Twilio Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results. Twilio provides a cloud communications platform and generates most revenue from customer usage of its APIs and related products.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $400.8 million | $275.0 million | $765.7 million | $508.2 million |
| Gross profit / margin | $209.1 million / 52% | $150.0 million / 55% | $402.7 million / 53% | $276.1 million / 54% |
| Operating loss | $102.6 million | $93.7 million | $195.3 million | $181.3 million |
| Net loss | $99.9 million | $92.6 million | $194.7 million | $129.1 million |
| Net loss per share, diluted | $0.71 | $0.72 | $1.39 | $1.05 |
| Non-GAAP operating income / margin | $9.5 million / 2% | $1.5 million / 1% | Not provided in this comparison | Not provided in this comparison |
Q2 revenue increased 46% year over year; six-month revenue rose 51%. Q2 growth reflected higher usage, particularly in Programmable Messaging and Voice, adoption of additional products by existing customers, and a 24% increase in active customer accounts to over 200,000. Six-month growth also benefited from including a full six months of Twilio SendGrid revenue, compared with the period from its February 2019 acquisition onward in the prior year.
Operating cash flow was positive $13.9 million for the first six months, versus cash used of $13.8 million a year earlier. Cash, cash equivalents and short-term marketable securities totaled approximately $1.90 billion at June 30, 2020. The company reported $475.7 million of cash and equivalents and $1.43 billion of short-term marketable securities. Investing cash flow was positive $144.8 million, primarily reflecting net sales and maturities of marketable securities; financing cash flow was positive $63.3 million, principally from employee stock-option exercises and ESPP proceeds.
Convertible senior notes had $550.0 million principal and a $470.5 million net carrying amount; the notes bear 0.25% interest and mature in 2023. Their conditional conversion feature was triggered, making them convertible at holders’ option from July 1 through September 30, 2020. Twilio stated its current intent was to settle note principal in cash. The balance sheet also included $224.9 million of operating and finance lease liabilities.
Changes, operating metrics and management commentary
- Q2 gross margin fell to 52% from 55%. Management cited higher network-provider fees in certain geographies; usage-related provider and cloud infrastructure costs rose as well. Six-month gross margin was 53%, versus 54%.
- Q2 operating expenses increased 28% year over year, led by sales and marketing (+44%) and research and development (+22%). Management attributed much of the increase to personnel costs and expanded hiring. General and administrative expense rose 12%, including higher charitable contributions and credit-loss allowances.
- Dollar-Based Net Expansion Rate was 132% in Q2, compared with 141% a year earlier, and 137% for the six-month period. The company changed its calculation beginning in Q1 2020; comparisons use the revised definition and may not align with previously reported figures.
- COVID-19 effects were mixed: usage remained below pre-pandemic levels in travel, hospitality and ridesharing, with a slight rebound from the prior quarter, while healthcare, education, consumer on-demand and retail saw increased usage. Management said demand and buying patterns remain uncertain.
- Management said it intends to prioritize expanding the reach and scale of the platform and revenue growth over maximizing near-term gross margin. It expects operating costs to rise in absolute dollars as it invests in employees and infrastructure.
Outlook, risks and unusual items
The filing provides no specific numerical revenue, earnings or margin guidance. Management said cash, cash equivalents, marketable securities and expected operating cash flows should be sufficient for anticipated working capital and capital expenditures for at least the next 12 months, while cautioning that this assessment could prove incorrect.
- COVID-19 may cause volatile demand, slower sales cycles, delayed renewals, reduced customer budgets or commitments, collection challenges, and infrastructure capacity constraints. The duration and financial impact were not clear.
- A jurisdiction assessed $38.8 million in historical taxes, interest and penalties, compared with $11.5 million accrued for that matter at June 30. Twilio disputed the assessment, paid it as required, and is seeking a refund. Total recorded liability for these taxes was $28.1 million; an adverse outcome could affect financial results.
- Credit-loss allowances increased amid macroeconomic uncertainty. Q2 additions to the customer credit reserve were $13.4 million, versus $2.9 million in Q2 2019.
- The company faces exposure to network-provider fees, service interruptions, cybersecurity and privacy requirements, competition, international regulation, and dependence on AWS for most cloud infrastructure.
- Telesign’s infringement case against Twilio was finally resolved in Twilio’s favor after the appeal deadline passed. Twilio’s separate patent case against Telesign remained stayed pending proceedings concerning certain patents and could proceed on another patent.
- Twilio early adopted income-tax accounting guidance ASU 2019-12 in Q2; it had no material financial-statement impact. Disclosure controls were deemed effective as of June 30.
Investor verification points
- Assess whether customer usage growth can continue and how the revised expansion-rate metric compares with prior disclosures.
- Track gross margin, especially network-provider fees, international usage mix, pricing changes and the effect of A2P SMS fees.
- Review cash conversion, rising receivables and credit-loss reserves, and whether operating cash flow remains positive.
- Monitor the convertible notes’ conversion status and potential cash-settlement needs, as well as the disputed $38.8 million tax assessment and refund claim.
- Evaluate the duration and industry-specific effects of COVID-19, including demand volatility and service-capacity risks.