Twilio Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Twilio provides cloud communications APIs and customer-engagement products. Results include Segment, acquired in November 2020, and ValueFirst, acquired March 12, 2021.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $590.0m | $364.9m | Up 62% |
| Gross profit / margin | $298.3m / 51% | $193.5m / 53% | Margin down 2 percentage points |
| Operating expenses | $495.6m | $286.2m | Up 73% |
| Operating loss | $(197.3)m | $(92.7)m | Operating margin was (33)% versus (25)% |
| Net loss / diluted loss per share | $(206.5)m / $(1.24) | $(94.8)m / $(0.68) | Loss widened |
| Operating cash flow | $4.5m | $15.5m | Lower year over year |
| Cash, cash equivalents and short-term marketable securities | $5.707bn | $3.040bn at Dec. 31, 2020 | Quarter-end liquidity |
| Long-term debt, net carrying amount | $1.218bn | $302.1m at Dec. 31, 2020 | Includes new senior notes and convertible notes |
Investing cash outflow was $1.366bn, principally reflecting net purchases of marketable securities and investments; financing cash inflow was $2.759bn. Financing included $1.766bn net proceeds from a February equity offering and approximately $987.4m net proceeds from March senior-note issuance. Cash and marketable securities substantially exceed current liabilities of $499.9m; the filing reports no free-cash-flow measure.
Usage-based fees generated 71% of revenue, down from 74%. U.S. revenue was 71% of total and international revenue 29%. Stock-based compensation was $137.2m, compared with $69.0m.
Material changes and management commentary
- Revenue growth reflected higher usage, particularly Programmable Messaging and Voice, adoption of additional products, and Segment contributions. Active Customer Accounts rose 24% to 235,000 from 190,000; dollar-based net expansion was 133%, down from 143%.
- Cost of revenue grew 70%, faster than revenue. Management cited higher network-provider and cloud costs, acquired-intangible amortization, faster messaging growth and a greater international usage mix; gross margin declined to 51%. Twilio said it prioritizes platform reach and revenue growth over maximizing near-term gross margin.
- Operating expenses rose across R&D (53%), sales and marketing (80%) and G&A (100%), primarily reflecting higher personnel costs and business growth, as well as acquisition-related and other expenses. Non-GAAP operating income was $17.3m (3% margin), versus $6.1m (2%); these adjusted measures exclude specified items and are not GAAP results.
- In February, Twilio completed a 4.3m-share public offering at $409.60 per share. In March, it issued $500m of 3.625% notes due 2029 and $500m of 3.875% notes due 2031. The $261.6m principal balance of 0.25% convertible notes due 2023 was conditionally convertible during Q2 2021; Twilio stated an intent to settle principal in shares, but conversion terms allow other settlement choices.
- ValueFirst was acquired for $70.2m cash. Twilio also proposed investing up to $750m in Syniverse, subject to transaction conditions and regulatory approvals, with closing expected before year-end 2021; this was not a completed investment at quarter-end.
Outlook, risks and contingencies
- The filing gives no specific revenue, earnings or margin guidance. Management said cash, cash equivalents, marketable securities and operating cash flow should cover anticipated working-capital and capital needs for at least 12 months, while noting this assessment could prove incorrect.
- COVID-19 effects remained uncertain. Twilio reported stable or increased usage in some affected industries in Q1 but warned of possible demand volatility, delayed sales cycles, lower customer budgets and infrastructure constraints.
- A February 26 platform disruption affected multiple products for several hours. Twilio expected customer-credit costs, did not expect the overall impact to be material, and described capacity and other mitigation steps; future disruption and customer attrition remain risks.
- Network-provider and cloud costs, competitive pricing, international expansion and regulation may pressure margins. From May 1, 2021, Twilio began passing certain carrier A2P SMS fees to customers; management expected this to increase revenue and cost of revenue without changing gross-profit dollars, while reducing reported gross margin mathematically.
- Twilio had $426.9m of new non-cancelable vendor purchase commitments with terms up to three years. The proposed Syniverse investment could require up to $750m if completed.
- A jurisdiction assessed $38.8m of taxes, interest and penalties, exceeding the $11.5m accrued for that assessment. Twilio disputed the assessment, paid it as required and was seeking a refund or settlement. The recorded liability for these taxes was $26.6m at March 31, 2021.
- Other key risks include continuing losses, integration of acquisitions, privacy and telecommunications regulation, reliance on AWS and network providers, service reliability, litigation, and debt-service or convertible-note settlement obligations. Management reported disclosure controls were effective and no material quarter-specific change in internal control.
Investor verification points
- Assess whether 62% revenue growth and 133% net expansion can be sustained, considering the lower expansion rate and contributions from acquisitions.
- Track gross-margin pressure, including carrier fees, international mix, messaging growth and acquired-intangible amortization; compare GAAP results with the company’s adjusted measures.
- Review operating cash generation relative to the widening GAAP loss, stock-based compensation and planned investment needs.
- Monitor conversion or repayment outcomes for the 2023 notes and the cost and covenants of the 2029 and 2031 notes.
- Verify whether the Syniverse transaction closes, its final investment amount and terms, and the status of the disputed tax assessment and potential refund.
- Evaluate customer credits, reliability improvements and any subsequent effects of the February service disruption.