Twilio Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below include the three months ended December 31, 2018. The 10-K was filed February 28, 2019. Unless otherwise stated, financial figures are in U.S. dollars.
Business context and reporting period
Twilio provides a cloud communications platform with usage-based voice, messaging and video services, plus APIs for customer engagement and account security. It reported 64,286 active customer accounts at year-end, up from 48,979, and a 140% dollar-based net expansion rate for FY 2018, compared with 128% in FY 2017.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $650.1 million | $399.0 million |
| Gross profit / gross margin | $349.2 million / 54% | $216.1 million / 54% |
| Operating loss | $115.2 million | $66.1 million |
| Net loss | $121.9 million | $63.7 million |
| Operating cash flow | $8.0 million provided | $3.3 million used |
Q4 2018: Revenue was $204.3 million versus $115.2 million in Q4 2017; gross profit was $108.0 million and gross margin was 53%, compared with 52%. Operating loss was $44.0 million and net loss was $47.2 million, versus $20.2 million and $18.9 million, respectively, in Q4 2017.
Revenue was predominantly usage-based (84% in FY 2018). Base revenue rose 62% to $593.0 million; variable revenue rose 70% to $57.1 million. International revenue increased to $165.3 million, or 25% of total revenue, from $90.4 million, or 23%.
At year-end, cash and cash equivalents were $487.2 million and marketable securities were $261.1 million; working capital was $735.1 million. Restricted cash was $18.1 million. Total assets were $1.03 billion and stockholders’ equity was $438.2 million.
Twilio issued $550 million of 0.25% convertible senior notes due 2023. Their year-end carrying amount was $434.5 million; fair value was approximately $743.4 million. FY 2018 financing cash flow included approximately $537 million net proceeds from the notes and a $58.5 million capped-call purchase. Cash flow from investing was a $139.4 million outflow.
Material changes versus the prior comparable period
- FY revenue grew 63%, driven mainly by greater customer usage, adoption of additional products, and more active accounts. The annual dollar-based net expansion rate increased to 140% from 128%.
- Cost of revenue increased 64%, broadly in line with revenue growth; annual gross margin held at 54%. Higher network-provider and cloud infrastructure costs were offset by operational improvements and product mix.
- Operating expenses increased 65% to $464.5 million. Sales and marketing rose 74%, R&D 42%, and general and administrative 85%. Higher staffing, public-company and litigation costs, acquisitions, and charitable contributions contributed to the increases.
- Net loss widened to $121.9 million from $63.7 million. Stock-based compensation increased to $93.3 million from $49.6 million.
- Operating cash flow improved to positive $8.0 million from negative $3.3 million, though FY 2018 included substantial non-cash stock compensation and working-capital movements.
Outlook, commentary, risks and unusual items
- Management said it expects to keep investing in product development, sales and marketing, infrastructure, and international expansion, prioritizing platform reach, scale and revenue growth over maximizing near-term gross margin. The filing does not provide clear numerical revenue or earnings guidance; it cautions that revenue growth is expected to decline over time and profitability is uncertain.
- Starting in 2019, a major U.S. carrier was expected to add fees on application-to-person SMS. Twilio planned to pass those charges to affected customers; management expected revenue and cost of revenue to rise, gross profit dollars to be unchanged, and gross margin percentage to decline mathematically.
- On February 1, 2019, after year-end, Twilio acquired SendGrid for approximately $2.6 billion in stock, issuing 23.4 million Class A shares. FY 2018 results exclude SendGrid’s operations; Twilio reported $3.6 million of related transaction expenses in 2018. Integration costs, synergies and preliminary purchase accounting remain uncertain.
- Key exposures include reliance on AWS and third-party network providers; variable usage and customer concentration (WhatsApp generated 7% of FY 2018 revenue); competition and pricing pressure; international expansion and lower international margins; cybersecurity, privacy and telecommunications regulation; and continuing losses.
- Contingencies include a proposed Flowers privacy-class-action settlement with a $10 million fund and an estimated Twilio liability of $1.7 million after insurance, accrued at year-end; final approval was scheduled for June 2019. A separate TCPA case had class certification, with loss probability and amount not reasonably estimable. Telesign appealed a judgment in Twilio’s favor. State sales and other tax liabilities were accrued at $22.6 million.
- Non-cancellable contractual obligations totaled $279.0 million, including $226.5 million of operating leases and $48.0 million of purchase obligations. A prior material weakness in controls over capitalized software costs was reported remediated; management and the auditor concluded internal control over financial reporting was effective at December 31, 2018.
Most important facts for investors to verify
- Whether customer usage, account growth and the 140% expansion rate persist, and how variable customers and WhatsApp affect revenue.
- Whether operating expense growth moderates and the path to sustainable profitability and positive operating cash flow.
- The actual margin effect of carrier fees, international growth, pricing actions and network-provider costs.
- SendGrid’s integration, dilution, purchase accounting and realized financial contribution following the $2.6 billion stock acquisition.
- Developments in the Flowers settlement, TCPA litigation, Telesign appeal and sales-tax assessments.
- Convertible-note settlement and dilution terms, lease commitments, and the continued effectiveness of remediated financial controls.