Twilio (NYSE: TWLO) shares plunged 17.46% in pre-market trading on Friday, as investors reacted negatively to the cloud communications company's lower-than-expected third-quarter guidance and concerns over declining gross margins, despite beating analyst expectations for the second quarter.

For Q2, Twilio reported adjusted earnings of $1.19 per share, surpassing the analyst consensus estimate of $1.05. Revenue reached $1.228 billion, up 13.39% year-over-year and beating expectations of $1.188 billion. However, the company's outlook for the third quarter fell short of Wall Street estimates, with projected earnings per share of $1.01 to $1.06, below the consensus of $1.15.

Several factors contributed to the sharp stock decline: 1. Gross margin pressure: Twilio's gross margin showed signs of strain, declining 260 basis points year-over-year to 50.7%. This decrease was primarily attributed to a shift in messaging mix and increased carrier fees. 2. Increased R&D investments: The company announced plans for heightened R&D investments, particularly in AI and voice capabilities. While potentially beneficial in the long term, these investments may impact near-term profitability. 3. Reduced financial transparency: Twilio's decision to cease separate financial disclosures for its business units starting in Q3 raised concerns among investors about transparency in financial reporting. Despite the negative market reaction, Twilio's management remained optimistic about the company's future prospects, highlighting strong growth in voice AI adoption and the potential for AI to expand their total addressable market. However, the market's response suggests that investors are adopting a cautious stance, focusing on near-term challenges rather than long-term potential.