Twilio Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Figures below are unaudited; dollar amounts are U.S. dollars.
Business context
Twilio provides a customer engagement platform spanning communications APIs and software. Following a 2023 reorganization, it reports two segments: Communications (Messaging, Voice and Email) and Data & Applications (including Segment, Engage, Flex and Marketing Campaigns). Comparative segment results were recast to the new presentation.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,037.8 million | $943.4 million | $2,044.3 million | $1,818.7 million |
| GAAP gross profit / margin | $505.8 million / 49% | $445.3 million / 47% | $996.4 million / 49% | $870.4 million / 48% |
| Operating loss | $141.8 million | $311.9 million | $405.9 million | $529.7 million |
| Net loss | $166.2 million | $322.8 million | $508.3 million | $544.4 million |
| Diluted loss per share | $0.91 | $1.77 | $2.75 | $3.00 |
- Q2 non-GAAP operating income was $120.1 million (12% margin), versus a $7.3 million non-GAAP operating loss in Q2 2022. Non-GAAP measures exclude specified items; they are not GAAP results.
- Q2 Communications revenue was $913.1 million, up 10%; Data & Applications revenue was $124.6 million, up 12%. Segment non-GAAP gross profit was $440.1 million and $101.8 million, respectively.
- Active Customer Accounts reached 304,000, up from 275,000. Dollar-Based Net Expansion Rate fell to 103% from 123%; Q2 segment rates were 103% for Communications and 99% for Data & Applications. Usage-based fees represented 71% of Q2 revenue.
- Six-month operating cash flow was negative $14.2 million, versus negative $80.1 million a year earlier. Investing activities provided $509.8 million, largely from net marketable-security sales and maturities; financing activities used $469.4 million, primarily for share repurchases.
- At June 30, cash and cash equivalents were $675.1 million and short-term marketable securities were $3.009 billion. Current assets were $4.665 billion versus current liabilities of $759.8 million. Long-term debt had a $988.2 million carrying value ($1.0 billion principal); the company reported covenant compliance.
Material changes and unusual items
- Revenue grew 10% in Q2, but the expansion rate declined materially year over year. Gross margin improved to 49%, primarily reflecting improved Communications margin; Data & Applications margin declined to 68% from 69%.
- Operating expenses were lower year over year in research and development, sales and marketing, and general and administrative costs, reflecting cost reductions, workforce actions and lower personnel costs. Q2 included $14.9 million of restructuring costs and $9.3 million of long-lived asset impairment. Six-month restructuring costs were $136.8 million and impairment charges were $31.1 million.
- Six-month other expenses included a $62.8 million share of losses from the Syniverse equity-method investment and a $46.2 million strategic-investment impairment. The company also recorded a $28.8 million loss on ValueFirst assets held for sale and $3.1 million of related expenses. ValueFirst was sold in July 2023 for $45.5 million cash. IoT assets were sold in Q2 for $15.8 million in stock consideration.
- The company repurchased 8.3 million shares for $495.0 million in the first six months under its $1.0 billion authorization; approximately $505.0 million remained available at June 30.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management said cash, cash equivalents, marketable securities and operating cash flows are expected to cover working capital, capital expenditures and authorized repurchases for the next 12 months and beyond, while cautioning that actual cash needs could be higher.
- Management’s stated priorities are to accelerate Data & Applications growth and drive Communications efficiencies. Risks include macroeconomic pressure on customer spending and usage, competition and pricing, network-provider costs and reliability, execution of workforce reductions and reorganization, and security, privacy and regulatory exposure. The filing also describes scheduled blocking of unregistered U.S.-bound A2P 10DLC messaging, which could reduce messaging volume and revenue.
- Twilio is challenging San Francisco’s $38.8 million Telephone Users and Access Line Tax assessment, paid under protest in 2020. The company seeks a refund; litigation is uncertain and an adverse outcome could result in additional material exposure. It also reported $31.8 million of domestic and $20.5 million of international non-income-based tax liabilities at June 30.
- The company disclosed a January 2023 FCC cease-and-desist letter concerning alleged fraudulent robocall traffic. It removed the identified traffic, responded to the FCC, and reported no further communication from the agency. The filing also describes a 2022 social-engineering incident affecting data of approximately 209 customers.
- Disclosure controls and procedures were assessed as effective at June 30. Internal controls were modified in Q2 to support reporting under the new segment structure.
Important facts for investors to verify
- Whether the lower expansion rate and usage-based customer demand stabilize, and whether the two segments sustain their reported growth.
- Whether cost reductions translate into durable GAAP profitability and positive operating cash flow, excluding restructuring and other unusual items.
- How network-provider fees, messaging restrictions and customer usage affect Communications margins and revenue.
- Developments in the San Francisco tax litigation, other tax exposures and the FCC matter.
- Use of remaining repurchase authorization relative to liquidity needs, and future performance of the Syniverse investment and goodwill-bearing reporting units.