Twilio Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Twilio provides a cloud communications platform and customer engagement products. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $448.0 million | $295.1 million | $1,213.7 million | $803.2 million |
| Gross profit / gross margin | $230.9 million / 52% | $158.2 million / 54% | $633.5 million / 52% | $434.2 million / 54% |
| Operating loss | $112.3 million | $94.7 million | $307.6 million | $276.0 million |
| Net loss | $116.9 million | $87.7 million | $311.6 million | $216.8 million |
| Net loss per share | $0.79 | $0.64 | $2.18 | $1.70 |
- Q3 revenue grew 52% year over year, driven mainly by greater use of messaging and voice products, adoption of additional products by existing customers, and customer-account growth. Active Customer Accounts exceeded 208,000, up about 21%; dollar-based net expansion was 137%, compared with 132%.
- Revenue growth outpaced cost-of-revenue growth less favorably: Q3 cost of revenue rose 59%, primarily reflecting higher network-provider and cloud-infrastructure fees. Gross margin declined two percentage points. Nine-month revenue growth also includes a full nine months of SendGrid revenue in 2020 versus a partial period in 2019.
- Q3 operating expenses rose 36% to $343.1 million; research and development increased 31%, sales and marketing 40%, and general and administrative 38%. Twilio reported Q3 non-GAAP operating income of $7.3 million, or a 2% margin, versus a $3.6 million non-GAAP operating loss, or negative 1%, in Q3 2019. This measure excludes specified items, including stock-based compensation.
- Cash provided by operating activities was $17.8 million for the nine months, versus $2.0 million in 2019. Cash used in investing was $620.9 million and cash provided by financing was $1.477 billion; the latter primarily reflects the August equity offering. Cash, cash equivalents and restricted cash ended at $1.127 billion.
- At September 30, cash and cash equivalents were $1.127 billion and short-term marketable securities were $2.172 billion. Current assets were $3.569 billion and current liabilities $326.3 million. Convertible notes had $499.0 million principal outstanding and a $432.7 million net carrying amount; the notes mature in 2023. Lease liabilities totaled $229.2 million.
Material changes and unusual items
- In August, Twilio issued 5.82 million Class A shares at $247 per share, receiving approximately $1.4 billion net proceeds.
- During Q3, Twilio settled $51 million principal amount of convertible notes with shares and cash; the settlement resulted in a $3.2 million loss. The notes became conditionally convertible at holders’ option from October 1 through December 31, 2020.
- Stock-based compensation was $89.4 million in Q3 and $237.8 million for the nine months. Q3 general and administrative expense also included a $5.8 million increase in charitable contributions, principally related to a Twilio.org share donation.
- Twilio reported an accumulated deficit of $990.4 million at quarter end and stated it has incurred annual losses since inception.
Outlook, risks and contingencies
- Management gave no specific revenue or earnings guidance in the provided filing text. It expects cash, cash equivalents, marketable securities and operating cash flows to cover anticipated working capital and capital expenditures for at least 12 months, while noting this assessment could prove incorrect. Management’s discussion excludes the proposed Segment acquisition.
- On October 12, 2020, after quarter end, Twilio agreed to acquire Segment for approximately $3.2 billion in cash and/or Class A shares, subject to adjustments and customary approvals and closing conditions. Closing was expected in Q4 2020; the company warned the deal could significantly affect liquidity, financial condition and results.
- COVID-19 effects remained uncertain. Usage in travel, hospitality and ridesharing remained below pre-pandemic levels, with a slight rebound from the prior quarter; usage increased in healthcare, education, consumer on-demand and retail. Management cited potential demand volatility, delayed sales and renewals, budget reductions, collection risks, and infrastructure-capacity pressures.
- Network-provider fees, product and geographic mix, and pricing reductions may pressure margins. Other principal risks include competition, customer usage and concentration, reliance on AWS and network providers, privacy and telecommunications regulation, cybersecurity and service disruptions, and the company’s history of losses.
- Twilio is disputing a $38.8 million tax assessment by one jurisdiction, paid as required, and is seeking a refund or settlement. The filing reports a $25.3 million liability for sales and other taxes overall; the assessment exceeded the $11.5 million accrued for the period it covered. The company also described pending litigation against Telesign, with a trial on one patent scheduled for July 2021.
Important facts for investors to verify
- Whether customer usage growth and 137% dollar-based net expansion persist, and whether lower pricing and provider costs continue to constrain gross margin.
- How much reported growth reflects underlying usage versus acquisition and pricing effects, particularly the SendGrid comparison in the nine-month figures.
- The funding mix, closing conditions, dilution and integration costs of the proposed Segment acquisition, and its effect on liquidity and operating results.
- Convertible-note conversion activity and any resulting cash settlement, dilution or liquidity needs; note carrying value differs from principal.
- Developments in the disputed tax assessment, other indirect-tax exposures, COVID-19 customer trends, and material legal proceedings.