Twilio Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Twilio provides a cloud communications platform, primarily on a usage-based model. Dollar amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $87.4 | $59.3 | +47% |
| Gross profit / gross margin | $50.1 / 57% | $32.5 / 55% | Margin +2 percentage points |
| Operating expenses | $64.8 | $38.9 | +67% |
| Operating loss | $(14.8) | $(6.4) | Loss widened |
| Net loss | $(14.2) | $(6.5) | Loss widened |
| Net loss per share, basic and diluted | $(0.16) | $(0.37) | |
| Operating cash flow | $2.4 | $6.0 | Lower |
- Revenue less cost of revenue produced a GAAP gross margin of 57%; management’s non-GAAP gross margin was 59%, versus 55% in Q1 2016.
- Cash and cash equivalents were $118.4 million and short-term marketable securities were $170.1 million at March 31, 2017. Total liabilities were $91.9 million; the filing reports no outstanding borrowings. The $15 million revolving credit facility expired in March and was not renewed.
- Cash and cash equivalents fell by $187.2 million during the quarter, principally reflecting $170.8 million invested in marketable securities, the $22.6 million acquisition payment, and capital and software spending. Including marketable securities, liquid resources were approximately $288.5 million at quarter-end.
Material changes and operating trends
- Base Revenue rose 62% to $80.6 million, while Variable Revenue fell 29% to $6.7 million. Base Revenue was 92% of total revenue, compared with 84% a year earlier; variable-customer revenue was 8%, compared with 16%.
- Active Customer Accounts increased 42% to 40,696. Dollar-Based Net Expansion Rate declined to 141% from 170%, and Base Revenue growth slowed to 62% from 92%.
- International revenue increased to $17.3 million, or 20% of total revenue, from $8.8 million, or 15%. The Swedish acquisition contributed $3.4 million of the year-over-year international revenue increase.
- Operating expenses rose across all major functions: research and development +78%, sales and marketing +57%, and general and administrative +62%. Management attributed increases primarily to higher personnel costs and continued product, sales, and international expansion investments.
- One customer organization represented 12% of Q1 2017 revenue; the 10 largest Active Customer Accounts together generated 25%, down from 32% in Q1 2016. Uber, Twilio’s largest Base Customer Account, had notified the company it may reduce usage in future periods.
Outlook, commentary, and key risks
- No specific revenue, earnings, or margin guidance is provided. Management said it expects cash, cash equivalents, marketable securities, and operating cash flows to cover anticipated working capital and capital expenditure needs for at least the next 12 months, while cautioning that additional financing may be needed depending on future needs.
- Management intends to prioritize expanding platform reach, scale, and revenue rather than maximizing near-term gross margin. It expects operating costs to increase and plans continued investment in research and development, enterprise sales, marketing, and international expansion.
- The company remains loss-making: accumulated deficit was $201.0 million at March 31, 2017. Management states it is uncertain about future profitability.
- Customer concentration and usage volatility are material risks, particularly the possible reduction in Uber usage and fluctuating usage by variable customers. Competition, pricing reductions, network-provider costs, and lower international margins could also affect growth and profitability.
- A $29.0 million liability was recorded for potential sales, use, telecommunications, and similar taxes; management says actual exposure could differ materially if jurisdictions challenge its assumptions. Twilio began collecting telecommunications-based taxes in certain jurisdictions in March 2017.
- Patent disputes with Telesign and a putative California privacy class action remain pending. The company says losses cannot currently be reasonably predicted or estimated. The filing also notes an expected June 2017 patent-review ruling and a May 2017 hearing on a motion to consolidate and stay a related case.
- On February 6, 2017, Twilio acquired a Swedish mobile operator specializing in messaging and SMS solutions for approximately $23.0 million. The purchase-price allocation was preliminary and included $12.7 million of goodwill and $13.6 million of acquired intangible assets.
Important facts for investors to verify
- Track whether Uber reduces usage and how customer concentration and variable-customer revenue evolve.
- Assess whether customer expansion and revenue growth can offset slower expansion rates and sharply rising operating expenses.
- Monitor operating cash generation, planned investment, and the adequacy of liquidity following expiration of the revolving credit facility.
- Review the assumptions and developments underlying the $29.0 million indirect-tax accrual, as well as outcomes of the Telesign and privacy litigation.
- Evaluate acquisition integration and the final valuation of acquired assets, including goodwill and intangible assets.