Twilio Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Twilio provides a customer engagement platform combining communications APIs with data and applications. Financial statements are unaudited and prepared under U.S. GAAP.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,006.6 million | $875.4 million | Up 15% |
| Gross profit / gross margin | $490.7 million / 49% | $425.1 million / 49% | Margin unchanged |
| Operating loss | $264.1 million | $217.8 million | Loss widened |
| Net loss | $342.1 million | $221.6 million | Loss widened |
| Diluted loss per share | $1.84 | $1.23 | Loss per share increased |
| Cash used in operations | $97.9 million | $17.6 million | More cash used |
| Cash, cash equivalents and short-term marketable securities | $3.945 billion | $4.155 billion at Dec. 31, 2022 | Down from year-end |
| Long-term debt, net | $987.8 million | $987.4 million at Dec. 31, 2022 | Nearly unchanged |
Q1 non-GAAP operating income was $103.8 million, or 10% of revenue, versus $5.0 million, or 1%, in Q1 2022. Non-GAAP gross margin was 52%, compared with 53%. These are company-defined non-GAAP measures, not GAAP results.
Cash provided by investing activities was $202.5 million, primarily reflecting net proceeds from marketable securities. Cash used in financing activities was $121.5 million, including $115.0 million for share repurchases. Cash, cash equivalents and restricted cash ended the quarter at $639.2 million. Twilio said its cash, cash equivalents, marketable securities and operating cash flows should cover anticipated needs for the next 12 months and beyond. The company was in compliance with debt covenants.
Business trends and changes versus prior period
- Revenue grew 15%, but growth slowed from 48% in Q1 2022. Active Customer Accounts increased 12% year over year to approximately 300,000, while Dollar-Based Net Expansion Rate declined to 106% from 127%.
- Communications revenue was $846.7 million, up from $742.7 million; Data & Applications revenue was $120.1 million, up from $101.1 million. The filing continued to report one operating and reportable segment; management expected to complete reporting realignments and move to two segments during 2023.
- Usage-based fees represented 71% of revenue, compared with 73% a year earlier. U.S. revenue was 66% of the total and international revenue 34%.
- Gross margin remained 49%. Cost of revenue rose 15%, principally because network service provider costs increased $58.4 million.
- Research and development expense fell 1%, sales and marketing fell 10%, and general and administrative expense fell 2%. These reductions were offset in reported operating expenses by new restructuring and long-lived-asset impairment charges.
Management commentary, outlook and notable items
- Workforce restructuring: The February 2023 plan eliminated approximately 17% of the workforce and was substantially completed by March 31. Twilio recorded $121.9 million of restructuring charges and estimated approximately $20 million of additional 2023 costs.
- Office closures: The company recorded $21.8 million of long-lived-asset impairment charges and expected a further $10–$20 million in 2023 as closures were finalized. Twilio described its operating strategy as remote-first.
- Investment and divestiture: A $46.2 million non-cash impairment of a strategic investment and a $30.4 million share of losses from an equity-method investment increased other expenses. Twilio signed an agreement to divest IoT assets and liabilities, recording a $3.8 million loss on assets held for sale and $2.2 million in related costs. Closing was expected in Q2 2023; any additional gain or loss was not expected to be material.
- Organization and strategy: Twilio reorganized into Communications, focused on efficiencies, and Data & Applications, focused on accelerating growth. Management cited macroeconomic uncertainty, customer budget constraints and usage sensitivity as factors that could pressure demand. No numerical financial guidance for future periods is provided in the supplied filing text.
- Repurchases: The board authorized up to $1.0 billion of Class A share repurchases through December 31, 2024. Twilio repurchased $125 million in Q1 and another $125 million after quarter-end. The filing gives differing remaining authorization amounts depending on timing: approximately $875 million at March 31, and approximately $750 million after the subsequent repurchases.
- Legal, tax and regulatory matters: San Francisco assessed $38.8 million of telephone and access-line taxes for 2009–2018; Twilio paid under protest and is seeking a refund. A case management conference was scheduled for June 2023, and an adverse outcome could result in material additional losses. The company also disclosed a January 2023 FCC cease-and-desist letter concerning allegedly fraudulent messaging traffic; Twilio said it removed the traffic, responded to the FCC, and had received no further communication.
- Other exposure: Risks highlighted include macroeconomic weakness, customer usage reductions and delayed payments, competition and pricing pressure, reliance on network providers and AWS, cybersecurity and privacy regulation, foreign exchange, potential future goodwill impairment as reporting units change, and tax liabilities. Twilio cited Oi SA’s Brazilian reorganization proceedings as a collection and ongoing-revenue risk.
Important facts for investors to verify
- Whether revenue growth and customer expansion stabilize, particularly given the decline in Dollar-Based Net Expansion Rate.
- Whether restructuring and office-closure savings materialize, and whether remaining charges approximate management’s estimates.
- How the shift to two reporting segments affects comparability and whether new reporting-unit assessments result in goodwill or other impairment charges.
- The outcome and reserve implications of the San Francisco tax litigation, other indirect-tax exposures and the FCC matter.
- Cash generation, investment portfolio valuation and liquidity after continued share repurchases; reconcile the authorization balance with the timing of post-quarter repurchases.
- Progress and financial impact of the IoT divestiture, and performance of the impaired strategic and equity-method investments.