Twilio Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; comparison is with Q1 2017. Twilio provides a cloud communications platform, primarily generating usage-based revenue from communications APIs.
Financial and operating performance
- Revenue: $129.1 million, up 48% year over year. Base Revenue was $117.5 million, up 46%; Variable Revenue was $11.6 million, up 73%. Usage-based fees were 84% of revenue.
- Gross profit and margin: $69.5 million; GAAP gross margin was 54%, down from 57%. Cost of revenue rose 60% to $59.6 million, primarily due to higher network provider costs and cloud infrastructure fees. Non-GAAP gross margin was 55%, versus 59%.
- Operating expenses and profit: Operating expenses increased 45% to $93.8 million. Operating loss was $24.3 million, versus $14.8 million; net loss was $23.7 million, versus $14.2 million. Basic and diluted loss per share was $0.25, versus $0.16.
- Cash flow: Operating cash flow was positive $16.9 million, compared with $2.4 million. Investing cash outflow was $20.9 million and financing cash inflow was $6.3 million. Cash, cash equivalents and restricted cash increased $2.5 million during the quarter.
- Liquidity and debt: Cash and cash equivalents were $117.7 million and short-term marketable securities were $190.3 million at quarter-end. Current assets were $382.1 million and current liabilities $109.3 million. The filing presents no interest-bearing debt balance; long-term liabilities were $11.0 million.
- Other metrics: Active Customer Accounts grew 33% to 53,985. Dollar-Based Net Expansion Rate was 132%, down from 141%. International revenue rose to 24% of total revenue from 20%.
Material changes versus Q1 2017
- Revenue growth was strong, but gross margin fell three percentage points and the net loss widened. Management attributed margin pressure primarily to a greater international usage mix and pricing adjustments made in 2017 for a large customer.
- Operating expenses increased across research and development (42%), sales and marketing (55%), and general and administrative (36%), reflecting higher staffing and growth-related investment.
- The ten largest Active Customer Accounts contributed 18% of revenue, down from 25%. WhatsApp accounted for 7% of Q1 revenue and Uber 4%; Uber usage had declined during 2017.
- Q1 2017 investing cash outflow was unusually large at $202.0 million, including marketable-security purchases and the Beepsend acquisition; Q1 2018 investing outflow was $20.9 million.
Outlook, risks and unusual items
- Management gave no specific quarterly or full-year revenue or earnings guidance in the provided filing text. It expects to prioritize platform reach, scale and revenue growth over maximizing near-term gross margin, and expects operating costs to rise in absolute dollars.
- Management said cash, cash equivalents, marketable securities and operating cash flows should cover anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that actual needs could differ.
- Significant risks include customer usage volatility and dependence on large customers, competitive pricing, network-provider costs, reliance on AWS, international expansion and regulation, privacy/GDPR compliance, and cybersecurity or service interruptions.
- Litigation includes Telesign patent disputes and a California privacy class action. The company said outcomes and possible losses could not be reasonably predicted or estimated. It also had a $21.2 million liability for historical sales and other taxes; actual exposure could differ materially.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in tracking and categorizing capitalized software-development costs. Management said the statements fairly present results in all material respects and that remediation was underway.
- ASC 606 was adopted using the modified retrospective method; the opening retained-earnings adjustment was $0.7 million and the overall financial-statement impact was described as insignificant. The company also entered a 22-month cloud-services commitment totaling $4.5 million.
- The CFO had announced plans to leave. The company adopted CEO and key-executive severance plans during the quarter.
Most important facts for investors to verify
- Whether revenue growth and customer expansion continue as the Dollar-Based Net Expansion Rate declines and major-customer usage fluctuates.
- Whether gross margin stabilizes amid international growth, network-provider costs and customer pricing concessions.
- Whether positive operating cash flow is repeatable, given working-capital movements and the reported net loss.
- Progress in remediating the material weakness in software-development cost controls and improving disclosure controls.
- Developments in the Telesign and privacy litigation, and whether tax liabilities exceed the recorded $21.2 million.
- Execution of international and enterprise growth plans, including compliance with GDPR and reliance on AWS and network providers.