Twilio, Inc. (NYSE:TWLO) Q2 2021 Earnings Conference Call July 29, 2021 5:00 PM ET

Company Participants

Andrew Zilli - VP, IR
Jeffrey Lawson - Co-Founder, Chairman & CEO
George Hu - COO
Khozema Shipchandler - CFO

Conference Call Participants

Michael Turrin - Wells Fargo Securities
James Wood - Cowen and Company
Taylor McGinnis - UBS
Meta Marshall - Morgan Stanley
Rishi Jaluria - RBC
Matthew Stotler - William Blair & Company
Samad Samana - Jefferies
Frederick Havemeyer - Macquarie Research
Aleksandr Zukin - Wolfe Research
Brent Bracelin - Piper Sandler & Co.
William Power - Robert W. Baird & Co.
Sitikantha Panigrahi - Mizuho Securities
Ryan Koontz - Needham & Company
Mark Murphy - JPMorgan Chase & Co.

Operator

Good day and thank you for standing by. Welcome to the Twilio Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Andrew Zilli, Vice President of Investor Relations and Treasury. Please go ahead.

Andrew Zilli

Thanks, Ashley. Good afternoon, everyone, and thank you for joining us for Twilio's Second Quarter 2021 Earnings Conference Call. Our prepared remarks, our earnings press release, SEC filings and a replay of today's call can be found on our IR website at investors.twilio.com.

Joining me today for Q&A are Jeff Lawson, Co-Founder and CEO; George Hu, COO; and Khozema Shipchandler, CFO. As a reminder, some of our commentary today may be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and further information related to guidance can be found in our earnings press release.

Additionally, some of our discussion and responses may contain forward-looking statements, which are subject to risks, uncertainties and assumptions. In particular, our expected business benefits and financial impact from our acquisitions, particularly Segment and Zipwhip and our partnerships, including the associated transactions; Twilio's outlook for the quarter ended ending September 30, 2021; and our ability to manage changes in network service provider fees that we pay in connection with the delivery of communications on our platform and the impact of those fees on our gross margin are subject to change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements.

A description of these risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-Q. And our remarks during today's discussion should be considered to incorporate this information by reference.

Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. With that, I'll hand it over to Jeff for a brief statement, and then we'll open the call for Q&A.

Jeffrey Lawson

Thanks, Zilli. Before we get started answering your questions today, I wanted to touch on Twilio's commitment to helping 1 billion people get vaccinated equitably and globally. For many, it started to feel like life was returning to normal, with vaccines readily available, at least here in the United States. Yet the Delta variant, which originated in a part of the world without the same level of access to vaccines, has now rippled through the entire world, infecting both vaccinated and unvaccinated people at higher rates than we've ever seen before.

To me, this underscores the importance of vaccinating the world, and I'm particularly proud of the role that Twilio has chosen to play using our product, our time, our people and our money to help ensure equitable vaccine -- vaccination globally. In March, we committed to the goal of helping reach 1 billion people with the aim of educating people and helping them get vaccinated. We partnered with 450 organizations and in just 3 short months, I'm proud to say our product has been used to help 297 million people get critical vaccine education, appointments or reminders.

In June, we also committed $10 million to Gavi, the Vaccine Alliance, in support of COVAX, which is the largest global initiative to vaccinate lower-income countries against COVID-19. We're supporting the program's goal to purchase and distribute 1.8 billion COVID-19 vaccine doses to more than 90 low and middle-income countries, and we expect to have greater influence on how the coalition uses technology to effectively distribute the vaccines.

I was honored and surprised to find that we were the second largest private company to contribute to Gavi's global vaccination program and the largest company in the tech sector. As a shareholder, you're part of the good work that Twilio is doing. To all of the Twilions out there, the work you do to build our product, to build this company are having an impact, so thank you. It's times like these when I see the impact that we can have, and I'm humbled and proud to lead you. And we will continue towards our goal of supporting 1 billion vaccinations worldwide. Now I'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Michael Turrin with Wells Fargo Securities.

Michael Turrin

I wanted to start off with Segment. You mentioned in the prepared remarks the pull forward there in co-selling. It seems like it's maybe 6 months ahead of what you're expecting. Are there any points of feedback or interest you can share to start? And maybe in tandem with that, the sequential growth, I know we have a limited set of data. It was maybe a little lighter than we would have expected given just strong product synergies that we see between the 2? Is it fair to assume this shift towards co-selling can maybe just change the shape of that trajectory as you work through that going forward?

George Hu

This is George. I'll take the first half of that question on the co-selling and then maybe Khozema can talk about the growth piece. Certainly, as I mentioned in our previous call, we are seeing interest in Segment from our customers, I think, across a broad segment of our customer base. And we believe that by opening up Segment to our entire sales force and letting the combined power, both sales forces really educate the market as well as sell the product, we think we can really bring Segment to as many customers as possible and maximize the opportunity.

We're very, very excited about this opportunity and I know our sales forces as well.

Khozema Shipchandler

Michael, this is Khozema. In terms of the guide, I mean, I guess what I would say is I think you're maybe you're reading a little too much into it. I think in terms of what we see for the third quarter guidance, it's a really strong growth rate of 50% to 52%. And I think on top of which we remain really optimistic about our performance in the near term as well. And we provided guidance previously, for example, of 30% plus growth over the next 4 years and feel really, really good about that over the medium term. And I think Segment will just continue to enhance where we're going over the long term.

Michael Turrin

Yes, and my comment was more just reflective of the -- just the sequential, I think it's 4% increase on segment Q2 to Q1. It's just -- I think my thought was more -- it just seems like as you work towards co-selling, there's a reason to believe maybe the sequential growth rates could pick up there over time.

The other observation and then I'll hop off, is just international picked up quite significantly as well. Is that a result of some of the on the ground-focused investments you've been talking about, Khozema, or were there specific regions to call out as contributors that drove the uptick in mix there as well?

Khozema Shipchandler

Yes. So okay. So two things there. So let me hit international first. I'd say on international, the uptick that we saw there is a benefit of our continued global expansion. As you'll recall, Michael, we've talked in the past about that's one of our focused areas of investment. On top of that, there's a small impact from ValueFirst. We did that acquisition. It was a very small contribution in late March, but obviously, we got a full quarter in Q2, and that's 100% international revenue based on the way that we classify it there.

Just back to your -- the first part of what you said. I mean the co-sell, certainly, we're very excited about it in the way that George described. It won't show up in our financials for some period of time. And we haven't even started, right? I mean we basically just started a few weeks ago, and it will just take some time for it to bleed into our financials.

Operator

Your next question comes from Derrick Wood with Cowen.

James Wood

Nice to see a reacceleration in organic growth. Just to get a pulse, what would you say the strongest outperformance areas were in the quarter maybe on a product basis? And then it sounds like you guys are seeing a lot more momentum with SI Partners. Can you talk about what kind of use cases these partners should open up new doors for you? Is it predominantly in the contact center? Or what other kind of solution areas do you see them becoming more instrumental?

Khozema Shipchandler

Derrick, it's Khozema. I'll take the first part, and then I'll hand it off to George on the partner side of it. Just in terms of the quarter overall, I think as with several of our prior quarters, we experienced broad-based strength across a number of facets of the business. And one that I particularly point out is that our messaging product continues to deliver really outstanding results. And I think Segment as well had a really, really great quarter.

On top of that, we had really strong net expansion. We had good new customer growth. And I think for us, we've been talking for a while now about this significant secular shift that's taking place and how that's really driving customers towards Twilio and our customer engagement platform. And there's just so many things that we can do to accelerate the digital transformation. I think we're seeing a continuation of that.

George Hu

This is George. On the SI front, we've always believed that Twilio is a great fit as a builder platform for SI that builds custom software. Really Flex on the contact center opportunity, I think, has really been the engine that's powered a lot of our discussions with customers with SIs. And as you see in the kind of prepared remarks, and I think that's going to continue to be true.

But this kind of production SIs through the contact center building these relationships is also opening us up to other types of customer engagement opportunities where Twilio is a part of a broader solution, whether it's around a marketing solution or other types of customer engagement solutions.

James Wood

And George, if I could squeeze one more. I mean, your headcount was up almost double year-on-year. Of course, there's some acquisitions that contribute to that. But I'm just curious to get a sense for how much growth you've built in the sales capacity roles and if you're planning to continue to be pretty aggressive in hiring in the second half.

George Hu

Well, at a macro level, obviously, we don't comment on our specific sales capacity or the numbers. But we do continue to invest in it. I think that you see our overall growth is -- our investment in people is really broad-based and distribution is part of that. So we are excited about the opportunity. I think we continue to invest into it, and we believe that there is still a large untapped opportunity in customer engagement out there in the market today.

Operator

Your next question comes from Taylor McGinnis with UBS.

Taylor McGinnis

So when you think about the uptick that you guys saw in dollar-based net expansion rate, I'd be curious if you're seeing any interesting mix shift trends yet of different products maybe driving up beyond just messaging. And then secondly on that, since messaging growth was so strong last year, can you speak to what you're seeing and hearing from customers, I guess, on the potential for the messaging business growth levels to be more sustainable in the back half of this year relative to what we've seen so far in the first half this year?

Khozema Shipchandler

Yes. I'll take the first part of the question, Taylor. This is Khozema, and then I'll hand it over to George for the second part. So in terms of the first part of the question, you're right. I mean we have seen really fantastic growth on the messaging side of the house. I mean we've been really excited about the progress in that product and the way that we've been able to grow it. And in fact, that product has been reaccelerating over many of the prior periods. And so that's been super exciting to see. And we think that leads to some of the additional growth opportunities in other channels.

I think the one area that we're equally excited about is that our application services revenues, so those that are not associated with a telephony-based cost structure, those continue to grow at accelerated levels and certainly above and beyond what we see in any other products. And so for example, that will include Flex or that will include Segment.

And I think over time, those products are going to continue contributing in a more meaningful way. We just have this sort of really good problem, is how I would characterize it, in that our core business is growing at such a fast rate. You're just -- it's going to take some time for the other pieces to start showing up in our financial statements. But on balance, I'd take that problem all day long. George?

George Hu

I don't think that my answer would be very confident with -- like Khozema said. Certainly, messaging, even at its size and scale, continues to be a strong performer for us. I think that when we talk to customers, there's still a ton of customers out there and companies out there looking for and finding new ways and use cases use messaging, whether it's for reaching customers, operations, customer service, security. So I think globally, messaging is going to continue to grow as a market and an opportunity for us.

Operator

Your next question comes from Meta Marshall with Morgan Stanley.

Meta Marshall

I wanted to take a second to just ask about M&A strategy. For the past couple of years, it's been more around platform extensions. And then since the beginning of the year, has kind of included more kind of service improvements or continuity acquisitions or investments. And so just how are you viewing and balancing those strategic imperatives and what you can do organically and inorganically? And I have one follow-up.

Jeffrey Lawson

Meta, this is Jeff. I'll answer the question. So I think the way we look at it is we know what our customers -- where our customers want us to go in terms of our product road map. And sometimes that manifests in capabilities that we're going to go build, and sometimes it manifests in like geographies where we're going to deepen our presence.

And when we look at those, if there is a company that has built what we have on our road map and if buying them would accelerate our ability to serve our customers, our time to market, then that's something that we consider. And we're always running an active game board just to see what options are out there as we evaluate our road map and look at our options.

And I think it's -- the smart thing to do is to say, hey, our customers are pulling us a road map to go here and these are on a road map, and if there's something that actually accelerates us with a great team, great technology that can be additive, then those are the type of opportunities that we pursue.

Meta Marshall

Great. And I mean maybe for -- it could be for anybody, but just as people are embarking on digital transformation initiatives, clearly, you're kind of still seeing a DB&E that's fairly similar. Just trying to get a sense of are you seeing any changes to the cohort analysis kind of where customers are making bigger investments upfront? Or is it still, I want to try out one product and then build from there? Just getting a sense of how digital transformation initiatives by corporations have kind of changed the initial purchase or initial experimentation with Twilio.

George Hu

This is George. I think that Twilio has always really thrived off of a land-and-expand type strategy given that we work with builders. These builders start with one use case and then they expand the other use cases. I think certainly during the height of the pandemic last year, we saw a different set of use cases emerge and maybe a little bit more urgency around some particular use cases, but it didn't really change the fundamental shape of how we work within our customer accounts.

Twilio typically is a product that developers learn, they love, they build and then they introduce to other developers and expand from there. I think that's really the magic of the platform and something that we're going to continue to build on in the future.

Operator

Your next question comes from Rishi Jaluria with RBC.

Rishi Jaluria

I just wanted to ask two related questions on Zipwhip. I guess first, I appreciate the color in the prepared remarks. Can you maybe give us a little bit more detail on the plans with the asset? And there's always a general question of why buy versus build or I guess in this case, partnering. So that would be helpful.

And then in terms of the guidance, I understand the puts and takes of deferred revenue write-down. But can you just maybe give us a general sense for what the unaffected size and growth rates look like so we can be a little bit more accurate in our models?

Jeffrey Lawson

Rishi, this is Jeff. I'll give you the first part of that answer and then I'll hand it to Kho for the second part. So essentially, why did we decide to acquire Zipwhip? Well, look, we're really excited. They are a real innovator in toll-free messaging, which they brought to market with the great relationships that they have with the carriers. And in particular, the CEO, John Lauer, has a great track record of helping carriers to productize things like toll-free messaging.

And it's noteworthy that they are the sole channel for toll-free messaging in North America. And so it points to the strength of the relationships they have, the fact that they are the only way to get into toll-free messaging in North America. And so we just closed the transaction a couple of weeks ago. So now we're starting to get sort of making our joint plans of how we're going to integrate and what that looks like.

And I think there's a lot that we can do together, especially in the world of trusted communications. When we think about where communications is going, calls, the messages as well, making every call, every text message coming from a trusted identity, not just some phone number, but a business name and with a padlock. It's like a web browser, where you know that it's trusted that when they say that they are the pharmacy or your kid's school, you trust that that's true. That's the world we're building towards. That's a next big innovation.

And it's with great partnerships in the entire ecosystem and with the carriers that we can execute on these big, bold ideas. And I think Zipwhip will be a big part about how we continue to evolve the ecosystem in order to make the experience of actually texting and calling with each other and with businesses to be much better.

Nowadays, you can get a text message, and like you don't know if it's authentic, and that's scary. It's like, is this person calling -- is this my friend or is this Kaiser's Jose? Who knows who this is? And we see a world where every text, every call is validated and has that secure padlock. And I think that Zipwhip can be a big part about us spending about this world of trusted communications. And I'm going to hand it over to Kho for the second part.

Khozema Shipchandler

Rishi, we're not disclosing any anticipated financial impacts right now. It's very consistent with how we've operated with prior acquisitions. As Jeff alluded to, we're still working through the integration plan, there's the purchase accounting impacts that we'll have to deal with as we consolidate. And so we just locked that out of our guidance to keep it clean, and we'll obviously provide an update when we report on Q3.

Operator

Your next question comes from Matt Stotler with William Blair.

Matthew Stotler

I guess, first, would just love to touch on -- you mentioned Segment Journeys. Obviously, it looks like a really interesting development. Obviously, kind of building consumer journeys from marketing applications, things like that. But it seems like if you think about the way that we interact with brands for services and products even on a daily basis, I mean, the breadth of the opportunity here seems to be pretty substantial, right? So I mean would love to get some kind of early feedback on interest that you're seeing and what people are looking to build with this and how you expect that opportunity to develop going forward.

Jeffrey Lawson

Thanks, Matt. This is Jeff. I think you're right to look at Segment Journeys as an exciting addition to our platform. And interestingly, it's not a very big step from where Segment was, which is helping companies take all the information that they see about their customers. How are they browsing the website? How are they using the mobile app? What products have they bought? How would they engage with the company. And using that to improve the customer engagement model across all the different touch points.

And if you think about it, one of the interesting tailwinds that's going on right now is how privacy and the moves that are going out in the world to increase the amount of privacy that consumers have, which is a very positive thing, makes it so that every company can't rely on shady cookies and third-party data and all this stuff that as consumers, we're like -- we're saying we don't want. And governance, and I would say, yes, we're not allowing it. And the major platforms, whether it's the browsers or iOS, are actually cracking down on some of these tactics from yesteryear.

And that is forcing every company to have to get better at looking at their first-party data and to understand their customer. And Segment, for a long time, have taken a hard stance to say, we will only deal in first-party data. We are not going to dive into that sketchy realm of weird data brokers, all those kind of stuff.

And so they have a great track record focusing on privacy-enabled great customer engagement, helping companies look at all their first-party data and then build a better customer journey. So what are all the things we know about this customer that if we use that knowledge to engage with them in their customer journey, we can help them succeed and in doing so, help the company better serve its customers.

So that's why I keep harping on this idea that the task of building a customer relationship is really 2 things. Number one, it's understand your customer. Pay attention. What are all the things that they're doing when they're on your website, browsing for men's T-shirts? Don't send them a marketing e-mail with -- for women's hats. That doesn't make any sense. That just shows you're not paying attention and you don't care.

And then second, guide them through that customer journey. And the way we've seen some of the leading companies think about this is, at every step of the way, if you use the knowledge that you have about your customer to help make them a better customer, help move them towards that ideal customer that every company thinks about, then that is the intelligent -- that, that's what intelligent customer engagement looks like, and that's what we're helping companies build.

And so I think Segment Journeys is a natural step in that direction. It allows companies to take all that information. They already used Personas to build a 360-degree view of the customer and then take where the customer's at in that journey and layer them into segments that then you can use to drive what's the next step in that journey. And that's what the Journeys product is doing. It's a fantastic product. It was very much conceived of in cooperation with customers and brought to market with customers at every step of the way showing us what they need.

Matthew Stotler

Right. Got it, got it. And then maybe just one more to follow up. Going to the -- last quarter, you talked about the changes in the R&D org structure of the company and kind of split the 3 separate kind of organizations, if you will. Any commentary on the progress there, how the teams are working together and then early feedback on that change?

Jeffrey Lawson

Absolutely. Thanks for the question. Overall, the reorganization is going well. We believe the changes that we made -- a reminder for folks, we're consolidating many business units under 3 discrete leaders that report to me. We believe that this change will better align the business to help Twilio continue to grow in scale. And we're also finding that it's enabling a greater amount of engagement in the company, visibility at the executive level with what's happening and driving alignment and clarity and road maps more efficiently than before.

And so all in all, I think the change has been going well and our teams are getting greater clarity, insight alignment as a result. And when you're growing a company as fast as you are, you can't just keep doing the same thing. There's always points in time when you need to consider the org chart and consider how the organization has changed. That's just one of these moments and I'd say that the reorganization has been well received and the teams are executing well.

Operator

Your next question comes from Samad Samana with Jefferies.

Samad Samana

Congrats on another great quarter. Maybe one on Zipwhip. I was wondering if you could maybe talk a little bit more about the strategic value of having that direct carrier connection. And I know you're not guiding for a revenue perspective, but anything you can give us around what maybe Zipwhip's growth looks like. Would be helpful just as we think about contextualizing the acquisition.

Jeffrey Lawson

Well, I can speak to the value of having direct connections. I don't think we're disclosing any particular growth rate numbers or anything like that. But look, in general, the more direct relationships you have, the better situated you are to cooperate with the carriers and build great products together. And I think that when -- in places like North America where there's 3 carriers now and there's a lot of opportunity, having those direct relationships is tremendously valuable. We've been watching and seeing how the Zipwhip team and John and the team have done a great job of building those relationships and bringing products to market with the carriers. And so I just think that, that's an important part of building up the ecosystem. Simple as that.

Samad Samana

Understood. And then maybe just if we kind of take a simplistic approach and just think about net expansion, it implies revenue from new customers or kind of new business is really strong in the quarter. I think even stronger than last quarter. So I was wondering maybe if you could just give us some context around what -- if there's a specific area of strength in terms of revenue from new customers. Was it more on the traditional messaging side? Are you seeing kind of a step-up in other products? Just maybe help us think about the new revenue from new customers in the quarter.

Jeffrey Lawson

Yes. I mean I think the way to kind of think about it, this is a little bit crude, but basically, if you take the DBNE number and then look at that number and the difference between that and our organic growth rate, that will give you a sense of how new customers contributed. And then obviously, on top of that, you've got the inorganic stuff.

In general, I mean, I would say that it's broad-based strength across the board. I mean what we're finding is, is that the messaging product has really, really done well during the last year or so. And the reacceleration of that product is something that we're incredibly proud of as a company, no doubt.

On top of which, as I mentioned earlier, we're seeing great traction as well in the application services areas of the business. We've talked a lot about Segment, but even in some of the other categories, inclusive of Flex and SendGrid as well, our e-mail product, we're doing really, really well. And so I wouldn't point to any one thing other than to say that the messaging product, in particular, has been delivering great results. Segment had a great quarter. But across the board, across industries, verticals, whatever, we're just seeing broad-based strength.

Operator

Your next question comes from Fred Havemeyer with Macquarie.

Frederick Havemeyer

I think I first wanted to just ask about your IoT business. It's something I don't think that we've necessarily been talking about much, but it's also quite interesting here. So I'd like to ask, can you just give us a general overview of where your IoT business stands and perhaps some initial customer perceptions around Super SIM? And generally, also, do you think that Segment is going to play a role in how businesses consider data collection utilization in the IoT space?

Jeffrey Lawson

Absolutely. This is Jeff. And I'll start by saying we're really happy with the IoT business. We actually just hired a new leader, Andrew Cohen, who came from Samsung, who is a fantastic leader. And I think what we're seeing is opportunity is that especially as the world is moving to 5G, there are so many more areas that have yet to be digitally enabled in terms of physical objects in the industrial sense, in the smart city sense. I think we as consumers think of IoT is like our smart devices in the home, like our watches and thermostats. And that is just -- like that is version 0.1 of what IoT is really going to be about.

So this is an early stage of, I think, a long game that's going to be a big outcome. And so we're excited by what we can bring. And what's really cool about the Super SIM -- and again, customers led us to the observations, the problem that Super SIM solves, is that as you deploy a device globally, you don't want to have to have a different vendor or a different set of chips, a different set of SIM cards and carriers behind the scenes based on where that device ends up in the world. You really want to manufacture a device once, put the same hardware, software and connectivity into that device and ship it out to a global supply chain. And that drastically reduces the complexity, but also it means that in the field, that device can get better every day. That's the power of software.

And so that's what we're seeing the Super SIM and a really powerful opportunity to make it so -- once devices leave the factory, they continue their connectivity stories. The performance of that connectivity, the cost of that connectivity is getting better all the time because it's expensive to manufacture. So imagine you've got an IoT humidifier or truck or garbage dumpster or trombone, you don't want to have to remanufacture that thing every time you get better connectivity technology. You want to be able to continually silently upgrade it in the background. That's what Super SIM enables companies to do because their connectivity is not something that is set into the device, and it's something that they can continually evolve in the cloud.

And so we took that whole layer of connectivity and really moved it to a software value proposition that runs in the cloud. I will say, I think the IoT world is a little challenged right now because of manufacturing and global supply chain issues that we've seen in every industry has set back some of these IoT use cases as they've struggled to get supply chains and things like that set up. And that's something I think we've seen across the industry of IoT, especially industrial lines and things like that. But I expect that, that's not a durable trend and that will -- that in the long scheme of things, the 5G rollout and the narrowband implementation that use far less energy and that are far more oriented towards a wide breadth of devices at a much lower price point will actually enable a whole slew of innovation in years to come.

Frederick Havemeyer

And gentlemen, another question. Can you give us an update on how your relationship with Syniverse is progressing? Are you at a point where you're materially routing A2P messages for Syniverse with your wholesale agreement?

Jeffrey Lawson

I'll take that. So just for background, we've worked with Syniverse for a long time. So they've been a partner of ours for many years. And so there hasn't been -- we didn't need to like make a material change to our business as a part where really that fuels about cementing our relationship. But the other thing I'll point out is we haven't closed the partnership yet, but still pending. And so a lot of that work still is a forthcoming as we close that partnership that we produce in house.

Operator

Your next question comes from Alex Zukin with Wolfe Research.

Aleksandr Zukin

I've got two sort of metrics focused ones. I think it would be pretty helpful. Just going back to Michael's original question about Segment, if we normalize in Q4 for Segment, the sequential growth from Q4 to Q1, something in the high teens, maybe 20%, and it stepped down to 4.5%. Could we just get a better understanding for what -- is there a heightened seasonality with this business later in the year? Because it would help us not get ahead of ourselves to just understand the seasonal kind of patterns of that business. And then I've got a quick follow-up.

Jeffrey Lawson

Is the follow-up on Segment? Do you want to ask that question now as well?

Aleksandr Zukin

No, no. The follow-up is on A2P.

Jeffrey Lawson

Okay. Well, let me take the Segment question first, Alex. So I would say, in general, there's not like per se a seasonal dynamic that I would necessarily point to. I think in general, I mean, we feel great about the way that the acquisition is performing as we've noted several times during the course of this call. We feel quite good about the way that, that business is progressing, some of the products that they've announced.

I think anything that you're seeing in terms of the sequential is just a little bit of noise, ups and downs from quarter-to-quarter, all of which I would just expect to normalize going forward. Again, we feel very optimistic about the way that, that acquisition is headed and some of the things that we can do with that business. So I really wouldn't read too much into anything that you're seeing sequentially.

Aleksandr Zukin

Okay. And then on A2P piece, we appreciate, I think, that you guys talked about the AT&T contribution. But is it possible to just get a better understanding for the Verizon A2P fees maybe this quarter or last quarter so we can -- because if we do the math, it does look like the underlying growth organically ex A2P is accelerating Q1 to Q2, but I'd love to just understand a little bit better if that's actually the case.

Jeffrey Lawson

I mean I think in general, that's the case. I think we're not really breaking Verizon out anymore. I mean it's kind of in the base rate and as we look at comparisons from last year to this year, it's apples-to-apples, which is why we've broken out the AT&T and T-Mobile aspect only. And we've obviously given you a number there as well. But yes, if you were to take all of that stuff out, what you would see is that we're growing very nicely organically with or without the fees and that there is a reacceleration there.

Operator

Your next question comes from Brent Bracelin with Piper Sandler.

Brent Bracelin

A question for George or Jeff on demand for 2-way messaging via Twilio Conversations versus traditional one-way SMS messaging API. I know in the new wins this quarter, you highlighted a couple of conversation use cases. What is the benefit to the model as customers move from SMS to Conversations? Is it primarily higher volumes? Or does it also include higher pricing? And really just trying to understand how fast could the industry move.

There's personally nothing more frustrating to me as a consumer than to get a text from a brand without the ability to actually reply back. And so certainly encouraged to see Conversations being brought up more, but love to get any color on adoption and how that would kind of change the messaging volumes for Twilio as well.

Jeffrey Lawson

Yes. That's a great question, Brent. This is Jeff. I'll answer it. If you think about the strategy of how companies have gone about adding messaging to their product experiences, natural first step was to add notification because it's easy and it's high value. But then, of course, consumers expect that to be a 2-way dialogue and they reply. What do you usually get back? You get back sometimes nothing. Sometimes you get back a text and data rates may apply, call this phone number. But really, the customer experience that companies are expecting is to be able to reach a person or a system that answers their question.

And that's why we've been focusing on products like Conversations that can turn those one-way messages into 2-way conversation. And then on top of Conversations, we've built Flex for the contact center and Frontline for their workers, so it's a front line of serving customers. And so to create all the vehicles for a company to have 2-way conversations, the door is often open to be able to have that conversation with the company by that first outgoing alert notification, the thing that kind of opens the door for you.

And I think for us, what we see is the more value we can add into the channel. A, customers get more value on it because their customers are happier. But b, it allows us to build great software products that enable those companies to actually be successful in 2-way messaging because it's nontrivial to build those types of experience. And so whether it's with the contact center, whether it's a frontline worker, someone out in the field, someone doing a delivery or what we're seeing a lot of it is for sales use cases, having salespeople with a open messaging channel open to their customers. These are valuable places where companies can now turn a message, that over the fullness of time, turn it into a relationship.

Because if you think about you and your friends or family in that phone, that history of all your messages, that is a good summary of your relationship. That is how we are actually building relationships now digitally as consumers. And companies want to be a part of those conversations, too. They want to be a part of that relationship. And that relationship is not transactional, and it's not just a bunch of alerts, it's actually a 2-way dialogue.

And I think that we're going to look back and we're going to see that history of conversation that you have with a company, that starts to become the new customer relationship. It's right there in that thread. And that's what we're helping companies create. In fact, I was talking to a major financial services company recently, and they really saw that vision of that's how we're going to build the relationship. And so I think that's a common conversation that I'm having with executives of many companies who really see that future coming. And we're helping them deliver it with Flex, with Frontline, with Conversations and all the things that we're working on.

Operator

Your next question comes from Will Power with Baird.

William Power

I guess maybe two questions. First, I think probably for Jeff. I guess, first, thanks for all the company's vaccination efforts, obviously great to see. I wanted to ask about Twilio Live. It was mentioned in the prepared remarks. I just want to better understand the market that's trying to address. Any kind of early use cases you could point to and really just kind of how you're thinking about the opportunity for that product?

Jeffrey Lawson

Absolutely. Thanks, Will. If you think about what is happening, the first use cases for live media on the Internet were largely one-to-one or one-to-few, And now we're seeing the number of use cases for broadcast scale, live experiences really grow. A lot of that is because of COVID. But you also look at interesting use cases where like you can have a large-scale audio experience. And many companies are looking at, hey, how can I have thousands of people involved in a live audio conversation. Or how can I do a webinar and have live interactive video with many, many, many people.

And so Twilio Live is the answer to this emerging market of live interactive video experiences. You're starting to see things like commerce opportunities happen online with live video. You've got the whole audio market. So one of our launch customers for that was Reddit Talk. So Reddit wanted to add a voice talk feature into their communities. And so they used Twilio Live to do that. And so those are -- that was one of the reference customers at the time of launch.

And we're just seeing -- I think there's -- we're at the very beginning of a lot of new experimentation into, okay, live media on the Internet. Not just 1 to 2, 1 to 3, 1 to 5, but actually at scale, like broadcast scale, but interactive is actually starting to become a reality. And I think COVID accelerated a lot of the experimentation into what's possible. And so we're looking forward to powering many of those new ideas, including, for example, Reddit.

William Power

Okay. That's great. And then I guess maybe just for Khozema. Any thoughts around how to frame the gross margin outlook as we head into Q3? I guess you have a full quarter impact of the A2P fees. But aside from that, any other puts and takes to be thinking about to help us kind of model that moving forward?

Khozema Shipchandler

Not really. Well, I mean, I wouldn't say there's any real change in our long-term framework around gross margins. I mean we're still targeting 60% to 65%. We've not really ever been focused on it per se in the short term and there's some noise in here. Obviously, there's our messaging product, which we feel great about the fact that it's had such a strong performance but mixes us down a little bit. Obviously, international, an increase there from 29% to 32% and then the fees clipped us a little bit. But I wouldn't say that there's anything really kind of in the -- different in the long-term outlook and the way that we're thinking about it.

Operator

Your next question comes from Siti Panigrahi with Mizuho.

Sitikantha Panigrahi

I just want to dig into the Flex adoption in contact center. And also I'm wondering, how are you looking at the cloud contact center opportunity now given that UCaaS vendors and there's kind of convergence of UCaaS and CCaaS vendor with recent consolidation? How are you looking at the opportunity there?

Jeffrey Lawson

Absolutely. This is Jeff. So first of all, with Flex, thanks for the question. We're really happy with how Flex is going. I know we don't break it out separately, but if you looked at Flex independently, I think you'd look at its momentum and say it's one of the fastest-growing SaaS products on the market. And I'm particularly proud of the fact that we've got the wide berth of customer adoption that we have from the digital disruptors that we saw early in the adoption cycle, Shopify, Lyft, Robinhood, through the Fortune 500 incumbents in the market who are adopting Flex as well, like the major bank that we mentioned, I think, back in Q4 or Allianz or today's announcement of a major retailer or the Philippine Airlines, right? And so we're seeing broad adoption by a wide set of companies. We're really happy with it.

Now for the second part of your question about the greater trends that are going out, look, I was guessing someone went in, asked that question. First, I'd say the market is still in the early stages of moving to the cloud. It's only around 15% or so of the market that's in the cloud. And so 85% of the market, give or take, is still on-prem, on legacy solutions. And so that's what I think we're looking at as the big opportunity.

But I also think the combination of like UCaaS and contact centers is an interesting one because I see the market changing a little bit. I think that UCaaS is typically thought of as a call center, it's like the desk firm. And what we're seeing the contact center become as much more of a customer experience, customer engagement point. Creating great customer experiences is a driver of top line and it's becoming closer to the revenue side of the business. How do we serve customers as opposed to the call center? How do we save money?

And so it used to be that IT and the call center side of the business was like the desk phones in the contact center. But I actually think that when you start looking at digital channels and serving customers over the digital channels, the nature of the contact center is changing from that IT cost center to something that's much closer to the revenue and the Chief Digital Officer and the thing that is going to drive happy customers, repeat customers and more business. And so I think that's a trend that we're well situated to attach to, given the hardware products, given where we sit and who we sell to inside the companies.

Operator

Your next question comes from Ryan Koontz with Needham.

Ryan Koontz

I want to circle back to your international revenue strength and characterize the adoption of digital customer engagement across these different customer sets. How do you view the international markets relative to the U.S. in terms of adoption there? Do you see some of them more advanced in the U.S.? Or are they all playing kind of catch up?

George Hu

This is George. I think it really depends on the technology, I would say, for any of our technologies like SMS and e-mail. Certainly, North America is at parity or ahead of any other place, I would argue. But some of other platforms like WhatsApp, we definitely have seen more advanced adoption in some of our international markets. So I think it just really depends on part of the portfolio.

Operator

Your last question comes from Mark Murphy with JPMorgan.

Mark Murphy

I'll add my congrats on a strong quarter. Jeff, I wanted to ask you about the Frontline product. We've been intrigued by the potential for a new kind of an app that would connect frontline workers with consumers. And we understand there are more non-desk workers in the world than desk workers. So understanding it's still early, how do you see that product progressing? And do you feel like you've been able to build some pretty good pipeline in that area?

Jeffrey Lawson

Yes. Thanks, Mark. I think -- so that is one of the observations that we launched the product with, which is that there are more non-desk workers than there are desk workers. And I think an interesting thing that we've also observed about the market is that there are -- there's 2 types of humans basically who interact with customers in most businesses. One are people who sit usually in a place and all they do is interact with customers. That's usually what you call a call center or a contact center. Maybe they're in a building with cubicles and maybe now they're sitting at home, but basically, they take call after call after call or chat after chat or whatever, right?

And what we're seeing in Frontline is there's another large category of workers who -- that isn't their full-time job. They've got many things that they're doing, yet when a customer needs help, they need to basically drop what they're doing and help that customer. And that's, I think, where Frontline is also finding a really interesting set of use cases.

And as I mentioned before, there's a lot of areas where the sales is a really interesting area where salespeople who often are busy doing many things, but need to communicate, need to engage with the customer, now are doing that with a tool like Frontline. And it's on the go, it's in their pocket, it's a mobile app. It's easy to use, it feels as native as their phone. And when you do that well, you can embed the CRM information right in that experience to power that person with all the information about that customer and the company gets to track and ensure compliance of all those communications that are going through that experience as opposed to if someone just used their mobile phone and their native personal phone number to actually communicate with the customer.

So we're seeing a lot of interesting areas, use cases and types of companies. Very excited with the company that we're able to talk about today, the health care company that was using Frontline for sales communications. And I think there -- the product isn't even GA yet, but to have a major Fortune 500 health care company already starting to deploy Frontline, I think, indicates that there are a broad set of use cases that we're seeing from not just them, but other companies as well that will -- where these frontline workers need to be empowered with great customer engagement tools, less -- they just do it less effectively in an uncompliant way using their personal phone. And I think there, we're just scratching the surface and excited to bring that product to GA.

Mark Murphy

And quick one for Khozema on the A2P fees. Did you think the carriers who have increased those fees are sort of one and done with the increases or is there a chance that there'll be some kind of some ongoing lift there in the future? And just, I guess, I'm inferring from the strength of results that it's pretty comfortable in terms of customers absorbing that cost just because the ROI remains so high. Is that a fair way to think about it?

Khozema Shipchandler

Yes. I mean I think the ROI is incredibly high when you think about the things that we're doing with customers to be able to enable their use cases. It's hard for me to say one way or the other as to whether or not it's one and done. I mean, I think certainly, based on what we know and see today, we don't see anything in the future, but it certainly doesn't preclude them doing something else. But all of our financial modeling is not based on any additional fees at this time.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.