Twilio Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Dollar amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Twilio provides a cloud communications platform that developers use to embed voice, messaging, video and related services in software applications. Revenue is predominantly usage-based. The company reported 48,979 active customer accounts at year-end, up 34% from 36,606 a year earlier, and operated in one reportable segment.
Financial and operating metrics
| Metric | FY 2017 | FY 2016 | Change or context |
|---|---|---|---|
| Revenue | $399.0 million | $277.3 million | Up 44% |
| Gross profit / margin | $216.1 million / 54% | $156.8 million / 57% | Margin contracted 3 percentage points |
| Operating expenses | $282.2 million | $198.1 million | Up 42% |
| Operating loss | $(66.1) million | $(41.3) million | Loss widened |
| Net loss | $(63.7) million | $(41.3) million | Loss widened; basic and diluted loss per share was $0.70 |
| Cash from operating activities | $(3.3) million | $10.1 million | Turned negative |
| Cash and cash equivalents | $115.3 million | $305.7 million | Year-end balance |
| Short-term marketable securities | $175.6 million | — | Cash plus securities totaled $290.9 million |
| Working capital | $274.7 million | $279.7 million | Current assets exceeded current liabilities |
At December 31, 2017, total liabilities were $89.9 million and stockholders’ equity was $359.8 million. The filing describes no outstanding borrowings; a $15 million revolving facility expired in March 2017 without being drawn. Cash used in investing activities was $223.6 million, largely reflecting net marketable-security purchases, the Beepsend acquisition and capitalized software costs. Cash from financing activities was $36.4 million, primarily employee option exercises and stock purchase plan proceeds.
Fourth-quarter revenue was $115.2 million, compared with $82.0 million in Q4 2016. Q4 gross margin was 52%, versus 58%; operating loss was $20.2 million and net loss was $18.9 million.
Material changes versus prior period
- FY revenue growth decelerated to 44% from 66% in 2016. Base revenue grew 49%, compared with 79% in 2016; fourth-quarter base revenue growth was 40%.
- Dollar-Based Net Expansion Rate declined to 128% from 161% for the year; the quarterly rate was 118% in Q4 2017 versus 155% in Q4 2016. Management attributed the trend partly to lower usage and pricing from Uber, its largest Base Customer.
- Uber accounted for 8% of 2017 revenue, down from 14% in 2016; WhatsApp accounted for 6%, down from 9%. The ten largest active customer accounts together represented 19% of 2017 revenue, versus 30% in 2016.
- International revenue increased to $90.4 million, or 23% of total revenue, from $43.4 million, or 16%. Management cautioned that international usage generally carries lower gross margins.
- R&D expense rose 55% to $120.7 million and sales and marketing expense rose 54% to $100.7 million, reflecting continued investment and headcount growth. Stock-based compensation increased to $49.6 million from $24.2 million.
- FY 2017 results included a $13.4 million reduction in net loss from revisions to state and other tax exposure estimates. A $1.2 million stock donation to Twilio.org was recorded as a charitable contribution.
Outlook, risks and unusual items
- Outlook: No quantified financial guidance is provided in the supplied filing text. Management expects revenue growth to decline over time and operating costs to increase, and says it intends to prioritize platform reach, scale and revenue growth over maximizing near-term gross margins. It believes available cash, cash equivalents, marketable securities and operating cash flows will cover anticipated needs for at least 12 months.
- Customer and margin exposure: Most customers can reduce or stop usage without penalty. Management expects Uber’s lower usage to continue weighing on revenue growth and expansion rates. Changes in network-provider costs, pricing and customer/product mix could further affect margins.
- Liquidity and commitments: Operating cash flow was negative in 2017. Contractual obligations totaled $93.9 million, comprising $45.7 million of operating leases and $48.1 million of purchase obligations, primarily with cloud and network providers.
- Financial reporting controls: Management identified a material weakness in controls over tracking and classifying capitalized internal-use software costs. Disclosure controls were deemed ineffective, and the auditor issued an adverse opinion on internal control over financial reporting. The auditor nevertheless gave an unqualified opinion on the financial statements. Management said the weakness had not caused a material misstatement and planned remediation, but could not estimate when it would be completed.
- Taxes: The balance sheet included $20.9 million of sales and other tax liabilities. The company remained in discussions with states about prior-period taxes; actual exposure could differ from estimates. The Tax Cuts and Jobs Act effects were not fully assessed for certain provisions.
- Litigation: Patent disputes with Telesign and a California privacy class action were ongoing. In January 2018, the court certified two classes in the privacy case. The company said it could not reasonably predict outcomes or estimate possible losses for the matters described.
- Operational and regulatory risks: Twilio relies substantially on AWS for cloud infrastructure and on external network service providers for communications delivery. Other material risks include service outages, security incidents, competitive pricing, GDPR compliance effective May 2018, TCPA exposure and international expansion.
- Leadership: The company announced on February 13, 2018 that CFO Lee Kirkpatrick would leave after a replacement was hired.
Most important facts for investors to verify
- Whether customer usage, especially at Uber and other large accounts, stabilizes, and whether the declining expansion and base-revenue growth rates persist.
- Whether revenue growth can support rising operating expenses, improve gross margins and restore positive operating cash flow.
- Progress in remediating the material weakness over software-cost capitalization and the timing of any control improvements.
- Resolution and potential financial exposure from state tax matters, the Telesign disputes and the certified privacy-action classes.
- Cash and marketable-security balances, cash burn and the ability to meet purchase commitments and lease obligations without additional financing.
- Effects of the CFO transition, stock-based compensation and dilution, international growth, and customer concentration on future results.