TWILIO INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. In addition to historical financial information, the
following discussion contains forward-looking statements that are based upon
current plans, expectations and beliefs that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under Part II, Item 1A, "Risk Factors" in this Quarterly Report on
Form 10-Q.
Overview
We are the leader in the cloud communications platform category. We enable
developers to build, scale and operate realtime customer engagement within
their software applications. We offer a customer engagement platform with
software designed to address specific use cases like account security and
contact centers, and a set of Application Programming Interfaces ("APIs") that
handles the higher level communication logic needed for nearly every type of
customer engagement. The power, flexibility, and reliability offered by our
software building blocks empowers companies of virtually every shape and size to
build world-class engagement into their customer experience. For additional
detail on the description of our business and products please refer to Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", of our Annual Report on Form 10-K filed with the SEC on February
26, 2021 ("Annual Report").
We have achieved significant growth in recent periods. In the three months ended
September 30, 2021 and 2020, our revenue was $740.2 million and $448.0 million ,
respectively, and our net loss was $224.1 million and $116.9 million ,
respectively. In the three months ended September 30, 2021 and 2020, our 10
largest Active Customer Accounts generated an aggregate of 11% and 14% of our
total revenue, respectively.
Acquisition of Zipwhip, Inc
On July 14, 2021 , we acquired Zipwhip, Inc. ("Zipwhip"), a leading provider of
toll-free messaging in the United States , for a purchase price of $838.4
million . The purchase price was paid in the form of shares of our Class A common
stock and cash and included fair value of pre-combination services of Zipwhip
employees that was embedded in the unvested equity awards which we assumed on
the acquisition closing date. Part of the cash consideration was paid to settle
the vested stock options of Zipwhip employees that were outstanding on the
acquisition closing date. We assumed all unvested and outstanding stock options
and restricted stock units of Zipwhip continuing employees as converted into our
own respective equity awards at the conversion ratio provided in the Agreement
and Plan of Merger and Reorganization. This acquisition is described in detail
in Note 7 to our condensed consolidated financial statements included elsewhere
in this quarterly report on Form 10-Q. During the nine months ended September
30, 2021 , we incurred $4.2 million in expenses related to this transaction.
COVID-19 UPDATE
A novel coronavirus disease ("COVID-19") was declared a global pandemic during
the first quarter of 2020 and has resulted in the imposition of numerous,
unprecedented, national and international measures to try to contain the virus,
including travel bans and restrictions, shutdowns, quarantines, shelter-in-place
and social distancing orders. To prioritize the health and safety of our
employees, customers and our community at large, we have either cancelled or
shifted our planned events to virtual-only experiences and may determine to
alter, postpone or cancel additional customer, employee or industry events in
the future. Since mid-March 2020 , we have also taken several precautionary
measures to protect our employees and contingent workers and help minimize the
spread of the virus, including temporarily closing our worldwide offices,
requiring all employees and contingent workers to work from home and suspending
almost all business travel worldwide for our employees. We have continued to
monitor the progress of vaccination efforts around the world. In the third
quarter of 2021, as COVID-19 related restrictions have eased in some
geographies, we commenced a phased reopening for certain offices. In these
cases, reopening includes limited capacity and social distancing, is voluntary,
and is only available to fully-vaccinated employees, unless they have a medical
or other protected exception.
The broader implications of COVID-19 on our results of operations and overall
financial performance remain uncertain. The COVID-19 pandemic and its adverse
effects have been prevalent in the locations where we, our customers, our
suppliers or our third-party business partners conduct business. There may be
additional impacts to the economy and our business as a result of COVID-19. We
expect that there may be some volatility in customer demand and buying habits as
the pandemic continues, and we may experience constrained supply or curtailed
customer demand that could materially and adversely impact our business, results
of operations and financial performance in future periods. Specifically, we may
experience impact from delayed sales cycles, including customers and prospective
customers delaying contract signing or contract renewals, or reducing
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budgets or minimum commitments related to the products and services that we
offer and changes to consumer behavior that may affect customers who use our
products and services for confirmations, notifications, and other use cases. See
the risk factor titled "The global COVID-19 pandemic may adversely impact our
business, results of operations and financial performance" in Part II, Item 1A,
"Risk Factors" of this Quarterly Report on Form 10-Q for further discussion of
the possible impact of the COVID-19 pandemic on our business, financial
condition and results of operations.
Key Business Metrics
Three Months Ended
September 30,
2021 2020Number of Active Customer Accounts (as of end date of period) (1)
250,000 208,000
Total Revenue (in thousands) (1) $ 740,176 $ 447,969
Total Revenue Growth Rate (1) 65 % 52 %
Dollar-Based Net Expansion Rate (2) 131 % 137 %
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(1) Includes the contributions from our ValueFirst business, acquired
(2) Revenue from Zipwhip, ValueFirst and Twilio Segment will not impact this calculation until the quarter following the one-year anniversary of the respective acquisition.
Number of Active Customer Accounts. We believe that the number of Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an "Active Customer Account" at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least$5 of revenue in the last month of the period. We believe that use of our platform by customers at or above the$5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below$5 per month. In the three months endedSeptember 30, 2021 and 2020, revenue from Active Customer Accounts represented over 99% of total revenue in each period. A single organization may constitute multiple unique Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account. DollarBased Net Expansion Rate. Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing Active Customer Accounts and to increase their use of the platform. An important way in which we have historically tracked performance in this area is by measuring the Dollar-Based Net Expansion Rate for Active Customer Accounts. Our Dollar-Based Net Expansion Rate increases when such Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product. Our Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce their usage of a product or when we lower usage prices on a product. As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric. We believe that measuring Dollar-Based Net Expansion Rate provides a meaningful indication of the performance of our efforts to increase revenue from existing customers. To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts that were Active Customer Accounts in the same quarter of the prior year. The Dollar-Based Net Expansion Rate is the quotient obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period. 34
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Key Components of Statements of Operations
Revenue. We derive our revenue primarily from usagebased fees earned from
customers using the software products within our Channel APIs. These usagebased
software products include offerings such as Programmable Messaging, Programmable
Voice and Programmable Video, among others. Some examples of the usagebased
fees for which we charge include the number of text messages sent or received
using our Programmable Messaging products, minutes of call duration activity for
our Programmable Voice products, and number of authentications for our Verify
product. In the three months ended September 30, 2021 and 2020, we generated 72%
and 77% of our revenue, respectively, from usagebased fees. We also earn
monthly flat fees from certain feebased products, such as our Email API,
Marketing Campaigns, Twilio Flex, our cloud contact center platform, and Twilio
Segment, our customer data platform.
When customers first begin using our platform, they typically pay upfront via
credit card in monthly prepaid amounts and draw down their balances as they
purchase or use our products. Our larger customers often enter into contracts,
for at least 12 months, that contain minimum revenue commitments, which may
contain more favorable pricing. Customers on such contracts typically are
invoiced monthly in arrears for products used.
Amounts that have been charged via credit card or invoiced are recorded in
revenue, deferred revenue or customer deposits, depending on whether the revenue
recognition criteria have been met. Our deferred revenue and customer deposits
liability balance is not a meaningful indicator of our future revenue at any
point in time because the number of contracts with our invoiced customers that
contain terms requiring any form of prepayment is not significant.
We define U.S. revenue as revenue from customers with IP addresses or mailing
addresses at the time of registration in the United States , and we define
international revenue as revenue from customers with IP addresses or mailing
addresses at the time of registration outside of the United States .
Cost of Revenue and Gross Margin. Cost of revenue consists primarily of fees
paid to network service providers. Cost of revenue also includes cloud
infrastructure fees, direct costs of personnel, such as salaries and stockbased
compensation for our customer support employees, and nonpersonnel costs, such
as depreciation and amortization expense related to data centers and hosting
equipment, amortization of capitalized internal use software development costs
and acquired intangibles. Our arrangements with network service providers
require us to pay fees based on the volume of phone calls initiated or text
messages sent, as well as the number of telephone numbers acquired by us to
service our customers. Our arrangements with our cloud infrastructure provider
require us to pay fees based on our server capacity consumption.
Our gross margin has been and will continue to be affected by a number of
factors, including the timing and extent of our investments in our operations;
our product mix; our ability to manage our network service provider and cloud
infrastructurerelated fees, including Application to Person SMS fees; the mix
of U.S. revenue compared to international revenue; changes in foreign exchange
rates; the timing of amortization of capitalized software development costs and
acquired intangibles; and the extent to which we periodically choose to pass on
our cost savings from platform optimization efforts to our customers in the form
of lower usage prices.
Operating Expenses. The most significant components of operating expenses are
personnel costs, which consist of salaries, benefits, sales commissions and
bonuses and stockbased compensation. We also incur other nonpersonnel costs
related to our general overhead expenses. We expect that our operating costs
will increase in absolute dollars as we add additional employees and invest in
our infrastructure to grow our business.
Research and Development. Research and development expenses consist primarily of
personnel costs, outsourced engineering services, cloud infrastructure fees for
staging and development, amortization of capitalized internal use software
development costs, depreciation and an allocation of our general overhead
expenses. We capitalize the portion of our software development costs that meets
the criteria for capitalization.
We continue to focus our research and development efforts on adding new features
and products, including new use cases, improving our platform and increasing the
functionality of our existing products.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel
costs, including commissions for our sales employees. Sales and marketing
expenses also include expenditures related to advertising, marketing, our brand
awareness activities and developer evangelism, costs related to our SIGNAL
customer and developer conferences, credit card processing fees, professional
services fees, depreciation, amortization of acquired intangibles and an
allocation of our general overhead expenses.
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We focus our sales and marketing efforts on generating awareness of our company,
platform and products through our developer evangelist team and selfservice
model, creating sales leads and establishing and promoting our brand, both
domestically and internationally. We plan to continue investing in sales and
marketing by increasing our sales and marketing headcount, supplementing our
selfservice model with an enterprise sales approach, expanding our sales
channels, driving our gotomarket strategies, building our brand awareness and
sponsoring additional marketing events.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for our accounting, finance, legal, human resources
and administrative support personnel and executives. General and administrative
expenses also include costs related to business acquisitions, legal and other
professional services fees, certain taxes, depreciation and amortization and an
allocation of our general overhead expenses. We expect that we will incur costs
associated with supporting the growth of our business and to meet the increased
compliance requirements associated with our international expansion. We may also
incur higher than usual losses related to deterioration of quality of certain
financial assets caused by the macroeconomic conditions and uncertainly in the
COVID-19 environment.
Our general and administrative expenses include a certain amount of sales and
other taxes to which we are subject in the United States and internationally
based on the manner we sell and deliver our products.
Provision for Income Taxes. Our income tax provision or benefit for interim
periods is determined using an estimate of our annual effective tax rate,
adjusted for discrete items occurring in the quarter. The primary difference
between our effective tax rate and the federal statutory rate relates to the
full valuation allowance the Company established on the federal, state and
certain foreign net operating losses and credits.
Non-GAAP Financial Measures:
We use the following nonGAAP financial information, collectively, to evaluate
our ongoing operations and for internal planning and forecasting purposes. We
believe that nonGAAP financial information, when taken collectively, may be
helpful to investors because it provides consistency and comparability with past
financial performance, facilitates periodtoperiod comparisons of results of
operations, and assists in comparisons with other companies, many of which use
similar nonGAAP financial information to supplement their GAAP results.
NonGAAP financial information is presented for supplemental informational
purposes only, should not be considered a substitute for financial information
presented in accordance with generally accepted accounting principles, and may
be different from similarlytitled nonGAAP measures used by other companies.
Whenever we use a nonGAAP financial measure, a reconciliation is provided to
the most closely applicable financial measure stated in accordance with
generally accepted accounting principles. Investors are encouraged to review the
related GAAP financial measures and the reconciliation of these nonGAAP
financial measures to their most directly comparable GAAP financial measures.
NonGAAP Gross Profit and NonGAAP Gross Margin. For the periods presented, we
define nonGAAP gross profit and nonGAAP gross margin as GAAP gross profit and
GAAP gross margin, respectively, adjusted to exclude, as applicable, certain
expenses as presented in the table below:
Three Months Ended
September 30,
2021 2020
Reconciliation: (In thousands)
Gross profit $ 364,615 $ 230,874
Gross margin 49 % 52 %
Non-GAAP adjustments:
Stock-based compensation 3,720 2,237
Amortization of acquired intangibles 31,558 12,540
Non-GAAP gross profit $ 399,893 $ 245,651
Non-GAAP gross margin 54 % 55 %
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NonGAAP Operating Expenses. For the periods presented, we define nonGAAP
operating expenses (including categories of operating expenses) as GAAP
operating expenses (and categories of operating expenses) adjusted to exclude,
as applicable, certain expenses as presented in the table below:
Three Months Ended
September 30,
2021 2020
Reconciliation: (In thousands)
Operating expenses $ 596,960 $ 343,144
Non-GAAP adjustments:
Stock-based compensation (160,323) (87,173)
Amortization of acquired intangibles (24,203) (7,886)
Acquisition-related expenses (1,620) (791)
Charitable contributions (8,389) (5,757)
Payroll taxes related to stock-based compensation (10,734)
(3,179)
Non-GAAP operating expenses $ 391,691
NonGAAP Income from Operations and NonGAAP Operating Margin. For the periods
presented, we define nonGAAP income from operations and nonGAAP operating
margin as GAAP loss from operations and GAAP operating margin, respectively,
adjusted to exclude, as applicable, certain expenses as presented in the table
below:
Three Months Ended
September 30,
2021 2020
Reconciliation: (In thousands)
Loss from operations $ (232,345) $ (112,270)
Operating margin (31) % (25) %
Non-GAAP adjustments:
Stock-based compensation 164,043 89,410
Amortization of acquired intangibles 55,761 20,426
Acquisition-related expenses 1,620 791 Charitable contributions 8,389 5,757 Payroll taxes related to stock-based compensation 10,734
3,179
Non-GAAP income from operations$ 8,202 $ 7,293 Non-GAAP operating margin 1 % 2 % 37
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Results of OperationsThe following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Condensed Consolidated Statements of
Operations Data: (In thousands)
Revenue $ 740,176 $ 447,969 $ 1,999,095 $ 1,213,686
Cost of revenue (1) (2) 375,561 217,095 1,004,929 580,146
Gross profit 364,615 230,874 994,166 633,540
Operating expenses:
Research and development (1) (2) 209,890 136,652 565,970 371,692
Sales and marketing (1) (2) 264,548 140,875 713,196 387,420
General and administrative (1) (2) 122,522 65,617 346,958 182,038
Total operating expenses 596,960 343,144 1,626,124 941,150
Loss from operations (232,345) (112,270) (631,958) (307,610)
Other expenses, net (6,613) (3,996) (39,219) (2,099)
Loss before benefit (provision) for income
taxes (238,958) (116,266) (671,177) (309,709)
Benefit (provision) for income taxes 14,849 (648) 12,673 (1,919)
Net loss attributable to common
stockholders $ (224,109) $
(116,914)
____________________________________
(1) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands)
Cost of revenue $ 3,720 $ 2,237 $ 9,461 $ 6,217
Research and development 69,242 46,294 185,072 119,344
Sales and marketing 53,843 26,573 143,419 69,602
General and administrative 37,238 14,306 107,414 42,659
Total $ 164,043 $ 89,410 $ 445,366 $ 237,822 ____________________________________
(2) Includes amortization of acquired intangibles as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands)
Cost of revenue $ 31,558 $ 12,540 $ 84,104 $ 37,616
Research and development 462 - 840 -
Sales and marketing 23,741 7,876 61,197 23,629
General and administrative - 10 125 68
Total $ 55,761 $ 20,426 $ 146,266 $ 61,313
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