Twilio Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 1, 2019. Twilio provides a cloud communications platform. Results include SendGrid from its February 1, 2019 acquisition date.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $275.0M | $147.8M | $508.2M | $276.9M |
| Gross profit / margin | $150.0M / 55% | $79.8M / 54% | $276.1M / 54% | $149.3M / 54% |
| Operating loss | $(93.7)M | $(22.0)M | $(181.3)M | $(46.2)M |
| Net loss | $(92.6)M | $(24.0)M | $(129.1)M | $(47.7)M |
| Diluted loss per share | $(0.72) | $(0.25) | $(1.05) | $(0.50) |
| Operating cash flow | Not separately stated in the summarized cash-flow data | Not separately stated | $(13.8)M | $19.2M |
Q2 GAAP gross margin was approximately 54.5% based on reported amounts; the filing reports it rounded to 55%. Non-GAAP operating income was $1.5M in Q2 2019 versus $2.2M in Q2 2018, with 1% non-GAAP operating margin in both periods. These non-GAAP measures exclude specified items, including stock compensation and acquired-intangible amortization.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $535.9M and short-term marketable securities were $1,346.4M, totaling about $1.88B, compared with $748.3M at December 31, 2018.
- Current assets were $2.06B versus current liabilities of $201.8M. Cash, cash equivalents and restricted cash totaled $536.8M at period end.
- Six-month financing cash flow was $1.01B, primarily reflecting $979.0M net proceeds from a June public offering. Investing cash use was $961.9M, including substantial marketable-security purchases and acquisition activity.
- Convertible notes have $550M principal, 0.25% coupon and June 2023 maturity; carrying value was $446.2M. The notes became conditionally convertible at holders’ option from July 1 through September 30, 2019. Twilio stated its current intent was to settle principal in cash. A $4.4M note payable was also assumed with SendGrid.
- Lease liabilities totaled $174.3M at June 30, including $160.7M operating and $13.7M finance lease obligations.
Changes versus prior period and management commentary
- Q2 revenue rose 86% year over year. Base Revenue increased 90% to $256.7M; Variable Revenue rose 44% to $18.3M. Dollar-Based Net Expansion Rate was 140%, versus 137%.
- Active Customer Accounts increased to 161,869 from 57,350, largely reflecting SendGrid. SendGrid contributed $45.9M of Q2 revenue and $74.5M for the six-month period.
- Management attributed growth to higher usage, especially Programmable Messaging and Voice, additional product adoption, international growth and SendGrid. Lower usage pricing partially offset revenue growth.
- Operating expenses increased 140% in Q2, driven in part by increased headcount, stock-based compensation, acquired-intangible amortization and SendGrid integration. GAAP losses widened substantially; six-month tax benefit of $53.8M primarily reflected valuation-allowance releases related to the acquisition.
- Management said it expects to prioritize platform reach, scale and revenue growth over maximizing near-term gross margin. It believes available cash, securities and operating cash flows should meet anticipated needs for at least 12 months; no specific revenue or earnings guidance is provided in this filing.
Risks, contingencies and unusual items
- SendGrid was acquired for adjusted purchase consideration of $2.84B, principally shares; preliminary allocation included $2.24B goodwill and $483M acquired intangible assets. Valuations and purchase accounting remained subject to measurement-period adjustment, and integration, customer retention and synergy delivery are risks.
- The June equity offering issued 8.06M Class A shares at $124 per share, raising $979.0M net. Stock-based compensation was $70.7M in Q2 and $129.1M for six months.
- Twilio reported a $26.1M liability for historical sales, use and similar taxes; actual exposure may differ. A privacy class action settlement was approved for a $10M fund; estimated Twilio liability after insurance was $1.7M. Other litigation includes a pending Telesign appeal and a TCPA class case for which other defendants agreed to fund settlement aspects, subject to court process.
- Key operating exposures include usage variability and large-customer concentration, network-provider fees and pricing pressure, dependence on AWS and third-party networks, service availability, email deliverability, privacy and telecom regulation, cybersecurity, international expansion and continuing losses.
- The filing identifies the convertible notes’ potential cash-settlement demands and conversion-related liquidity effects as risks. The notes’ fair value was approximately $1.12B, substantially above their balance-sheet carrying value.
Most important facts for investors to verify
- How much reported growth reflects underlying usage and customer expansion versus SendGrid contribution, and whether SendGrid customers and products are being retained and integrated effectively.
- Whether margins and operating losses improve as acquisition-related amortization, stock compensation and increased operating investment evolve.
- Cash generation and liquidity needs, including possible cash settlement or reclassification effects from the notes’ conversion feature and lease commitments.
- Whether the $26.1M tax reserve and disclosed litigation estimates remain adequate as proceedings and tax discussions develop.
- How customer concentration, network-provider fee changes, pricing actions and service reliability affect revenue growth and gross margin.