Twilio Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Twilio provides a cloud communications platform with usage-based voice, messaging, video and related services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $95.9 million | $64.5 million | $183.2 million | $123.9 million |
| Gross profit / margin | $53.5 million / 56% | $36.3 million / 56% | $103.6 million / 57% | $68.8 million / 56% |
| Operating loss | $(7.1) million | $(10.9) million | $(21.8) million | $(17.2) million |
| Net loss | $(7.1) million | $(11.0) million | $(21.3) million | $(17.5) million |
| Net loss per share | $(0.08) | $(0.45) | $(0.24) | $(0.84) |
- Q2 revenue grew 49% year over year. Base Revenue rose 55% to $87.6 million; Variable Revenue increased 2% to $8.3 million. Six-month revenue increased 48%, led by 58% growth in Base Revenue; Variable Revenue declined 15%.
- Q2 gross margin was unchanged at 56%; six-month margin improved one percentage point. Usage-based fees generated 83% of revenue in both Q2 periods.
- Operating expenses increased 29% in Q2 and 46% in the first half. Research and development and sales and marketing grew substantially as Twilio expanded headcount and product and sales investment. Q2 general and administrative expense fell 59%, principally reflecting a tax-liability release.
- Q2 results included a $12.2 million benefit from revisions and settlements of estimated state sales and other tax exposure, reducing reported net loss by $0.13 per share. The six-month benefit was $13.1 million, or $0.15 per share. This item materially affects comparison of reported expenses and earnings.
- Six-month operating cash flow was $(4.0) million, versus $5.1 million provided in the prior-year period. Investing cash flow was $(234.3) million, primarily due to net marketable-security purchases of $197.9 million, a $22.6 million acquisition payment, capitalized software and capital expenditures. Financing cash flow was $24.8 million.
- At June 30, cash and cash equivalents were $92.2 million and short-term marketable securities were $197.0 million, totaling $289.2 million in these liquid assets. Current assets were $345.6 million; current liabilities were $67.4 million. Total liabilities were $79.8 million. The filing reports no financial debt balance; long-term liabilities primarily include deferred rent and a deferred tax liability.
Changes, outlook and risks
- Active Customer Accounts increased 41% to 43,431. Q2 Dollar-Based Net Expansion Rate was 131%, down from 164%; the six-month rate was 136%. International revenue reached 22% of Q2 revenue, versus 16% a year earlier.
- Management said revenue from Uber, its largest Base Customer Account, declined in the quarter due to lower usage and price adjustments and is expected to decline further, weighing on future revenue growth and expansion rates. Uber represented 11% of first-half revenue. WhatsApp, a Variable Customer Account, represented 5%.
- Twilio acquired a Sweden-based messaging and SMS provider for approximately $23.0 million in cash. The purchase accounting was preliminary; acquired goodwill and intangible assets increased accordingly.
- Management said cash, cash equivalents, marketable securities and operating cash flows were expected to cover working capital and capital needs for at least 12 months, while cautioning that additional financing might be needed. No numerical revenue or earnings guidance was provided. Management expects operating costs to rise and prioritizes platform reach, scale and revenue growth over maximizing near-term gross margin.
- State sales and other tax exposure remained uncertain: the recorded liability was $18.1 million at June 30, and actual exposure could differ materially if other jurisdictions challenge management’s assumptions. Twilio began collecting certain taxes from customers in March 2017.
- Material litigation includes Telesign patent-infringement suits, consolidated and stayed pending patent review, and a California privacy class action proceeding through discovery. Twilio said losses could not be reasonably predicted or estimated.
- Key business risks include customer concentration and variable usage, competition and pricing pressure, reliance on AWS and network providers, service interruptions and security risks, international expansion and regulatory compliance, tax uncertainty, and continued operating losses. Twilio reported an accumulated deficit of $208.1 million.
Investor facts to verify
- How much future growth and expansion-rate pressure will result from lower Uber usage and pricing?
- How sustainable are reported earnings comparisons after separating the one-time state-tax estimate revisions and settlements?
- Will operating cash flow improve as growth investments continue, and how will cash and securities be used?
- What is the eventual outcome and potential financial impact of the state tax exposures, Telesign litigation and privacy class action?
- Can Twilio sustain customer growth and margins while expanding internationally and investing in research, sales and infrastructure?