TWILIO INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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 I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K. Our fiscal year ends onDecember 31 . 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 via our simpletouse Application Programming Interfaces ("APIs"). The power, flexibility, and reliability offered by our software building blocks empowers companies of virtually every shape and size to build worldclass engagement into their customer experience. We offer a customer engagement platform with software designed to address specific use cases like account security and contact centers and a set of APIs that handles the higher level communication logic needed for nearly every type of customer engagement. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. We also offer a set of APIs that enables developers to embed voice, messaging, video and email capabilities into their applications and are designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. The Super Network is our software layer that allows our customers' software to communicate with connected devices globally. It interconnects with communications networks and inbox service providers around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of APIs that gives our customers access to more foundational components of our platform, like phone numbers. Our customers' applications are able to reach users via voice, messaging, video and email in nearly every country in the world by utilizing our platform. We support our global business through over 25 cloud data centers across more than seven regions around the world and have developed contractual relationships with network service providers globally. 61 -------------------------------------------------------------------------------- Table of Contents Our business model is primarily focused on reaching and serving the needs of software developers, who we believe are becoming increasingly influential in technology decisions in a wide variety of companies. We call this approach our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed. We established and maintain our leadership position by engaging directly with, and cultivating, our developer community, which has led to the rapid adoption of our platform. We reach developers through community events and conferences, including our SIGNAL customer and developer conference, to demonstrate how every developer can create differentiated applications incorporating communications using our products. Once developers are introduced to our platform, we provide them with a low friction trial experience. By accessing our easytoadopt APIs, extensive selfservice documentation and customer support team, developers build our products into their applications and then test such applications through free trial periods that we provide. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products. Historically, we have acquired the substantial majority of our customers through this selfservice model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account executives or customer success advocates within our sales organization to ensure their satisfaction and expand their usage of our products. We also supplement our selfservice model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach. To help increase awareness of our products in the enterprise, we have expanded our marketing efforts through programs like our Twilio Engage roadshow where we seek to bring business leaders and developers together to discuss the future of customer engagement. We have developed products to support this effort as well, like the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration. Our sales organization targets technical leaders and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developerfocused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel. When potential customers do not have the available developer resources to build their own applications, we refer them to either our technology partners who embed our products in the solutions that they sell to other businesses (such as contact centers and sales force and marketing automation) or our consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications. We generate the substantial majority of our revenue from customers based on their usage of our software products that they have incorporated into their applications. Our Flex contact center platform is generally offered on a per user, per month basis or on a usage basis per agent hour. In addition, our email API is offered on a monthly subscription basis and our Marketing Campaigns product is priced based on the number of email contacts stored on our platform and the number of monthly emails sent to those contacts through our Email API. Also, customers using our Programmable Messaging or Programmable Voice APIs typically purchase one or more telephone numbers from us, for which we charge a monthly flat fee per number. Some customers also choose to purchase various levels of premium customer support for a monthly fee. Customers that register in our selfservice model typically pay upfront via credit card and draw down their balance as they purchase or use our products. Most of our customers draw down their balance in the same month they pay up front or are charged on a monthly subscription basis for our email-related products. As a result, our deferred revenue and customer deposits liability at any particular time is not a meaningful indicator of future revenue. As our customers' usage grows, some of our customers enter into contracts and are invoiced monthly in arrears. Most of these customer contracts have terms of approximately 12 months and typically include some level of minimum revenue commitment. Most customers with minimum revenue commitment contracts generate a significant amount of revenue in excess of their minimum revenue commitment in any period. Historically, the aggregate minimum commitment revenue from customers with whom we have contracts has constituted a minority of our revenue in any period, and we expect this to continue in the future. Our developerfocused products are delivered to customers and users through our Super Network, which uses software to optimize communications on our platform. We interconnect with communications networks and inbox service providers globally to deliver our products, and therefore we have arrangements with network service providers in many regions in the world. Historically, a substantial majority of our cost of revenue has been network service provider fees. We continue to optimize our network service provider coverage and connectivity through continuous improvements in routing and sourcing in order to lower the usage expenses we incur for network service provider fees. As we benefit from our platform optimization efforts, we sometimes pass these savings on to customers in the form of lower usage prices on our products in an effort to drive increased usage and expand the reach and scale of our platform. In the near term, we intend to operate our business to expand the reach and scale of our platform and to grow our revenue, rather than to maximize our gross margins. 62 -------------------------------------------------------------------------------- Table of Contents We have achieved significant growth in recent periods. In the years endedDecember 31, 2020 , 2019 and 2018, our revenue was$1.8 billion ,$1.1 billion and$650.1 million , respectively, and our net loss was$491.0 million ,$307.1 million and$121.9 million , respectively. In the years endedDecember 31, 2020 , 2019 and 2018, our 10 largest Active Customer Accounts generated an aggregate of 14%, 13% and 18% of our total revenue, respectively. Acquisition of Segment.io, Inc. in 2020 InNovember 2020 , we acquired Segment.io, Inc. ("Segment"), the market-leading customer data platform, for a purchase price of$3.0 billion , consisting of 9.5 million shares of our Class A common stock with a total value of$2.5 billion and$413.3 million in cash. Part of the cash consideration was paid to settle the vested equity awards of Segment employees. The estimated transaction value of$3.2 billion , as previously announced, includes certain shares of Class A common stock and assumed equity awards that are subject to future vesting. We assumed all unvested and outstanding equity awards of Segment's continuing employees as converted into our equity awards at the conversion ratio provided in the Agreement and Plan of Reorganization. The total value of Class A shares of our common stock and assumed equity awards that are subject to future vesting was$316.0 million on the acquisition closing date, which will be recorded into our stock-based compensation expense over the period the services are provided. Because the acquisition of Twilio Segment occurred during the year endedDecember 31, 2020 , the information presented in this section with respect to the year endedDecember 31, 2020 includes the contribution of Twilio Segment starting fromNovember 2, 2020 , the date of acquisition. The information with respect to the prior-year comparable periods relates toTwilio on a standalone basis. As a result, comparisons to the prior-year period may not be indicative of future results or future rates of growth. Acquisition ofSendGrid, Inc. in 2019 InFebruary 2019 , we acquiredSendGrid, Inc. ("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of$2.7 billion . We also assumed all of the outstanding stock options and restricted stock units ofSendGrid as converted into our stock options and restricted stock units, respectively,based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended. Public Equity Offerings InFebruary 2021 ,August 2020 andJune 2019 we completed public equity offerings in which we sold 4,312,500 shares, 5,819,838 shares and 8,064,515 shares, respectively, of our Class A common stock at public offering prices of$409.60 per share,$247.00 per share and$124.00 per share, respectively. We received aggregate proceeds of$1.8 billion ,$1.4 billion and$979.0 million , respectively, after deducting underwriting discounts and offering expenses paid and payable by us. 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 other planned events to virtual-only experiences and may determine to alter, postpone or cancel additional customer, employee or industry events in the future. Sincemid-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 all business travel worldwide for our employees for the time being. 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 become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business. In the three months endedDecember 31, 2020 , we experienced a modest rebound in usage levels from customers in the travel and hospitality industry, while the ridesharing industry remained below pre-COVID-19 levels. We also continued to experience increased usage in other areas, including healthcare, education, consumer on-demand, and retail. We acknowledge that 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 63 -------------------------------------------------------------------------------- Table of Contents 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 service for confirmations, notifications, and other use cases. While we are continuing our recruiting efforts, it is possible that the pace of our hiring may slow during the COVID-19 pandemic. See the risk factor titled "The global COVID-19 pandemic may adversely impact our business, results of operations and financial performance" in Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition and results of operations. Key Business Metrics Year Ended December 31, 2020 2019 2018
Number of Active Customer Accounts (as of end date of period) (1)
221,000 179,000 64,286
Total Revenue (in thousands) (1) $ 1,761,776 $ 1,134,468 $ 650,067
Total Revenue Growth Rate (1) 55 % 75 % 63 %
Dollar-Based Net Expansion Rate (2) 137 % 135 % 143 %
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(1) Includes the contributions from our Twilio Segment business, acquiredNovember 2, 2020 , and Twilio SendGrid business, acquiredFebruary 1, 2019 , from the dates of their respective acquisitions. EffectiveDecember 31, 2019 , we round down the number of Active Customer Accounts to the nearest thousand. (2) As previously announced in our Annual Report on Form 10-K filed with theSEC onMarch 2, 2020 , commencing with the three-month period endedMarch 31, 2020 , we calculate our Dollar-Based Net Expansion Rate by comparing total revenue from a cohort of Active Customer Accounts in a period to the same period in the prior year (the "New DBNE Definition"). To facilitate comparison between the periods presented, Dollar-Based Net Expansion Rate as presented in the table above has been calculated as if the New DBNE Definition had been in effect during that period. As a result of the New DBNE Definition, unless specifically identified as being calculated using total revenue, any Dollar-Based Net Expansion Rates disclosed by us in ourSEC filings, press releases and presentations prior to the date of our press release for the three months endedMarch 31, 2020 , will not be directly comparable to our Dollar-Based Net Expansion Rates going forward. Revenue from Twilio Segment will not impact this calculation until the one-year anniversary of the 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 years endedDecember 31, 2020 , 2019 and 2018, 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. EffectiveDecember 31, 2019 , we round down the number of Active Customer Accounts to the nearest thousand. 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, for reporting periods starting with the three months endedDecember 31, 2016 , 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. For historical periods throughDecember 31, 2019 , our Dollar-Based Net Expansion Rate compared the revenue from Active Customer Accounts, other than large Active Customer Accounts that have never entered into 12-month minimum revenue commitment contracts with us, in a quarter to the same quarter in the prior year. For reporting periods starting with the three months endedMarch 31, 2020 , 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- 64 -------------------------------------------------------------------------------- Table of Contents 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. As a result of the change in calculation of Dollar-Based Net Expansion Rate, unless specifically identified as being calculated based on total revenue, any Dollar-Based Net Expansion Rates disclosed by us in ourSEC filings, press releases and presentations prior to the date of our press release for the three months endedMarch 31, 2020 , will not be directly comparable to our Dollar-Based Net Expansion Rates going forward. The table below sets forth our historical Dollar-Based Net Expansion Rates as calculated based on total revenue. Three Months Ended Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 125 % 132 % 141 % 142 % 150 % 147 % 138 % 138 % Three Months Ended Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016 Sep 30, 2016 Jun 30, 2016 123 % 125 % 132 % 128 % 141 % 140 % 148 % Net Loss Carryforwards AtDecember 31, 2020 , we had federal, state and foreign net operating loss carryforwards of approximately$2.7 billion ,$1.8 billion and$27.9 million respectively, and federal and state tax credits of approximately$79.8 million and$57.7 million , respectively. If not utilized, the federal and state loss carryforwards will expire at various dates beginning in 2029 and 2025, respectively, and the federal tax credits will expire at various dates beginning in 2029. The state tax credits can be carried forward indefinitely. At present, we believe that it is more likely than not that the federal and state net operating loss and credit carryforwards will not be realized. Accordingly, a full valuation allowance has been established for these tax attributes, as well as the rest of the federal and state deferred tax assets. Key Components of Statements of Operations Revenue. We derive our revenue primarily from usagebased fees earned from customers using the software products within our Solutions APIs and Channel APIs. These usagebased software products include offerings, such as Programmable Voice, Programmable Messaging and Programmable Video. Some examples of the usagebased fees for which we charge include minutes of call duration activity for our Programmable Voice products, number of text messages sent or received using our Programmable Messaging products and number of authentications for our Account Security products. In the years endedDecember 31, 2020 , 2019 and 2018, we generated 76%, 75% and 84% of our revenue, respectively, from usagebased fees. We also earn monthly flat fees from certain feebased products, such as our Email API, Marketing Campaigns, Flex seats, telephone numbers, short codes and customer support. 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. As customers grow their usage of our products, they automatically receive tiered usage discounts. 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 defineU.S. revenue as revenue from customers with IP addresses or mailing addresses at the time of registration inthe United States , and we define international revenue as revenue from customers with IP addresses or mailing addresses at the time of registration outside ofthe United States . 65 -------------------------------------------------------------------------------- Table of Contents 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 ofU.S. revenue compared to international revenue, changes in foreign exchange rates and 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. 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 inthe United States and internationally based on the manner we sell and deliver our products. Prior toMarch 2017 , we did not collect sales or other taxes from our customers and recorded such taxes as general and administrative expenses. EffectiveMarch 2017 , we began collecting most of these taxes from customers in certain jurisdictions and since then we have expanded the number of jurisdictions where we currently collect. We expect that these expenses will gradually decline in future years as we continue to expand the jurisdictions where we collect these taxes from our customers. 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 net operating losses in jurisdictions with a valuation allowance or a zero tax rate, and the income tax benefit recorded in connection with the Segment andSendGrid acquisitions. 66 -------------------------------------------------------------------------------- Table of Contents OnJune 7, 2019 , a three-judge panel from theU.S. Court of Appeals for the Ninth Circuit overturned theU.S. Tax Court's decision inAltera Corp. v. Commissioner and upheld the portion of theTreasury regulations under Section 482 of the Internal Revenue Code that requires related parties in a cost-sharing arrangement to share expenses related to share-based compensation. As a result of this decision, our gross unrecognized tax benefits increased to reflect the impact of including share-based compensation in cost-sharing arrangements. OnJuly 22, 2019 , Altera filed a petition for a rehearing before the full Ninth Circuit and the request was denied onNovember 12, 2019 . OnFebruary 10, 2020 , Altera filed a petition to appeal the decision to theSupreme Court , and onJune 22, 2020 , theSupreme Court denied the petition. We will continue to monitor future developments and their potential effects on our consolidated financial statements. Results of Operations 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 Twilio Segment in our results of operations prospectively afterNovember 2, 2020 , and Twilio SendGrid in our results of operations prospectively afterFebruary 1, 2019 , the respective closing dates of each acquisition. The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future.
Year Ended
2020 2019 2018
Consolidated Statements of Operations Data: (In thousands, except share and per share amounts)
Revenue $ 1,761,776 $ 1,134,468 $ 650,067
Cost of revenue (1) (2) 846,115 525,551 300,841
Gross profit 915,661 608,917 349,226
Operating expenses:
Research and development (1) (2) 530,548 391,355 171,358
Sales and marketing (1) (2) 567,407 369,079 175,555
General and administrative (1) (2) 310,607 218,268 117,548
Total operating expenses 1,408,562 978,702 464,461
Loss from operations (492,901) (369,785) (115,235)
Other (expenses) income, net (11,525) 7,569 (5,923)
Loss before benefit (provision) for income
taxes (504,426) (362,216) (121,158)
Benefit (provision) for income taxes 13,447 55,153 (791)
Net loss attributable to common
stockholders (490,979) (307,063) (121,949)
Net loss per share attributed to common
stockholders, basic and diluted $ (3.35) $ (2.36) $ (1.26)
Weighted-average shares used in computing net
loss per share attributable to common
stockholders, basic and diluted 146,708,663 130,083,046 97,130,339
____________________________________
(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
2020 2019 2018
(In thousands)
Cost of revenue $ 8,857 $ 7,123 $ 1,126
Research and development 173,303 126,012 42,277
Sales and marketing 103,450 60,886 23,616
General and administrative 76,301 70,297 26,254
Total $ 361,911 $ 264,318 $ 93,273 ____________________________________
(2) Includes amortization of acquired intangibles as follows:
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Year Ended December 31,
2020 2019 2018
(In thousands)
Cost of revenue $ 59,501 $ 45,267 $ 5,656
Research and development - - 22
Sales and marketing 38,915 27,540 1,117
General and administrative 78 - 375
Total $ 98,494 $ 72,807 $ 7,170
Year Ended December 31,
2020 2019 2018
Consolidated Statements of Operations, as a
percentage of revenue: **
Revenue 100 % 100 % 100 %
Cost of revenue 48 46 46
Gross profit 52 54 54
Operating expenses:
Research and development 30 34 26
Sales and marketing 32 33 27
General and administrative 18 19 18
Total operating expenses 80 86 71
Loss from operations (28) (33) (18)
Other (expenses) income, net (1) 1 (1)
Loss before benefit (provision) for income
taxes (29) (32) (19)
Benefit (provision) for income taxes * * *
Net loss attributable to common
stockholders (28 %) (27 %) (19) %
____________________________________
* Less than 0.5% of revenue.
** Columns may not add up to 100% due to rounding.
Comparison of the Fiscal Years Ended December 31, 2020 , 2019 and 2018
Revenue
Year Ended December 31,
2019 to 2020 2018 to 2019
2020 2019 2018 Change Change
(Dollars in thousands)
Total Revenue$ 1,761,776 $ 1,134,468 $ 650,067 $ 627,308 55 %$ 484,401 75 % 2020 compared to 2019 In 2020, total revenue increased by$627.3 million , or 55%, 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 products and Programmable Voice products, the adoption of additional products by our existing customers, and revenue contribution from our acquisition of our Twilio Segment business for the period fromNovember 2, 2020 throughDecember 31, 2020 . This increase was partially offset by pricing decreases that we have implemented over time in the form of lower usage prices, in an effort to increase the reach and scale of our platform. The changes in usage and price in 2020, were reflected in our DollarBased Net Expansion Rate of 137%. The increase in usage was also attributable to a 23% increase in the number of Active Customer Accounts, from 179,000 as ofDecember 31, 2019 , to over 221,000 as ofDecember 31, 2020 , which was also positively impacted by the customer accounts added through our acquisition of the Twilio Segment business. 68 -------------------------------------------------------------------------------- Table of Contents In 2020,U.S. revenue and international revenue represented$1.3 billion or 73%, and$479.6 million , or 27%, respectively, of total revenue. In 2019,U.S. revenue and international revenue represented$808.9 million , or 71%, and$325.6 million , or 29%, respectively, of total revenue. The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts; a 23% increase in the number of international Active Customer Accounts driven in part by our focus on expanding our sales to customers outside ofthe United States ; and revenue contribution from our acquisition of the Twilio Segment business. 2019 compared to 2018 In 2019, total revenue increased by$484.4 million , or 75%, 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 products and Programmable Voice products, the adoption of additional products by our existing customers, and revenue contribution from our acquisition of the Twilio SendGrid business for the period fromFebruary 1, 2019 throughDecember 31, 2019 . This increase was partially offset by pricing decreases that we have implemented over time in the form of lower usage prices, in an effort to increase the reach and scale of our platform. The changes in usage and price in 2019, were reflected in our DollarBased Net Expansion Rate of 135%. The increase in usage was also attributable to a 178% increase in the number of Active Customer Accounts, from 64,286 as ofDecember 31, 2018 , to over 179,000 as ofDecember 31, 2019 , which was also positively impacted by the customer accounts added through our acquisition of the Twilio SendGrid business. In 2019,U.S. revenue and international revenue represented$808.9 million or 71%, and$325.6 million , or 29%, respectively, of total revenue. In 2018,U.S. revenue and international revenue represented$484.8 million , or 75%, and$165.3 million , or 25%, respectively, of total revenue. The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts; a 167% increase in the number of international Active Customer Accounts driven in part by our focus on expanding our sales to customers outside ofthe United States ; and revenue contribution from our acquisition of the Twilio SendGrid business. Cost of Revenue and Gross Margin Year Ended December 31, 2019 to 2020 2018 to 2019 2020 2019 2018 Change Change (Dollars in thousands) Cost of revenue$ 846,115 $ 525,551 $ 300,841 $ 320,564 61 %$ 224,710 75 % Gross margin 52 % 54 % 54 % 2020 compared to 2019 In 2020, cost of revenue increased by$320.6 million , or 61%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a$246.2 million increase in network service providers' costs and a$32.3 million increase in cloud infrastructure fees, both to support the growth in usage of our products. The increase was also due to a$14.2 million increase in the amortization expense of intangible assets that we acquired through business combinations. In 2020, gross margin percentage declined compared to 2019. This decline was primarily driven by a re-acceleration in growth of our messaging business, an increase in amortization expense related to acquired intangible assets, the impact of an increasing mix of international product usage and an increase in network service provider fees in certain geographies. These declines were partially offset by the impact of the acquisition of the Twilio Segment business and certain operational improvements. 2019 compared to 2018 In 2019, cost of revenue increased by$224.7 million , or 75%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a$133.1 million increase in network service providers' costs and a$18.6 million increase in cloud infrastructure fees, both to support the growth in usage of our products. The increase was also due to a$39.6 million increase in depreciation and amortization expense primarily related to the acquired intangible assets and our internally developed software. 69 -------------------------------------------------------------------------------- Table of Contents In 2019, gross margin percentage remained stable compared to 2018. Changes in product mix, which includes the impact of the acquisition of the Twilio SendGrid business, and some operational improvements were largely offset by an increase in amortization expense related to acquired intangible assets, the impact of an increasing mix of international product usage, and an increase in network service provider fees in certain geographies. Operating Expenses Year Ended December 31, 2019 to 2020 2018 to 2019 2020 2019 2018 Change Change (Dollars in thousands)
Research and development$ 530,548 $ 391,355 $ 171,358 $ 139,193 36 %$ 219,997 128 % Sales and marketing 567,407 369,079 175,555 198,328 54 % 193,524 110 % General and administrative 310,607 218,268 117,548 92,339 42 % 100,720 86 % Total operating expenses$ 1,408,562 $ 978,702 $ 464,461 $ 429,860 44 %$ 514,241 111 % 2020 compared to 2019 In 2020, research and development expenses increased by$139.2 million , or 36%, compared to the same period last year. The increase was primarily attributable to a$128.3 million increase in personnel costs, net of a$17.8 million increase in capitalized software development costs, largely as a result of a 63% average increase in our research and development headcount, as we continued to focus on enhancing our existing products, introducing new products as well as enhancing product management and other technical functions. This increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio Segment business onNovember 2, 2020 . The increase was also due to a$13.3 million increase in our cloud infrastructure fees related to staging and development of our products. In addition, 2020 included research and development expenses from our acquired Twilio Segment business for the period fromNovember 2, 2020 throughDecember 31, 2020 . In 2020, sales and marketing expenses increased by$198.3 million , or 54%, compared to the same period last year. The increase was primarily attributable to a$137.4 million increase in personnel costs, largely as a result of a 88% average increase in sales and marketing headcount, as we continued to expand our sales efforts inthe United States and abroad. The increase also reflected the impact of growth in the headcount as a result of the acquisition of ourTwilio Segment business onNovember 2, 2020 . The increase was also due to a$11.4 million increase related to the amortization of acquired intangible assets, and a$20.1 million increase in advertising expenses. In addition, 2020 included sales and marketing expenses from our acquired Twilio Segment business for the period fromNovember 2, 2020 throughDecember 31, 2020 . In 2020, general and administrative expenses increased by$92.3 million , or 42%, compared to the same period last year. The increase was primarily attributable to a$25.4 million increase in personnel costs, largely as a result of a 66% average increase in general and administrative headcount, to support the growth of our business domestically and internationally. The increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio Segment business onNovember 2, 2020 . The increase was also due to a$19.0 million increase in charitable contributions due to several donations made by Twilio.org, a$10.7 million increase in our allowance for estimated credit losses partially impacted by the COVID-19 environment, and a$5.8 million increase in professional expenses related to our acquisitions of other business. Additionally, certain of our taxes increased by$7.9 million primarily in foreign jurisdictions and our professional services fees increased by$6.6 million . In addition, 2020 included general and administrative expenses from our acquired Twilio Segment business for the period fromNovember 2, 2020 throughDecember 31, 2020 . 2019 compared to 2018 In 2019, research and development expenses increased by$220.0 million , or 128%, compared to the same period last year. The increase was primarily attributable to a$183.3 million increase in personnel costs, net of a$5.0 million increase in capitalized software development costs, largely as a result of a 71% average increase in our research and development headcount, as we continued to focus on enhancing our existing products, introducing new products as well as enhancing product management and other technical functions. This increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio SendGrid business. The increase was also due to a$16.5 million increase in facilities and depreciation expenses to accommodate the growth in our headcount. In addition, 2019 included research and development expenses from our acquired Twilio SendGrid business for the period fromFebruary 1, 2019 throughDecember 31, 2019 . 70 -------------------------------------------------------------------------------- Table of Contents In 2019, sales and marketing expenses increased by$193.5 million , or 110%, compared to the same period last year. The increase was primarily attributable to a$117.3 million increase in personnel costs, largely as a result of a 93% average increase in sales and marketing headcount, as we continued to expand our sales efforts inthe United States and internationally. The increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio SendGrid business. The increase was also due to a$26.4 million increase related to the amortization of acquired intangible assets, a$16.4 million increase in advertising expenses and an$11.4 million increase in facilities and related expenses. In addition, 2019 included sales and marketing expenses from our acquired Twilio SendGrid business for the period fromFebruary 1, 2019 throughDecember 31, 2019 . In 2019, general and administrative expenses increased by$100.7 million , or 86%, compared to the same period last year. The increase was primarily attributable to a$74.3 million increase in personnel costs, largely as a result of a 64% average increase in general and administrative headcount, to support the growth of our business domestically and internationally. The increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio SendGrid business. The increase was also due to a$11.7 million increase in professional expenses related to our acquisitions of other business and a$6.5 million increase in facilities and depreciation expenses. In addition, 2019 included general and administrative expenses from our acquired Twilio SendGrid business for the period fromFebruary 1, 2019 throughDecember 31, 2019 . 71
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Quarterly Results of Operations
The following tables set forth our unaudited quarterly statements of operations
data for each of the eight quarters within the two years ended December 31,
2020 , as well as the percentage that each line item represents of our revenue
for each quarter presented. The information for each quarter has been prepared
on a basis consistent with our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K, and reflect, in the
opinion of management, all adjustments of a normal, recurring nature that are
necessary for a fair presentation of the financial information contained in
those statements. For the three months ended December 31, 2020 , our revenue also
includes the contribution from our Twilio Segment business since the date of our
acquisition of this business on November 2, 2020 . For the three months ended
March 31, 2019 and all subsequent periods thereafter, our revenue also includes
the contribution from our Twilio SendGrid business since the date of our
acquisition of this business on February 1, 2019 . Our historical results are not
necessarily indicative of the results that may be expected in the future. The
following quarterly financial data should be read in conjunction with our
audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
Consolidated Statements of Operations:
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2019 2019 2019 2019 2020 2020 2020 2020
(Unaudited, in thousands)
Revenue $ 233,139 $ 275,039 $ 295,066 $ 331,224 $ 364,868 $ 400,849 $ 447,969 $ 548,090
Cost of revenue (1) (2) 107,089 125,024 136,904 156,534 171,333 191,718 217,095 265,969
Gross profit 126,050 150,015 158,162 174,690 193,535 209,131 230,874 282,121
Operating expenses:
Research and development
(1) (2) 77,855 98,783 104,481 110,236 114,339 120,701 136,652 158,856
Sales and marketing (1) (2) 71,607 90,421 100,657 106,394 116,722 129,823 140,875 179,987
General and administrative
(1) (2) 64,176 54,543 47,690 51,859 55,170 61,251 65,617 128,569
Total operating expenses 213,638 243,747 252,828 268,489 286,231 311,775 343,144 467,412
Loss from operations (87,588) (93,732) (94,666) (93,799) (92,696) (102,644) (112,270) (185,291)
Other (expenses) income, net (636) (880) 4,377 4,708 (1,118) 3,015 (3,996) (9,426)
Loss before benefit
(provision) for income taxes (88,224) (94,612) (90,289) (89,091) (93,814) (99,629) (116,266) (194,717)
Benefit (provision) for
income taxes 51,721 2,033 2,555 (1,156) (977) (294) (648) 15,366
Net loss attributable to
common stockholders $ (36,503) $ (92,579) $ (87,734) $ (90,247) $ (94,791) $ (99,923) $ (116,914) $ (179,351) ____________________________________
(1) Includes stock-based compensation expense as follows:
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2019 2019 2019 2019 2020 2020 2020 2020
(Unaudited, in thousands)Cost of revenue$ 1,809 $ 1,623 $ 1,674 $ 2,017 $ 1,837 $ 2,143 $ 2,237 $ 2,640 Research and development 25,339 33,701 34,348 32,624 33,209 39,841 46,294 53,959 Sales and marketing 11,749 14,564 16,143 18,430 19,943 23,086 26,573 33,848 General and administrative 19,427 20,852 16,103 13,915 14,036 14,317 14,306 33,642 Total$ 58,324 $ 70,740 $ 68,268 $ 66,986 $ 69,025 $ 79,387 $ 89,410 $ 124,089
____________________________________
(2) Includes amortization of acquired intangibles as follows:
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2019 2019 2019 2019 2020 2020 2020 2020
(Unaudited, in thousands)Cost of revenue$ 8,460 $ 11,857 $ 12,549 $ 12,401 $ 12,381 $ 12,695 $ 12,540 $ 21,885 Sales and marketing 5,003 7,329 7,322 7,886 7,864 7,889 7,876 15,286 General and administrative 153 62 121 (336) 47 11 10 10 Total$ 13,616 $ 19,248 $ 19,992 $ 19,951 $ 20,292 $ 20,595 $ 20,426 $ 37,181 72
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Consolidated Statement of Operations, as a percentage of revenue **
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2019 2019 2019 2019 2020 2020 2020 2020
(Unaudited)
Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue 46 45 46 47 47 48 48 49
Gross profit 54 55 54 53 53 52 52 51
Operating expenses:
Research and development 33 36 35 33 31 30 31 29
Sales and marketing 31 33 34 32 32 32 31 33
General and administrative 28 20 16 16 15 15 15 23
Total operating expenses 92 89 86 81 78 78 77 85
Loss from operations (38) (34) (32) (28) (25) (26) (25) (34)
Other (expenses) income, net - - 1 1 * 1 (1) (2)
Loss before benefit
(provision) for income taxes (38) (34) (31) (27) (26) (25)
(26) (36)
Benefit (provision) for
income taxes 22 1 1 * * * * *
Net loss attributable to
common stockholders (16) % (34) % (30) % (27) % (26) % (25) % (26) % (33) %
____________________________________
* Less than 0.5% of revenue.
** Columns may not add up to 100% due to rounding.
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
2019 2019 2019 2019 2020 2020 2020 2020
(Unaudited, dollars in thousands)Number of Active Customer Accounts (as of end date of period) (1) (2) (3) 154,797 161,869 172,092 179,000 190,000 200,000 208,000 221,000 Total Revenue (in thousands) (1) (2)$ 233,139 $ 275,039 $ 295,066 $ 331,224 $ 364,868 $ 400,849 $ 447,969 $ 548,090 Total Revenue Growth Rate (1) (2) 81 % 86 % 75 % 62 % 57 % 46 % 52 % 65 % Dollar-Based Net Expansion Rate (4) 142 % 141 % 132 % 125 % 143 % 132 % 137 % 139 %
____________________________________
(1) For the three months endedDecember 31, 2020 , Active Customer Accounts, Total Revenue and Total Revenue Growth Rate include the contribution from the Twilio Segment acquisition, which closed onNovember 2, 2020 . EffectiveDecember 31, 2019 , we round down the number of Active Customer Accounts to the nearest thousand. (2) For the three months endedMarch 31, 2019 and all subsequent quarterly periods thereafter, Active Customer Accounts, Total Revenue and Total Revenue Growth Rate include the contribution from the Twilio SendGrid acquisition, which closed onFebruary 1, 2019 . (3) See the section titled "Key Business Metrics-Number of Active Customer Accounts." (4) See the section titled "Key Business Metrics-Dollar-Based Net Expansion Rate." Quarterly Trends in Revenue and Gross Margin Our quarterly revenue increased in each period presented primarily due to an increase in the usage of our products, the adoption of additional products by our existing customers, as evidenced by our Dollar-Based Net Expansion Rates and an increase in our new customers. For the three months endedDecember 31, 2020 , our revenue also includes the contribution from our Twilio Segment business since the date of our acquisition of this business onNovember 2, 2020 . For the three months endedMarch 31, 2019 and all subsequent quarterly periods thereafter, our revenue also includes the contribution from our Twilio SendGrid business since the date of our acquisition of this business onFebruary 1, 2019 . In the first three quarters of 2020, the gross margin stayed relatively consistent due to continued platform optimization, offset by continued international product usage. In the fourth quarter of 2020, international usage continued to increase at a higher rate than domestic usage, causing a slight decline in the gross margin percentage. 73 -------------------------------------------------------------------------------- Table of Contents In the first three quarters of 2019 the gross margin stayed relatively consistent due to continued platform optimization, offset by continued international product usage. In the fourth quarter of 2019, international usage continued to increase at a higher rate than domestic usage, causing a slight decline in gross margin percentage. Quarterly Trends in Operating Expenses Our operating expenses have generally increased sequentially on a dollar basis as a result of our growth, primarily related to our acquisitions of our Segment andSendGrid businesses, increased personnel costs to support our expanded operations, our continued investment in our products, our operations as a public company and our litigation costs. In the fourth quarter of 2020, our general and administrative expenses included$20.7 million of costs related to the acquisition of our Twilio Segment business onNovember 2, 2020 . The fourth quarter general and administrative expense also included$31.7 million of stock-based compensation expense related to vesting of equity awards of Twilio Segment that we assumed, and vesting of certain shares of our Class A common stock that we issued subject to service conditions on the acquisition closing date. In the first and second quarters of 2019, our general and administrative expenses included$20.7 million and$26.0 million , respectively, of additional stock-based compensation expense related to vesting of equity awards ofTwilio SendGrid that we assumed on the acquisition closing date. The first quarter general and administrative expenses also included$12.4 million of costs related to the acquisition ofSendGrid onFebruary 1, 2019 . In the third quarter of 2019, our sales and marketing expenses included$9.4 million of costs related to our SIGNAL customer and developer conference, which occurred in the third quarter of 2019. Liquidity and Capital Resources To date, our principal sources of liquidity have been (i) the net proceeds of$155.5 million ,$64.4 million ,$979.0 million ,$1.4 billion , and$1.8 billion , net of underwriting discounts and offering expenses paid by us, from our initial public offering inJune 2016 and our subsequent public offerings inOctober 2016 ,June 2019 ,August 2020 , andFebruary 2021 , respectively; (ii) the net proceeds we received through private sales of equity securities; (iii) the net proceeds of approximately$537.0 million , after deducting purchaser discounts and debt issuance costs paid by us, from issuance of the 0.25% convertible senior notes due 2023 (the "Notes"), as described in Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K; and (iv) the payments received from customers using our products. We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I, Item 1A, "Risk Factors." We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected. Additionally, cash from operations could also be affected by various risks and uncertainties in connection with the COVID-19 pandemic, including timing and ability to collect payments from our customers and other risks detailed in Part I, Item 1A, "Risk Factors." Cash Flows The following table summarizes our cash flows: Year Ended December 31, 2020 2019 2018 (In thousands) Cash provided by operating activities$ 32,654 $ 14,048 $ 7,983 Cash used in investing activities (845,855) (1,285,792) (139,419) Cash provided by financing activities 1,493,311 1,020,145 515,819 Effect of exchange rate changes on cash, cash equivalents and restricted cash 40 - 163 Net increase (decrease) in cash, cash equivalents and restricted cash$ 680,150 $ (251,599) $ 384,546 74
-------------------------------------------------------------------------------- Table of Contents Cash Flows from Operating Activities In 2020, cash provided by operating activities consisted primarily of our net loss of$491.0 million adjusted for non-cash items, including$360.9 million of stock-based compensation expense,$16.5 million of tax benefit related to release of valuation allowance in connection with our acquisitions of other businesses,$149.7 million of depreciation and amortization expense,$23.8 million amortization of the debt discount and issuance costs related to our Notes,$38.4 million of non-cash reduction to our operating right-of-use asset,$13.3 million amortization of deferred commissions, a$13.2 million increase in our allowance for credit losses, and$97.4 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased$92.9 million primarily due to the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses. Accounts payable and other current liabilities increased$98.4 million primarily due to increases in transaction volumes. Operating lease liability decreased$33.9 million due to payments made against our operating lease obligations. Other long-term assets increased$81.9 million primarily due to an increase in the sales commissions balances related to the growth of our business. In 2019, cash provided by operating activities consisted primarily of our net loss of$307.1 million adjusted for non-cash items, including$264.3 million of stock-based compensation expense,$55.7 million of tax benefit related to release of valuation allowance in connection with our acquisitions of other businesses,$110.4 million of depreciation and amortization expense,$23.7 million amortization of the debt discount and issuance costs related to our Notes,$23.2 million of non-cash reduction to our operating right-of-use asset and$48.0 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased$71.7 million primarily due to the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses. Accounts payable and other current liabilities increased$63.4 million primarily due to increases in transaction volumes. Operating lease liability decreased$21.1 million due to payments made against our operating lease obligations. Other long-term assets increased$18.0 million primarily due to an increase in the deferred sales commissions balances related to the growth of our business. In 2018, cash provided by operating activities consisted primarily of our net loss of$121.9 million adjusted for non-cash items, including$93.3 million of stock-based compensation expense,$26.1 million of depreciation and amortization expense,$14.1 million amortization of the debt discount and issuance costs related to our Notes and$14.8 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased$67.0 million , which resulted primarily from the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses. Accounts payable and other current liabilities increased$52.1 million and deferred revenue and customer deposits increased$6.0 million primarily due to increases in transaction volumes. Cash Flows from Investing Activities In 2020, cash used in investing activities was$845.9 million primarily consisting of$453.1 million of purchases of marketable securities and other investments, net of maturities and sales,$333.6 million of net cash paid to acquire other businesses as described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K,$33.3 million related to capitalized software development costs and$25.8 million related to purchases of long-lived assets. In 2019, cash used in investing activities was$1.3 billion , primarily consisting of$1.3 billion of purchases of marketable securities and other investments, net of maturities and sales,$122.7 million of net cash paid to acquire other businesses,$21.9 million related to capitalized software development costs and$45.4 million related to purchases of long-lived assets. In 2018, cash used in investing activities was$139.4 million , primarily consisting of$84.2 million of purchases of marketable securities, net of maturities,$30.6 million of net cash paid to acquire other businesses and$19.5 million related to capitalized software development costs. Cash Flows from Financing Activities In 2020, cash provided by financing activities was$1.5 billion primarily consisting of$1.4 billion in net proceeds from our public equity offering, as described in Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and$104.8 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan. 75 -------------------------------------------------------------------------------- Table of Contents In 2019, cash provided by financing activities was$1.0 billion primarily consisting of$979.1 million in net proceeds from our public equity offering and$57.5 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan. In 2018, cash provided by financing activities was$515.8 million , primarily consisting of$537.1 million in net proceeds from our Notes, net of purchaser discounts and issuance costs paid in the period, and$40.0 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan. This was partially offset by a$58.5 million payment for capped call transactions. Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any
holdings in variable interest entities.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations as of December 31,
2020 :
Less Than One One to Three Three to Five Five Years or
Year Years Years More Total Payments
(In thousands)
Operating leases (1) $ 60,220 $ 109,281 $ 76,664 $ 75,410 $ 321,575
Finance leases (2) 9,866 14,429 3,920 518 28,733
Convertible senior notes (3) - 343,702 - - 343,702
Noncancelable purchase
obligations (4) 81,988 57,049 - - 139,037
Total payments $ 152,074 $ 524,461 $ 80,584 $ 75,928 $ 833,047 ____________________________________
(1) Operating leases represent total future minimum rent payments under
noncancellable operating lease agreements.
(2) Finance leases represent total future minimum payments under a
noncancellable financing lease agreements.
(3) See Note 9 to the consolidated financial statements included elsewhere in
this Annual Report on Form 10-K for a discussion of our convertible senior
notes.
(4) Noncancellable purchase obligations represent total future minimum payments
under contracts with our cloud infrastructure provider, network service
providers and other vendors. Purchase obligations exclude agreements that are
cancellable without penalty. Unrecognized tax benefits are not included in the
table above because any amounts expected to be settled in cash are not material.
Segment InformationWe have one business activity and operate in one reportable segment.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America . The preparation
of these 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.
We believe that the accounting policies, assumptions and estimates associated
with revenue recognition and business combinations have the greatest potential
impact on our consolidated financial statements. Therefore, we consider these to
be our critical accounting policies and estimates.
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Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services
to customers in an amount that reflects the consideration we expect to receive
in exchange for those products or services. We enter into contracts that can
include various combinations of products and services, which are generally
capable of being distinct and accounted for as separate performance obligations.
Revenue is recognized net of allowances for credits and any taxes collected from
customers, which are subsequently remitted to governmental authorities.
Our revenue is primarily derived from usage-based fees earned from customers
accessing our enterprise cloud computing services. Platform access is considered
a monthly series comprising one performance obligation and usage-based fees are
recognized as revenue in the period in which the usage occurs.
Subscription-based fees are derived from certain non-usage-based contracts, such
as with the sales of short codes, customer support, and fees charged to access
the cloud-based platform of our recently acquired Twilio Segment business that
is further described in Note 6 to our consolidated financial statements included
elsewhere in this Annual Report of Form 10-K. Non -usage-based contracts revenue
is recognized on a ratable basis over the contractual term which is generally
one year or less for our legacy products and one to three years for the
contracts acquired with Segment.
Our arrangements do not contain general rights of return. However, credits may
be issued on a case-by-case basis. Credits are accounted for as variable
consideration, are estimated based on historical trends and are recorded against
revenue. The contracts do not provide customers with the right to take
possession of the software supporting the applications. Amounts that have been
invoiced are recorded in accounts receivable and in revenue or deferred revenue
depending on whether the revenue recognition criteria have been met.
Business Combinations
Accounting for business combinations requires us to make significant estimates
and assumptions, especially at the acquisition date with respect to tangible and
intangible assets acquired and liabilities assumed. We use our best estimates
and assumptions to accurately assign fair value to the tangible and intangible
assets acquired and liabilities assumed at the acquisition date as well as the
useful lives of those acquired intangible assets. Examples of critical estimates
in valuing certain of the intangible assets and goodwill we have acquired
include but are not limited to future expected cash flows from acquired
developed technologies; existing customer relationships; uncertain tax positions
and tax related valuation allowances assumed; and discount rates. Unanticipated
events and circumstances may occur that may affect the accuracy or validity of
such assumptions, estimates or actual results.
Recent Accounting Pronouncements Not Yet Adopted
See Note 2(ac) to the consolidated financial statements included elsewhere in
this Annual Report on Form 10-K for a discussion of recent accounting
pronouncements not yet adopted.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks in the ordinary course of our business,
including sensitivities as follows:
Interest Rate Risk
We had cash and cash equivalents of $933.9 million and marketable securities of
$2.1 billion as of December 31, 2020 . Cash and cash equivalents consist of bank
deposits and money market funds. Marketable securities consist primarily of U.S.
treasury securities and high credit quality corporate debt securities. The cash
and cash equivalents and marketable securities are held for working capital
purposes. Such interestearning instruments carry a degree of interest rate
risk. To date, fluctuations in interest income have not been significant. The
primary objective of our investment activities is to preserve principal while
maximizing income without significantly increasing risk. We do not enter into
investments for trading or speculative purposes and have not used any derivative
financial instruments to manage our interest rate risk exposure. Due to the
shortterm nature of our investments, we have not been exposed to, nor do we
anticipate being exposed to, material risks due to changes in interest rates. A
hypothetical 10% change in interest rates during any of the periods presented
would not have had a material impact on our consolidated financial statements.
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In May 2018 , we issued $550.0 million aggregate principal amount of Notes, of
which $206.3 million was redeemed as of December 31, 2020 . The fair market value
of the Notes is affected by our stock price. The fair value of the Notes will
generally increase as our common stock price increases and will generally
decrease as our common stock price declines in value. In addition, the fair
market value of the Notes is exposed to interest rate risk. Generally, the fair
market value of our fixed interest rate Notes will increase as interest rates
fall and decrease as interest rates rise. Additionally, on our balance sheet we
carry the Notes at face value less unamortized discount and debt issuance cost,
and we present the fair value for required disclosure purposes only.
Currency Exchange Risks
The functional currency of most of our foreign subsidiaries is the U.S. dollar.
The local currencies of our foreign subsidiaries are the Australian dollar, the
Bermuda dollar, the Brazilian real, the British pound, the Canadian dollar, the
Columbian peso, the Czech Republic koruna, the Euro, the Hong Kong dollar, the
Indian rupee, the Japanese yen, the Mexican Peso, the Serbian Dollar, the
Singapore dollar and the Swedish krona.
Our subsidiaries remeasure monetary assets and liabilities at period-end
exchange rates, while non-monetary items are remeasured at historical rates.
Revenue and expense accounts are remeasured at the average exchange rate in
effect during the year. If there is a change in foreign currency exchange rates,
the conversion of our foreign subsidiaries' financial statements into U.S.
dollars would result in a realized gain or loss which is recorded in our
consolidated statements of operations. We do not currently engage in any hedging
activity to reduce our potential exposure to currency fluctuations, although we
may choose to do so in the future. A hypothetical 10% change in foreign exchange
rates during any of the periods presented would not have had a material impact
on our consolidated financial statements.
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