chat, but I'd be happy to work in any questions from the room. We've got 25 minutes. So with that, I think we can get right into it.
Let's do it.
Rodney, look, I think investors probably know the Twilio story well, but probably don't know kind of the massive transition that's happened in the business over the last couple of years. So maybe you could talk about some of those changes and kind of what -- how that's driving what you're seeing in the business today?
Yes. So I mean 1 thing that's always been true about Twilio that has remained true over the last couple of years is we are the large communications platform in the world. And so we provide critical infrastructure to our customers to deliver communications, to harness data, to deliver better and more personalized, more contextual experiences for their customers. The journey that we've been on over the last couple of years is really doing a lot of hard work to, quite frankly, just build a better business. We accrued a lot of really interesting technology assets over the course of the last 10 years. We have this great communications platform. We have these incredible data assets. But what we hadn't done kind of through COVID was do some of the hard work to integrate those assets. And so over the last 2.5 years, we've not only really rightsized the cost structure of the business. The last 18 months have been a pretty heavy innovation cycle, where we've natively integrated a lot of the data capabilities that we have in the business directly into the communications. And the net result of that was a series of releases that launched in our Signal Conference in May that now give developers a natively integrated set of tools so they can very easily send communications workloads across any channel, messaging, voice, e-mail and also deliver real-time contextual intelligence in those communications. So whatever your preferences that you've expressed to a business, whatever competitor you mentioned in the context of a live support call, what other channels you prefer to interact with, maybe you're a text-only type of person, all that data can be wheeled in real time to drive more relevant, more contextual interactions between businesses and consumers. And so as a result of that, we've really refocused and doubled down our efforts as being an infrastructure provider. There is a time where Twilio was trying to serve 2 masters, provide really critical infrastructure on the communications side and also build applications. We've largely abandoned that second initiative to really focus on the infrastructure layer where we have real domain expertise, a real right to win. We have 12 million developers who love the work that we do there. And the net result of that over the last couple of years is a business that's gone from roughly breakeven non-GAAP operating margins to with 20% here in the last couple of quarters. We've reaccelerated the top line from kind of the high single digits up into the high teens in most recent quarter. And alongside that, gross profit dollar growth, which is a pretty critical measure for us, has also reaccelerated each of the last 5 quarters and actually reached 18% in the most recent quarters. So you now have a business that in, again, has a really strong financial foundation and has accelerated the top line and is now providing infrastructure, not just to large enterprises, but also now to AI needs as well. So it's been a pretty transformative couple of years, but the business is on the best footing it's probably ever been on.
Yes, that's great. bringing that to life when you just reported Q2 results, stock acted quite well off them. You mentioned some of the numbers Talk about what stood out to you in Q2?
Yes. I mean, it's kind of again the culmination of a heart that we've put in over the last couple of years. But we held an Investor Day in January of last year. And one of the things that we expressed there was we firmly believe that the company can be a double-digit grower with consistency over time. We hadn't really demonstrated that in the preceding 6 or 8 quarters. But I think what Q2 resembled was just a breadth of strength that we're seeing across the business. So one of the surprises, I think, in the first half of this year is the strength of our messaging business, it grew 18%, excluding the incremental carrier fees that we're digesting. Voice has been a very consistent story for us over the last 7 quarters. It's been accelerating since the end of 2024. That's getting some benefit from some of these AI natives that communications infrastructure actually deliver those agentic experiences for their enterprises that they serve. And that's also coming on the back of volume but also software nods that we deliver within that channel, so voice accelerated to north of 20% growth in Q2, which is really exciting. And then, you look down the revenue stack. You've got other add-on, the Verifi, which is our multi-fact authentication platform. It accelerated to 30% plus revenue growth. So as you look across the business, whether it's messaging, voice, software, support and services offering, we continue to see huge attach. It is a business that's executing very well as we go to market. Our self-serve channel, which we've put a lot of investment into over the last couple of years, it accelerated to 30% plus growth. We're now serving more customers there than ever. They're being met with much richer console experience, more AI native tooling to help them get up and running even faster. And so Q1 was probably the strongest balance of revenue growth and profitability that we've demonstrated as a company since we've come public.
Yes. Maybe you can talk about some of those growth drivers, you kind of set up the next few questions pretty well. Messaging in the first half has been particularly, what's driving the strength of messaging? And how durable do you see it?
Yes. I mean I think, first and foremost, we've likely been a share taker over, not just the last quarter, but frankly, over probably the last couple of years. We've made a lot of investments in things that probably sound on sexy compliance, navigating a very complex regulatory environment, navigating a very fragmented carrier landscape. We have 4,800 internet globally. But another area that we've placed to have investment in ability and fraud mitigation. And those 2 things are pretty critical to be able to say to a customer, look, only the messages that you intend to send are going to be the ones that you actually send and you're only going to pay for those messages, and they're going to get delivered with extremely high reliability. I think that's observed as a really interesting wedge for us to go out into some of these international markets and take share where we are maybe a little bit less penetrated relative to our leading position here in the United States. We've maintained, if not extended that lead domestically. We're helping businesses around the world, not just reach the U.S. consumer with scale, but also increasingly reach of their global consumer audiences. So as you drill down into the individual verticals that we serve, top rate verticals are all growing meaningfully into the double digits. So you're seeing breadth of strength not just isolated and finserv or health care or tech, it's really happening everywhere. And then as you drill it out into the use cases, if you use some of our marketing ISP customers as a proxy for marketing use cases, they continue to grow very quickly. And VERIFI growing north of 30%, a good proxy for how 2FA and multifactor authentication is proliferating not just in regulated verticals like the finserv and health care but into more traditional consumer-facing businesses in retail and e-commerce. And so there really isn't a 1 area that's been like an outsized driver of the messaging strength. It's been broad-based, and that's not just been the story for Q2. It's really been the story year-to-date.
Yes. That's great. AI was another area of strength. How do you see that opportunity unfolding? And kind of where are we in terms of AI natives and enterprises adopting AI voice?
Yes. It's weird because it's moving quickly, but it's also still very early -- and a shorthand because X, which I think is effective, just how many AI agents do you interacted with and customer service context. And the answer that we usually receive is 0 or 1 or 2. It's growing, but there is still -- there's been a gradual pace of adoption that we've helped serve. And I think what's fascinating about the opportunity to us is we just provide the infrastructure to actually make the communication happen, we increasingly are providing software items to actually orchestrate that call, that's conversation related to do the model pipelining from Texas speech to the LLM back to detect conversational intelligence, which I mentioned a bit earlier, to actually get real-time context of what's happening on that call to understand what's being said, the sentiment that's being shared by the consumers who can actually affectively in real time. . And so we've seen native our platform primarily through our sales because that is a developer-led motion with most of our customers that come to Twilio, find Twilio to serve -- and we've seen a lot of these is still pretty quickly. We've referenced a couple of customers that if you rewind to Q1 of 2025, we're spending, call it, low 6 years on a quarterly basis. Fast forward to today, we have customers that are spending upwards of $5 million, but annualized, growing at 60%, 70%, 80%, 90%, 100% year-over-year, and they're not just doing that in the voice channel. They're increasingly looking to those software essence as well as messaging channel to keep their workloads done. But I think what's encouraging about the voice acceleration is it hasn't just been driven by those AI natives, they're certainly contributing, but the bulk of the growth is actually coming from the rest of the installed base. Like the large customers that we serve have continued to grow their volume, have continued to consume software tons. So you have this really healthy balance between the upstart innovative AI natives who are increasingly driving more volume as well as the larger enterprise customers who we can serve in a very holistic fashion, not just in voice, but as well as in other channels.
Yes. The breadth of opportunities and growth is awesome. You talked about signal and being 1 of the most consequential kind of customer events you've had in a while. Part of that, there was a bunch of new product introduction. Maybe just talk about what was introduced, what was important for investors to know coming out of that event and kind of what you're seeing in terms of early signals?
Yes, there's a lot that we launched in Signal. I think the core kind of product offering that grab a lot of attention was actually the combination of work that propane is 5 or 6 years dating back to when we bought segment many years ago. And look, the vision then is still the vision today, which is if you compare highly relevant neutral information by your consumers with real-time communications, you can deliver just a much better consumer experience and drive more revenue, drive better retention and loyalty, have better support experiences, actually solve the customers' problem. . The challenge our customers always face though is, well, how do I state these 2 things together? Like a CDP can be a pre-owners implementation, the integration work that's required to maybe stitch the CDP together to source systems and then stitch the back to the channels, like that's pretty hard working to result in the customers of ours that were very ambitious, writing a lot of what we would call blue code to basically keep all these things together. And it was lucky. And it created long sales cycles. It certainly created frustrations, and so what we did over the last 18 to 24 months was let's just eliminate all of our work for our customers. Let's take the best elements of segment and create kind of an API-first layer where you can integrate the memory of who you are as a consumer, what preferences you've expressed, what you've purchased in the past, real-time intelligence so that I can actually understand what's happening during the context of a conversation. And then an orchestration engine so that I can move with the consumer seamlessly, as they maybe hang up a support call and then pick it up later seamlessly in the text messaging channel. And so in May, we launched effectively all those capabilities as a series of natively integrated APIs that sit beneath all of our communications channels so that our developer -- all of our customers -- your developer, an enterprise, somebody using a coding tool, you can just tap into these APIs very seamlessly and drive whether it's a human-led interaction or an agent-led interaction, you can have that real-time context in the real-time intelligence, streaming underneath all your all of your communications and that data asset compounds. As you install generative customer operators that are telling you which competitors being mentioned or which price points are maybe a bit too painful for your customers, that all get reconciled back to a unified profile and conversation memory to then inform the next interaction or the next marketing communication that you deliver. So it's super early days. Customers like car finance have already launched real working AI agents that are built on this conversations layer. They're a fantastic example, where they're seeing 60% uplift in conversion. It's driving a multimillion dollar uplift in annual revenue. So we're focused on not just delivering the capabilities but showing to our customers the ROI that they can actually get by harnessing AI for recontextualin communications.
Yes. I want to talk about gross margins a little bit. I mean I feel like it's always been a hot button topic for investors with the Twilio story, but there's some moving dynamics there with carrier fees and digesting those, but while gross margins have come under pressure, you've been accelerating gross dollar -- gross profit dollar growth. Just talk about some of the moving parts there, kind of how you counterbalance them and what the outlook is going forward?
Yes. This is -- you've covered the company for a long time. I covered Twilio on the sell side when it first came publicly. This is a bit that's raised about Twilio for a decade at point. I think we've worked hard to, number one, educate the Street on what is the various gross margin profiles across all of our products. And the shorthand is that you have messaging, which has historically been lower margin products, and you call it in the low 30s historically. And everything else, resembles software has very high gross margins. And so the framework that we use internally is, look, as long as we are disciplined as we go to marketing to win messaging business unit economics are strong, and we are delivering those services as efficiently as we can, meaning we're getting as many direct connections as possible to really streamline our supply chain. Then the gross margin, actually it doesn't necessarily matter all that much, especially when you contemplate the pass-through fees that we are obligated to charge and give back to carriers as we terminate messages. And so as long as those gross profit dollars flow into the messaging business, we'll deal with the gross margin outcome on the other side, especially if we're also getting healthy growth invoice, in e-mail, in software add-ons, in support and services, all of which we run at a meaningfully gross margin accretive level. And so this year, it was actually the first time where we offered a directional guide on gross profit dollars. And I think it's really just cut through the noise that you sometimes see on our gross margin line. I think the irony from my perspective is we've now printed in consecutive quarters, the lowest gross margins in company history. I'm being the fewest questions on gross margin that I've ever gotten because gross profit dollars have accelerated to 17% and 18% growth in each of the first 2 quarters this year. So look, it's an important conversation. When we talk about these dynamics, it's not that gross margins don't matter. It's just that to us as long as we're driving a healthy combination of organic revenue growth and gross profit dollar growth, the gross margin chips will kind of fall wherever they land.
Yes. Yes. It's amazing. When growth accelerates, you got a lot last questions on gross margins. Maybe sticking with the cost side of the business, OpEx in Q2 was up a little bit more. It's kind of a departure from what we've seen in recent quarters. Just talk about what's behind that and kind of what the forward-looking view on OpEx is?
Yes. I mean, the frame for us coming into this year was OpEx was always going to be a little bit higher in the front half of the year, especially as we delivered these innovations that we just launched at Signal. And so in Q2, you also have some seasonal factors that drive some of your larger flux. So you've got our annual merit increases occur in Q2. The other factor that drove some of the uplift in OpEx was incremental bonus accruals. The company is performing well. Our outlook for the year has been increased. And so we're accruing at a higher level of attainment for the bonus. So there's a little bit of onetime noise there, catch-up for the period that were Q1 where we weren't accruing at that level. . You always just had some timing things on platform and development costs in terms of when our new cloud commitment rolled in versus when we rolled off of the other one. So you had some temporary elevated costs there. I think as we look out to the second half of the year, our guidance implies a much more moderated pace of OpEx growth, call it mid-single-digit growth versus the closer to 10% than we saw in the first half of the year. That's a more accurate frame of how we think about investment. We've been very disciplined in where we've invested in product. The investments that we've made in self-serve have made us wildly more efficient in our go-to-market motion. So we can burden our go-to-market teams less and allow them to focus on a more targeted series of accounts. So there's, of course, always areas of the business that we want to invest in, particularly in R&D. But we've managed to keep head count flat for 2.5 years. That will drift higher over time at some point, but we feel like we have a pretty good OpEx envelope that we're working within and continue to drive very healthy growth with relatively modest OpEx investments.
Yes, makes sense. One more model question, we'll stick with the numbers Q3 guidance implies a little bit of a deceleration from Q2. What's embedded in that? Is there just conservatism in the outlook? Is there something that you're seeing that maybe warrants a little bit more caution in Q3? Just how do you frame that for investors.
Yes. I mean the thing that's always been true about Twilio were a usage-based business. And that has always framed the way that we approach forecasting and setting guidance off of those forecasts. And look, I think Q1 and Q2, like it's a good example of when the usage model really works for you. Like we had really strong usage in the messaging channel. We had really healthy trends in the voice channel. We don't want to just assume that those things are always going to reoccur. So we will always take a little bit more prudence when we approach our guidance even if it's just for the next quarter and especially if we're looking out over a further period of time. We also do face some tougher comps in the voice and software add-ons business in the second half of the year. We obviously see very healthy trends in those businesses, but we are mindful that we saw a pretty sharp bend in the curve as we headed into the second half last year in both areas of -- both of those areas. And so we're being mindful of that. all of which is to say, our Q3 guide of 11% to 12% organic revenue growth is actually our fastest in several years. So we feel very good about the trends we're seeing in the business, just being mindful of who we are as a usage-based business and some of the comps we do face in the second half.
Yes, makes sense. We've got a few minutes left with -- on the clock here. I'll open it up if there's any questions from the room or I can take the -- I just want to make sure we give everyone chance to participate. Buybacks have been a pretty central part of the Twilio story for a while now. maybe just talk about capital allocation strategy here and what to expect going forward?
Yes. I think we've run 1 of the more successful capital return programs in all software over the last couple of years. We've bought back over $4 billion of our own stock, much of which occurred at sharply lower prices than where we are today. And so that's been a fantastic piece of capital. It's still a good use of capital. We still expect to be buying back our own stock even at these levels even as the shares have re-rated because we still see very compelling opportunities on the horizon for the business. And so that remains a critical component of the capital allocation framework. We have $800 million left on our existing authorization. So I would expect us to continue buying back our own stock. Look, M&A, I think we're certainly open to it. We did our first deal in several years late last year. We bought an identity asset called Stitch, which is a very near adjacency to what we already do with 2FA with VERIFI. We think there's an emergent opportunity in agentic identity that we can play a pretty meaningful role in. And I think the Stitch acquisition, which is a fantastic team, accelerates what we're trying to do in that particular technology area. That's a good framework for how we're thinking about M&A going forward. If we can find assets that accelerate product development accelerated is in an area that we're already going, and we can do so at a digestible purchase price, we'll take a look at those things. And so we're not itching to do anything there, but that, I think, is the general framework we've approached M&A. And again, I think capital returns remain an important part of the story.
Yes. Hopefully, we get a chance to do this again in a year from now. What are we going to be talking about then? Like what should investors be paying attention to over the next year or so as kind of key mile markers to watch?
Yes. I mean I think, number one, from a product perspective, like keeping the pace of innovation going. We launched these big conversations pieces in May, there's still a long list of features that we want to implement into those products to better serve our customers. And so I think 1 of the good things that we did in this launch cycle is we did a pretty onerous private beta in the first 4 months of this year -- 4-plus months of this year, where we had about 50 customers and partners participate. So we've got really amazing feedback on what's working, what needs to be improved, what features are we looking for. And so executing against that list of additional capabilities is going to be really critical. And again, continue to push the balance on identity and introducing new capabilities to better serve our customers as we increasingly move from a human to human to more of a hybrid world where it's human to agent and agent to human and then eventually potentially agent to agent interactions. And so we're making some investments there. So I think on the product side, it's continue to drive the pace of innovation that we've seen over the last 12 to 18 months. And look, we've got to execute. We've now launched a series of products. We have an incredible communications platform. We've been out competing our peers in the space pretty handily. We need to keep our foot on the gas. And so continue to deliver really compelling self-serve experiences so developers never have to think twice about where they go to build communications, infrastructure, making sure that we're showing up in the agented coding tools, having integrations with Quad code, with Replat, with Codecs, with all the various tools that are out there now for either human developers or agenetic workflows to discover and utilize our APIs. That continues to be a big focus of ours. And then executing with our large enterprises and showcasing to them, look, as you go through this transition and begin to actually implement AI into workflows, it's not just about implementing it, how do you actually get to value? And what does value look like? And so continuing to case to our customers, here's exactly how you get to better retention, more revenue, more cross-sell, more upsell, better profitability, lower costs using the series of tools that we've just launched. And so if we can demonstrate that there are many, many customers out there like car finance, like, who have been early adopters of these things. I think that will be -- that will mean that we're being pretty successful and there should be a durable profitable growth story alongside that.
Yes. Maybe a final question just to wrap, like what's a question you wish you got asked more? Like what's the underappreciated part of the story that you want investors to understand and there with?
I think like the underappreciated part or maybe like the misconception or whatever the view on AI is it's all going to happen right now. We all experience like all these major model releases, all these major innovation cycles. And the reality for enterprise is like we're all still figuring this out. And so like both things can be true. We can be moving very, very quickly, and the rate of adoption can be very gradual. And so we've kind of consistently frame to investors like we all believe that in 3 years, the first point of interaction with any customer service team is probably going to be AI. There's long ways to go between here and there. . The 1 breakout use case with AI has been coming. I think we're still kind of like looking to make sure that, that next breakout use case is service or support or sales. And we're getting there, and we're seeing some really healthy use cases, and we're seeing it in our own business with our own self-serve AI agents, which are doing everything from qualifying leads to scoring leads to working leads, to making product recommendations to resolving support tickets, but there's still going to be a gradual pathway for a lot of businesses to make this stuff robust, especially if you enterprise. So the excitement is justified. I think the pace is going to be more gradual than realized. But I think for us, we're in a really strong position to help deliver that reality to your customers. You now have a broader array of tools to think it happens -- where I would go.
Yes. That's probably a good spot to leave it. A lot of momentum in the business is going to be fun to keep tabs on progress. Everybody, thank you for being here.
Thank you. Thanks.
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