Earnings Call
Twilio Inc (TWLO)
Earnings Call Transcript - TWLO Q2 2024
Operator, Operator
Good day, and thank you for standing by. Welcome to Twilio, Inc., Second Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bryan Vaniman, SVP, Investor Relations. Please go ahead, sir.
Bryan Vaniman, SVP, Investor Relations
Good afternoon everyone, and thank you for joining us for Twilio's second 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 at investors.twilio.com. 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 these risks and uncertainties are described in our SEC filings, including our most recent Form 10-K in 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. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A.
Khozema Shipchandler, CEO
Thank you, Bryan. 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 $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels. We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation. 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. 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, 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. Our Twilio Communications business had a strong quarter, with revenue of $1.01 billion, 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 eight-figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solution. 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 continue 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 one sign-up streamlines the log-in process by having one login for a customer to access all of their Twilio accounts and products. 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. One customer, a leading mortgage lender, adopted both Voice and Verify in the quarter and expanded their messaging usage. 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. Not only is it growing quickly, it is saving our customers millions of dollars by mitigating fraud at the source and to continue deliver better outcomes for our customers leveraging AI, our SMS pumping protection product 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 second product that natively embeds Segment into Communications. With personalized virtual agent, our customers receive a truly personalized interactive voice response. Each caller receives a custom menu of options based on their recent interactions with 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 about 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 second year in a row, positioned highest for ability to execute and ranked number one in four of six use cases in the Gartner Critical Capabilities Report. Twilio is also named a leader in IDC's Marketscape Worldwide Contact Center as a Service. Turning to our Twilio Segment business. Segment delivered revenue of $75 million, 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, 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 seven-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 Data Graph 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. We've gotten a great response, and we're excited to have customers like LegalZoom and Trade Me 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 four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers. 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.
Aidan Viggiano, CFO
Thank you, Khozema, and good afternoon, everyone. Jumping into our results. Total Q2 revenue was $1.083 billion, up 4% reported and 7% organically year-over-year. Communications revenue was $1.007 billion, up 4% reported and 7% organically year-over-year. And Segment revenue was $75 million, 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 IFC business. 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 sun setting of the software component of our Zipwood 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. 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 four times faster as a result. We are also pushing for more multi-year deals with customers. And in Q2, over 40% of Segment's new bookings were multi-year deals versus 17% a year ago. We delivered record non-GAAP gross profit of $577 million, up 7% year-over-year. This represented a non-GAAP gross margin of 53.3%, 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 Segment 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. 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 million, up 46% year-over-year even after including $20 million 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 Segment's expense profile and ongoing cost discipline. Our non-GAAP operating margin of 16.2% was up 460 basis points year-over-year and 100 sequentially. Non-GAAP income from operations for our Communications business was $250 million and non-GAAP loss from operations for our Segment business was $16 million, a $5 million improvement quarter-over-quarter. GAAP loss from operations was $19 million, 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 year-over-year. We generated free cash flow of $198 million, driven by continued operating efficiency and ongoing collection strength. This was up $126 million year-over-year. And over the last 12 months, we generated free cash flow of $781 million. 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 billion share repurchase program and have repurchased over $700 million since our last earnings call in May. This brings our total repurchases to date over $2.2 billion. We intend to complete the remaining $800 million 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 million, down 10% year-to-date. Moving to guidance. For Q3, we're initiating a revenue target of $1.085 billion to $1.095 billion, representing year-over-year growth of 5% to 6% on both a reported and organic basis. We've now lapped our two 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. For Q3, we expect non-GAAP income from operations of $160 million to $170 million. Given our outperformance in Q2, we're raising our full year non-GAAP income from operations guidance to $650 million to $675 million. 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 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 prudently. We are progressing towards GAAP profitability, and we continue to see significant opportunities for margin expansion and improve 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. And with that, we'll now open it up to questions.
Operator, Operator
And our first question is from James Fish with Piper Sandler. Your line is open. Please go ahead.
Quinton Gabrielli, Analyst
Hi guys. This is Quinton on for Jim Fish. Thanks for taking our question. 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? 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?
Aidan Viggiano, CFO
Great. I'll begin, and then Khozema can add his insights. We've made significant progress on margins. If you reflect on the expansion we achieved last year and coming into this year, our initial guidance anticipated minimal operating margin leverage. Currently, at the midpoint of our guidance for the year, we're looking at approximately 250 basis points of margin improvement. We continue to identify opportunities for growth in both operating expenses and stock-based compensation, and there's more to come. We've previously mentioned our goal to have the Segment business break even by the second quarter of next year. That business incurred losses of $16 million in the second quarter and $21 million in the first quarter, indicating a potential for leverage there. Additionally, in the wider organization, especially in communications and general administrative functions, we are actively working on automation. As a remote-first company, we can utilize lower-cost regions to enhance efficiencies. We're implementing these strategies consistently. While I can’t specify an exact timeline, I believe we have numerous opportunities to further improve margins on both the non-GAAP and GAAP fronts, including stock-based compensation. Regarding profit improvements from process enhancements versus cost discipline, it’s a combination of both, though primarily driven by cost management. We remain confident that we can operate this company without incurring significant additional costs. You’ve seen us maintain this approach for six consecutive quarters. Thus, we are exercising greater discipline in how we manage the company, which is something Khozema emphasizes regularly with the team.
Quinton Gabrielli, Analyst
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? Thank you.
Aidan Viggiano, CFO
Thank you for the question. I'll address it again. We grew by 7% year-to-date through the first half and are guiding for 5% to 6% in Q3. We believe the 6% to 7% range we provided for the year is reasonable based on current observations. In the second quarter, we noticed several positive trends in the business. Specifically, we experienced strength in messaging, which is our largest segment, with solid performance in the U.S. as seen throughout most of this year, and we also observed modest improvements internationally. Additionally, our email business growth picked up, and as Khozema mentioned in his remarks, we had very strong outcomes in both our ISV and self-serve segments. Several encouraging trends have emerged. For Q3, we are guiding to 5% to 6%, which takes into account the 4% to 5% guidance from Q1 and Q2. Thus, we are seeing these trends reflect in our guidance. However, we remain a usage-based business, so there is inherent variability to consider. We will continue to plan and guide cautiously due to this variability and the dynamic market conditions we are facing.
Khozema Shipchandler, CEO
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, 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 Mark Murphy with JPMorgan. Your line is open. Please go ahead.
Mark Murphy, Analyst
Thank you very much. So Khozema, you mentioned an acceleration in email. And I'm curious to what you might attribute to 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 into outbound marketing activities or on customer engagement initiatives in a way that maybe they weren't a couple of quarters ago? And then I have a quick follow-up.
Khozema Shipchandler, CEO
Yes. Hi, 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, in that part of the business. 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 to 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-à-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 comm. 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.
Mark Murphy, Analyst
Thank you for the information. Aidan, I wanted to ask you about two quick points. You generated approximately $1.25 per share in free cash flow in Q2, which suggests a run rate of around $5 per share, a significant amount. Is any of this one-time in nature, or can we expect that kind of free cash flow margin to continue into 2025? Additionally, regarding the narrowing of the range, we're trying to understand the discrepancy between the positive comments and the slight adjustment below the midpoint. With notable brands like Starbucks, Nike, McDonald's, and Tesla experiencing consumer slowdowns, is any of this influencing your outlook for the holiday season?
Khozema Shipchandler, CEO
Yes. Mark, let me begin by addressing the latter part of your question, and then I’ll let Aidan discuss the cash flow aspect. From an industry standpoint, the good news for Twilio is that you are quite familiar with our company and have been tracking us for a long time. We have a very diverse customer base, with over 300,000 clients across various industries. This means we are always observing fluctuations in different areas. Regarding the sectors you mentioned, such as retail and e-commerce, I can say that this has been particularly beneficial for us. However, I don't see it as tied to a seasonal or holiday trend. I am not predicting a strong Thanksgiving or Christmas season; rather, we aim to manage the company effectively and make prudent decisions, regardless of the timeframe. That's our approach to running the company and how it informs our revenue guidance. Now, Aidan, would you like to cover the cash aspect?
Aidan Viggiano, CFO
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 second quarter. What we saw there is largely a function of the profit generation and the continued leverage that we're getting on OpEx, but we did see collections improvement in the quarter by about two days. 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.
Operator, Operator
Our next question will be from Arjun Bhatia at William Blair. Your line is open, please go ahead.
Unidentified Analyst, Analyst
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 was great to see the improvement there. And I was wondering if you think that we're starting to stabilize and kind of found the bottom and how we should think about the trends going forward.
Aidan Viggiano, CFO
Yes. Segment's dollar-based net expansion was 93% this quarter, up from 92% last quarter. The business grew by 3%. For this year, we expect that growth to be muted, and that's our ongoing outlook. The 93% DBNE per segment aligns with our expectations. We're focusing on several initiatives we outlined in March during our operational review. Firstly, we're enhancing our customer onboarding experience, reducing the time it takes for customers to achieve value from months to mere weeks. Additionally, we're actively signing more multi-year contracts, which will aid in reducing churn and contraction and ultimately support dollar-based net expansion. In this quarter, 40% of the bookings we secured were multi-year deals, compared to just 17% a year ago. Lastly, we are making strides in our data warehouse interoperability, which is crucial for our customers. In Q2, we launched linked audiences, enabling customers to merge their Segment CDP data with their warehouse data. All these efforts will contribute to improving DBNE over time, although it is a trailing 12-month metric and won't show immediate results. However, we believe that as these initiatives gain traction, they will positively influence this metric in the long run.
Unidentified Analyst, Analyst
Great. Thank you. That's very helpful color. And the second question for me was, the personalized agent sounds like an interesting way to kind of combine the Communications platform with Segment. I was curious what kind of reception it’s getting from customers so far? And what other kinds of products are on the roadmap that incorporate Segment into Communications? Thanks.
Khozema Shipchandler, CEO
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 think it's pretty early. I mean we just launched the thing a few weeks ago. 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. And I think it also has the benefit of like creating a feedback loop. So, the customers that I've spoken with are very, very excited. I know our team is very excited based on the customers they've spoken with as well. But in terms of financials, it's just early days, and we'll have to kind of report back on that later.
Unidentified Analyst, Analyst
Got it. Thanks and congrats on the quarter.
Operator, Operator
Thank you. Our next question is going to come from the line of Taylor McGinnis with UBS. Your line is open. Please go ahead.
Taylor McGinnis, Analyst
Yes, hi. Thanks so much for taking my question. 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 email. Segment growth improved slightly, and then you talked about some of the ISC and co-sell opportunities. So, I know you have some initiatives in place to accelerate growth that could be additive to a 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? Thanks.
Aidan Viggiano, CFO
Yes, I'll begin. We believe that the projected outcomes for Q4 are reasonable based on the current state of the business. As we've mentioned, there are several encouraging trends that we have observed over the past three months. It's important to keep in mind that Twilio is quite dynamic and operates on a usage-based model. Therefore, we're committed to planning carefully and avoiding over-optimism. We want to ensure we're not making undue assumptions based on just three months of data, as it's vital to approach this market with caution.
Khozema Shipchandler, CEO
Yes, Taylor, the only thing I'd add is, I mean, again, just to maybe reinforce a few points that Aidan made, I think we see encouraging signs like we feel 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 juice 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.
Operator, 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.
Meta Marshall, Analyst
Great. Thanks. I just wanted to kind of confirm on political traffic. I know in the past, you guys have kind of kind of 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, just should we still be thinking about kind of political traffic either to email or text message as something that's kind of more limited contribution to Twilio. Thanks.
Aidan Viggiano, CFO
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 that before with you in an acceptable use policy. And if customers don't meet those policies, we won't take the traffic. 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.
Meta Marshall, Analyst
Great. Thanks. And then 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 or ISV traction? Thanks.
Aidan Viggiano, CFO
Yes, we observed an improving trend in international messaging traffic. When we refer to international, we are talking about internationally terminating messaging traffic. This improvement was broad-based, not limited to a specific group of customers, which was encouraging. However, I don't have any specific details to highlight; there wasn't a particular industry or market that stood out with a significant increase in traffic. It was a general improvement across the board.
Operator, Operator
Thank you, One moment for our next question. Our next question is going to come from the line of Ryan Koontz with Needham & Co. Your line is open. Please go ahead.
Ryan Koontz, Analyst
Hi. Thanks for the question. I wanted to ask about any of the changes you're making in go-to-market? And these sorts of changes that are driving the strength you're able to reduce costs? And any progress in automation that you've had on the Comm side of the business?
Khozema Shipchandler, CEO
Yes, to provide some context, we made several changes last year that unfortunately led to a series of layoffs. Now in 2023, we are starting to see the positive effects of those changes, particularly in our cost structure. Our goal was to direct more customers toward self-serve options, and we've seen strong performance in that area, especially in the recent quarter. This segment encompasses a wide range of customer spending, from smaller amounts to larger ones. We also implemented various technological enhancements to ensure customers can quickly onboard and activate with Twilio. Overall, we've made significant progress in self-serve communications. Additionally, as Aidan mentioned, we've seen advancements in helping customers realize value with the Segment product through similar technological improvements, which have increased the speed at which they achieve that value. We're also focused on automation and believe there are substantial opportunities to enhance cost efficiency in the future, and we will continue to pursue those initiatives.
Ryan Koontz, Analyst
That’s helpful, Khozema. Thank you.
Operator, 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.
Rich Magnus, Analyst
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 reduce friction in that process and drive that faster TTV through the self-serve process. But can you help us think through any impacts there that might drive Segment growth this year and next year? Thanks.
Khozema Shipchandler, CEO
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 foreseeable future. We've been 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. 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. And so the combination of those things, I think, has been pretty powerful, frankly, in really accelerating what Aidan characterized as what was months in the past, down to weeks, and what we've quantified as a 4x improvement from where we were.
Operator, 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 Citizens JMP. Your line is open. Please go ahead.
Austin Cole, Analyst
Great. Thanks for taking my question. This is Austin Cole on for Pat. You touched on an eight-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? Thank you.
Khozema Shipchandler, CEO
I believe our opportunity in AI is fundamentally tied to data, especially contextual data. We have strong confidence in this because our customers possess proprietary data sets that won't be shared with a large language model. This data represents a crucial aspect of their business. Our capability to collaborate with them through Segment, utilizing that data as part of a comprehensive profile for each unique consumer, enables us to create personalized experiences. This is a significant unlock that will contribute to overall business growth. It's about combining communication with contextual data and AI. Regarding voice, I find it particularly interesting because AI functions most naturally in voice interactions. Just like how we are conversing now, it feels normal to engage in this manner. The advancements in AI for processing natural language have become increasingly sophisticated. When combined with contextual data, this presents a tremendous opportunity. I believe much of that value will ultimately benefit not just messaging and email, which we remain optimistic about, but also voice.
Austin Cole, Analyst
Great. Thanks. Thank you.
Operator, Operator
Thank you. And one moment for our next question. Our next question is going to come from the line of Nick Altmann with Scotiabank. Your line is open. Please go ahead.
Nick Altmann, Analyst
Awesome. Thanks, guys. You guys sort 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?
Khozema Shipchandler, CEO
Yes. 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 ascertained 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. 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, 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 a Braze, Klaviyo, Insider, Bloomreach, Airship, because we've got like these strong integrations within the ecosystem. We're engaged in co-sell and re-sell 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.
Nick Altmann, Analyst
Awesome. Thanks, guys.
Operator, Operator
Thank you And one moment for our next question. And our next question is going to come from the line of William Power with Baird. Your line is open. Please go ahead.
Yanni Samoilis, Analyst
Great. Thanks for taking the question. This is Yanni Samoilis on for Will. I know you mentioned earlier in the call that retail and 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 on e-commerce, are there any other verticals out there that are standing out right now or maybe even showing signs of upward inflection?
Aidan Viggiano, CFO
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 a 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.
Yanni Samoilis, Analyst
And just to be clear, growing, but not necessarily growing above the company average or...
Aidan Viggiano, CFO
In some cases, they are, in some cases, it's more in line with the company average.
Operator, Operator
Our next question is from Derrick Wood with TD Cowen. Your line is open. Please go ahead.
Derrick Wood, Analyst
Great. Thanks. Just on AI, I guess, stepping back a bit from a high level, Khozema, how would you describe the generative AI monetization strategy for Twilio, whether via direct modernization or just indirect implications?
Khozema Shipchandler, CEO
Yes. I think there are a couple of perspectives to consider. First, when we began working with AI, one of the initial applications was focused on fraud prevention and building trust. We integrated AI capabilities to protect consumers because we want to maintain the integrity of the ecosystem. Over the last year, we have introduced several products such as Fraud Guard and Verify to enhance consumer protection. As mentioned earlier, we are observing positive activity in this area. Moving forward, we anticipate that AI will primarily center around contextual data. The significant opportunity for our business lies in improving customer engagement, with personalization at scale being the key to unlocking this potential. Achieving that involves having detailed contextual data about consumers obtained through Segment. We can then communicate this back to consumers through various channels and leverage AI to enhance that process. For instance, we have a voice intelligence product that allows us to gather insights from a call's context, which not only benefits the current interaction but also enriches customer profiles for future engagements. Additionally, we see a future where consumers may unknowingly interact with an automated agent, a process that will occur seamlessly and include natural language processing. While this capability isn’t a unique strategic edge for us—many companies can achieve it—we aim to distinguish ourselves by focusing on delivering personalized experiences to individual consumers at the same time. This approach relies heavily on contextual data, which is why we are committed to integrating Segment within our Communications offerings to support that entire workflow. Does that make sense, Derrick?
Derrick Wood, Analyst
Yes, that's great color. Thanks. Helpful. Thank you.
Operator, Operator
Our next question comes from Samad Samana with Jefferies. Your line is open. Please go ahead.
Billy Fitzsimmons, Analyst
Thank you for taking my question. This is Billy Fitzsimmons standing in for Samad. Regarding stock-based compensation, it's down compared to last year both in terms of dollars and percentages. How should we consider the potential direction of that moving forward, and at what stage are we in that regard? You have mentioned adjustments to the bonus structure; when do you expect it to stabilize? Is there still more to be done for it to continue declining as it has? Thank you.
Aidan Viggiano, CFO
Yes. Thanks for the question. There's more leverage here in terms of the opportunity ahead. So we were 13.6% SBC in the quarter, was down 110 basis points year-over-year, it was down 13% 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. 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 that kind of range.
Billy Fitzsimmons, Analyst
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 Comms gross margins going forward given some of the new initiatives and given the mix of growth in new products going forward?
Aidan Viggiano, CFO
In the quarter, Comm's gross margins increased year-over-year but decreased quarter-over-quarter. The decline from the previous quarter was primarily due to hosting credits that were seen in the first quarter, which accounted for about 80 basis points. This did not occur in the subsequent quarter, creating a headwind. Year-over-year, margins were up approximately 160 basis points, driven by product mix; specifically, the growth in email, which has a higher margin compared to the average, contributed positively. Additionally, the absence of last year's dispositions in the July timeframe, which carried a dilutive gross margin rate, also helped improve margins. Looking ahead, margins in the Communications business will largely depend on product mix, including messaging versus voice and the type of terminations—whether domestic or international—as these factors influence gross margins differently. We evaluate this through the lens of unit economics, and as long as these remain attractive, we will continue our business. Therefore, you might anticipate some variability in the Communications gross margin in the near term.
Billy Fitzsimmons, Analyst
Super helpful. Thank you very much.
Operator, Operator
And our next question comes from Mike Funk with Bank of America. Your line is open. Please go ahead.
Unidentified Analyst, Analyst
Great. Yes. This is Matt on for Mike Funk. 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 algorithm to shake out in the medium term?
Aidan Viggiano, CFO
I missed the second part. No, we're not going to get into the split 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. Can you just repeat your second question? I missed it.
Unidentified Analyst, Analyst
Yes. It was just high level about how the growth algorithm could shake out over the next couple? But it seems like that's not something you're going to comment on?
Aidan Viggiano, CFO
Yes, not today. At a later time. Thank you.
Operator, 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. Everyone, have a great day. Goodbye.