Twilio - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered accelerating double‑digit growth with revenue of $1.172B (+12% y/y) and record non‑GAAP operating income of $213.4M; Twilio raised FY25 targets for organic growth, non‑GAAP operating income, and free cash flow. Management cited broad‑based strength across Messaging (U.S. and international), ISVs, self‑serve, cross‑sell, and multi‑product adoption.
• Results beat Wall Street consensus: revenue beat by ~$33M and non‑GAAP diluted EPS beat by $0.18; management flowed only part of the beat into FY25 targets to prudently manage macro uncertainty, a potential stock reaction catalyst alongside the guidance raise and buybacks.
• Gross margins declined y/y and q/q on international messaging mix and non‑recurring hosting credits last year; operating leverage improved with non‑GAAP operating margin at 18.2% (+300 bps y/y).
• Guidance: Q2 2025 revenue $1.180–$1.190B; non‑GAAP OpInc $195–$205M; FY25 organic growth raised to 7.5–8.5% and non‑GAAP OpInc/FCF raised to $850–$875M.
• Strategic narrative: expanding AI voice and conversational intelligence (ConversationRelay, ElevenLabs partnership), stronger ISV/self‑serve motions, and trusted communications including branded calling and RCS; SIGNAL announcements reinforce platform vision across communications + data + AI.

What Went Well and What Went Wrong

What Went Well

• Broad‑based growth: Communications revenue up 13% y/y to $1.097B; Segment revenue up 1% y/y to $75.7M; DBNR improved to 107% consolidated, with Communications at 108%.
• Operating leverage and cash generation: record non‑GAAP OpInc $213.4M (18.2% margin) and FCF $178.3M (15% margin); share repurchases of $130.2M in Q1 with additional ~$90M in April.
• AI product momentum: ConversationRelay enabling AI voice agents, Generative Custom Operators in public beta; partnership with ElevenLabs (1,000+ voices, 40 languages); early healthcare wins like Cedar’s Kora agent aimed to automate 30% of inbound calls by YE25.

Quoted management remarks:

• “Twilio saw another quarter of revenue growth acceleration and double‑digit growth…” — CEO K. Shipchandler.
• “We delivered…record non‑GAAP income from operations of $213M and $178M of free cash flow.” — CFO A. Viggiano.
• “We’re laser‑focused on shipping great products from a single platform…for the future that AI is creating.” — CEO K. Shipchandler.

What Went Wrong

• Margin pressure: Non‑GAAP gross margin 51.3% down 270 bps y/y and 60 bps q/q, due to non‑recurring hosting credits last year and higher international messaging mix; management does not guide gross margin, expects variability.
• Segment still loss‑making: non‑GAAP loss from operations of ~$2M, though management targets breakeven in Q2 2025.
• Ongoing macro caution: despite healthy April usage, FY outlook incorporates conservatism given transactional model exposure; only partial flow‑through of Q1 beat.

Transcript

Operator (participant)

Dane, thank you for standing by. Welcome to the Twilio First Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your first speaker today, Bryan Vaniman, Senior Vice President, Investor Relations, please go ahead.

Bryan Vaniman (Senior VP of Investor Relations)

Good afternoon, everyone, and thank you for joining us for Twilio's First Quarter 2025 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer; Aidan Viggiano, Chief Financial Officer; and Thomas Wyatt, Chief Revenue 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 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. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q1 results, and we'll then open the call for Q&A.

Khozema Shipchandler (CEO)

Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio had a strong Q1, reaching $1.172 billion in revenue, a 12% increase year over year. This marked another quarter of year-over-year revenue growth acceleration and double-digit growth. We also delivered another solid quarter of non-GAAP income from operations and continued to generate meaningful levels of free cash flow. I'm very pleased with our solid execution in Q1, and I'm encouraged by the momentum we've established to start the year.

Our commitment to operating with more rigor, discipline, and focus continues. All things being equal, I feel good about the setup for Q2 and the remainder of the year. Clearly, it's a dynamic macro environment, and while we have not yet seen any notable adverse impacts to our business through the end of April, we're continuing to monitor the situation closely.

In the meantime, we're focused on what's in our control. On the innovation front, we're laser-focused on shipping great products from a single platform that are purpose-built for today and for the future that AI is creating. In go-to-market, we're continuing to make good progress with our key growth levers, including ISVs and self-serve. We also saw solid growth in cross-sell as well as multi-product adoption. Finally, we're focused on taking care of our customers by ensuring the Twilio platform will aid them in creating enriching relationships with their own customers.

In fact, recent conversations validate that during these uncertain times, our customers are leaning on the Twilio platform to drive revenue, recognize further operating efficiencies, and ultimately deliver higher ROI. During the quarter, we released a number of new products and introduced new partnerships to help customers realize the full potential of the Twilio platform.

Today, we're at a major inflection point across industries where Twilio is at the center of the technology value chain, helping our hundreds of thousands of active customer accounts capitalize on the profound shifts in the age of AI. For example, our new ConversationRelay product is proving to be a key tool in helping developers easily build AI voice agents.

In Q1, we entered into a partnership with ElevenLabs, an AI audio research and deployment company, bringing premium, natural-sounding voices to Twilio's ConversationRelay. With this collaboration, brands can now gain access to over 1,000 voices across 40 languages, delivering low-latency, high-fidelity conversational experiences. Cedar, the leading patient financial experience platform for healthcare providers, recently announced that their new AI voice agent, Kora, was built using Twilio's ConversationRelay. With Twilio's technology, Cedar projects Kora will automate 30% of inbound calls by the end of 2025.

Additionally, ConversationRelay became HIPAA eligible, supporting healthcare use cases. With all the new AI workloads we've released, customers are using these AI-enabled voice capabilities to unlock more value. We also introduced a new Voice Intelligence feature that's powered by generative AI called Generative Custom Operators, which allows brands to use natural language to describe what you want to understand from customer interactions.

While it just went into public beta a few weeks ago, we're excited about the opportunity to help customers automate complex tasks, as we've already seen customers deploy a variety of use cases spanning custom call scoring, conversation topic detection, compliance monitoring, and tailored summarization. Twilio continues to receive high praise for our innovation. This quarter, Twilio was recognized as a leader in the IDC MarketScape, Worldwide CPaaS 2025 vendor assessment, and a leader by Omdia for its CDP Universe leadership.

In a few weeks, we're hosting our user conference, SIGNAL, where we'll share more details on our innovations across communications, data, plus AI, and new partnerships that will fuel our aggressive roadmap. The growth acceleration that we delivered in Q1 reflects a combination of continued progress across our key go-to-market levers and the overall broad-based strength of our business. Additionally, we saw customer enthusiasm for our AI products and software add-ons. During the quarter, we had notable wins across Twilio.

We landed an eight-figure deal with a leading identity and access management platform to continue leveraging Twilio messaging for two-factor authentication. We signed a Segment partnership with the Chelsea Football Club, who will use Twilio Segment to create highly personalized experiences for its 615 million-strong global fanbase. During Q1, we saw solid traction with our ISV customers as this cohort delivered another quarter of strong revenue growth.

As a result of our superior reliability, ability to scale globally, and value-added software add-ons, we're continuing to see success in landing competitive takeout wins with new ISV customers, including Ylopo, a real estate digital marketing platform that's leveraging Twilio's voice to enhance its calling capabilities, and TextUs, an SMS engagement company that has consolidated all of their messaging traffic onto Twilio. In self-serve, we're leveraging AI to help builders get started on our platform faster.

This quarter, our AI-enabled technology and automation that we developed in-house drove significant efficiency for our sales team and better experiences for customers. In Q1, we handled 85% of inbound leads with AI and also used Isa, our AI assistant, to serve as a personal concierge post-sales by helping customers set up their accounts and encouraging new customers to upgrade to a paid account.

As a result, customers that engaged with our AI assistant were 3x more likely to upgrade from a free trial to a paid account. As we continue to make it easier for builders to get started on Twilio, we're seeing AI startups, particularly those with AI voice needs, bring their workloads to us. One example that helps bring this to life is Bland.ai, an AI agent platform. The integration provides the scalability and reliability Bland.ai needs to support larger and more complex customer engagements. Bland.ai originated as a self-serve customer from a single developer sign-up just a few quarters ago.

By leveraging our targeted activation and expansion strategies within self-serve, we've scaled this customer into a significant account. In summary, I'm very pleased with the hard work of our team and our Q1 results and equally excited about the future.

We're demonstrating that we can drive improved top-line performance with continued operating leverage and strong cash flow while delivering meaningful product innovation. As we continue to execute against our plans, we will continue to partner with our customers and help them unlock the power of communications, contextual data, plus AI. I would like to turn it over to Aidan, who will walk you through our financial results.

Aidan Viggiano (CFO)

Thank you, Khozema, and good afternoon, everyone. Twilio had a strong start to 2025, delivering our third consecutive quarter of double-digit revenue growth and year-over-year growth acceleration. For Q1, we generated revenue of $1.172 billion, up 12% year-over-year, record non-GAAP income from operations of $213 million, and $178 million of free cash flow.

Revenue in our communications business for the quarter was $1.097 billion, up 13% year-over-year. This was driven by the continued progress we're making across our go-to-market growth levers, including ISVs, self-serve, cross-sell, and international expansion. We also saw strong growth in messaging both in the U.S. and internationally. Segment revenue for the quarter was $76 million, up 1% year-over-year. We are seeing continued improvement in leading indicator metrics, including AE productivity and win rates, as well as a meaningful reduction in churn and contraction in the quarter, which hit its lowest level since Q1 2023.

Our Q1 dollar-based net expansion rate was 107%, reflecting the improving growth trends we've seen in our communications business over the last several quarters. Our dollar-based net expansion rate for communications was 108%, and the dollar-based net expansion rate for Segment was 94%. We delivered non-GAAP gross profit of $602 million, up 6% year-over-year. This represented a non-GAAP gross margin of 51.3%, down 270 basis points year-over-year and 60 basis points quarter over quarter.

The year-over-year decline in gross margin was primarily driven by non-recurring hosting credits we received in the year-ago quarter, as well as a higher mix of international messaging revenue and communications in the quarter. The sequential decline was driven by the acceleration in international messaging in Q1. Despite the mixed effect on gross margins, international unit economics remained strong. Non-GAAP gross margin for communications was 49.8%, and non-GAAP gross margin for Segment was 74%.

Non-GAAP income from operations came in ahead of expectations at a record $213 million, up 34% year-over-year, driven by strong revenue growth and ongoing cost discipline. Our non-GAAP operating margin of 18.2% was up 300 basis points year-over-year and 170 basis points quarter over quarter. In addition, we generated $23 million in GAAP income from operations. Non-GAAP income from operations for communications was $277 million, and non-GAAP loss from operations for Segment was $2 million.

Segment operating losses improved sequentially as a result of ongoing cost discipline and gross margin improvement in the quarter, and we remain on track to achieve break-even non-GAAP income from operations for Segment in Q2. Stock-based compensation as a percentage of revenue was 11.9%, down 120 basis points quarter over quarter and 330 basis points year-over-year as we continue our efforts to reduce equity compensation.

We anticipate a modest increase in this percentage in Q2 due to the timing of our annual refresh grants. We generated free cash flow of $178 million in the quarter despite making a $122 million payment related to the payout of our annual cash bonus program. This headwind was partially offset by strong collections and timing of payments during the quarter.

Finally, in January, our board authorized a $2 billion share repurchase program expiring at the end of 2027, and we are targeting to return an average of 50% of our annual free cash flow to shareholders from 2025 through 2027. We began executing on this program following our Q4 earnings release in February. We repurchased $130 million of shares in the first quarter, and we executed more than $90 million of additional repurchases in April.

Moving to guidance, we're encouraged by the growth acceleration we've delivered over the last three quarters, and as we look ahead, we're optimistic about our ability to execute against the things we can control. We're also mindful of rising macro uncertainty and the potential impact it could have on the health of our customers, businesses, and our own.

As Khozema mentioned, we have not seen any impact on our business through the end of April, and we'll continue to monitor the situation closely. Customer engagement and usage remain healthy, but we're taking a prudent approach to our outlook and only filling through a portion of our Q1 beat into our full-year outlook, allowing us to navigate any potential macro risk over the balance of the year. For Q2, we're initiating a revenue target of $1.18 billion to 1.19 billion, representing year-over-year growth of 9% to 10%.

Based on our Q1 performance and Q2 guidance, we're raising our full-year 2025 organic revenue growth guidance to a range of 7.5% to 8.5%, up from 7% to 8% previously. Turning to our profit outlook, for Q2, we expect non-GAAP income from operations of $195 million to 205 million, reflecting incremental costs associated with our annual merit increases along with expenses for our Signal conference, which we're hosting later this month.

We're also raising our full-year non-GAAP income from operations to the range of $850 millionto 875 million. Similarly, we're raising our full-year free cash flow to the range of $850 million to 875 million. I'm very pleased with the accelerated revenue growth we delivered in the first quarter, as well as our ongoing cost discipline that is driving strong profitability and free cash flow.

We had a strong start to the year, and we will continue to focus on what we can control as we seek to drive durable revenue growth, continued operating leverage, and strong free cash flow generation throughout 2025. With that, we'll now open it up to questions.

Operator (participant)

Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for a name to be announced. To withdraw your question, please press star 11 again. Please leave yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from Meta Marshall from Morgan Stanley. Your line is open. One moment for our next question. Next question will come from Michael Turrin from Wells Fargo Securities. Your line is open.

Michael Turrin (Analyst)

Hey, great. Thanks. Appreciate you taking the question and nice job with the results. I think the overall question is just tied back to some of the items you're mentioning, specifically on drivers of upside to growth in the communication segment you saw in Q1, and then just in terms of lining up what we have Q1 and Q2 with the rest of your guidance. The second half has sort of a more conservative growth assumption. I'm wondering if that's tough comparisons, if there's anything macro embedded there or just anything else for us just to consider as we work throughout the course of the year and are updating our models accordingly as well. Thank you.

Aidan Viggiano (CFO)

Sure. Yeah. In terms of starting with Q1, I'd say it was similar to what we saw in Q4 and Q3. It was pretty broad in terms of the strength that we saw across the business. It was our third consecutive quarter of double-digit revenue growth. Messaging, in particular, was strong both U.S. and internationally. When you look at it by industry, we saw all of our top five verticals grow: financial services, tech, professional services, retail, e-commerce. We saw those trends continue through April. You are seeing that kind of influence our guidance for Q2. We are guiding to 9-10%. That is up from 8-9% last quarter.

Now, while customer engagement, usage of our products remain healthy, we are taking a prudent approach to our forecast, and we only flowed through a portion of our Q1 revenue beat, which we think allows us to navigate macro risks as we think about the balance of the year. To be clear, we're not trying to signal that the second half looks weaker today than it did when we gave guidance a quarter ago. The implied reduction in the second half revenue is simply conservatism related to factors beyond our control. That's kind of what you're seeing there, Michael.

Michael Turrin (Analyst)

Thanks very much.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Nick Altman from Scotiabank. Your line is open.

Nick Altmann (Analyst)

Awesome. Thank you. Khozema, I wanted to ask about the resurgence in voice driven by generative AI. You outlined Conversation Relay, a win with Sierra, and then some new Voice Intelligence features, which is all really interesting. Can you maybe just talk about how you see voice playing out over the medium term? I mean, today, it seems like it's more of a driver on the generative AI native customer side, but perhaps you're seeing greater interest from some of your longtime customers, which can surface cross-sell opportunities. Any broader thoughts on the resurgence in voice would be great, and just kind of any medium-term, high-level thoughts as you guys start to see kind of more voice traction here. Thank you.

Khozema Shipchandler (CEO)

Yeah, sure, Nick. I mean, I'd say by and large, today, what you're seeing play out is really animated by AI. The voice still has some of the hangover, right, from robocalling and stuff like that in terms of a pure play channel. As it relates to AI, so many of these interactions take place through voice that I think that's what ends up driving a lot of the recent resurgence, a lot of the interest. Obviously, you've got thousands of startups who are building their own voice AI capabilities. I think that's pretty exciting and very interesting for the channel. I think that that is kind of the basis of really what we're seeing, and I think we're seeing it in a number of different pockets.

I think that what's exciting for me about it is that much in the same way that you saw for the preponderance of our business, that's going to end up translating into more meaningful interactions through SMS and email over time as well. I think voice is interesting, at least right now, and I think it will be for a sustainable period of time. I think even more interesting is some of the cross-channel applicability that goes beyond that. One last thing I'll add is we talked a little bit about, I think Thomas did during our investor day, about how customers see higher ROI when they use multiples of our products. I think one other anecdote with voice there is that we do see much higher ROI with customers when they're using voice in conjunction with one of our other channels.

We have seen some ongoing and increased, I would say, customer interest along those lines. I think that's pretty interesting too. Finally, as branded really takes off, I think that's ultimately what becomes the defense against stuff like Robo. I think that allows the channel to kind of come back overall.

Nick Altmann (Analyst)

Great. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Ayanna Meta Marshall from Morgan Stanley. Your line is open.

Meta Marshall (VP and Managing Director)

All right. It's got the unmute to work instead of hang up. Appreciate the question. Maybe first question, just can you give a sense of you've seen this uptick in kind of multi-product adoption, just kind of where you're seeing kind of that greatest attach? Then maybe second, just particularly with these ISV relationships expanding and kind of continuing to have better growth kind of internationally, does it change your perspective on kind of what markets internationally are the most attractive? Thanks.

Thomas Wyatt (CRO)

Hey, Mita. It's Thomas Wyatt here. Just to touch on the multi-product adoption, we're seeing it broadly, both in terms of customers adding second and third channels. For example, if they were voice, they're adding messaging and email and a lot of consolidation of spend there. The other big area that we're seeing it is the add-on software, the advanced features on our voice products, as well as our messaging, like SMS Pumping Protection and Verify, are growing much faster than the company average.

Those combinations really are what's driving a lot of the cross-sell and solutions motion. In the ISV channel, we're definitely seeing more expansion. Again, another example where Khozema mentioned before around voice, a lot of our ISVs that were primarily messaging customers are now adding voice for customer care use cases as an example and broadening out their spend with us.

That is happening in international markets as well as domestically.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Mark Murphy from JPMorgan. Your line is open.

Mark Murphy (Executive Director)

Thank you. It's nice to see the revenue acceleration in this kind of an environment and coming with the margin expansion. Congrats on that. Khozema, I wanted to ask you on the communication side. It's great to see all these multiple new AI logos, and I think especially Sierra, excuse me, Sierra, because it's just a coveted logo and a high-growth company. Can you help us understand in a case like that, how exactly are they using Twilio?

What I mean is, is it tied to the front end of the launch cycle through authentication, or is it something that's going to align more with ongoing usage, whether it's for Sierra or for other AI companies? I have a quick follow-up.

Khozema Shipchandler (CEO)

Yeah. Good question, Mark. It varies a little bit from customer to customer. I would say that in the majority of use cases, especially as companies are getting started, they are very eager to get their products out into the marketplace. They need infrastructure, and our voice infrastructure is obviously very strong. Because of our well-known brand and our high quality, I think a lot of these AI companies end up attaching themselves to our voice stack. I would say that that is a very initial kind of entry point where customers attach themselves.

Thomas alluded to another one of them, which is once they start using it, a lot of these companies end up being voice AI agents. Voice intelligence is very powerful in that environment. A lot of these deployments end up being customer care.

During the course of those customer care engagements, you obviously do want to learn a lot about those interactions so that you can end up serving your consumer base a lot better over time. I think that provides an avenue for us effectively to cross-sell voice intelligence and then fundamentally incorporate more of our Segment capabilities over time too.

I would say kind of the third version of it is, and this is sort of on the other side of the continuum, but increasingly where we're getting excited as well is where a customer, and this is kind of irrespective of channel, but I'll just stick with voice right now, where they're using voice, they're using our Unified Profiles vis-à-vis Segment, and then whether it's our technology, whether it's one of our partners' technology, they're combining it with AI to be able to put their own capabilities out there in the world. Like Cedar, which was one of the customer references that we provided this time, I'd say they're a very good example of being able to solve patient care in their environment by using that full string of capabilities.

Mark Murphy (Executive Director)

Okay. That's very helpful. Then, Aidan, I was listening closely to all your comments on the macro environment and appreciate the way you're handling kind of the de-risking going forward. When we think about transactional volume levels, there's obviously a lot of companies having issues. JetBlue, Southwest, Delta, Starbucks, McDonald's, Lululemon, shipping freight is down. I mean, I'm just trying to understand, are you not seeing any impact of less consumers taking flights or less people dining out or anything like the transactional confirmation messages, even the marketing messages via email? Because I think you said even in April, or are you saying there is some slowdown there? You're just making up for it in some of the stronger vectors?

Aidan Viggiano (CFO)

No, we're not seeing a slowdown, Mark. Obviously, different industries make up a different portion of our revenue. I'd say travel tends to be one that's a bit smaller in terms of our overall revenue mix. We're obviously looking at the business in-depth daily, right? Daily volumes by country, daily volumes by industry, by sales channel, by customer level kind of trending. It's really grounded in data, and it incorporates what we're seeing through April. It's still quite robust.

We know that we're operating in a nuanced environment for sure. Given that, we believe it's prudent to build in a sensible amount of conservatism. That's what you're seeing in the back half of the year, right? We only flow through a portion of our Q1 revenue beat. We're not yet seeing impacts on our business, but we're watching it very, very closely.

Mark Murphy (Executive Director)

Okay. Appreciate it. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Alex Zukin from Wolfe Research. Your line is open.

Alex Zukin (Managing Director and Senior Analyst)

Hey, guys. Thanks for taking the question. I guess maybe a quick one for me is maybe just double down or double-click on some of the gross margin headwinds that you saw in the quarter. I ask about that because if I look at the delta this quarter between gross profit dollar growth and top-line growth, it's a lot larger than we've seen in the last few quarters. I know that we usually do not kind of talk about guiding to that metric going forward, but just given that divergence, I want to understand if it's possible how we see that trending over the course of the next few quarters such that better kind of appreciating kudos to everything you guys have done on the operating margin front. It's been amazing.

Just wanting to understand kind of quality of revenue as we look quality of revenue dollar growth as we look at the rest of the year, how that should shape and flow based on what you're seeing today.

Aidan Viggiano (CFO)

Yeah. Let me describe a little bit what happened on gross margin. Importantly, we continue to be disciplined in the pursuit of the business that we go after, including maintaining price discipline. We look at unit economic threshold, and we shared some of that at our investor day earlier this year. The lower gross margins in the quarter were primarily a function of two things. We had some non-repeat of hosting credits that occurred in the first quarter of last year. We had higher international messaging mix. That is a growth priority for Thomas and the team. We know that we are under-penetrated from an international perspective. That is a focus for the team. We saw good performance there in the quarter.

In particular, we saw that this is the first quarter in over two years where international termination mix increased year over year versus the U.S. You are seeing that kind of impact the gross margins. As we think about it going forward, so long as messaging makes up more than half of our revenue, it is going to be the primary driver of gross margins in any given quarter. Over time, as we cross-sell into non-messaging products, as we continue to innovate, we do think there is an opportunity to expand to higher gross margins. In the near term, messaging will be the factor. It is really a function of where our customers are terminating their messages, which we do not have control over.

Alex Zukin (Managing Director and Senior Analyst)

Got it. Any trends to kind of walk through in terms of how to shape that for the rest of the year?

Aidan Viggiano (CFO)

Yeah. We don't guide to gross margins. There will be a little bit of variability quarter over quarter. I'll just say again, it comes down to messaging and termination mix, but we don't give a forecast on gross margins.

Alex Zukin (Managing Director and Senior Analyst)

Got it. Thank you, guys.

Operator (participant)

One moment for our next question. Our next question will come from Joshua Reilly from Needham. Your line is open.

Joshua Reilly (Managing Director)

Yeah. Thanks for taking my questions here. I guess, what are you seeing in terms of carrier support for RCS messaging outside the U.S. versus here domestically? Maybe any thoughts on how this channel will scale between the U.S. and international markets?

Khozema Shipchandler (CEO)

Yeah. I think it's relatively early days still. I think we're investing from our perspective in the channel. We are seeing a little bit of customer adoption. My guess is that you personally don't receive a lot of RCS-capable messages sort of in the rich context that has been promised. I mean, they're labeled a little bit differently, especially on an Android device. In terms of the rich capabilities, those aren't really coming across yet. I think they're compelling, obviously, if they really start to kind of take off.

I think we are seeing some instances in which when you pair it both with branding as well as some of those rich capabilities, it does deliver a pretty awesome experience. All of that said, I think that from our perspective, we're cautiously optimistic about the way that that ends up contributing over time.

I think it's really the ecosystem that's got to mature. Carrier support is in different places, I would say. Apple is in a slightly different place in terms of the way that it ends up working with iOS. I think until such time that there's broad supportability from carriers, which there's not yet, until there's kind of broad support from various other technology ecosystem partners, which there's not yet, I think it's still going to be relatively muted. I think over time, there's potential there.

Again, we've talked to a number of investors about this over the years. We're cautiously optimistic. I do think Twilio with communications, data, and AI is well-positioned when that time comes, but that's kind of where we are today.

Joshua Reilly (Managing Director)

Got it. That's helpful. Just a quick follow-up on free cash flow. How should we think about the linearity for the balance of the year here and any factors we should be considering as we balance out our models? Thanks, guys.

Aidan Viggiano (CFO)

Yeah. As it relates to free cash flow, we increased our guidance range for the year by $25 million. It is $850 million to 875 million. We delivered $175 million in the first quarter. It was slightly better than expected, but a relatively lower cash quarter just given the timing of our bonus payout. As we think about Q2, we would expect—we did see some working capital tailwinds in Q1. That was what drove kind of the slightly better than expected performance. I would expect some of that to come back in Q2. I would expect Q2 free cash flow to be more in line with Q2 non-GAAP income guidance. As we think about the balance of the year, you could obviously then do the math on what it implies for the second half given the $850 million-$875 million for the year.

Joshua Reilly (Managing Director)

Understood. Thanks, Pete. Thank you.

Aidan Viggiano (CFO)

Yep.

Operator (participant)

One moment for our next question. Our next question will come from Samad Samana from Jefferies. Your line is open.

Billy Fitzsimmons (VP Equity Research)

Hey, guys. This is Billy Fitzsimmons on for Samada. A two-part question here. First, it's been a little over two years since we saw this level of active customers added quarter over quarter. Can we kind of break down what's driving that? Khozema, was that primarily a result of the AI self-serve investments you made and called out in the prepared remarks with that ISV momentum, with that strength of adding new logos, something else, or kind of all of the above?

Second, and kind of expanding on that, and I'm not asking for guidance here, just generally and qualitatively, to what extent did the macro dynamics in early April, so early second quarter, that we're seeing other companies call out impact or not impact the momentum you're seeing with getting new customers on the platform?

Thomas Wyatt (CRO)

Hey, Billy. This is Thomas here. I just want to touch on the first part of the question, which is where we're seeing the customer growth. Absolutely, we are really pleased with the growth we had in the quarter, although we have 300,000-plus customers, so a lot of our revenue comes from the existing customer base. We've seen the self-service channel is really accelerating.

We touched on a lot of the reasons why. Some of that is the AI startups, and some of it is just a lot of people are building more voice-enabled applications, and they're using Twilio to do it. Some of those are larger direct customers of ours as well that are new. Our new business machine is working better than it's been in years. We're pretty excited about the momentum from customers' perspective.

Aidan Viggiano (CFO)

Yeah. As it relates to April, I'll just kind of reiterate what I said before. We're looking at the business on a number of different dimensions. We're really not seeing any kind of slowdown relative to the macro. It's grounded in data through yesterday, and it incorporates kind of, again, country views, industry views, customer-level views. That's the latest we have. We're continuing to monitor it daily, just given the usage-based nature of our business. There's really not anything I'd specifically call out through April.

Billy Fitzsimmons (VP Equity Research)

Perfect. Thank you very much.

Operator (participant)

One moment for our next question. Our next question will come from Jim Fish from Piper Sandler. Your line is open.

James Fish (Managing Director)

Hey, guys. Thanks for the questions here. One of your ISVs announced their own CDP solution, and it kind of brings in the co-opetition question, I guess. How are you framing this relationship now in that it won't disrupt the Segment strategy while keeping everybody happy on the API side of things?

Khozema Shipchandler (CEO)

I don't think it's going to disrupt it much, honestly. I think there's always been co-opetition in the space in a number of different ways. I just don't think it's a material dynamic in the way that we think about the business. I don't think it's material in the way that we think about our forecasts with customers. It's obviously our job to make sure that we're providing compelling solutions. In terms of impact, I think it'd be pretty de minimis.

James Fish (Managing Director)

Got it. Aidan, for you, just on capital use here, we're roughly $2 billion net cash. You guys have said, "Hey, we want to be smart about how we use it and kind of earn the right around M&A." As you think about that international arena around messaging in particular, does it start to make sense to look into tucking there to get you a stronger foothold internationally on the message routing side? How are you thinking about even accelerating the buyback opportunity given sort of the market reset? Thanks, guys.

Aidan Viggiano (CFO)

Yeah. From a buyback perspective, we've been out in the market. We've, to date, year to date, I'd say, purchased $220 million plus, I mean, $225 million worth of shares back. We have some flexibility in the timing of that as it relates to the $2 billion authorization that goes through 2027. We're in market, and we disclose those numbers. We'll continue forward there so long as we think it makes sense and is attractive for the company.

From an M&A perspective, we kind of talked about it at investor day as well. We're being opportunistic from an M&A perspective. There's nothing in particular that we'll signal today or call out. We're always looking at what might make sense for the business. We'll be disciplined, really focused more right now on kind of tech or talent tuck-ins to help accelerate our roadmap.

Nothing more really to offer beyond that today, Jim.

James Fish (Managing Director)

Got it. Thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Arjun Bhatia from William Blair. Your line is open.

Arjun Bhatia (Software Research Analyst)

Perfect. Thank you. Yeah, congrats on the nice start to the year. One question for you, Khozema. If we just zoom out for a second, I think Twilio has evolved quite a bit over the past several years. Now, if we go into this more volatile macro environment and we do start to see consumption trends and transactional volumes get impacted, how should we think about Twilio in terms of the use cases that you're powering now?

What portion, whether qualitatively or quantitatively, is more sticky, more strategic, more recurring versus the portion of your usage that's maybe a little bit more susceptible to macro, maybe something like two-factor authentication? I'm curious how you would break apart the business along those two dimensions there.

Khozema Shipchandler (CEO)

Yeah. It's a fair question. I mean, I guess I'll give you as much color as I can. I think, first of all, just to kind of reiterate a point that Aidan's made a few times, at least through April, we haven't really seen any impacts to the business. No one here is pretending that it would be not a that there wouldn't be any impacts if the economy kind of went in a really different direction. At least based on the trends that we're seeing in our business, we're just not seeing it materialize yet. I think there's going to be puts and takes depending on how it plays out. I mean, I think the one thing—this is not the perfect analogy—is to just bear with me.

If you look back to what transpired during COVID, and a lot of companies were forced to change their engagement models and the ways in which they were kind of deploying, we were obviously a beneficiary of that. Now, a lot of that was driven by moving from sort of the physical world to the digital world. The reality is that companies have to engage with their customers in some form or fashion to be able to sustain their own businesses, right? To the extent that we're super tied to transactional volumes and those begin to fall, yeah, I mean, I think we would probably see an impact to our business in some ways.

On the other hand, I do think that there's also an opportunity for, especially in the age of AI, right, as a lot of things are starting to happen, there's also an opportunity for elevated volumes as it relates to things like customer care where you're using a combination of voice and our unified profile and some AI to kind of activate. I think it's kind of balanced going forward. I mean, we're innovating on sort of the basis that the macro is going to be hard to call, and we're going to kind of plan for the things that are under our control. I think it's a mixed bag. I do think that there are going to be some puts and takes, and we're not macroeconomists ourselves. That's why we're watching it all carefully. So far, so good.

I think based on the stuff that we've got, I think there's a real opportunity for it to kind of play out in that way too. All of that said, we obviously put out a financial framework, and we feel pretty good about it. We're going to make sure that we manage the business with discipline, and you'll continue to see that from us going forward.

Arjun Bhatia (Software Research Analyst)

Okay. Perfect. Yep. That's helpful. Thank you. Just maybe a question on the cross-sell motion. Clearly, it's something you're focusing on, and you're incentivizing your sales team to go after that motion. I'm curious how the sales team is reacting to it, how well-equipped you feel they are to sell other products like Verify and others, and how that's impacting the size of customer that you're going after, your move-up market into the enterprise. Any color there would be helpful. Thank you.

Khozema Shipchandler (CEO)

Yeah. This is definitely a multi-year journey that we're on around cross-sell motion. We just get better at it every quarter incrementally. A lot of it is starting with enablement and making sure that all of our AEs are ramped up on all of the products in the portfolio. More importantly, though, customers are coming inbound and have demand and interest in consuming more of Twilio across multiple channels, across some of our advanced add-ons and the features. That actually makes it pretty easy for the AEs to be able to have those conversations.

From an R&D perspective, we're putting a lot of investment into integrating the technologies more deeply together to make the experience more frictionless. Like I said, we're seeing really strong growth in the most popular mature add-ons that we have around voice intelligence, Verify, and SMS pumping protection.

We are really excited about bringing personalization in as well from our unified profile capability and connecting that to use cases like we have talked about around voice and Conversation Relay and AI assistance. We are pretty pleased, but it is a multi-year journey. We think this is one of the most, I think, productive growth levers we have over the next three years.

Arjun Bhatia (Software Research Analyst)

Got it. Perfect. Thank you very much.

Operator (participant)

Thank you. As a reminder, that's Star 11 for questions. Star 11. Our next question will come from Patrick Walravens from Citizens. Your line is open.

Patrick Walravens (Managing Director)

Oh, great. Thanks. Congratulations on the third quarter of acceleration. At the investor day, you shared with us that for Q3, hopefully, I have this right, growth by product was led by email at 11%, smaller products at 10%, messaging 8%, and voice 6%. Growth by industry was led by retail, 14%, healthcare, 13%, financial services, 12%, professional services, 12%, and IT, 10%. I'm just wondering if you could share with us how those things have changed.

Aidan Viggiano (CFO)

Yeah. So those were Q3 LTM. We do not provide those quarter to quarter. We do provide.

Patrick Walravens (Managing Director)

Yeah. No, I don't expect the numbers. Just if the order changed.

Aidan Viggiano (CFO)

Yeah. Actually, yeah, I would say that on the industries, we saw strength in those top five. We called out our top five communications verticals. You mentioned them, technology, financial services, professional services, healthcare, and then retail and e-commerce. In the first quarter, they all grew very well. From a product perspective, I'd say messaging was in particular very strong this quarter. We saw both U.S. and international messaging grow quite well. Beyond that, I would say pretty much in line with what you saw at investor day.

Patrick Walravens (Managing Director)

Awesome. Thank you so much.

Operator (participant)

Ayanna—oh, go ahead.

Thomas Wyatt (CRO)

To add one more point, I think it's worth noting. We've talked a lot about the growth of self-service in the quarter, which was excellent. Also, large deals in the quarter, our communications business in particular, $500,000 plus customers grew 37% year over year. That's another good motion that we're seeing as well.

Patrick Walravens (Managing Director)

Actually, Thomas, maybe this is for you. How should investors think about competition? When you have these big deals, how does the competition play out?

Thomas Wyatt (CRO)

I think it's interesting because from a Twilio perspective, competitors, depending on what channel you are talking about, may be different. A lot of the conversations that we have around platform and how Twilio can be a partner for the largest brands, we're having a conversation that spans multiple channels and a set of software capabilities that are differentiated. For example, if you want to personalize your communications, really, there isn't any other player that can do that with the combination of what Segment can do plus the communication channels that we do have.

When we think about it, there's always going to be the tactical competitors and individual channels. Our strategy is to really tell the bigger story and differentiate through the capabilities that are more broad. That sets us up for above-average win rates against our competitors.

Patrick Walravens (Managing Director)

Okay. Thank you both.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Michael Funk from Bank of America. Your line is open.

Great. Hi. Yeah, this is Matt from Mike. Appreciate you taking the question. Congrats on the strong start of the year. Maybe just one for Khozema. Voice, obviously, transactional and then email more marketing-driven. Can you help us better understand the breakdown of use case mix across transactional versus marketing in the messaging product line? Thanks.

Aidan Viggiano (CFO)

Yeah. We haven't given that number. What we've said historically—this is Aidan, by the way, Matt. Not that you couldn't tell that from the email voice, but—we've said it's roughly kind of evenly split between verification use cases, customer notification type use cases, as well as marketing. So roughly a third, a third, a third. That's kind of roughly the same today.

Understood. Thank you.

Operator (participant)

Thank you. With that, this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.