Diagnosis
1.We did a pcap on PSN and found that ISE server is not trusting Twilio cert even after adding DIGI cert root and intermediate certs
2.Even after fixing the cert issue, ISE says SMS sent but user is not receiving it.
Solution
For Problem 1, we are using a proxy in our environment, so, our Proxy is acting as a root CA and issuing a cert to api.twilio.com.
Even if we are not using any proxy settings on ISE, our traffic by default is going out through proxy and did not have any problems with Cisco Licensing portal. Now, we added our proxy root CA under trusted Certificates on ISE and SSL error is remediated.
For Problem 2
Instead of having $message$ under Data (Url encoded portion) section in SMS Gateway Settings, in ISE 2.7 we left that section empty and it worked. Rest, i followed the document in above link.
@Rahul Govindan