Twilio Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited U.S. GAAP results. Twilio provides cloud communications APIs and earns most revenue from customer usage.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $100.5 million | $71.5 million | $283.8 million | $195.4 million |
| Revenue growth | 41% | 45% | ||
| Gross profit / margin | $52.3 million / 52% | $40.2 million / 56% | $155.9 million / 55% | $109.1 million / 56% |
| Operating loss | $(24.0) million | $(11.3) million | $(45.9) million | $(28.5) million |
| Net loss | $(23.5) million | $(11.3) million | $(44.8) million | $(28.7) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(7.1) million | $4.4 million |
- Q3 operating expenses rose 48% to $76.3 million, led by research and development (+50%) and sales and marketing (+62%). Stock-based compensation was $14.2 million for the quarter and $36.0 million year to date.
- At September 30, cash and cash equivalents were $91.9 million and short-term marketable securities were $192.0 million, for $283.9 million in combined cash and securities. Total liabilities were $88.5 million; the filing reports no borrowings. Current assets were $347.6 million and current liabilities $76.0 million.
- Year-to-date investing cash outflow was $235.8 million, including $193.2 million net purchases of marketable securities, a $22.6 million acquisition payment, and $12.3 million of capitalized software development. Financing cash inflow was $29.0 million, mainly employee option exercises and ESPP proceeds.
Changes and operating trends
- Q3 Base Revenue increased 43% to $92.0 million; Variable Revenue rose 15% to $8.6 million. Active Customer Accounts grew 35% to 46,489, while dollar-based net expansion fell to 122% from 155%.
- International revenue reached 24% of Q3 revenue, up from 15% a year earlier. Growth reflected increased usage, more international accounts, and the Swedish messaging-provider acquisition completed in February for approximately $23.0 million.
- Gross margin declined to 52% from 56% in Q3. Cost of revenue increased 54%, primarily from network-provider fees, infrastructure costs, and amortization. Management says it prioritizes platform reach and revenue growth over maximizing near-term gross margin and may pass cost savings to customers through lower prices.
Outlook, risks and unusual items
- Management expects year-over-year declines in revenue from Uber, its largest Base Customer Account, to continue weighing on revenue growth and dollar-based net expansion. Uber accounted for 9% of revenue in the first nine months of 2017. WhatsApp, a Variable Customer Account, accounted for 5% of that period’s revenue.
- Management expects operating costs to increase and says it will continue investing in product development, sales and marketing, enterprise selling, and international expansion. It expects available cash, securities, and operating cash flows to cover anticipated needs for at least 12 months, while cautioning that additional financing may be needed.
- Sales and other tax exposure was revised following settlements and estimate changes: the resulting $13.1 million reduction in tax liability reduced nine-month net loss by $13.1 million, or $0.14 per share. The September 30 liability was $19.4 million; actual exposure may differ materially.
- Legal matters include Telesign patent litigation and a California privacy class action. Outcomes and possible losses could not be reasonably estimated. The filing also identifies dependence on AWS and network providers, competition, customer usage variability, international and regulatory risks, and continued losses as material risks.
- No specific revenue, margin, or earnings guidance is provided. The company reported an accumulated deficit of $231.5 million and stated that it expects continued losses and cannot assure future profitability.
Key facts for investors to verify
- Whether Uber usage and pricing changes, and the concentration of revenue in large customers, continue to pressure growth and expansion rates.
- Whether revenue growth can be sustained while gross margin declines and operating expenses grow faster than revenue.
- Cash generation and liquidity trends, including the effect of working-capital movements and ongoing investment needs.
- The adequacy of the $19.4 million indirect-tax liability and developments in Telesign and privacy litigation.
- Customer and international growth metrics, including the effects of pricing reductions, acquisition integration, and elevated international delivery costs.