Twilio Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Twilio provides cloud communications APIs and customer-engagement software; its usage-based model means revenue depends substantially on customer activity. The February 2019 SendGrid acquisition added email products and is included in results from February 1, 2019.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1.134 billion | $650.1 million |
| Gross profit / gross margin | $608.9 million / 54% | $349.2 million / 54% |
| Operating loss | $369.8 million | $115.2 million |
| Net loss | $307.1 million | $121.9 million |
| Net loss per share, diluted | $2.36 | $1.26 |
| Cash from operating activities | $14.0 million | $8.0 million |
- Revenue increased 75% year over year. Base revenue rose 79% to $1.060 billion; variable revenue rose 31% to $74.7 million. SendGrid contributed $177.1 million of revenue after acquisition, so reported growth is not a like-for-like organic comparison.
- Gross margin remained approximately 54%. Cost of revenue increased 75%, principally due to higher network-provider and cloud-infrastructure costs, greater usage, and acquired-intangible amortization.
- Operating expenses increased 111% to $978.7 million, reflecting acquisition-related costs and substantial hiring and investment. Stock-based compensation was $264.3 million, versus $93.3 million in 2018; acquired-intangible amortization was $72.8 million.
- Fourth-quarter revenue was $331.2 million, versus $204.3 million a year earlier. Q4 gross margin was 53%; net loss was $90.2 million, versus $47.2 million in Q4 2018. Dollar-based net expansion was 124% in Q4, down from 147% in Q4 2018.
- Active Customer Accounts were approximately 179,000 at year-end, versus 64,286 a year earlier; the 2019 figure includes SendGrid accounts and is rounded down to the nearest thousand. Annual dollar-based net expansion was 136%, versus 140%.
- Year-end cash and cash equivalents were $253.7 million and short-term marketable securities were $1.599 billion. Working capital was $1.814 billion. Operating cash flow was positive, while investing cash outflow was $1.286 billion, mainly reflecting marketable-security purchases and acquisitions.
- Convertible notes had $550.0 million principal outstanding, a 0.25% coupon, and a 2023 maturity; their net carrying value was $458.2 million. The notes became conditionally convertible during Q1 2020. The company reported $871.1 million in total liabilities.
Material changes, outlook, and risks
- SendGrid was acquired for approximately $2.84 billion in total purchase-price value, primarily stock and assumed awards. The transaction added $2.235 billion of goodwill and $483 million of identifiable intangible assets; integration, customer retention, and realizing expected synergies remain execution risks.
- Twilio raised approximately $979 million net in a June 2019 follow-on equity offering. Shares outstanding increased, and stock-based compensation also rose substantially.
- Management said it intends to prioritize platform reach, scale, revenue growth, product development, international expansion, and enterprise adoption over maximizing near-term gross margin. It expects operating costs to increase as it hires and invests. The filing provides no specific forward financial guidance.
- Key exposures include customer usage volatility and concentration (WhatsApp represented 5% of 2019 revenue), competition and pricing pressure, dependence on AWS and third-party network providers, service reliability and cybersecurity, and privacy, telecommunications, and messaging regulation.
- Management noted that a major U.S. carrier introduced a new A2P SMS fee in February 2020. Twilio said it was passing the fee to affected customers; this may increase reported revenue and cost of revenue without increasing gross-profit dollars, while lowering gross-margin percentage.
- The filing flags uncertainty about COVID-19’s effects, including potential disruption to customers and the global economy. This is a risk disclosure, not a quantified impact estimate.
- Twilio recorded a $55.2 million income-tax benefit in 2019, primarily associated with the SendGrid acquisition and release of valuation allowance; it remained loss-making and retained a valuation allowance on U.S. deferred tax assets. It also reported a $27.0 million reserve for potential prior state sales and other taxes.
- A privacy class-action settlement had a stated $10 million common fund; Twilio reported paying $1.7 million toward the settlement in August 2019. The Telesign patent judgment in Twilio’s favor was affirmed on appeal in January 2020. The filing reports no probable or estimable loss for that matter.
- Management and the auditor concluded internal control over financial reporting was effective at year-end. The auditor’s control assessment excluded SendGrid, which represented 5% of consolidated assets and 16% of 2019 revenue.
Important facts for investors to verify
- How much of revenue growth reflects acquired SendGrid revenue versus underlying customer usage, pricing, and organic growth.
- Whether expansion-rate trends and customer growth remain healthy after the metric definition changes planned for 2020, including inclusion of variable accounts.
- Whether elevated operating expenses, stock compensation, and acquisition amortization translate into a path toward sustained profitability and positive operating cash generation.
- Current conversion, settlement, and liquidity implications of the $550 million convertible notes, including the notes’ conditional convertibility in Q1 2020.
- Final outcomes of state tax discussions, integration and synergy realization, and the effects of carrier fees, privacy rules, and COVID-19 on margins and demand.