Twilio Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
Twilio provides a cloud communications and customer engagement platform, primarily priced on usage. Revenue is generated mainly from communications APIs, with additional subscription and other fee-based products. The filing includes the acquisitions of ValueFirst and Segment in reported results; Ionic Security was acquired in April 2021.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $668.9 | $400.8 | $1,258.9 | $765.7 |
| Revenue growth | 67% | 46% | 64% | Not stated |
| Gross profit | $331.2 | $209.1 | $629.6 | $402.7 |
| GAAP gross margin | 50% | 52% | 50% | 53% |
| Operating expenses | $533.5 | $311.8 | $1,029.2 | $598.0 |
| Loss from operations | $(202.3) | $(102.6) | $(399.6) | $(195.3) |
| Net loss | $(227.9) | $(99.9) | $(434.4) | $(194.7) |
| Diluted net loss per share | $(1.31) | $(0.71) | $(2.55) | $(1.39) |
Q2 non-GAAP operating income was $4.2 million, a 1% margin, compared with $9.5 million and a 2% margin a year earlier. Non-GAAP measures exclude specified items, including stock-based compensation and acquired-intangible amortization.
- Growth and customer metrics: Active Customer Accounts reached 240,000, up from 200,000. Q2 Dollar-Based Net Expansion Rate was 135%, versus 132% a year earlier. The ten largest Active Customer Accounts contributed 12% of Q2 revenue, down from 15%.
- Cash flow: Six-month operating cash flow was $26.2 million, versus $13.9 million. Investing activities used $2.18 billion, chiefly reflecting net purchases of marketable securities and other investments, acquisitions, and capitalized software. Financing activities provided $3.02 billion.
- Liquidity: At June 30, cash and cash equivalents were $1.80 billion and short-term marketable securities were $4.13 billion. Current assets were $6.37 billion and current liabilities $583.3 million.
- Debt: Long-term debt carrying value was $985.2 million, representing $1.0 billion principal of 2029 and 2031 senior notes bearing fixed rates of 3.625% and 3.875%. The 2023 convertible notes were fully redeemed during the quarter. Twilio reported compliance with note covenants.
- Other: Stock-based compensation expense was $144.2 million in Q2 and $281.3 million for the first half. The accumulated deficit was $1.60 billion.
Material changes versus prior comparable periods
- Q2 revenue rose 67%, driven by increased use of messaging and voice products, existing-customer adoption of additional products, and Segment revenue. Six-month revenue increased 64%.
- Gross margin declined to 50% from 52% in Q2 and to 50% from 53% for the first half. Management cited messaging growth, acquired-intangible amortization, a higher international usage mix, and network-provider fees; Segment and operational improvements partly offset these pressures.
- Q2 operating expenses increased 71% year over year, led by sales and marketing (+83%), general and administrative (+86%), and research and development (+50%). Management attributed increases mainly to hiring, growth investments, acquisitions, and acquired-intangible amortization.
- International revenue rose to 32% of Q2 revenue from 27% a year earlier. The company also began using foreign-currency forward contracts as cash-flow hedges in Q2.
- Twilio raised $1.8 billion net from a February 2021 equity offering and approximately $985 million net from March note issuances. It also issued shares in connection with the convertible-note redemption and received proceeds from settling the related capped call.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no numerical revenue, earnings, or margin guidance. Management said cash, cash equivalents, marketable securities, and expected operating cash flows should cover anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that this assessment could prove incorrect.
- COVID-19: Twilio reported stable or increased usage in some affected industries, including travel, hospitality, and ridesharing, but said demand, sales cycles, customer budgets, and the broader economic impact remained uncertain. A phased reopening of some offices was planned for Q3 2021.
- Acquisitions and proposed investment: On July 14, 2021, Twilio acquired Zipwhip for consideration of $850 million, subject to adjustments and exceptions, in cash and/or Class A shares. The Ionic Security acquisition cost $30.2 million in cash. A proposed investment of up to $750 million in Syniverse, tied to a wholesale messaging agreement, remained subject to conditions and was expected to close before year-end 2021.
- Commitments: Non-cancelable vendor agreements entered into during the first half carried total purchase commitments of $438.0 million, with terms up to four years.
- Tax dispute: One jurisdiction assessed $38.8 million in taxes, interest, and penalties, exceeding the $11.5 million accrued for the assessment. Twilio disputed the assessment, paid the full amount as required, and filed a court complaint after settlement talks failed. The total recorded liability for these taxes was $28.8 million at June 30, 2021.
- Other unusual items: The convertible-note extinguishment resulted in a $21.4 million loss; the capped-call settlement generated a $3.2 million gain. A February 2021 platform disruption affected multiple products for several hours; Twilio said customer credits were not material overall.
- Principal risks: Continued operating losses; pressure on gross margin from network fees and international mix; dependence on network providers and AWS; outages and cybersecurity threats; privacy, telecom, and tax regulation; acquisition integration; and the ability to service and repay debt. The company reported effective disclosure controls as of June 30, 2021.
Most important facts for investors to verify
- Whether high revenue growth and customer expansion persist, particularly after separating organic growth from acquired contributions and usage-related effects.
- Whether gross-margin pressure from messaging, network fees, and international mix continues, and how much pricing pass-through offsets those costs.
- How operating losses, stock-based compensation, and cash generation develop as headcount and operating expenses rise.
- The final funding mix and integration costs for Zipwhip, and whether the proposed Syniverse investment closes on the stated terms and timetable.
- The outcome and potential financial exposure of the disputed tax assessment, and the company’s substantial vendor commitments and senior-note obligations.