Twilio Inc. (TWLO) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary indicates a strong financial performance with revenue growth and optimistic guidance. Product development, particularly in AI, and strategic partnerships are positive indicators. The Q&A section highlights durable growth, strong customer engagement, and promising AI opportunities, with some concerns over gross margins and regulatory impacts. Overall, the positive aspects outweigh the negatives, suggesting a likely stock price increase in the next two weeks.

Key Financial Performance

Revenue Record revenue of $1.228 billion, up 13% year-over-year, both on a reported basis and an organic basis. Reasons for growth include strong performance in communications and segment businesses, as well as increased uptake among AI start-ups and international expansion.

Communications Revenue $1.153 billion for the quarter, up 14% year-over-year. Growth driven by focused go-to-market initiatives, accelerating messaging revenue, and double-digit voice revenue growth for the first time in 2 years.

Segment Revenue $75 million, flat year-over-year. No specific reasons for the lack of growth were mentioned.

Dollar-Based Net Expansion Rate (DBNE) 108%, reflecting improving growth trends in communications. Communications DBNE was 109%, and Segment DBNE was 95%. Pass-through revenue from incremental carrier fees contributed roughly 60 basis points to both total and communication DBNE.

Non-GAAP Gross Profit $623 million, up 8% year-over-year. Non-GAAP gross margin was 50.7%, down 260 basis points year-over-year. Decline attributed to increased messaging revenue mix, $6 million of increased carrier fees, and FX impacts.

Non-GAAP Income from Operations Record $221 million, up 26% year-over-year. Growth driven by strong revenue growth and ongoing cost discipline.

Free Cash Flow Record $263 million. Growth attributed to strong revenue performance and cost management.

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Operating Highlights

ConversationRelay: Empowers developers to create robust natural voice AI agents using their choice of LLM. Completed nearly 1 million calls in its first quarter of general availability. Example: A fintech company automated customer care requests, validating and scaling the solution within 2 weeks.

Conversational Intelligence: Supports messaging conversations in private beta and has seen an 86% increase in account usage year-over-year. Unifies conversational data across voice and messaging for human and AI agents, providing cross-channel customer insights.

WhatsApp Business calling via programmable voice: Became generally available, enabling seamless messaging and voice conversations on WhatsApp.

RCS (Rich Communication Services): Currently available in select markets with full general availability expected soon. Example: Fresha achieved a 99.2% message delivery rate and saw a 6% increase in appointment confirmations using RCS.

Event-triggered Journeys: Allows brands to respond dynamically to customer actions, such as abandoned carts, by creating rich contextual payloads. Example: Combines data from triggering events and customer profiles for personalized engagement.

International Expansion: Achieved double-digit revenue growth in international markets, contributing to overall growth.

Strategic Partnership with Microsoft: Announced a multiyear partnership to enhance conversational AI capabilities, unlocking potential for over 10 million Twilio developers and Microsoft customers.

Revenue Growth: Achieved $1.2 billion in revenue, marking double-digit growth and year-over-year acceleration. Messaging and voice revenue showed strong growth, with messaging revenue accelerating for the fourth consecutive quarter.

Operational Efficiency: Delivered record non-GAAP income from operations ($221 million) and free cash flow ($263 million). Achieved breakeven target for segment business earlier than planned.

AI and Customer Engagement: Focused on combining communications, contextual data, and AI to drive personalized customer experiences. Example: SIGNAL conference showcased innovations and highlighted Twilio's role as an infrastructure layer for customer interactions.

Market Leadership: Recognized as a leader in the CPaaS Magic Quadrant for the third consecutive year and #1 in 3 of 5 use cases in the CPaaS Critical Capabilities Report.

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Risk or Challenges

Gross Margin Decline: Twilio experienced a decline in non-GAAP gross margin, down 260 basis points year-over-year and 60 basis points quarter-over-quarter. This was primarily driven by an increased messaging revenue mix, higher carrier fees, and FX impacts on international carrier costs.

Carrier Fee Increases: Verizon raised its A2P messaging fee rate, contributing $6 million in incremental pass-through costs. These fees are passed through at 0% gross margin, impacting overall profitability.

Segment Revenue Stagnation: Segment revenue remained flat year-over-year at $75 million, indicating challenges in driving growth in this business unit.

Stock-Based Compensation: Stock-based compensation as a percentage of revenue increased modestly quarter-over-quarter, which could impact overall cost management.

R&D Investment Impact: Twilio plans to make accelerated R&D investments in response to customer demand in voice, RCS, and AI offerings, which could pressure short-term profitability.

Economic Sensitivity: Twilio's business is sensitive to economic conditions, as evidenced by the focus on cost discipline and the impact of carrier fee increases on revenue and margins.

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Guidance & Outlook

Revenue Growth: For Q3 2025, Twilio expects revenue between $1.245 billion and $1.255 billion, representing 8% to 9% organic growth and 10% to 11% reported growth. Full-year 2025 organic revenue growth guidance has been raised to 9% to 10%, up from the previous 7.5% to 8.5%, with reported revenue growth expected at 10% to 11%.

Carrier Fees Impact: Revenue guidance includes $20 million in pass-through revenue from incremental carrier fees in both Q3 and Q4 2025.

Profitability: For Q3 2025, non-GAAP income from operations is expected to range between $205 million and $215 million. Full-year 2025 non-GAAP income from operations is projected to remain between $850 million and $875 million.

Free Cash Flow: Full-year 2025 free cash flow guidance has been raised to a range of $875 million to $900 million, up from $850 million to $875 million previously.

R&D Investments: Twilio plans to make accelerated R&D investments in response to strong customer demand in voice, RCS, and AI offerings.

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Shareholder Return Plan

share repurchase: Additionally, we purchased $177 million of shares in the second quarter, bringing our year-to-date share repurchases to $307 million through the end of Q2.

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Key Q&A

Q:Can you speak to the traction of where you're seeing the most traction with ISVs?

A:Thomas Wyatt mentioned that they are seeing traction across verticals such as financial services, healthcare, and professional services. Use cases often start with messaging and expand to other channels like voice and RCS. The Twilio platform provides orchestration capabilities and newer products like conversational insights, which help ISV customers understand consumer engagement. ISV growth continues to grow above company averages.

Q:Is there any impact from the price increase in the quarter?

A:Aidan Viggiano stated that the impact was not material.

Q:Why did you implement a price increase in the U.S. for messaging, and is it tied to the Verizon A2P increase?

A:Aidan Viggiano clarified that the price increase was not tied to the Verizon A2P fee increase. Thomas Wyatt explained that the price increase reflects pricing power in their self-service business, which is growing fast. It also helps with enterprise deals over time, though the impact will be modest due to different renewal timelines.

Q:Where are the new customer additions coming from, and how much is tied to the voice AI opportunity?

A:Thomas Wyatt stated that new customers are coming from the self-service channel, where innovations have reduced onboarding friction and increased conversion rates. A new trial service for email customers has also contributed. This was one of the strongest quarters for new customer acquisition, with strong performance in the enterprise segment as well.

Q:What is your updated view on the durability and drivers of growth and actions to stabilize gross margins?

A:Khozema Z. Shipchandler mentioned that growth feels durable across industries, customers, and geographies. Actions to stabilize gross margins include price increases, platform optimization, and growth in higher-margin products. Aidan Viggiano added that the Verizon fee increase will have a $20 million impact in Q3 and Q4, but it is passed through at 0% gross margin.

Q:What role does Twilio play in the voice AI wave, and how are customers relying on Twilio?

A:Khozema Z. Shipchandler explained that Twilio provides voice infrastructure, calling capabilities, and products like ConversationRelay, which incorporate voice intelligence, recording, and context awareness. The role depends on the customer, with AI-native companies using voice infrastructure and enterprises using the full stack. Voice is gross margin accretive and important for growth.

Q:Are messaging customers expanding toward RCS faster than expected?

A:Thomas Wyatt noted encouraging trends in RCS adoption, with ISV customers adding RCS traffic and achieving excellent results. The holiday season is expected to be a proof point for RCS due to its deliverability, read receipts, and branded capabilities.

Q:What is the revenue outlook for this year, and are there any incremental opportunities in Q4?

A:Aidan Viggiano stated that the company has delivered four consecutive quarters of accelerating double-digit growth. Tougher comparisons in the second half are due to political traffic and new platform innovations introduced last year. However, momentum in self-serve, cross-sell, ISVs, and international growth is expected to drive durable growth.

Q:How did voice perform relative to expectations, and what is its growth trajectory?

A:Khozema Z. Shipchandler stated that voice performed well, driven by demand from voice AI customers and new products like ConversationRelay. Voice is gross margin accretive and expected to contribute more over time. Aidan Viggiano added that gross margins, adjusting for fees and FX, were roughly flat quarter-over-quarter.

Q:How are you balancing market share growth for messaging in international markets with pricing considerations?

A:Thomas Wyatt explained that messaging often serves as a landing point internationally, with customers adding voice and other channels over time. Aidan Viggiano noted that messaging mix increased as a percentage of total revenue, impacting gross margins.

Q:How are you prioritizing product investments relative to efficiency targets for 2027?

A:Khozema Z. Shipchandler stated that investments are focused on AI opportunities and are predominantly in engineering. The goal is to capture the full opportunity while maintaining strong operating profit and cash flow.

Q:How are customers responding to the integration of customer profiles from Segment into the communications business?

A:Khozema Z. Shipchandler mentioned strong customer interest in products like ConversationRelay and conversational intelligence, which integrate Segment capabilities. Thomas Wyatt added that customers are using these integrations to enhance agent productivity and reduce costs.

Q:What is the long-term opportunity for AI and voice AI, and how does it compare to past growth drivers?

A:Khozema Z. Shipchandler stated that AI is TAM-expansive and positions Twilio at the center of the AI value chain. AI has been a tailwind for growth and is expected to add material dollars to the top line over time.

Q:How big is SIP trunking as part of the voice business?

A:Khozema Z. Shipchandler stated that they do not provide a breakdown of SIP trunking within the voice business but noted that voice infrastructure is a significant contributor.

Q:What are the incremental R&D investments focused on, and what do they add to the platform?

A:Khozema Z. Shipchandler stated that investments are predominantly in engineering to accelerate AI capabilities. Thomas Wyatt added that customers are pushing for acceleration in RCS and voice AI capabilities.

Q:What is the impact of regulatory changes in various countries on the business?

A:Khozema Z. Shipchandler stated that there is no short-term impact, but regulatory changes could have a mild positive impact long-term by reinforcing compliance in the ecosystem.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the financial impact of the messaging price increase in the U.S., stating only that it was not material. They also did not provide a breakdown of SIP trunking within the voice business or specific dollar figures for the AI opportunity, making it difficult to assess the full scope of these areas.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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