Twilio Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Twilio provides a cloud-based customer engagement platform, with revenue primarily tied to customer usage of communications products. Financial amounts below are in U.S. dollars.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $983.0m | $740.2m | $2,801.7m | $1,999.1m |
| Revenue growth | 33% | 65% | 40% | Not stated |
| Gross margin | 47% | 49% | 48% | 50% |
| Operating loss | $457.0m | $232.3m | $986.7m | $632.0m |
| Net loss | $482.3m | $224.1m | $1,026.7m | $658.5m |
| Loss per share, diluted | $2.63 | $1.26 | $5.63 | $3.82 |
Q3 non-GAAP operating loss was $35.1m, versus non-GAAP operating income of $8.2m a year earlier; non-GAAP operating margin was negative 4%, versus positive 1%. These non-GAAP measures exclude specified items, including stock-based compensation, acquired-intangible amortization, restructuring and impairment charges.
- Cash flow: Nine-month operating cash used was $195.9m, compared with $19.9m in 2021. Investing activities used $682.2m; financing provided $33.3m. Cash, cash equivalents and restricted cash fell $844.7m to $637.2m.
- Liquidity: At September 30, cash and cash equivalents were $632.8m and short-term marketable securities were $3,575.8m. Together these totaled approximately $4.21bn, down from approximately $5.36bn at December 31, 2021.
- Debt: Long-term debt, net, was $987.0m, representing $1.0bn principal of 2029 and 2031 notes, with fixed coupons of 3.625% and 3.875%. Twilio reported compliance with financial covenants.
- Other metrics: Active customer accounts were approximately 280,000, up 12% year over year. Q3 dollar-based net expansion rate was 122%, down from 131%. International revenue was 34% of Q3 revenue, versus 33% a year earlier. The 10 largest active customer accounts generated 13% of Q3 revenue, versus 11%.
Material changes and management commentary
- Revenue increased 33% in Q3, supported by greater customer usage, adoption of additional products, and acquired businesses. Management also cited growth in Programmable Messaging and Voice, Email, Segment and Flex.
- Gross margin declined as lower-margin international messaging grew, carrier network costs increased (including A2P fees), and acquired-intangible amortization rose. Q3 cost of revenue increased 39%, faster than revenue growth of 33%.
- Operating expenses rose 54% in Q3. Twilio recorded $72.5m of restructuring costs and $97.7m of long-lived asset impairment, neither present in the comparable 2021 quarter.
- The restructuring plan eliminates approximately 11% of the workforce and is intended to reduce costs, improve margins and shift selling capacity toward software. The company estimated total costs of $70m–$90m, with $55m–$70m expected to be cash costs; it anticipated a further $10m–$15m of charges as the plan was completed.
- Remote-first operations led to permanent closure of several offices and the Q3 impairment charge. Management expected an additional $5m–$10m impairment charge in Q1 2023.
- Management said it remained focused on accelerating software sales and delivering non-GAAP operating profit starting in 2023. This is a stated priority, not quantified financial guidance in the provided filing text. Management reported resilient demand overall, but noted greater macroeconomic pressure, delayed purchasing decisions and longer sales cycles, including in cryptocurrency, consumer on-demand, retail, e-commerce and social media markets.
- Twilio acquired a 44.55% interest in Syniverse for $750m cash. It recorded $13.4m of its share of losses and basis amortization. A wholesale agreement with Syniverse generated $32.1m of Q3 transactions recorded in cost of revenue.
- The new employee sabbatical program produced a $29.2m liability at quarter-end; management did not expect a significant ongoing effect on results.
Risks, contingencies and unusual items
- Macroeconomic uncertainty may reduce usage and customer spending, lengthen sales cycles and pressure collections. Usage-based revenue and variable network-provider fees can make results difficult to forecast.
- In June and August 2022, social-engineering attacks targeted employees. The August incident involved access to some employee credentials and data for approximately 209 customers; Twilio reported customer notification and remedial security steps.
- San Francisco assessed $38.8m of telephone-user and access-line taxes, interest and penalties for 2009–2018. Twilio paid under protest and is seeking a refund; trial was scheduled for March 6, 2023. The company stated that an adverse result could produce additional material losses.
- Non-income-based tax liabilities recorded at September 30 were $27.7m for U.S. jurisdictions and $21.6m outside the U.S. Tax authorities may challenge the company’s assumptions and reserves.
- Twilio stated its cash, cash equivalents, marketable securities and operating cash flows should cover anticipated working capital and capital expenditure needs for the next 12 months and beyond, while cautioning that this assessment could prove incorrect. Operating cash flow was negative for the first nine months.
- Other key exposures include cybersecurity and service availability, reliance on AWS and network providers, privacy and telecommunications regulation, competition, customer concentration and retention, foreign exchange, acquisitions, and the ability to achieve profitability. Management reported disclosure controls were effective as of September 30, 2022.
Most important facts for investors to verify
- Whether usage growth and customer expansion stabilize or continue to weaken, and how much revenue growth reflects acquired businesses and carrier fees.
- Whether gross margin can recover despite international messaging mix and network-provider costs.
- Whether restructuring and office closures deliver durable expense reductions, and whether the company reaches its stated goal of non-GAAP operating profit in 2023.
- Whether operating cash burn improves and liquidity remains adequate after the Syniverse investment and other cash uses.
- Developments in the San Francisco tax litigation, other indirect-tax exposures, and the Syniverse investment’s financial performance.
- Any further material cybersecurity incidents and the effectiveness of remediation following the 2022 customer-data incident.