Twilio Inc Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Twilio, Inc. Third 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bryan Vaniman, SVP of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us for Twilio's third quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer; and Aidan Viggiano, 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. 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-K 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. And with that, I'll hand it over to Khozema and Aidan, who will discuss our Q3 results, and then we'll open the call for Q&A.

Thank you, Bryan. Good afternoon everyone and thank you for joining us today. Twilio delivered a strong third quarter. We exceeded our Q3 guidance delivering $1.134 billion in revenue, up 10% year-over-year, and generated $182 million in non-GAAP income from operations. We also delivered another strong quarter of cash generation with $189 million of free cash flow. I'm encouraged to see the acceleration to double-digit revenue growth this quarter, alongside strong operating leverage and continued product innovation. Our commitment to financial discipline, operating rigor, and innovation remain key guideposts for the team, and I'm proud of what we accomplished in Q3. Since becoming CEO at the start of the year, I've met with hundreds of customers in nearly every industry across the globe. In my conversations with customers, many of the problems they're encountering can be solved by greater personalization via communications, contextual data, and AI. Our concerted focus on embedding AI and machine learning throughout the Twilio platform has resulted in a differentiated offering that strategically positions us to capture a massive opportunity as we leverage the strength of our platforms, the leading CPaaS supported by unmatched data tools, including Segment to minimize complexity and create better customer outcomes. More customers are turning to Twilio because we deliver a stronger ROI, driving demonstrable results that help customers increase their revenue and reduce their costs. By integrating AI with our core product suite, we're able to automate capabilities, boost productivity, and drive personalization at scale. An example is a longtime customer that is a global business supplies retailer, which has been using our AI recommendations product. They recently ran an email campaign targeting customers most likely to purchase Apple products and saw a 592% increase in sales per email. This is just one of the many examples of the unique value that Twilio offers, helping brands create better engagement, deliver greater value, and build more trusted customer experiences. AI presents a huge opportunity to improve and expand the impact of CPaaS solutions to truly enhance the customer experience. We are well positioned to win in the age of AI because, unlike other CPaaS players, our true value comes from the integration of communications with data. Twilio uniquely combines communications and customer data to help brands drive deeper customer engagement. What sets Twilio apart is our ability to unify this valuable contextual data, whether it's real-time, triggered by customer interactions, or stored in a data warehouse or a system of record, and help brands activate it. With our platform, we're already powering these intelligent interactions at scale, whether it's personalized engagement via unified profiles on IVR and Flex or fraud prevention with our security products. We're powering over 1 trillion emails and billions of messages annually while ingesting hundreds of thousands of events per second. We recently announced our integration with OpenAI's new real-time API, making it easier for Twilio's customers and developers to build powerful conversational virtual agents. As the world of conversational AI evolves rapidly, this is an exciting milestone that enables customers to take advantage of OpenAI's flagship multilingual and multimodal GPT-4.0 model to create and build virtual agents for IVRs that feel more human, making these advanced tools accessible for businesses of all sizes. Now, let's turn to our business highlights. Our Twilio Communications business had a strong third quarter with revenue of $1.060 billion, up 10% year-over-year. Our quarter-over-quarter growth acceleration was driven predominantly by strength in both messaging and email. We're seeing good performance in each of these areas, and a continued bright spot is our ability to deliver increased value through software capabilities built on top of Twilio's core channels. Verify, SMS Pumping Protection, Engagement Suite, and Voice Intelligence leverage AI and machine learning to drive better outcomes such as combating fraud and providing better data analytics in real time. These products are designed to deliver smarter and more trusted communications, which is key to unlocking value for our customers. Furthermore, as we focus on integrating our communications products with Segment's products and contextual data, it's exciting to see how products like personalized virtual agents leverage Twilio's unified profiles to help brands better understand their customers and make incremental changes to enhance customer experience. Another area driving improved messaging volumes is our platform feature updates that now give customers greater transparency into communications deliverability and engagement. Within our console, messaging customers now receive a deliverability score with personalized actionable instructions from our AI agent so they can immediately take action to remediate messaging deliverability errors. By providing analytics, we're radically simplifying the messaging experience for developers, leading to better engagement and ensuring that the messages intended to be sent are delivered error-free. In addition to enhancing our current products, we released new innovations in Q3 to support branded communications. RCS Business Messaging went into public beta, which is key for brands wanting to deliver a more customized personalized experience. In a recent Twilio survey, we found that 75% of consumers who received a branded text set to increase their trust in the communication. RCS Business Messaging improves the branded experience through rich content and interactive messaging features, including carousels, high-quality media, content cards, and location sharing. Customers like Fresia have deployed RCS capabilities to build brand trust and increase message open rates, while one of our ISV partners, Hive, will leverage RCS to enhance marketing campaigns for their customers in the live events industry, driving greater fan engagement and boosting ticket sale conversion rates. We also saw exciting wins with branded calling, which allows brands to display their name, logo, and call reason when placing calls to customers. CareSignal, a remote patient monitoring company, needed a cost-effective way to improve patient pickup rates and achieve health outcomes in the process. With Twilio branded calling, they've improved call pickup rates by 6% to 7% in just three months. In the future, we expect this type of incremental value will accelerate as we continue to help brands use their contextual data to unlock smarter and more personalized experiences. Turning to our Twilio Segment business. Segment delivered revenue of $73 million, flat year-over-year, as we continue to focus on and make progress against the priorities we outlined in our operational review earlier this year. We ended the quarter with an increase in our win rate both quarter-over-quarter and year-over-year, and a reduction in churn and contraction. While there is more work to be done, we're encouraged by the progress we're making, and Segment remains part of our long-term strategy, enabling us to differentiate our communications products by infusing contextual data while we continue to innovate for stand-alone CDP buyers. With respect to product innovation, we continue to enhance our data warehouse interoperability capabilities and improve customer time to value by graduating many features to GA. For example, with Segment products like Data Graph and Linked Audiences, we are addressing key pain points that our customers are trying to solve, such as removing data silos and disjointed customer profiles. We have advanced our data warehouse integrations with Databricks, Snowflake, Google BigQuery, and Amazon Redshift so that customers can activate their data in meaningful ways to drive more personalized touchpoints with consumers. We are seeing promising results and are excited to add additional integrations with other major data warehouses moving forward. Our new features and integrations for advertisers to create targeted campaigns began delivering promising results. First, our generative audiences feature that uses generative AI to create audiences with natural language prompts is significantly reducing the time and resources required to build targeted audiences for customer engagement campaigns. Over 25% of our Segment CDP customers have already started taking advantage of this new capability in the few weeks it's been globally available. Second, we've expanded and created new integrations with Amazon, Google, LinkedIn, and Meta, giving marketers the ability to activate their data in campaigns across these platforms and reduce their customer acquisition costs. For example, The Motley Fool needed an out-of-the-box integration to help build, manage, and activate audiences. With Segment, The Motley Fool increased its operational efficiencies by automating processes, accurately targeting paid ad campaigns to decrease its cost per acquisition, and making the experience more relevant for its premium members, helping with retention and lifetime value. I am incredibly energized about the opportunities ahead. The solid quarter that we delivered and significant progress we made against our financial goals is a testament to the hard work and focus of our team. As we look to create a world in which every digital interaction between businesses and consumers is amazing, I firmly believe that Twilio has the right strategy, leaders, and innovative platform to unleash the full potential of communications, contextual data, and AI. And with that, I'll turn it over to Aidan.

Thank you, Khozema, and good afternoon, everyone. We're pleased with our performance in the third quarter, delivering record revenue, non-GAAP gross profit, and non-GAAP income from operations. Revenue of $1.134 billion was up 10% year-over-year. Communications revenue was $1.06 billion, also up 10% year-over-year, and Segment revenue was $73 million, flat year-over-year. We saw encouraging volume trends in our communications business with growth acceleration and messaging and strong performance in email. Our efforts with ISVs and on self-serve and cross-sell initiatives continue to yield good results. We also implemented several new features, including the messaging deliverability dashboard that Khozema mentioned, which helped drive volume and revenue in the quarter. In addition, our new AI-enabled products and features such as Verify and SMS Pumping Protection are helping to drive faster growth. While we had higher political revenue in the quarter, those contributions were fairly immaterial and contributed roughly 90 basis points to our reported revenue growth rate. This was offset by a 90 basis point headwind associated with sunsetting the software component of our Zipwhip business. Our Q3 dollar-based net expansion rate was 105%, representing our best performance since Q1 of 2023 and reflecting the improved growth trends we've seen in our communications business over the last several quarters. Our dollar-based net expansion rate for communications was 106%, and the dollar-based net expansion rate for Segment was 91%. While we're encouraged by the early progress we've made with Segment since the operational review in March, there is more work to be done, and it will take time to improve our dollar-based net expansion given it's a trailing metric. We delivered record non-GAAP gross profit of $600 million, up 9% year-over-year. This represented a non-GAAP gross margin of 52.9%, down 50 basis points year-over-year, and 40 basis points quarter-over-quarter, both driven by our Segment infrastructure migration efforts. Non-GAAP gross margin for our communications business unit was 51.8%, flat both sequentially and year-over-year. As in previous years, we expect higher hosting costs in the fourth quarter associated with the holiday shopping season, and as a result, we anticipate a modest sequential decline in communications and consolidated gross margins in Q4. Non-GAAP gross margin for our Segment business unit was 69.8%, down 350 basis points sequentially. As we noted in Q1, we are migrating part of Segment's architecture to new infrastructure providers this year to recognize greater efficiencies. We are continuing to make progress on this project, and we expect to complete the migration during the fourth quarter, after which we expect Segment gross margins to begin to improve. Non-GAAP income from operations came in ahead of expectations at a record $182 million, up 34% year-over-year, driven by strong revenue growth and ongoing cost discipline. Our non-GAAP operating margin of 16.1% was up 290 basis points year-over-year and down 10 basis points sequentially. Our Q3 results reflect an additional $18 million in expenses for our company-wide performance-based cash bonus program, representing roughly $6 million of expense for each of the first three quarters this year. This increase reflects a higher anticipated bonus payout as a result of our year-to-date outperformance on non-GAAP operating income and increased outlook for the year. We are proud of the operating margin improvement we've achieved over the last two years, and we continue to see opportunities for additional operating leverage over the next several years. Non-GAAP income from operations for our communications business was $268 million, and a non-GAAP loss from operations for our Segment business was $60 million. Segment operating losses were flat sequentially, primarily as a result of the incremental bonus expenses I referenced. We remain committed to Segment achieving breakeven on a non-GAAP operating income basis by Q2 of 2025. The GAAP loss from operations was $5 million. We continue to make solid progress on our path toward GAAP operating profitability, and we are tracking ahead of our previous target to achieve GAAP operating profitability by Q4 of 2025. Stock-based compensation as a percentage of revenue was 13.6%, excluding restructuring costs, which was flat quarter-over-quarter and down 430 basis points year-over-year as we continue our efforts to reduce equity compensation. We generated free cash flow of $189 million in the quarter and over the last 12 months, we generated free cash flow of $775 million. We remain focused on driving strong free cash flow margins going forward. Finally, we're continuing to execute on our $3 billion share repurchase program. Since initiating the program, we've repurchased more than $2.7 billion of shares and we intend to complete the remaining balance of the authorized repurchases by year-end. Our total shares outstanding as of September 30 was $155 million, down 15% year-to-date. Moving to guidance. We're encouraged by the trends we're seeing across the business, and we're continuing to plan prudently given our usage-based revenue model and the dynamic market backdrop. For Q4, we're initiating a revenue target of $1.15 billion to $1.16 billion, representing year-over-year growth of 7% to 8% on both a reported and organic basis. Based on our year-to-date performance and Q4 outlook, we're increasing our full-year organic growth guidance range to 7.5% to 8%. Turning to our profit outlook. For Q4, we expect non-GAAP income from operations of $185 million to $195 million, and we're raising our full-year non-GAAP income from operations guidance to $700 million to $710 million. As for free cash flow, year-to-date, we've generated $564 million, which has outpaced our non-GAAP income from operations. However, we anticipate higher prepayments in the fourth quarter, which we expect will drive a sequential decline in free cash flow. As we said previously, we periodically pay certain vendors early to secure favorable terms and pricing. As a result, for the full year 2024, we expect free cash flow in the range of $650 million to $675 million. Before we open up the call for questions, given the various tailwinds and headwinds that have influenced the business over the past several quarters, we also want to provide a preliminary outlook on how we would expect more normalized fiscal 2025 to play out. We are encouraged by the volume and growth stabilization we have seen in our communications business over the last several quarters, and we continue to make progress on the operational goals in Segment. Based on the trends in business and assuming a neutral macro environment, we would expect full-year 2025 revenue growth in a range of 7% to 8%. We also expect to generate meaningful non-GAAP operating margin expansion over the course of the full year. Finally, we would expect to achieve GAAP operating profitability for the full year. We will provide more commentary on both our fiscal 2025 and longer-term outlook at our upcoming Investor Day, which we're currently targeting for late January. I'm very pleased with the accelerated revenue growth we delivered in the third quarter, as well as our ongoing cost discipline that is driving strong profitability and free cash flow. I'm also encouraged by the innovation we are delivering and the impact new products and features are having, both for our customers and on our revenue growth. We are tracking well ahead of our target to reach GAAP operating profitability, and we are confident in our plans to drive durable growth, continued margin expansion, and free cash flow growth over the next several years. I'm looking forward to finishing 2024 strong and seeing you all at our Investor Day in Q1. And with that, we'll now open it up to questions.

Thank you. Our first question comes from the line of Arjun Bhatia from William Blair.

Thank you and congrats on the nice quarter here. I wanted to maybe start with just the OpenAI partnership. Khozema, can you just touch a little bit on what exactly that entails and how that might play out across your customer base? Like, are these agents going to be built largely on the voice side? Do you see this expanding into the messaging front as well? And then, I'd be curious to hear just about the timing of how long this might take to play out across your customer base? Thank you.

Yes. Good question. Thanks, Arjun. To start with, it's built off of the voice side of things, but I would anticipate, whether it's with OpenAI or one of the other partners that we have out there, that you should expect to see it across all channels over time. That's probably not a surprise to you. The way that we want to approach it ultimately is in more of a multichannel way. I think that's the most optimal way to reach consumers via the customers that we serve. As it relates specifically to the partnership, it is voice-based, as I said; basically, what it allows for is for us to use OpenAI's capabilities related to their large language models and then apply them using a Twilio API with our voice capabilities. I think where it gets really interesting and as we alluded to in our earlier remarks, if you compare that with some of the contextual data we have about our customers' consumers, you end up with a really personalized, lively interaction between one of our customers and the consumer. In terms of timeframe around revenue, obviously, AI is evolving rapidly. I wouldn't anticipate that it shows up materially in our revenues for a little while. That said, we are very excited about the partnership and what's happening with AI. In particular, I would point to the combination of communications and contextual data paired with AI as a valuable combination.

Perfect. That's very helpful. And then Aidan, if I can ask one, I'm sure we'll hear more about this at Investor Day. But since you gave the initial guidance on the outlook for fiscal 2025, I think you mentioned you were assuming a neutral macro for the 7% to 8% growth target. Is that neutral compared to what we're in right now in 2024? Or is it like a headwind right now in 2024 and that goes to neutral in 2025, implying slight improvement? Just curious how you're thinking about that.

Yes. I'd say, Arjun, it's in line with what we're seeing right now. So I'd say neutral to kind of what we're experiencing today.

Thank you. One moment for our next question. Our next question comes from the line of Jim Fish from Piper Sandler.

Hey, everyone. Great quarter. Could you provide some insight into how significant the ISV channel is for Twilio right now and how its growth compares to the overall business?

We haven't established the specific details regarding the amount of business we're doing with ISVs. However, I can share that this segment is a significant contributor to our success. For instance, this area is growing more rapidly than our overall revenue, which is very encouraging for us. Additionally, it yields higher gross margins compared to our consolidated revenue. Our ability to effectively utilize our distribution to support these ISVs makes it a crucial channel and partnership. We are committed to helping these partners grow, which in turn will support our growth.

Got it. And on the RCS side of that major airline win, is there a way to understand how this will potentially change volumes for that customer, be it on the SMS side versus RCS and what that sort of gross margin profile looks like for RCS relative to SMS at this point?

I think it's really difficult, either on a unique customer basis or more broadly to extrapolate what's happening with a particular usage inside of a channel, with this channel being messaging. I think I would imagine that fundamentally, you'll probably see something relatively consistent with where we are now. Our expectation is not necessarily that RCS will end up supplanting a bunch of the other activities. It works really well for an airline use case. With respect to airlines, I would imagine that, that category more broadly will end up using RCS. I would certainly hope they take advantage of some of the features and capabilities there. But I don't expect it to fundamentally change the dynamics of our underlying business. We’re not anticipating at least sitting here today that RCS will impact revenues or margins in terms of our business dynamics.

Thanks, Khozema.

Thank you. One moment for our next question. Our next question comes from the line of Ryan Koontz from Needham & Co.

Great. Thanks for the question and great quarter there certainly. Khozema, can you outline kind of where you are in your self-service journey? It sounds like that's a nice growth driver. I'm sure it's an operating margin expansion with your lower sales and marketing expense. But can you maybe explain kind of where you are from kind of a milestone perspective and where you might be headed in the future? Thanks.

Yes. Look, not to be cliché about it, I would say it's always a day-one approach that we're trying to take to self-serve. Being a long-term follower of us, you know that the developers' attraction to the platform has always been a hallmark of the company. Over the last several years, to ensure that there's trust and compliance on the platform, we've had to introduce certain levels of friction in the sign-up process to onboard new customers. What we want to do is make it fundamentally as easy as possible for a developer to engage with the platform, to get up and running with a use case, and then to start disseminating that inside their consumer base. I would say we're never done. Our milestone list is quite long. We're happy with the progress made, but we will always look for ways to improve the experience for developers. In that spirit, I would say it's still day one.

When you talk about that friction, you're talking about malicious use. Do you want to qualify these folks? Or is that the reason for it?

Yes, that's definitely one reason. I think you're also familiar with last summer, where we went through the 10 DLC onboarding process where we had to put customers through that. We got through without any real impact on the business. But you as a consumer certainly don't want your children receiving unwanted messages. Trust has always been one of the number one things we promote, and creating a platform that embodies both trust and ease of use has always been a hallmark of Twilio.

Great. Congrats on the results.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Alex Zukin from Wolfe Research.

Hi, guys. You have Rich Magnus on for Alex. A question on free cash flow. Should we expect flow margin expansion to outpace operating margin expansion next year given the prepayments affecting free cash flow in the fourth quarter? Can you help sort of quantify that headwind in Q4? Thanks.

Yes. Hi, Rich. Thanks for the question. So we're not yet providing explicit free cash flow guidance or commentary for 2025. In general, the way to think about it is it tracks closely with our non-GAAP operating income over time. Within quarters, there might be some variability, but over time, they track closely. As we said previously, we do have episodic prepayments from time to time, and we will experience some of them in Q4. As we think about free cash flow going forward, I'd think about them generally in line. We'll discuss more regarding 2025 specifically at our Investor Day.

Thanks. And then one more on whether there is anything you should think about regarding political traffic in Q4 from these final election pushes? How does that compare to prior cycles? Thanks, guys.

Yes. As we called out in prepared remarks, in the third quarter, we did have some political traffic. It contributed about 90 basis points to our growth rate but was offset by a product we are sunsetting, so it didn't drive revenue growth. I'd expect Q4 to be similarly immaterial. There will be some political traffic, but we don't expect it to contribute much. In previous years, we had more significant political traffic, but we made a decision a couple of years ago to limit that based on our acceptable use policy.

Thanks a lot. Congrats on the quarters, guys.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Taylor McGinnis from UBS.

Yes. Hi. Congrats on the quarter and thanks so much for taking my questions. The first one is just given the acceleration we saw in revenue in the quarter, particularly in the Messaging business, anything specific you would flag as really driving that? And as we look into Q4, it seems like you only raised the guide modestly. Anything specific to Q3 with the Messaging business, or should we consider seasonality looking into Q4?

Yes. Let me cover a bit on Q3 and then talk about the guide. We're really pleased with the acceleration we saw. To be clear, reported and organic are now equal, having lapped all the acquisitions. The 10% growth is both reported and organic. We saw strength across the business. Messaging, as you highlighted, accelerated in the quarter from a growth perspective, while email continued to show strength. We also saw good performance in our ISV platform and in self-serve. Regarding industries, we saw healthy revenue growth in tech, healthcare, financial services, retail, and e-commerce. Social and messaging continued to be softer for us but represent a smaller portion of our revenue. Geographically, the U.S. remained strong, and we saw improved international volumes and revenue trends for the second straight quarter. So pulling it all together, multiple factors drove strength in the quarter. Regarding guidance, we guided 7% to 8% for Q4, which is actually 2 points higher than in Q3, showing some favorability. As we're usage-based, we continue to guide prudently given that dynamic.

Perfect. Thanks. And then maybe last one for me would just be on your margin outlook. You've had pretty impressive upside to margins over the last several quarters, but it seems like the pace of expansion on a year-over-year basis is starting to come down. As we think into next year, any high-level thoughts on how to think about that versus what we've experienced? I know segment reaching breakeven is a driver, but across the model, any other areas of efficiency you’re targeting?

Yes. I'm not going to give a specific number for next year, but I want to call out a couple of things. In Q3, the lower leverage quarter-over-quarter was due to an additional bonus accrual of $18 million, which was a catch-up based on our profit forecast for the year. That impacted the quarter and should factor in thinking about underlying operating margin expansion. Regarding future leverage, we're confident in our ability to continue getting leverage. Next year, some of the levers are, as you mentioned, Segment, which lost $60 million in Q3. Annualizing that reflects $64 million. Other areas of focus include automation and workforce planning to optimize our structures and geographic team locations.

Great. Thanks so much.

Thank you. One moment for our next question. Our next question comes from the line of Ryan MacWilliams from Barclays.

Hi. Thanks for taking the question and I appreciate the color on the 2025 numbers. Are there any trends in your business giving you more visibility to provide this out-year guidance? Like, are your customers feeling better about their own messaging volumes? Just love to hear more detail on your build-up to that 2025 revenue guidance. Thanks.

Yes, I'll give you a couple of things. First, we've been working on various efforts inside the business, categorized into three buckets: discipline, rigor, and focus. We've characterized stabilization in trends over the last several quarters that has modestly begun to reaccelerate into slightly better growth, as seen in Q3. As Aidan mentioned, Q4 guidance reflects consistent raises across several quarters. This outlook for 2025 isn't just a trend extrapolation; it's also based on conversations with our customers. Self-serve has been particularly strong and appears sustainable, and we've seen strengths across multiple products, evidenced by our innovations.

Excellent. Thanks for that color, Khozema. And on RCS, for Twilio, it's always been seen as a catalyst that's two years away. But now it seems more realistic with Apple rolling it out on iPhones. How are you thinking about the timeline for RCS adoption? Are the carriers ready for RCS? And could Generative AI potentially enhance RCS adoption?

Those are great questions. It's unclear how RCS will play out. We're excited to support the technology; it's really cool and delivers rich content. However, I'm not sure about the long-term outcome. RCS is well-suited for certain companies like airlines because of their frequent purchases. For one-time purchases or simple notifications, it's not always necessary. Regardless, we're adapting, and we're optimistic that AI integration, especially in terms of contextual data, will improve our position with RCS and two-way messaging.

Makes sense. Appreciate the color. Thank you.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Meta Marshall from Morgan Stanley.

Great. Thanks and echoing my congrats. Maybe just on the DB&E pickup on the communications side of the business, understanding ISVs helped bring in a lot of new customers. But wondering if you think that part of the messaging gains or DB&E improvement is gaining share within customers through Verify products or the other enhancements you've made to the portfolio or if marketing budgets have gotten better, leading to more volumes. Additionally, where do you think you are on go-to-market improvements within Segment after nine months of changes?

Yes. Hey Meta, this is Khozema. I'll start, and Aidan can provide additional color. We've made several go-to-market improvements for Segment and feel better about our position now compared to where we were. There have been improvements in churn, contract lifecycle, and customer time to value. That said, there's still work to do. The metrics aren't fully reflected in reported numbers yet, weighing on our net retention rates. However, our milestones are being met, if not exceeded. For messaging gains, we have picked up new customers, but this isn't purely macro-driven. Customers are implementing more products alongside existing ones. We’ve seen a modest improvement in DB&E. Although we're not guiding to that metric, we’re encouraged by what we see and will continue focusing on self-serve.

Great. Thanks so much.

Thank you. One moment for our next question. Our next question comes from the line of Michael Turrin from Wells Fargo.

Hey. This is Rich Poland on for Michael. Thanks for taking my question. So just one on the ISV side of things. I think you mentioned that you walked away from Engage Premier, which helped avoid competing with some of those ISV partners. I wanted to get insight on potential further areas to look at or how that has played into your strength with ISVs?

Yes. To clarify, we did decide to sunset Engage Premier, which was a good decision. That paired with our commitment to ongoing operating rigor and discipline has helped us focus on the right things. It allows us to grow partnerships with leading marketing automation companies instead of competing with them. Our technology integrations with companies like Airship, Bloom Ridge, Brakes, Insider, and Klaviyo have been strong. We're excited about growing with these companies and solving customer needs together.

That's very helpful. As a follow-up on the AI side, could you point out any significant use cases where Twilio serves as a building block on the core comms or API side aside from the partnership?

Yes. I see AI not just as communications or merely about Segment, but rather the combination of contextual data and communications. The most interesting interactions for our customers happen when we bring this data together. Our customers want their data secure in a data warehouse rather than being utilized for LLMs. In the future, expect to hear us speak less about individual products and more about the interactions that contextual data enables across all our product lines.

Awesome. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Nick Altmann from Scotiabank.

Hey. Awesome. Thank you. In your prepared remarks, you noted an eight-figure ISV deal consolidating volume from three vendors on Twilio on the SMS side. Can you discuss what unlocked that consolidation and the opportunity with your installed base in terms of large customers or ISVs who may be multisourcing?

To start with mult-sourcing, it happens occasionally, and customers explore it. However, our platform's abilities and the quality we provide drive customers to us. We're strong in helping our customers deliver critical workloads, especially regarding message timing. For the ISV example, that customer struggled to scale internationally but found Twilio easy for that purpose. Engaging customers through multiple channels enhances value, and I wouldn't be surprised to see more of this over time.

Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Samad Samana from Jefferies.

Hi, this is Billy Fitzsimmons on for Samad. Khozema, in the prepared remarks, you highlighted the AI opportunity with Flex to create intelligent IVRs and broader AI agents. The contact center seems like a focus for traditional comms vendors given its turnover and volumes. Vendors from outside the market are targeting it too. Can you share how Flex has performed recently, customer feedback, and the integration of AI in Flex? How are you thinking about pricing and differentiation as you add AI features?

The focus is not solely on Flex but on achieving outcomes for customers, which could change the dynamics of seat-based SaaS models. Various entrants in the space exist, but true differentiated value comes from combining contextual data with communication channels. Generic models may only solve basic problems, while Twilio aims to understand customer interactions at deeper levels. Contextual data is proprietary to our customers, and they wouldn't share it with large LLMs for training. Thus, we see ourselves well-positioned with Flex and contextual data integration for every product.

Super helpful. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.