TWLO Q2 Deep Dive: Revenue Growth Accelerates, Guidance Raises Concerns Over Profitability

Cloud communications infrastructure company Twilio (NYSE:TWLO) reported Q2 CY2025 results exceeding the market’s revenue expectations, with sales up 13.5% year on year to $1.23 billion. On top of that, next quarter’s revenue guidance ($1.25 billion at the midpoint) was surprisingly good and 3% above what analysts were expecting. Its non-GAAP profit of $1.19 per share was 13.3% above analysts’ consensus estimates.

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StockStory’s Take

Twilio’s second quarter results were met with a significant negative market reaction, as shares declined sharply following the report. Management highlighted that revenue growth was supported by accelerated momentum in messaging and double-digit expansion in voice, driven by both established enterprise customers and new AI-centric startups. Chief Executive Officer Khozema Shipchandler cited strong customer wins and large deal activity, particularly among independent software vendors (ISVs), as primary growth drivers. However, a decline in gross margin and increased operating costs, attributed in part to carrier fees and platform investments, were areas of concern discussed on the call.

Looking forward, Twilio’s updated guidance is shaped by ongoing investments in artificial intelligence capabilities, pricing adjustments, and a continued focus on cross-channel product integration. Management outlined that sustained demand for voice AI and rich communication services (RCS), alongside expanded partnerships like the new Microsoft collaboration, are expected to drive product adoption. Chief Financial Officer Aidan Viggiano noted that the company will increase research and development spending to accelerate growth in high-demand areas, but cautioned that these investments could pressure margins in the near term as Twilio balances innovation with profitability.

Key Insights from Management’s Remarks

Management identified robust demand in messaging and voice, product-led innovation, and strategic partnerships as central to the quarter’s performance, while margin pressures from mix and carrier fees emerged as notable headwinds.

• Messaging and Voice Acceleration: Messaging revenue growth accelerated for the fourth consecutive quarter, while voice revenue achieved double-digit growth for the first time in two years. Management attributed this to increased adoption by both AI startups and traditional enterprise clients, highlighting Twilio’s role in powering conversational AI use cases.
• Large Deal Momentum: The company closed a significantly higher number of large deals (>$500,000) year-over-year, reflecting a shift toward multiproduct adoption and greater cross-sell of software add-ons like Verify and Fraud Guard. Chief Revenue Officer Thomas Wyatt emphasized that these transactions are increasingly common among ISVs and technology customers.
• RCS and International Expansion: Rich Communication Services (RCS) adoption is gaining traction, especially among ISVs expanding internationally. Early pilots demonstrated higher delivery rates and customer engagement, with management expecting the upcoming holiday season to be a key test for broader RCS adoption.
• Product Innovation and Integration: Twilio launched new AI-powered offerings such as ConversationRelay, conversational intelligence for messaging, and event-triggered customer journeys. These products are designed to unify communication channels and customer data, enabling personalized engagement and driving customer value.
• Gross Margin and Cost Pressures: Although non-GAAP operating profit improved, gross margin declined due to a higher mix of messaging revenue and incremental carrier fees. Management is taking actions to stabilize margins, including raising prices in core products and investing in platform efficiency, but acknowledged these measures will require time to fully materialize.

Drivers of Future Performance

Twilio’s outlook is influenced by ongoing investment in AI-centric products, continued expansion in voice and messaging, and efforts to stabilize margins amid changing product mix.

• AI and Product Investment: Management is prioritizing research and development spending on AI-driven features, such as voice AI and RCS, to meet increasing customer demand. CEO Shipchandler described this as a “once-in-a-generation technology paradigm,” with engineering resources allocated to accelerate product innovation and maintain Twilio’s competitive position.
• Margin Management Efforts: While pricing actions and cost optimizations are underway, management cautioned that near-term gross margins will remain pressured by carrier fees and a rising share of lower-margin messaging revenue. Over time, they expect growth in higher-margin products and improved platform efficiency to help margins recover.
• Customer Acquisition and Cross-Sell: The company is seeing strong new customer additions, driven by simplified onboarding and upselling into multiproduct packages. This trend is particularly evident in self-serve and ISV channels, supporting durable revenue growth but potentially delaying immediate profitability as Twilio invests in capturing market share.

Catalysts in Upcoming Quarters

Looking ahead, our team will monitor (1) the impact of Twilio’s new AI-powered products and Microsoft partnership on customer adoption, (2) progress in stabilizing gross margins through pricing and platform efficiency efforts, and (3) the rate of multiproduct adoption among new and existing clients. Additionally, we will track the adoption curve for RCS and the effect of increased R&D spending on both innovation and profitability.

Twilio currently trades at $92.21, down from $122.62 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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