Twilio Inc (TWLO) August 2026 Conference Transcript

All right. I think we're ready to kick things off.

I'm DJ Hines. I'm the senior software analyst here at Canaccord. This is the 46th year that Canaccord's hosted this conference.

We couldn't do it without the support of the corporates to come and bring all the great content and the investors that show up and fill the rooms and eat the food and ask the smart questions. So thank you for everyone for being here. Delighted to have the Twilio team. We have Rodney Nelson who runs IR. We're going to do this as a fireside chat, but I'd be happy to work in any questions from the room. We've got 25 minutes. So with that, I think we can get right into it. Let's do it. Rodney, look, I think investors probably know the Twilio story well, but probably don't know kind of the massive transition that's happened in the business over the last couple of years.

So maybe you could talk about some of those changes and kind of how that's driving what you're seeing in the business today yeah so i mean one thing that's always been true about twilio that has remained true over the last couple of years is we we are the largest communications platform in the world and so we provide critical infrastructure to our customers to deliver communications to harness data to deliver better more personalized more contextual experiences for their customers the journey that we've been on over the last couple of years is you know really doing a lot of hard work uh to quite frankly just build a better business we We accrued a lot of really interesting technology assets over the course of the last 10 years. We have this great communications platform, we have these incredible data assets. But what we hadn't done kind of through COVID was do some of the hard work to integrate those assets. And so over the last two and a half years, we've not only really right sized the cost structure of the business, the last 18 months have been a pretty heavy innovation cycle where we've natively integrated a lot of the data capabilities that we have in the business directly into the communication stack. And the net result of that was a series of releases that we launched at our Signal conference in May that now give developers a natively integrated set of tools so they can very easily spin up communications workloads across any channel, messaging, voice, email, and also deliver real-time contextual intelligence in those communications. So, you know, whatever your preferences have been that you've expressed to a business, whatever, you know, competitor you mentioned in the context of a live support call, whatever channels you prefer to interact with, maybe you're a text-only type of person, all of that data can be wielded in real time to drive more relevant, more contextual interactions between businesses and consumers. And so as a result of that, we've really refocused and doubled down our efforts as being an infrastructure provider. There was a time where Twilio was trying to serve two masters, provide really critical infrastructure on the communication side, and also build applications. We largely abandoned that second initiative to really focus on the infrastructure layer where we have real domain expertise, a real right to win. And we have 12 million developers who love the work that we do there. And the net result of that over the last couple of years is a business that's gone from roughly break-even non-gap operating margins to flirting with 20% here in the last couple of quarters. We've re-accelerated the top line from kind of the high single digits up into the high teens in this most recent quarter. And alongside that, gross profit dollar growth, which is a pretty critical measure for us, has also re-accelerated each of the last five quarters and actually reached 18% in the most recent quarter. So you now have a business that is innovating again, has a really strong financial foundation, and has accelerated the top line, and is now providing infrastructure not just to large enterprises, but also now to AI natives as well. So it's been a pretty transformative couple of years, but the business is on the best footing it's probably ever been on.

Yeah, that's great.

Bringing that to life, I mean, you just reported Q2 results.

Stock acted quite well off them. You know, you mentioned some of the numbers. Talk about what stood out to you in Q2.

Yeah, I mean, it's kind of, again, the culmination of a lot of the work that we've put in over the last couple of years, but we held an investor day in January of last year, and one of the things that we expressed there was we firmly believe that this company can be a double-digit grower with consistency over time. We hadn't really demonstrated that in the preceding six or eight quarters, but I think what Q2 resembled was just the breadth of strength that we're seeing across the business. So, you know, one of the bigger surprises, I think, in the first half of this year is strength of our messaging business it grew 18 percent excluding the incremental carrier fees that we're digesting voice has been a very consistent story for us over the last seven quarters it's been accelerating since the end of 2024 that's getting some benefit from some of these ai natives that need us for the need us for communications infrastructure to actually deliver those agentic experiences for their their enterprises that they serve and that's also coming on the back of not just volume but also software add-ons that we deliver within that channel and so voice accelerated to north of 20 growth in q2 which was really exciting and then you look down kind of the revenue stack you've got other add-ons like verify which is our multi-factor authentication platform it accelerated to 30 plus revenue growth so as you look across the business you know whether it's messaging voice software add-ons even our support and services offerings continue to see huge attach it's just a business that's executing very well as we go to market our self-serve channel which we've put a lot of investment into over the last couple of years, it accelerated to 30% plus growth. We're now serving more customers there than ever. They're being met with a much richer console experience, more AI-native tooling to help them get up and run even faster. And so Q1 was probably the strongest balance of revenue growth and profitability that we've demonstrated as a company since we've come public.

Yeah. Maybe we can talk about some of those growth drivers. You kind of set up the next few questions pretty well. Messaging in the first half has been particularly strong. What's driving the strength of messaging and how durable do you see it?

Yeah, I mean, I think first and foremost, we've likely been a share taker over not just the last quarter, but frankly, over probably the last couple of years. We've made a lot of investments in things that probably sound unsexy, compliance, navigating a very complex regulatory environment, navigating a very fragmented carrier landscape. We have over 4,800 interconnects globally. But another area that we've placed to heavy investment is in deliverability and fraud mitigation. And those two things are pretty critical to be able to say to a customer, look, only the messages that you intend to send are going to be the ones that you actually send. And you're only going to pay for those messages, and they're going to get delivered with extremely high reliability. I think that's served as a really interesting wedge for us to go out into some of these international markets and take share where we are maybe a little bit less penetrated relative to our leading position here in the United States. We've maintained, if not extended, that lead domestically. We're helping businesses around the world, not just reach the U.S. consumer with scale, but also increasingly reach their global consumer audiences. So then as you drill down into the individual verticals that we serve, our top six or eight verticals are all growing meaningfully into the double digits. So you're seeing breadth of strength, not just isolated in FinServe or healthcare or tech. It's really happening everywhere. And then as you drill it down into the use cases, if you use some of our marketing ISV customers as a proxy for marketing use cases, they continue to grow very quickly. Again, Verify, growing north of 30%, a good proxy for how 2FA and multi-factor authentication is proliferating, not just in regulated verticals like FinServe and healthcare, but into more traditional consumer-facing businesses in retail and e-commerce. And so there really isn't any one area that's been an outsized driver of the messaging strength. It's been pretty broad-based, and that's not just been the story for Q2. It's really been the story year-to-date.

Yeah, that's great. AI voice was another area of strength. How do you see that opportunity unfolding and kind of where are we in terms of AI natives and enterprises adopting AI voice?

Yeah, it's weird because it's moving quickly, but it's also still very early. And a shorthand that Cosame likes to use, which I think is effective, is just how many AI agents have you interacted with in a customer service context? And the answer that we usually receive is zero or one or two. It's growing, but there's been a gradual pace of adoption that we've helped serve. And I think what's fascinating about the opportunity to us is we don't just provide the infrastructure to actually make the communication happen. We increasingly are providing software items to actually orchestrate that call, whether that's conversation relay to do the model pipelining from text to speech to the LM, back to speech to text, conversational intelligence, which I mentioned a bit earlier, to actually get real-time context of what's happening in that call to understand what's being said, the sentiment that's being shared by the consumer so you can actually react effectively in real time. And so we've seen AI natives flock to our platform primarily through our self-serve channel because that is a developer-led motion with most of our customers that come to Twilio, find Twilio through self-serve. And we've seen a lot of these AI natives scale pretty quickly. We referenced a couple of customers that if you rewind to Q1 of 2025, we're spending, call it low six figures on a quarterly basis. Fast forward to today, we have customers that are spending upwards of $5 million, but dollars annualized growing at 60, 70, 80, 90, 100% year over year. And they're not just doing that in the voice channel, they're increasingly looking to those software add-ons as well as the messaging channel to get their workloads done. But I think what's been encouraging about the voice acceleration is it hasn't just been driven by those AI natives, they're certainly contributing. But the bulk of the growth is actually coming from the the rest of the install base like the large customers that we serve have continued to grow their volume have continued to consume software add-ons so you have this really healthy balance between the upstart innovative AI natives who are increasingly driving more volume as well as the the larger enterprise customers who we can serve in a very holistic fashion not just in voice but as well as in other channels yeah yeah the breadth of opportunities and growth is awesome you talked about signal and being one the most consequential kind of customer events you've had in a while as part of that there was a bunch of new product introduction maybe just talk about what was introduced what was important for investors to know coming out of that event and kind of what you're seeing in terms of early signals yeah there was a lot that we we launched at signal um i think the core kind of product offering that that grabbed a lot of attention was actually the culmination of work that probably spans five or six years dating back to when we bought segment uh many years ago and look the vision then is still the vision today, which is if you can pair highly relevant contextual information about your consumers with real-time communications, you can deliver just a much better consumer experience and drive more revenue, drive better retention and loyalty, have better support experiences, actually solve a customer's problem. The challenge our customers always face, though, is, well, how do I stitch these two things together? Like a CDP can be a pretty onerous implementation. The integration work that's required to maybe stitch the CDP together to source systems and then stitch that back to the channels like that's pretty hard work and it resulted in you know the customers of ours that were very ambitious writing a lot of what we would call glue code to basically keep all these things together um and it was clunky and it created long sales cycles it certainly created frustrations and so we've taken what we did over the last 18 to 24 months was let's just eliminate all that work for our customers let's take the best elements of segment um and create you know kind of an api first layer where you can integrate the memory of who who you are as a consumer what preferences you've expressed what you've purchased in the past real-time intelligence so that i can actually understand what's happening during the context of a conversation and then an orchestration engine so that i can move with a consumer seamlessly as they maybe hang up a support call and then pick it up later asynchronously in the text messaging channel and so in in may we launched effectively all those capabilities as a series of natively integrated apis that sit beneath all of our all of our communications channels so that our developer, all of our customers, whether you're a developer, an enterprise, somebody using a coding tool, you can just tap into these APIs very seamlessly and drive, whether it's a human-led interaction or an agent-led interaction, you can have that real-time context and the real-time intelligence streaming underneath all of your communications and that data asset compounds as you install generative custom operators that are telling you which competitors are being mentioned or which price points are maybe a bit too painful for your for your customers that can all get reconciled back to a unified profile and conversation memory to then inform the next interaction or the next marketing communication that you deliver um so it's it's super early days customers like car finance have already launched real working ai agents that are built on this conversations layer they're they're a fantastic example where they're seeing a 60 uplift in conversion striving multi-million dollar uplift in annual revenue um and so we're focused on not just delivering the capabilities but showing to our customers the ROI they can actually get when they harness AI with contextual data and communications.

Yeah I want to talk about gross margins a little bit I mean I feel like it's always been a hot button topic for investors with the Twilio story you know there's some moving dynamics there with carrier fees and digesting those but while gross margins have come under pressure you've been accelerating you know gross dollar growth gross profit dollar growth. Just talk about some of the moving parts there, kind of how you counterbalance them and what the outlook is going forward.

You've covered the company for a long time. I covered Twilio on the sell side when it first came public. This is a debate that's raged about Twilio for a decade at this point. I think we've worked hard to, number one, educate the street on what is the various gross margin profiles across all of our products. The shorthand is, look, you have messaging, which has historically been a lower margin product team called it in the low 30s historically and everything else resembles software it has very high gross margins and so the the framework that we use internally is look as long as we are disciplined as we go out to marketing go win messaging business and the unit economics are strong and we are delivering those services as efficiently as we can meaning we're getting as many direct connections as possible to really streamline our supply chain then the gross margin actually doesn't it doesn't necessarily matter all that much especially when you contemplate the pass-through fees that we are obligated to charge and give back to carriers as we terminate messages. And so as long as those gross profit dollars flow into the messaging business, we'll deal with the gross margin outcome on the other side, especially if we're also getting healthy growth in voice, in email, in the software add-ons, in support and services, all of which we run at a meaningfully gross margin accretive level. And so this year was actually the first time where we offered a directional guide on gross profit dollars. And I think it's really just cut through the noise that you sometimes see on our gross margin line. I think the irony from my perspective is we've now printed in consecutive quarters the lowest gross margins in company history. I'm getting the fewest questions on gross margin that I've ever gotten because gross profit dollars have accelerated to 17% and 18% growth in each of the first two quarters this year. So it's an important conversation. When we talk about these dynamics, it's not that gross margins don't matter. It's just that to us, as long as we're driving a healthy combination of organic revenue growth and gross profit dollar growth, the gross margin chips will kind of fall wherever they land.

It's amazing. When growth accelerates, you get a lot less questions on gross margins. Maybe sticking with the cost side of the business, OPEX in Q2 was up a little bit more. It's kind of a departure from what we've seen in recent quarters. Just talk about what's behind that and kind of what the forward-looking view on OPEX is.

Yeah. I mean, the frame for us coming into this year was OPEX was always going to be a little bit higher in the front half of the year, especially as we deliver these innovations that we just launched at Signal. And so in Q2, you also have some seasonal factors that drive some year-over-year flux. So you've got our annual merit increases occur in Q2. The other factor though that drove some of the uplift in OPEX was incremental bonus accruals. The company's performing well. Our outlook for the year has been increased. And so we're accruing at a higher level of attainment for the bonus. So there's a little bit of one-time noise there to catch up for the period for Q1 where we weren't accruing at that level. You also just had some timing things on platform and development costs in terms of when our new cloud commitment rolled in versus when we rolled off of the other one. So you had some temporarily elevated costs there. I think as we look ahead to the second half of the year, our guidance implies a much more moderated pace of OPEX growth. We call it mid-single-digit growth versus the closer to 10% that we saw in the first half of the year. That's probably a more accurate frame of how we think of OPEX investment. We've been very disciplined in where we've invested in product. The investments that we've made in self-serve have made us wildly more efficient in our go-to-market motion. So we can burden our go-to-market teams less and allow them to focus on a more targeted series of accounts. So there's, of course, always areas of the business that we want to invest in, particularly in R&D. But we've managed to keep headcount flat for two and a half years. That will drift higher over time at some point. But we feel like we have a pretty good OPEX envelope that we're working within and can continue to drive very healthy growth with relatively modest OPEX investments.

Yeah, makes sense. One more model question. We'll stick with the numbers. Q3 guidance implies a little bit of a deceleration from Q2. What's embedded in that? Is there just conservatism in the outlook? Is there something that you're seeing that maybe warrants a little bit more caution heading into Q3? How do you frame that for investors?

Yeah, I mean, the thing that's always been true about Twilio is we're a usage-based business, and that has always framed the way that we approach forecasting and setting guidance off of those forecasts. And look, I think Q1 and Q2, it's a good example of when the usage model really works for you. We had really strong usage in the messaging channel. We had really healthy trends in the voice channel. We don't want to just assume that those things are always going to reoccur. So we will always take a little bit more prudence when we approach our guidance, even if it's just for the next quarter, and especially if we're looking out over further periods of time. We also do face some tougher comps in the voice and software add-ons business in the second half of the year. We obviously see very healthy trends in those businesses, but we are mindful that we saw a pretty sharp bend in the curve as we headed into the second half last year in both of those areas. And so we're being mindful of that. All of which is to say, our Q3 guide of 11% to 12% organic revenue growth is actually our fastest in several years.

So we feel very good about the trends we're seeing in the business, just being mindful of who we are as a usage-based business. in some of the comps we do face in the second half yeah makes sense um we've got a few minutes left with the uh on the clock here um open it up if there's any questions from the room or i can take us home just want to make sure we give everyone a chance to participate um buybacks uh have been a a pretty central part of the this video story uh for a while now um maybe just talk about capital allocation strategy here and what to expect going forward yeah i think we've run one of the more successful capital return programs in all of software over the last couple of years.

We've bought back over four billion dollars of our own stock, much of which occurred at sharply lower prices than where we are today. And so that's been a fantastic use of capital. It's still a good use of capital. We still expect to be buying back our own stock, even at these levels, even as the shares have re-rated, because we still see very compelling opportunities on the horizon for the business. And so that remains a critical component of the capital allocation framework we have 800 million dollars left on our existing authorization so I would I would expect us to continue buying background stock like M&A I think we're we're certainly open to it we did our first deal in several years late last year we bought an identity asset called stitch which is a very near adjacency to what we already do with 2FA with verify we think there's an emergent opportunity and agentic identity that we can play a pretty meaningful role in. And I think the stitch acquisition, which is a fantastic team, accelerates what we're trying to do in that particular technology area. That's a good framework for how we're thinking about M&A going forward. If we can find assets that accelerate product development, accelerate us in an area that we're already going, and we can do so at a digestible purchase price, you know, we'll take a look at those things. And so, you know, we're not itching to do anything there, but that I think is the general framework we've approached M&A. And again, I think capital returns remain an important part of the story yeah um hopefully we get a chance to do this again in a year from now what are we going to be talking about then like what what should investors be paying attention to uh over the next year or so is uh kind of key mile markers to watch yeah i mean i think number one from a product perspective like keeping the pace of innovation going you know we launched these big conversations pieces in may there's still a long list of features that we want to implement into those products to better serve our customers and so So I think one of the good things that we did in this launch cycle is we did a pretty onerous private beta the first four months of this year, four plus months of this year, where we had about 50 customers and partners participate. So we got really amazing feedback on what's working, what needs to be improved, what features are we looking for? And so executing against that list of additional capabilities is going to be really critical. And again, continue to push the bounds on identity and introducing new capabilities to better serve our customers as they increasingly move from a human to human to more of a hybrid world where it's human to agent agent to human and then eventually potentially agent agent interactions and so we're making some investments there so i think on the product side it's continue to drive the pace of innovation that we've seen over the last 12 to 18 months and then look we've got to execute um we've now launched this series of products we have an incredible communications platform um we've you know been out competing our peers in the space pretty handily, we need to keep our foot on the gas. And so continue to deliver really compelling self-serve experiences so developers never have to think twice about where they go to build communications infrastructure, making sure that we're showing up in the agent decoding tools, having our native integrations with Cloud Code, with Replit, with Codex, with all the various tools that are out there now for either human developers or agentic workflows to discover and utilize our APIs. That continues to be a big focus of ours. And then executing with our large enterprises and showcasing to them look as you go through this transition and begin to actually implement ai in your workflows it's not just about implementing it how does you actually get to value and what does value look like and so continuing to showcase to our customers here's exactly how you get to better better retention more revenue more cross-sell more upsell better profitability lower costs using the series of tools that we've just launched and so if we can demonstrate that there are you know many many more customers customers out there like car finance like Vazi, who have been early adopters of these things. I think that will mean that we're being pretty successful and there should be a durable, profitable growth story alongside that.

Yeah. Maybe a final question just to wrap. What's the question you wish you got asked more? What's the underappreciated part of the story that you want investors to understand and leave here with?

I mean, I think the underappreciated part or maybe the misconception perception or, you know, whatever, the view on AI is, it's all going to happen right here, right now. Because we've all experienced, like, all these major model releases, all these major innovation cycles. And the reality for enterprise is, like, we're all still figuring this out. And so, like, both things can be true. We can be moving very, very quickly, and the rate of adoption can be very gradual. And so, we've kind of consistently framed to investors, like, we all believe that, you know, in three years, the first point of interaction with any customer service team is probably going to be AI. There's a long ways to go between here and there. And you know, the one breakout use case with AI has been coding. I think we're still kind of like looking to make sure that that next breakout use case is service or support or sales. And we're getting there. We're seeing some really healthy use cases. And we're seeing it in our own business with our own self-serve AI agents, which are doing everything from qualifying leads to scoring leads to working leads to making product recommendations to resolving support tickets. But there's still going to be a, you pathway for a lot of businesses to make this stuff robust especially if you're in a regulated industry so I think the excitement is justified I think the the pace is gonna be more gradual than most realize but I think for us we're in a really strong position to help deliver that reality for customers and we now have a broader array of tools to make it happen so that's probably where I'd go yeah that's probably a great spot to leave it lots of momentum in the business gonna be fun to keep tabs on progress Rodney thank you for being here Thanks for having us.