Twilio Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Twilio provides cloud communications APIs and related customer-engagement products. Results include a full quarter of Twilio SendGrid, versus only February and March in Q1 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $364.9 million | $233.1 million | +57% |
| Gross profit / GAAP gross margin | $193.5 million / 53% | $126.1 million / 54% | Margin down 1 percentage point |
| Operating loss | $92.7 million | $87.6 million | Loss widened |
| Net loss | $94.8 million | $36.5 million | Loss widened |
| Net loss per share, diluted | $0.68 | $0.31 | Loss per share increased |
| Operating cash flow | $15.5 million provided | $9.1 million used | Improved |
Non-GAAP operating income was $6.1 million, or a 2% margin, compared with $3.4 million and 1% a year earlier. Non-GAAP gross margin was 57%, versus 58%. These non-GAAP measures exclude specified items, including stock-based compensation and acquired-intangible amortization.
- Liquidity: Cash and cash equivalents were $345.5 million and short-term marketable securities were $1.498 billion at quarter-end, totaling about $1.843 billion. Current assets were $2.078 billion; current liabilities were $277.0 million.
- Debt: The 0.25% convertible senior notes due 2023 had $550.0 million principal and a $464.4 million net carrying amount. The notes became convertible at holders’ option from April 1 through June 30, 2020; management said it currently intended to settle principal in cash.
- Other obligations: Lease liabilities totaled $183.9 million. The company also reported $16.8 million of new non-cancelable vendor commitments and a $27.5 million liability for potential prior-period sales and other taxes.
Changes and operating performance
- Revenue rose $131.7 million, primarily from increased usage of messaging and voice products, greater adoption of additional products by existing customers, and the full-quarter SendGrid contribution. Pricing reductions partially offset growth.
- Active Customer Accounts increased 23% to over 190,000. Dollar-Based Net Expansion Rate was 143%, versus 142%; the company changed its calculation to include total revenue from all Active Customer Accounts, limiting comparability with previously reported rates.
- Cost of revenue rose 60%, faster than revenue, mainly reflecting higher network-provider and cloud-infrastructure costs. Management cited product mix, international usage and acquired-intangible amortization as factors affecting gross margin.
- Research and development increased 47% and sales and marketing increased 63%, reflecting headcount growth and investment. General and administrative expense declined 14%, partly due to lower acquisition-related professional costs compared with 2019.
- The larger reported net loss also reflects the comparison with a $51.7 million income-tax benefit in Q1 2019, primarily from a partial release of the U.S. valuation allowance associated with SendGrid. Q1 2020 recorded a $1.0 million tax provision.
Outlook, risks and notable items
- The filing gives no specific revenue or earnings guidance. Management said cash, cash equivalents, marketable securities and expected operating cash flows should cover anticipated working-capital and capital needs for at least 12 months, while noting this assessment could prove incorrect.
- COVID-19 impacts were mixed: usage declined among travel, hospitality and ridesharing customers, while healthcare, education, entertainment and media usage increased. Management warned of uncertain demand, delayed sales and renewals, reduced customer budgets, collection risk, and potential infrastructure costs and gross-margin pressure.
- The company postponed its SIGNAL event to September 2020 as a virtual event, closed offices temporarily, shifted employees to remote work and suspended business travel.
- Significant risks include reliance on AWS and global network providers, changing provider fees, service outages and capacity constraints, intense competition, regulatory and privacy obligations, and customer usage volatility. WhatsApp represented 7% of Q1 revenue and had no long-term contract.
- In the Telesign patent case against Twilio, the Federal Circuit affirmed a judgment in Twilio’s favor on January 9, 2020; Telesign had not indicated whether it would seek further appeal. Twilio did not believe a loss was probable or estimable.
- Management reported disclosure controls were effective as of March 31, 2020, with no material changes in internal control over financial reporting during the quarter.
Investor facts to verify
- How much of the 57% revenue growth reflects underlying usage and customer expansion versus SendGrid consolidation and pricing changes.
- Whether COVID-19-related usage shifts, customer payment timing and enterprise sales delays affect subsequent quarters and operating cash flow.
- Whether network-provider fee increases and international product mix continue to pressure gross margin.
- Potential cash settlement or conversion-related effects from the notes’ temporary convertibility, and the company’s ability to maintain liquidity.
- Exposure to the $27.5 million prior-period tax liability and any additional assessments, alongside the concentration represented by WhatsApp.