Twilio beats Q2 2023 estimates as CEO outlines ‘Act Two’, focused on AI

Twilio’s share price jumped 7 percent in after hours trading as the communications and data platform provider beat analyst estimates with its Q2 2023 earnings. CEO Jeff Lawson said that Twilio had reduced its GAAP loss from operations by over 50% year over year and had delivered $72 million of free cash flow in the quarter - and that the company would be raising its full-year non-GAAP income from operations guidance from $350 million to $400 million. 

These numbers are significant in the context of a market that’s facing tough macroeconomic conditions, as investors and stakeholders seek out organizations with higher profitability and improved efficiency. 

Lawson said:  

We begin the second half of the year energized by the progress we’ve made to date in Communications, confident that we’ve laid the foundation to reaccelerate growth in our Data & Applications business over time, and optimistic about AI’s potential to be an accelerant for Twilio’s vision. We also remain committed to continuing to deliver against our profitability targets in any financial environment.

Key figures for the quarter include:

• Total revenue of $1.04 billion, up 10% year-over-year. Communications revenue of $913.1 million for the second quarter of 2023, up 10% year-over-year. Data & Applications revenue of $124.6 million for the second quarter of 2023, up 12% year-over-year.

• Total second quarter organic revenue grew 10% year-over-year. Communications second quarter organic revenue grew 10% year-over-year.

• GAAP loss from operations of $141.8 million for the second quarter of 2023, compared with GAAP loss from operations of $311.9 million for the second quarter of 2022.

• Non-GAAP income from operations of $120.1 million for the second quarter of 2023, compared with non-GAAP loss from operations of $7.3 million for the second quarter of 2022.

Act Two

Lawson said that Twilio’s Communications business is showing continued signs of stabilization across the company’s customer base and that the efficiency actions undertaken in recent months mean that it is now delivering with a more streamlined operating profile. In addition to this, Twilio saw its largest email deal in Q1 and its largest ever messaging deal in Q2. 

In June this year, the vendor previewed its CustomerAI vision, which will see predictive and generative AI capabilities layered across its platform “at every customer touch point”. Lawson said that he believes that the value in artificial intelligence will come from painting Large Language Models (LLMs) with first party data sets (a strategy other B2B software vendors are also pursuing). He said: 

We believe this is where Twilio is most differentiated through our data asset segment. 

Segment’s customer profiles will become even more data rich with AI, accelerating our data and communications flywheel. By training large language models for customers with their data that lives inside Segment, Twilio will help customers enter the AI race multiple steps ahead of their peers. 

Twilio's ability to drive that level of differentiated customer value proposition has the potential to be a significant tailwind for our business.

This is what Twilio is describing as Act Two of its business strategy. Lawson added: 

A business transformation as big as what Twilio is taking on takes time. It requires tactical focus in the short term and a bold vision for what’s possible in the long term. Twilio’s Act 1, Communications, has been a success in terms of scale and efficiency. Our Communications business continues to deliver against the objectives we’ve set, driving efficient growth, while we target ongoing operating leverage in the coming years.

And we're now building ActTtwo based on our belief that Twilio’s data asset, when combined with the power and reach of our Communications platform and accelerated by AI, can unlock value for businesses that we are uniquely positioned to deliver through our innovative combination of product offerings. 

While I don’t expect the road ahead to be linear, we’ve embarked on a massive market opportunity, one that has the ability to transform the status quo for customer engagement.

My take

As most software vendors in the market pursue a generative AI strategy, it will be the ones that utilize their core data the best and build out use cases that are genuinely useful for their customers. It’s still very, very early days, but as it stands today, it’s a positive set of results for Twilio.