Twilio Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The unaudited filing was signed August 5, 2022. Twilio provides a cloud-based customer engagement platform for communications and data applications.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $943.4 million | $668.9 million | $1,818.7 million | $1,258.9 million |
| Revenue growth | 41% | 67% | 44% | Not stated |
| Gross profit / margin | $445.3 million / 47% | $331.2 million / 50% | $870.4 million / 48% | $629.6 million / 50% |
| Operating loss | $(311.9) million | $(202.3) million | $(529.7) million | $(399.6) million |
| Net loss | $(322.8) million | $(227.9) million | $(544.4) million | $(434.4) million |
| Diluted net loss per share | $(1.77) | $(1.31) | $(3.00) | $(2.55) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(80.1) million | $26.2 million |
- Revenue drivers: Management attributed growth to higher product usage, adoption of additional products by existing customers, carrier A2P messaging fees passed through to customers, and acquisitions. Zipwhip was acquired in July 2021, so its contribution is included in 2022 results but not the comparable 2021 quarter.
- Customer metrics: Active Customer Accounts were 275,000, up 15% from 240,000. Q2 Dollar-Based Net Expansion Rate was 123%, down from 135%; H1 rate was 125%. Twilio’s 10 largest Active Customer Accounts generated 12% of Q2 revenue.
- Operating performance: GAAP operating expenses rose 42% to $757.2 million in Q2, led by personnel costs and increased headcount. Non-GAAP operating loss was $7.3 million, versus non-GAAP operating income of $4.2 million a year earlier. Q2 non-GAAP gross margin was 51%, versus 54%.
- Cash and liquidity: At June 30, cash and cash equivalents were $798.6 million and short-term marketable securities were $3.594 billion. Current assets were $5.104 billion and current liabilities $795.3 million. Management said cash, cash equivalents, marketable securities and operating cash flows should meet anticipated working-capital and capital needs for the next 12 months and beyond, while cautioning that actual cash needs could be higher.
- Cash flows: H1 investing cash outflow was $635.6 million, including the $750 million Syniverse investment, offset in part by net purchases and maturities of marketable securities. H1 financing cash inflow was $34.4 million. Cash, cash equivalents and restricted cash declined $681.1 million during H1.
- Debt: Long-term debt had a net carrying value of $986.6 million, representing $1.0 billion principal of fixed-rate notes due 2029 and 2031. Twilio reported compliance with financial covenants.
Material changes and unusual items
- Revenue growth slowed to 41% in Q2 from 67% in the prior-year quarter. Gross margin declined three percentage points, primarily due to a greater mix of lower-margin international messaging, carrier A2P fees passed through at cost, and acquired-intangible amortization.
- Q2 stock-based compensation expense was $242.1 million, up from $144.2 million; H1 expense was $397.4 million. H1 operating cash flow turned negative, compared with positive operating cash flow in H1 2021.
- In May, Twilio paid $750 million for approximately 43% of Syniverse and entered a wholesale messaging agreement with it. Twilio will begin recording its share of Syniverse’s results and related excess-basis amortization in Q3 2022.
- Accumulated other comprehensive loss increased to $117.4 million from $18.1 million at year-end, including unrealized losses on marketable securities and foreign currency hedges.
- Twilio announced a remote-first operating model. Potential office-closure impairment charges were estimated at $90 million to $110 million in Q3, subject to future conditions. A new sabbatical program was expected to result in approximately $35 million of non-cash expense in Q3.
Outlook, management commentary and risks
- Management identified accelerating software sales and delivering non-GAAP operating profit beginning in 2023 as its primary priorities. Hiring was largely frozen outside selected growth areas, including Segment, Engage and Flex, and the company planned to shift more selling capacity toward software.
- Management described demand as strong overall and the business as resilient, but noted softness in cryptocurrency, consumer on-demand and social media customers, and some longer sales cycles. It cited volume gains in financial services and information technology.
- The filing gives no clear numerical revenue or earnings guidance for the next quarter or full year. Management’s discussion emphasizes uncertainty in usage-based revenue, customer spending, foreign exchange, network-provider costs, and macroeconomic conditions.
- Key risks include ongoing losses, margin pressure from network and international messaging costs, customer usage variability, competition and enterprise sales cycles, reliance on AWS and network providers, cybersecurity and service availability, privacy and telecommunications regulation, and foreign currency exposure.
- Twilio is contesting San Francisco tax assessments of $38.8 million, including interest and penalties, for 2009–2018. It paid the assessment under protest and is seeking a refund; trial was scheduled for March 6, 2023. The company said litigation is uncertain and an adverse outcome could lead to additional material losses. Separately, it reported $47.5 million of liabilities for non-income-based taxes in domestic and foreign jurisdictions.
- Disclosure controls were assessed as effective. Twilio completed implementation of a new ERP system in May and modified certain related internal controls; the filing reported no other material internal-control changes during the quarter.
Important facts for investors to verify
- Whether revenue growth and customer expansion remain resilient as the Dollar-Based Net Expansion Rate declines and selected customer sectors soften.
- Whether Twilio can stabilize gross margins despite international messaging mix, carrier fees, and infrastructure costs.
- How quickly operating cash flow improves, given H1 cash usage and substantial stock-based compensation.
- The realized costs and timing of office closures and the new sabbatical program, and progress toward non-GAAP operating profitability starting in 2023.
- The financial and operating returns from the Syniverse investment, including the impact of equity-method accounting beginning in Q3.
- The outcome of the San Francisco tax litigation and changes in other indirect-tax exposures.
- Liquidity and debt-service capacity if operating cash flows or customer collections weaken; marketable securities had $100.8 million of gross unrealized losses at June 30, 2022.