Twilio Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Twilio provides a cloud communications platform, primarily priced on customer usage. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Revenue | $71.5 | $44.3 | +62% |
| Gross profit / margin | $40.2 / 56% | $24.7 / 56% | Margin unchanged |
| Operating expenses | $51.5 | $33.6 | +53% |
| Operating loss | $(11.3) | $(8.9) | Loss widened |
| Net loss | $(11.3) | $(9.0) | Loss widened |
| Net loss per share, basic and diluted | $(0.13) | $(0.70) |
For the first nine months, revenue was $195.4 million versus $115.6 million (+69%); gross profit was $109.1 million and gross margin was 56%, compared with 55% in 2015. Operating expenses rose 51% to $137.6 million. Operating loss was $28.5 million and net loss was $28.7 million, versus losses of $27.2 million and $27.2 million, respectively, in the prior-year period.
Cash and cash equivalents were $252.2 million at September 30, up from $108.8 million at year-end 2015; restricted cash was $8.6 million. Current assets were $299.8 million and current liabilities $66.3 million. The company reported no outstanding borrowings under its $15 million revolving facility, which expires in March 2017. Total liabilities were $76.3 million.
Nine-month operating cash flow was positive $4.4 million, compared with negative $14.4 million in 2015. Investing cash flow was negative $21.8 million, including restricted cash, software development and property and equipment spending. Financing cash flow was positive $160.8 million, principally reflecting IPO proceeds; cash increased by $143.4 million during the period.
Material changes and operating trends
- Q3 Base Revenue increased 75% to $64.1 million, while Variable Revenue decreased 1% to $7.4 million. Base Revenue represented 90% of Q3 revenue, versus 83% a year earlier.
- Active Customer Accounts rose 45% to 34,457. Dollar-Based Net Expansion Rate was 155%, compared with 156% in Q3 2015. Management attributed growth primarily to increased usage, especially in Programmable Messaging and Voice, and adoption of additional products; lower usage prices partly offset growth.
- International revenue grew to $11.0 million, or 15% of Q3 revenue, from $6.0 million, or 13%. Management cited growth in international customer usage and customer accounts.
- Q3 cost of revenue rose 60%, mainly due to higher network-provider fees. Operating expenses increased across research and development (+82%), sales and marketing (+32%) and general and administrative (+46%), reflecting hiring, product investment, sales expansion and higher related costs.
- Stock-based compensation expense was $7.6 million in Q3 and $15.6 million for the nine-month period, materially above prior-year amounts. GAAP losses therefore remain important alongside management’s non-GAAP measures.
- The June 2016 IPO generated $155.5 million of net proceeds. In October, after quarter-end, Twilio sold shares in a follow-on offering and reported $64.4 million in net proceeds; selling stockholders also sold shares, for which the company received no proceeds.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, margin or earnings guidance. Management said it expects operating costs to increase in absolute dollars and intends to prioritize platform reach, scale and revenue growth over maximizing near-term gross margin. It believed cash, the credit facility and operating cash flows would cover anticipated needs for at least 12 months, while cautioning that liquidity needs could exceed expectations.
- Management has incurred losses since inception and stated that profitability is uncertain. Continued investment in engineering, products, sales, marketing, infrastructure and international expansion may not produce sufficient revenue to offset costs. Revenue growth is expected to decline over time.
- Revenue is usage-based, and many customers can reduce or stop usage without penalty. Customer concentration is notable: WhatsApp accounted for 10% of revenue in the first nine months of 2016, and another customer accounted for 13%. Variable customer usage can fluctuate substantially.
- Twilio relies substantially on Amazon Web Services and third-party network providers; outages, capacity constraints, provider pricing or service changes could affect service quality, costs and results. Competition, pricing pressure, rapid growth, international expansion, security and regulatory requirements are also highlighted risks.
- Two Telesign patent lawsuits concern authentication products; one case was stayed while patent review proceedings continued, and Twilio’s motion to dismiss the amended complaint in the second case was pending. A putative California privacy class action was in discovery. The company said outcomes and potential losses could not reasonably be predicted or estimated.
- The company recorded a $26.7 million liability for potential sales, use and telecommunications taxes, up from $17.6 million at year-end 2015. Actual exposure could differ materially if tax authorities challenge assumptions about taxability, nexus or revenue sourcing.
- Other commitments include $49.4 million of future minimum operating lease payments and $18.9 million of non-cancellable purchase obligations. After quarter-end, Twilio also entered into a three-year, $57.7 million service commitment with a related-party vendor, and signed a non-binding term sheet proposing up to a $1 million investment in SpeakEasy, subject to due diligence and definitive agreements.
- Class B shares carry ten votes per share versus one vote for Class A, concentrating voting control. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Base Revenue growth and customer expansion can continue as pricing reductions and variable customer usage affect reported revenue.
- Revenue exposure to major customers, particularly WhatsApp and the other customer identified in the filing, and the implications of their usage or contract terms.
- Whether gross margins can be sustained as network-provider costs, international growth and customer pricing evolve.
- The drivers and durability of positive operating cash flow, given the reported net loss, working-capital movements and substantial stock-based compensation.
- Potential outcomes and financial effects of the Telesign and privacy litigation, and the adequacy of the $26.7 million indirect-tax accrual.
- The cash proceeds and share dilution from the October follow-on offering, plus the related-party service commitment and proposed SpeakEasy investment.