Twilio Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Twilio provides cloud communications APIs for voice, messaging, video and email. The results include SendGrid from its February 1, 2019 acquisition date.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $295.1 million | $168.9 million | $803.2 million | $445.8 million |
| Gross profit / margin | $158.2 million / 54% | $91.9 million / 54% | $434.2 million / 54% | $241.2 million / 54% |
| Operating loss | $94.7 million | $25.0 million | $276.0 million | $71.2 million |
| Net loss | $87.7 million | $27.1 million | $216.8 million | $74.8 million |
| Net loss per share | $0.64 | $0.28 | $1.70 | $0.78 |
Q3 GAAP operating margin was approximately negative 32%, versus negative 15% a year earlier. For the nine-month period, a $56.3 million income tax benefit—primarily associated with the SendGrid acquisition and release of valuation allowance—partly offset the operating loss.
- Cash flow: Nine-month operating cash flow was $2.0 million, down from $12.8 million. Investing used $1.18 billion, primarily reflecting net purchases of marketable securities, acquisitions and capital spending. Financing provided $1.01 billion, mainly from the June equity offering.
- Liquidity: Cash and equivalents were $330.6 million and short-term marketable securities were $1.55 billion at September 30, totaling about $1.88 billion. Current assets were $2.07 billion and current liabilities $216.2 million.
- Debt and leases: The 0.25% convertible notes due 2023 had $550 million principal and a $452.2 million net carrying amount. Lease liabilities totaled $171.6 million. SendGrid’s $5.4 million assumed note payable was repaid during Q3.
- Other notable balance-sheet items: Goodwill was $2.28 billion and intangible assets $465.3 million, largely reflecting acquisitions. Accumulated deficit was $588.5 million.
Changes versus prior period
- Q3 revenue rose 75%; nine-month revenue rose 80%. Management attributed growth to increased usage, adoption of additional products and SendGrid revenue.
- Active Customer Accounts increased 181% year over year to 172,092, including accounts added with SendGrid. Q3 Base Revenue grew 79% to $275.5 million; the Dollar-Based Net Expansion Rate was 132%, down from 145%.
- Gross margin remained 54%, as product mix and operating improvements were offset by acquired-intangible amortization, international usage mix and network provider costs.
- Operating expenses rose 116% in Q3 and 127% for the nine-month period, driven in part by higher headcount, stock compensation, acquisition-related amortization and SendGrid integration.
- Twilio issued 8.1 million Class A shares in a June public offering, generating approximately $979 million net proceeds. SendGrid consideration included 23.6 million Class A shares.
Outlook, commentary and risks
- Management said available cash, marketable securities and expected operating cash flows should cover working capital and capital expenditures for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Management said near-term priorities are expanding platform reach and revenue rather than maximizing gross margin. It expects operating costs to increase as it invests in product development, sales and marketing, infrastructure and international growth.
- Twilio expects a new major-carrier A2P SMS fee in coming months and plans to pass it on to affected customers. Management expects no change to gross profit dollars on those messages, but noted the pass-through would mathematically reduce gross margin.
- The notes became conditionally convertible at holders’ option from October 1 through December 31, 2019. Cash settlement of conversions could affect liquidity; Twilio stated its current intent is to settle note principal in cash.
- Key disclosed risks include dependence on AWS and network providers, service reliability and security, changing carrier fees and pricing pressure, privacy and telecommunications regulation, email deliverability, customer usage variability, competition, and the integration and retention of SendGrid customers and employees.
- Twilio recorded a $26.2 million liability for potential historical sales and other taxes. The SendGrid purchase-price allocation remained preliminary and could be adjusted. The Flowers privacy class action settlement was approved for a $10 million fund; Twilio paid its previously reserved $1.7 million net amount. The Bauman TCPA matter was subject to a proposed settlement funded by other defendants; dismissal motions were pending.
Important facts for investors to verify
- How much reported growth and customer-account expansion reflects SendGrid versus organic usage, and whether post-acquisition customer retention and cross-selling meet expectations.
- Whether operating expenses, stock-based compensation and acquisition amortization moderate enough to improve operating margins and cash generation.
- The scale and timing of carrier fee changes, customer pass-throughs and their effects on usage, gross profit and reported margins.
- Whether holders convert the notes during the currently eligible period, and the resulting cash, dilution and balance-sheet effects.
- Potential changes to the preliminary SendGrid purchase-price allocation, goodwill and intangible-asset assumptions, and the adequacy of the $26.2 million tax reserve.