Twilio Inc. — Q3 2021 Form 10-Q
Business context and reporting period: Twilio provides a cloud communications platform and reported the three and nine months ended September 30, 2021. The unaudited financial statements are prepared under U.S. GAAP. The quarter included Zipwhip from its July 14 acquisition date.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $740.2 million | $448.0 million | $1,999.1 million | $1,213.7 million |
| Revenue growth | 65% | 52% | 65% | Not stated |
| Gross profit | $364.6 million | $230.9 million | $994.2 million | $633.5 million |
| GAAP gross margin | 49% | 52% | 50% | 52% |
| Operating expenses | $597.0 million | $343.1 million | $1,626.1 million | $941.2 million |
| Loss from operations | $(232.3) million | $(112.3) million | $(632.0) million | $(307.6) million |
| Net loss | $(224.1) million | $(116.9) million | $(658.5) million | $(311.6) million |
| Net loss per share, diluted | $(1.26) | $(0.79) | $(3.82) | $(2.18) |
Q3 non-GAAP gross margin was 54% versus 55% a year earlier; non-GAAP operating income was $8.2 million, with a 1% margin, versus $7.3 million and 2%. These company-defined non-GAAP measures exclude specified items, including stock-based compensation and acquired-intangible amortization.
Cash flow and liquidity: For the first nine months, operating cash flow was negative $19.9 million, versus positive $17.8 million in 2020. Investing cash outflow was $2.45 billion and financing cash inflow was $3.04 billion. Cash, cash equivalents and restricted cash increased by $567.5 million to $1.50 billion. At September 30, cash and cash equivalents were $1.50 billion and short-term marketable securities were $3.90 billion, totaling about $5.39 billion. Management said available cash, securities and expected operating cash flows should cover anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that this assessment could prove incorrect.
Debt and balance sheet: Long-term debt carrying value was $985.5 million, representing $1.0 billion principal of unsecured notes: $500 million of 3.625% notes due 2029 and $500 million of 3.875% notes due 2031. The 2023 convertible notes were fully redeemed in Q2. Total assets were $13.0 billion, total liabilities $1.90 billion, and stockholders’ equity $11.08 billion. Current assets were $5.91 billion and current liabilities $617.1 million.
Material changes versus the prior comparable period
- Revenue rose 65% year over year in Q3, reflecting higher usage—especially messaging and voice—additional products adopted by existing customers, carrier A2P fees passed through to customers, and acquired businesses. Active Customer Accounts increased 20% to over 250,000; quarterly dollar-based net expansion rate was 131%, down from 137%.
- Gross margin declined three percentage points to 49%. Management cited faster messaging growth, higher acquired-intangible amortization, carrier A2P fees, more international usage and higher network-provider costs in some geographies; Segment-related effects and operational improvements partly offset these pressures.
- Q3 operating expenses increased 74%, with hiring and personnel costs a major factor. Stock-based compensation was $164.0 million in the quarter and $445.4 million for the first nine months, compared with $89.4 million and $237.8 million, respectively, in 2020.
- Operating cash flow turned negative, partly reflecting growth in receivables and prepaid expenses, including timing of customer receipts and cloud-infrastructure prepayments.
- The company raised $1.77 billion net from a February 2021 equity offering and issued the $1.0 billion notes. It also acquired Zipwhip for a preliminary purchase price of $838.4 million, including cash and Twilio shares. Zipwhip contributed $23.6 million of Q3 revenue.
Outlook, commentary, risks and contingencies
- The filing provides no specific revenue, earnings or margin guidance. Management expects operating costs to rise as the company hires and invests in products, infrastructure, international expansion and enterprise sales; it also expects revenue growth rates to decline over time and reports a history of losses.
- Management said COVID-19’s effects remain uncertain and could affect customer demand, sales cycles, collections and service-provider capacity. Volatility in customer usage and buying behavior may continue.
- Network-provider fees, particularly A2P messaging charges, can pressure gross margins. The company said passing these fees through increases both revenue and cost of revenue but does not increase gross profit dollars on the affected messages.
- A proposed Syniverse investment remained subject to closing conditions and regulatory approvals. Twilio had agreed to invest between $500 million and $750 million, depending on shareholder redemptions, and expected closing before year-end 2021. The filing also reports non-cancelable vendor purchase commitments of $447 million entered into during the first nine months.
- Twilio paid San Francisco $38.8 million under protest for disputed telephone-user and access-line taxes covering 2009–2018 and sued to seek a refund. The amount exceeded the $11.5 million accrued for that assessment; the excess was recorded as a deposit. The company said an adverse result could cause additional material losses. Recorded liabilities for other sales and similar taxes were $43.2 million at September 30, 2021.
- Other notable risks include privacy and data-transfer regulation, cybersecurity and service outages, reliance on AWS and network providers, competition, acquisition integration, foreign-exchange exposure and the ability to achieve profitability. The company reported a February 2021 service disruption that affected multiple products for several hours; customer credits were not material, but future customer effects were uncertain.
- Management concluded disclosure controls were effective as of September 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile reported growth with acquisition contributions, pass-through A2P fees and underlying usage; monitor expansion rate and customer-account trends.
- Track gross-margin drivers, especially messaging mix, international usage, carrier costs and acquired-intangible amortization.
- Assess the persistence and cash impact of operating losses, stock-based compensation, receivables growth and customer collection timing.
- Confirm the final Zipwhip purchase-price allocation and integration results, and whether the proposed Syniverse investment closed and on what terms.
- Follow the San Francisco tax litigation, other indirect-tax exposures and the adequacy of related reserves.
- Review debt-service capacity, vendor commitments and liquidity needs alongside management’s 12-month liquidity assessment.