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    TWLO   US90138F1021

TWILIO INC.

(TWLO)
  Report
Delayed Nyse  -  04:00 2022-09-27 pm EDT
70.11 USD   +1.61%
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TWILIO INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2022 | 04:34pm EDT
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.
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                                    Overview

Today's leading companies trust Twilio's Customer Engagement Platform (CEP) to
build direct, personalized relationships with their customers everywhere in the
world. Twilio enables companies to use communications and data to add
intelligence and security to every step of the customer journey, from sales to
marketing to growth, customer service and many more engagement use cases in a
flexible, programmatic way. For more information about Twilio refer to Part I,
Item 1, "Business," of our Annual Report on Form 10-K filed with the SEC on
February 22, 2022 ("Annual Report").

We have achieved significant growth in recent periods. In the three months ended
June 30, 2022 and 2021, our revenue was $943.4 million and $668.9 million,
respectively, and our net loss was $322.8 million and $227.9 million,
respectively. In each of the three months ended June 30, 2022 and 2021, our 10
largest Active Customer Accounts generated an aggregate of 12% of our total
revenue.

                              Key Business Metrics

                                                                       Three Months Ended June 30,
                                                                        2022                   2021

Number of Active Customer Accounts (as of end date of period) (1)

                                                             275,000               240,000
Total Revenue (in thousands) (2)                                  $     943,354           $   668,931
Total Revenue Growth Rate (2)                                                41   %                67  %
Dollar-Based Net Expansion Rate (3)                                         123   %               135  %

____________________

(1) Excludes customer accounts from Zipwhip.
(2) Includes revenue from Zipwhip, acquired July 14, 2021, and other smaller acquisitions made after
April 1, 2021.
(3) Excludes the contributions from Zipwhip, acquired July 14, 2021, and other smaller acquisitions made
after April 1, 2021.


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 ended June 30, 2022 and
2021, 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 more meaningful indication of the performance of our
efforts to increase revenue from existing customers.

Our Dollar-Based Net Expansion Rate compares the revenue from all Active
Customer Accounts in a quarter to the same quarter in the prior year. 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. Revenue from
acquisitions does not impact the Dollar-Based Net Expansion Rate calculation
until the quarter following the one-year anniversary of the applicable
acquisition, unless the acquisition closing date is the first day of a quarter.
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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 others. Some examples of the usage­based fees that we charge include
fees related to the number of text messages sent or received using our
Programmable Messaging products, minutes of call duration activity for our
Programmable Voice products and the number of authentications for our Verify
product. In the three months ended June 30, 2022 and 2021, we generated 73% and
72% of our revenue, respectively, from usage­based fees. We also earn monthly
flat fees from certain fee­based products, such as our Email API, our cloud
contact center platform Twilio Flex and our customer data platform Twilio
Segment.

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 A2P 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, 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. General and administrative expenses also
include costs related to business acquisitions, legal and other professional
services fees, certain taxes, depreciation and amortization, charitable
contributions 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.

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 we 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 June 30,
                                                                     2022                     2021
Reconciliation:                                                             (In thousands)
Gross profit                                                  $       445,289           $      331,247
Gross margin                                                               47   %                   50  %
Non-GAAP adjustments:
Stock-based compensation                                                3,996                    3,024
Amortization of acquired intangibles                                   31,236                   26,204
Payroll taxes related to stock-based compensation                         242                        -
  Non-GAAP gross profit                                       $       480,763           $      360,475
  Non-GAAP gross margin                                                    51   %                   54  %


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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 June 30,
                                                                       2022                    2021
Reconciliation:                                                               (In thousands)
Operating expenses                                              $       757,225          $      533,521
Non-GAAP adjustments:
Stock-based compensation                                               (238,094)               (141,144)
Amortization of acquired intangibles                                    (20,929)                (19,150)

Acquisition-related expenses                                             (1,840)                 (2,836)

Charitable contributions                                                 (2,373)                 (6,789)

Payroll taxes related to stock-based compensation                        (5,924)                 (7,329)
Non-GAAP operating expenses                                     $       

488,065 $ 356,273



Non­GAAP (Loss) Income from Operations and Non­GAAP Operating Margin. For the
periods presented, we define non­GAAP (loss) 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 June 30,
                                                                 2022               2021
 Reconciliation:                                                    (In thousands)
 Loss from operations                                     $     (311,936)       $ (202,274)
 Operating margin                                                    (33)  %           (30) %
 Non-GAAP adjustments:
 Stock-based compensation                                        242,090           144,168
 Amortization of acquired intangibles                             52,165            45,354

 Acquisition-related expenses                                      1,840             2,836

 Charitable contributions                                          2,373             6,789

 Payroll taxes related to stock-based compensation                 6,166    

7,329

 Non-GAAP (loss) income from operations                   $       (7,302)       $    4,202
 Non-GAAP operating margin                                            (1)  %             1  %


                             Results of Operations

Our results of operations may be significantly affected by many factors, such as
uncertainty regarding the impacts of fluctuations in foreign exchange rates,
changes in global economic conditions and customer demand and spending,
inflation, labor market constraints, world events and existing and new domestic
and foreign laws and regulations, as well as those factors outlined in Part II,
Item 1A, "Risk Factors."

Our revenue is primarily derived from usage-based fees we charge for certain of
our products, which can lead to variability and at times create significant
differences between forecasts and actual results. In addition, our product mix
and mix of international and domestic customers may significantly impact our
gross margin. Because usage trends by geographic region and by customer are
inherently difficult to estimate, our actual results could differ significantly
from our estimates, particularly if market and industry specific conditions
continue to shift.

In May 2022, we announced our decision to become a remote-first company, whereby
employees would have the flexibility to work remotely on a permanent basis. As
part of our new operating strategy we expect that certain of our office
locations will be closed in the near future. Subject to meeting certain future
conditions, closure of these locations may trigger impairment losses that may
negatively impact our results of operations. We estimate that potential non-cash
impairment charges could range from $90 million to $110 million in the third
quarter of 2022.
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In May 2022, we paid $750.0 million to acquire approximately 43% of Syniverse
Corporation's ("Syniverse") common shares issued and outstanding after the
closing of the transaction. Refer to Notes 2 and 6 of our condensed consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q
for further description of this transaction. As required by the accounting
guidance for equity method investments, we will be recording our share of
Syniverse's net income or loss and the amortization of the excess investment
basis into our statements of operations every reporting period starting in the
third quarter of 2022.

In July 2022, we adopted a new sabbatical program for our tenured employees,
whereby every three years, employees may apply for a paid sabbatical leave of
four consecutive weeks. Employees with more than three years at Twilio became
immediately eligible for s sabbatical leave as of the July 1, 2022, the
program's effective date. As such, a non-cash expense of approximately $35.0
million related to the adoption of this program will impact our results of
operations in the third quarter of 2022. In the quarters subsequent to the
adoption, the impact from this program is not expected to be significant to our
results of operations.

We continue to execute against our two primary priorities of accelerating
software sales and delivering non-GAAP operating profit starting in 2023. To
this end, our hiring efforts are focused on areas that we believe will unlock
significant value and present strong opportunities for continued growth such as
Twilio Segment, Twilio Engage and Twilio Flex, and we have frozen the vast
majority of new hires and backfills outside of these areas. We are also shifting
more of our selling capacity to software, while looking to leverage more of our
self-service capability for customers that don't need direct account coverage.

We also continue to see strong demand for our portfolio of products that make up
our customer engagement platform and overall our business has remained
resilient. We generate a portion of our revenue from certain sectors of the
economy that have experienced recent softness, including cryptocurrencies,
consumer on-demand and social media, as well as some instances of longer sales
cycles. Given our diverse customer base, use cases and verticals served, this
has not had a material impact on our overall business, and we have seen volume
gains in other areas such as financial services and information technology.

The following tables set forth our results of operations for the periods
presented and as a percentage of our total revenue for those periods. We have
included Zipwhip in our results of operations prospectively after its closing
date of July 14, 2021, and all other acquisitions from the respective closing
dates of each acquisition. The period-to-period comparison of our historical
results are not indicative of the results that may be expected in the future.

                                                      Three Months Ended June 30,                     Six Months Ended June 30,
                                                      2022                    2021                   2022                   2021
Condensed Consolidated Statements of
Operations Data:                                                 (In thousands, except share and per share amounts)
Revenue                                        $       943,354          $   

668,931 $ 1,818,717 $ 1,258,919 Cost of revenue (1) (2)

                                498,065                337,684                 948,357               629,368
Gross profit                                           445,289                331,247                 870,360               629,551
Operating expenses:
Research and development (1) (2)                       279,641                181,280                 520,252               356,080
Sales and marketing (1) (2)                            334,958                238,058                 622,864               448,648
General and administrative (1) (2)                     142,626                114,183                 256,988               224,436
Total operating expenses                               757,225                533,521               1,400,104             1,029,164
Loss from operations                                  (311,936)              (202,274)               (529,744)             (399,613)
Other expenses, net                                     (8,239)               (24,293)                (14,916)              (32,606)
Loss before (provision for) benefit from
income taxes                                          (320,175)              (226,567)               (544,660)             (432,219)
(Provision for) benefit from income
taxes                                                   (2,594)                (1,286)                    264                (2,176)
Net loss attributable to common
stockholders                                   $      (322,769)         $   

(227,853) $ (544,396) $ (434,395) Net loss per share attributable to common

   stockholders, basic and diluted             $         (1.77)         $   

(1.31) $ (3.00) $ (2.55) Weighted-average shares used in computing net

loss per share attributable to common

   stockholders, basic and diluted                 182,347,864            173,407,187             181,624,316           170,275,609


__________________________________

(1) Includes stock-based compensation expense as follows:

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                                                           Three Months Ended June 30,                  Six Months Ended June 30,
                                                            2022                  2021                  2022                  2021
                                                                                       (In thousands)
Cost of revenue                                      $         3,996          $    3,024          $        8,517          $    5,741
Research and development                                     109,524              58,871                 188,893             115,830
Sales and marketing                                           78,492              47,940                 126,078              89,576
General and administrative                                    50,078              34,333                  73,877              70,176
Total                                                $       242,090          $  144,168          $      397,365          $  281,323


____________________________________

(2) Includes amortization of acquired intangibles as follows:

                                                           Three Months Ended June 30,                  Six Months Ended June 30,
                                                            2022                  2021                  2022                  2021
                                                                                       (In thousands)
Cost of revenue                                      $        31,236          $   26,204          $       61,872          $   52,546
Research and development                                         420                 378                     840                 378
Sales and marketing                                           20,509              18,762                  40,912              37,456
General and administrative                                         -                  10                       7                 125
Total                                                $        52,165          $   45,354          $      103,631          $   90,505


                                                      Three Months Ended June 30,                    Six Months Ended June 30,
                                                      2022                   2021                   2022                   2021
Consolidated Statements of Operations, as
a percentage of revenue: **
Revenue                                                  100  %                 100  %                 100  %                 100  %
Cost of revenue                                           53                     50                     52                     50
Gross profit                                              47                     50                     48                     50
Operating expenses:
Research and development                                  30                     27                     29                     28
Sales and marketing                                       36                     36                     34                     36
General and administrative                                15                     17                     14                     18
Total operating expenses                                  80                     80                     77                     82
Loss from operations                                     (33)                   (30)                   (29)                   (32)
Other expenses, net                                       (1)                    (4)                    (1)                    (3)
Loss before (provision for) benefit from
income taxes                                             (34)                   (34)                   (30)                   (34)
(Provision for) benefit from income taxes                      *                      *                      *                      *

Net loss attributable to common

   stockholders                                          (34  %)                (34  %)                (30  %)                (35  %)


____________________________________

* Less than 0.5% of revenue.
** Columns may not add up to 100% due to rounding.


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Comparison of the Three Months Ended June 30, 2022 and 2021


Revenue

                                     Three Months Ended June 30,
                                        2022                   2021                      Change
                                                 (Dollars in thousands)

        Total Revenue        $       943,354                $ 668,931            $ 274,423        41  %


In the three months ended June 30, 2022, total revenue increased by $274.4
million, or 41%, compared to the same period last year. This increase was
primarily attributable to an increase in the usage of our products, particularly
our Programmable Messaging, Programmable Voice, Email and Software products; the
adoption of additional products by our existing customers; the additional A2P
fees imposed by certain carriers; and revenue contributions from our acquisition
of Zipwhip and other businesses. The change in usage from our existing customers
was reflected in our Dollar­Based Net Expansion Rate of 123% for the three
months ended June 30, 2022. The increase in usage was also attributable to a 15%
increase in the number of Active Customer Accounts, from over 240,000 as of
June 30, 2021, to over 275,000 as of June 30, 2022.

In the three months ended June 30, 2022, U.S. revenue and international revenue
represented $616.3 million or 65%, and $327.0 million, or 35%, respectively, of
our total revenue. In the three months ended June 30, 2021, U.S. revenue and
international revenue represented $452.9 million, or 68%, and $216.0 million, or
32%, respectively, of total revenue. The increase in international revenue was
attributable to the growth in usage of our products, particularly our
Programmable Messaging products, by our existing international customers; a 15%
increase in the number of international Active Customer Accounts driven in part
by our focus on expanding our sales to customers outside of the United States;
and revenue contribution from our recent acquisitions.

Cost of Revenue and Gross Margin

                                      Three Months Ended June 30,
                                    2022                      2021                Change
                                        (Dollars in thousands)
         Cost of revenue      $     498,065               $ 337,684       $ 160,381        47  %
         Gross margin                    47   %                  50  %


In the three months ended June 30, 2022, cost of revenue increased by $160.4
million, or 47%, compared to the same period last year. The increase in cost of
revenue was primarily attributable to a $128.9 million increase in network
service providers' costs, which included the additional A2P fees imposed by
certain carriers, and a $9.8 million increase in cloud infrastructure fees, all
to support the growth in usage of our products. The increase was also due to a
$5.0 million increase in the amortization expense of intangible assets that we
acquired through business combinations and partially due to increases in cost of
revenue from our recent acquisitions.

In the three months ended June 30, 2022, the gross margin percentage declined
compared to the same period last year. This decline was primarily driven by
continued strong growth of our lower margin international messaging business and
the additional A2P fees imposed by certain carriers, which we pass to our
customers at cost. The decline was also due to an increase in amortization
expense related to our acquired intangible assets. These declines were partially
offset by certain operational improvements.
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Operating Expenses

                                            Three Months Ended June 30,
                                              2022                  2021                      Change
                                                       (Dollars in thousands)
    Research and development        $      279,641               $ 181,280            $  98,361        54  %
    Sales and marketing                    334,958                 238,058               96,900        41  %
    General and administrative             142,626                 114,183               28,443        25  %
    Total operating expenses        $      757,225               $ 533,521            $ 223,704        42  %


In the three months ended June 30, 2022, research and development expenses
increased by $98.4 million, or 54%, compared to the same period last year. The
increase was primarily attributable to a $91.0 million increase in personnel
costs, largely as a result of a 40% average increase in our research and
development headcount, as we continued to focus on enhancing our Twilio Segment
and Flex products and strengthening our platform infrastructure.

In the three months ended June 30, 2022, sales and marketing expenses increased
by $96.9 million, or 41%, compared to the same period last year. The increase
was primarily attributable to a $78.7 million increase in personnel costs,
largely as a result of a 41% average increase in sales and marketing headcount,
as we continued to expand our sales efforts globally, and a $3.4 million
increase in advertising expenses.

In the three months ended June 30, 2022, general and administrative expenses
increased by $28.4 million, or 25%, compared to the same period last year. The
increase was primarily attributable to a $29.2 million increase in personnel
costs, largely as a result of a 44% average increase in general and
administrative headcount, to support the growth of our business globally. This
increase was partially offset by a $4.4 million decrease in charitable
contributions that we made through Twilio.org.

           Comparison of the Six Months Ended June 30, 2022 and 2021

Revenue

                           Six Months Ended June 30,
                         2022                     2021                      Change
                                       (Dollars in thousands)

Total Revenue        $1,818,717               $1,258,919            $559,798          44%


In the six months ended June 30, 2022, total revenue increased by $559.8
million, or 44%, compared to the same period last year. This increase was
primarily attributable to an increase in the usage of our products, particularly
our Programmable Messaging, Programmable Voice, Email and Software products; the
adoption of additional products by our existing customers; the additional A2P
fees imposed by certain carriers; and revenue contributions from our acquisition
of Zipwhip and other businesses. The change in usage from our existing customers
was reflected in our Dollar­Based Net Expansion Rate of 125% for the six months
ended June 30, 2022. The increase in usage was also attributable to a 15%
increase in the number of Active Customer Accounts, from over 240,000 as of
June 30, 2021, to over 275,000 as of June 30, 2022.

In the six months ended June 30, 2022, U.S. revenue and international revenue
represented $1.2 billion or 65%, and $632.0 million, or 35%, respectively, of
total revenue. In the six months ended June 30, 2021, U.S. revenue and
international revenue represented $874.4 million, or 69%, and $384.5 million, or
31%, respectively, of total revenue. The increase in international revenue was
attributable to the growth in usage of our products, particularly our
Programmable Messaging products, by our existing international customers; a 15%
increase in the number of international Active Customer Accounts driven in part
by our focus on expanding our sales to customers outside of the United States;
and revenue contribution from our recent acquisitions.
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Cost of Revenue and Gross Margin

                             Six Months Ended June 30, 2022
                            2022                         2021                Change
                                 (Dollars in thousands)
Cost of revenue      $      948,357                  $ 629,368       $ 318,989        51  %
Gross margin                     48   %                     50  %


In the six months ended June 30, 2022, cost of revenue increased by $319.0
million, or 51%, compared to the same period last year. The increase in cost of
revenue was primarily attributable to a $265.5 million increase in network
service providers' costs, which included the additional A2P fees imposed by
certain carriers, and a $17.6 million increase in cloud infrastructure fees, all
to support the growth in usage of our products. The increase was also due to a
$9.3 million increase in the amortization expense of intangible assets that we
acquired through business combinations and partially due to increases in cost of
revenue due to our recent acquisitions.

In the six months ended June 30, 2022, the gross margin percentage declined
compared to the same period last year. This decline was primarily driven by
continued strong growth of our lower margin international messaging business and
the additional A2P fees imposed by certain carriers, which we pass to our
customers at cost. The decline was also due to an increase in amortization
expense related to our acquired intangible assets. These declines were partially
offset by certain operational improvements.

Operating Expenses

                                        Six Months Ended June 30, 2022
                                           2022                   2021                       Change
                                                     (Dollars in thousands)
Research and development        $        520,252              $   356,080            $ 164,172        46  %
Sales and marketing                      622,864                  448,648              174,216        39  %
General and administrative               256,988                  224,436               32,552        15  %
Total operating expenses        $      1,400,104              $ 1,029,164            $ 370,940        36  %


In the six months ended June 30, 2022, research and development expenses
increased by $164.2 million, or 46%, compared to the same period last year. The
increase was primarily attributable to a $153.8 million increase in personnel
costs, largely as a result of a 46% average increase in our research and
development headcount, as we continued to focus on enhancing our Twilio Segment
and Flex products and strengthening our platform infrastructure.

In the six months ended June 30, 2022, sales and marketing expenses increased by
$174.2 million, or 39%, compared to the same period last year. The increase was
primarily attributable to a $137.5 million increase in personnel costs, largely
as a result of a 52% average increase in sales and marketing headcount, as we
continued to expand our sales efforts globally, and a $10.8 million increase in
advertising expenses.

In the six months ended June 30, 2022, general and administrative expenses
increased by $32.6 million, or 15%, compared to the same period last year. The
increase was primarily attributable to a $31.2 million increase in personnel
costs, as a result of a 52% average increase in general and administrative
headcount. The increases due to the growth in headcount were partially offset by
a $12.0 million decrease in the stock-based compensation expense in the first
three months of this six month period mainly driven by attrition. The increase
in general and administrative expenses was also attributable to a $4.7 million
increase in professional services fees and a $3.5 million increase in software
subscription fees. The increase was also partially offset by a $9.6 million
decrease in charitable contributions that we made through Twilio.org.





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                        Liquidity and Capital Resources

Our principal sources of liquidity have been (i) the net proceeds of $979.0
million, $1.4 billion and $1.8 billion, net of underwriting discounts and
offering expenses paid by us, from our public equity offerings in June 2019,
August 2020 and February 2021, respectively; (ii) the aggregate net proceeds of
approximately $984.7 million, after deducting purchaser discounts and debt
issuance costs paid by us, from the issuance of our 2029 Notes and 2031 Notes in
March 2021; (iii) the net proceeds of $228.4 million, after deducting
transaction costs paid by us, from settlement of our capped call arrangements in
June 2021; and (iv) the payments received from customers using our products.

Our primary uses of cash include operating costs, such as personnel-related
costs, network service provider costs, cloud infrastructure costs,
facility-related spending, as well as acquisitions and investments. Our
principal contractual and other commitments consist of obligations under our
2029 Notes and 2031 Notes, our operating leases for office space and contractual
commitments to our cloud infrastructure and network service providers. Refer to
Note 9 and Note 11(a) to our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q for detailed
discussions of our obligations and commitments related to debt and other
purchase obligations.

We may, from time to time, consider acquisitions of, or investments in,
complementary businesses, products, services, capital infrastructure or
technologies which might affect our liquidity requirements, cause us to secure
additional financing or issue additional equity or debt securities. There can be
no assurance that additional credit lines or financing instruments will be
available in amounts or on terms acceptable to us, if at all.

We believe that our cash, cash equivalents and marketable securities balances,
as well as the cash flows generated by our operations, will be sufficient to
satisfy our anticipated cash needs for working capital and capital expenditures
for the next 12 months and beyond. However, our belief may prove to be
incorrect, and we could utilize our available financial resources sooner than we
currently expect. Our future capital requirements and the adequacy of available
funds will depend on many factors, including those set forth in Part II,
Item 1A, "Risk Factors." We may be required to seek additional equity or debt
financing in order to meet these future capital requirements. In the event that
additional financing is required from outside sources, we may not be able to
raise it on terms acceptable to us, or at all. If we are unable to raise
additional capital when desired, our business, results of operations and
financial condition would be adversely affected. Additionally, cash from
operations could also be affected by various risks and uncertainties in
connection with the impact of an economic downturn or recession, the COVID-19
pandemic, significant market volatility in the global economy, timing and
ability to collect payments from our customers and other risks detailed in Part
II, Item 1A, "Risk Factors."

Cash Flows

The following table summarizes our cash flows:

                                                                              Six Months Ended
                                                                                   June 30,
                                                                         2022                 2021
                                                                               (In thousands)
Cash (used in) provided by operating activities                      $  (80,141)         $     26,222
Cash used in investing activities                                      (635,629)           (2,181,489)
Cash provided by financing activities                                    34,402             3,024,856

Effect of exchange rate changes on cash, cash equivalents and restricted cash

                                                             313                  (143)
Net (decrease) increase in cash, cash equivalents and
restricted cash                                                      $ (681,055)         $    869,446


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Cash Flows from Operating Activities


In the six months ended June 30, 2022, cash used in operating activities
consisted primarily of our net loss of $544.4 million adjusted for non-cash
items, including $397.4 million of stock-based compensation expense, $137.7
million of depreciation and amortization expense, $25.5 million of non-cash
reduction to our operating right-of-use asset, $26.1 million amortization of
deferred commissions and $160.0 million of cumulative changes in operating
assets and liabilities. With respect to changes in operating assets and
liabilities, accounts receivable and prepaid expenses increased $149.8 million
primarily due to revenue growth, the timing of cash receipts and pre-payments of
our cloud infrastructure fees and certain operating expenses. Accounts payable
and other current liabilities increased $85.1 million primarily due to increases
in transaction volumes. Operating lease liabilities decreased $31.1 million due
to payments made against our operating lease obligations. Other long-term assets
increased $52.5 million primarily due to an increase in the sales commissions
balances related to the growth of our business.

In the six months ended June 30, 2021, cash provided by operating activities
consisted primarily of our net loss of $434.4 million adjusted for non-cash
items, including $281.3 million of stock-based compensation expense, $119.4
million of depreciation and amortization expense, $16.2 million of donated
common stock, $29.0 million loss on extinguishment of our convertible notes,
$5.1 million amortization of the debt discount and issuance costs related
primarily to our convertible notes, $23.2 million of non-cash reduction to our
operating right-of-use asset, $12.4 million amortization of deferred
commissions, and $48.1 million of cumulative changes in operating assets and
liabilities. With respect to changes in operating assets and liabilities,
accounts receivable and prepaid expenses increased $86.3 million primarily due
to the timing of cash receipts from certain of our larger customers,
pre-payments of our cloud infrastructure fees and certain operating expenses.
Accounts payable and other current liabilities increased $93.0 million primarily
due to increases in transaction volumes. Operating lease liabilities decreased
$23.6 million due to payments made against our operating lease obligations.
Other long-term assets increased $39.1 million primarily due to an increase in
the sales commissions balances related to the growth of our business.

Cash Flows from Investing Activities


In the six months ended June 30, 2022, cash used in investing activities was
$635.6 million primarily consisting of $570.8 million of purchases of marketable
securities and other investments, net of maturities and sales; $750.0 million
paid to acquire our equity method investment in Syniverse, as described in Note
2(h) and Note 6 to our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q; $31.7 million of net cash paid
to acquire other businesses, $22.4 million related to capitalized software
development costs and $10.8 million related to purchases of long-lived assets.

In the six months ended June 30, 2021, cash used in investing activities was
$2.2 billion primarily consisting of $2.1 billion of purchases of marketable
securities and other investments, net of maturities and sales, $94.2 million of
net cash paid to acquire other businesses, $21.8 million related to capitalized
software development costs and $12.1 million related to purchases of long-lived
assets.

Cash Flows from Financing Activities


In the six months ended June 30, 2022, cash provided by financing activities was
$34.4 million primarily consisting of $41.7 million in proceeds from stock
options exercised by our employees and shares issued under our employee stock
purchase plan, offset by $6.2 million in principal payments on debt and finance
leases.

In the six months ended June 30, 2021, cash provided by financing activities was
$3.0 billion primarily consisting of $1.8 billion in net proceeds from our
public equity offering, $986.1 million in net proceeds from the issuance of our
2029 Notes and 2031 Notes and $55.6 million in proceeds from stock options
exercised by our employees and shares issued under our employee stock purchase
plan. This was offset by $6.7 million in principal payments made on finance
leases and $4.7 million related to the value of equity awards withheld to settle
tax liabilities.


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                   Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America. The preparation of these unaudited condensed consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expenses and related
disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other assumptions that
we believe to be reasonable under the circumstances. Our actual results could
differ from these estimates.

There have been no changes to our critical accounting policies as described in our Annual Report on Form 10-K filed with the SEC on February 22, 2022.

                Recent Accounting Pronouncements Not Yet Adopted

There are no material recent accounting pronouncements not yet adopted.

Available Information


Our filings are available to be viewed and downloaded free of charge through our
investor relations website after we file them with the Securities and Exchange
Commission ("SEC"). Our filings include our Annual Report on Form 10-K, as
amended, Quarterly Reports on Form 10-Q, our Proxy Statement for our annual
meeting of stockholders, Current Reports on Form 8-K and other filings with the
SEC. Our investor relations website is located at http://investors.twilio.com.
The SEC also maintains an Internet website that contains periodic and current
reports, proxy statements and other information about issuers, like us, that
file electronically with the SEC. The address of that website is www.sec.gov.

We webcast our earnings calls and certain events we participate in or host with
members of the investment community on our investor relations website.
Additionally, we provide notifications of news or announcements regarding our
financial performance, including SEC filings, investor events, press and
earnings releases, and blogs as part of our investor relations website. Further
corporate governance information, including our corporate governance guidelines
and code of business conduct and ethics, is also available on our investor
relations website under the heading "Governance." The contents of our websites
are not intended to be incorporated by reference into this Quarterly Report on
Form 10-Q or in any other report or document we file with the SEC, and any
references to our websites are intended to be inactive textual references only.

© Edgar Online, source Glimpses

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