Twilio Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Twilio provides a usage-based cloud communications platform for developers, including voice, messaging, video, wireless and authentication products. This filing covers the quarter and six months ended June 30, 2016; financial amounts below are in U.S. dollars, generally millions unless noted. Twilio completed its IPO in June, selling 11.5 million Class A shares at $15 per share and receiving $155.7 million in net proceeds.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $64.5 | $38.0 | $123.9 | $71.3 |
| Gross profit / margin | $36.3 / 56% | $21.1 / 56% | $68.8 / 56% | $38.9 / 55% |
| Operating loss | $(10.9) | $(9.5) | $(17.2) | $(18.3) |
| Net loss | $(11.0) | $(9.6) | $(17.5) | $(18.2) |
| Basic and diluted loss per share | $(0.45) | $(0.52) | $(0.84) | $(1.01) |
- Q2 revenue rose 70% year over year; first-half revenue rose 74%. Q2 base revenue grew 84% to $56.4 million, while variable revenue increased 12% to $8.1 million.
- Q2 operating expenses rose 54% to $47.2 million: research and development increased 85%, sales and marketing 28%, and general and administrative 65%. First-half operating expenses increased 50% to $86.0 million.
- Cash and cash equivalents were $261.4 million at June 30, versus $108.8 million at December 31, 2015. Restricted cash was $8.6 million. Total liabilities were $69.3 million; no borrowings were outstanding on the $15 million revolving credit facility, which expires in March 2017.
- For the six months, operating activities provided $5.1 million, compared with $12.1 million used in the prior-year period; investing used $15.1 million and financing provided $162.5 million, principally from the IPO. Management attributed operating cash generation partly to increases in accounts payable and other liabilities, deferred revenue and other long-term liabilities.
Changes and operating indicators
- Active Customer Accounts increased 45% year over year to 30,780. Q2 Dollar-Based Net Expansion Rate was 164%, up from 149%; the six-month rate was 170%.
- International revenue was 16% of Q2 revenue, versus 15% a year earlier; first-half international revenue was also 15% of total. Management cited customer usage growth and international expansion.
- Gross margin was flat year over year in Q2 and improved one percentage point for the first half. Management cited platform optimization savings, while noting that it may pass savings to customers and is prioritizing platform reach, scale and revenue growth over maximizing near-term gross margin.
- Twilio reported $8.0 million of stock-based compensation for the first half, up from $3.6 million. IPO-related conversion of preferred shares and the two-class common stock structure were significant capital-structure changes; Class B shares carry ten votes each versus one vote for Class A.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management expected operating costs to increase and stated that cash, the credit facility and operating cash flows should cover anticipated working capital and capital expenditures for at least 12 months, while cautioning that this assessment could prove incorrect.
- Management identified continued investment in engineering, product development, sales and marketing, international expansion, infrastructure and public-company compliance. Growth, customer usage, pricing, network-provider costs and competition could affect results; most customers can reduce or stop usage without long-term commitments.
- Revenue and customer concentration are notable: the ten largest Active Customer Accounts generated 31% of Q2 revenue. Variable Customer Accounts represented 13% of Q2 revenue; WhatsApp alone represented 12% of first-half revenue. One customer represented 13% of Q2 revenue.
- Twilio recorded a $23.3 million liability for sales, use and telecommunications-related taxes at June 30, up from $17.6 million at year-end. The estimate depends on assumptions about taxability, jurisdictional nexus and revenue sourcing; actual exposure could differ materially.
- Litigation includes Telesign patent suits concerning authentication products and a California privacy class action. The company said losses could not be reasonably predicted or estimated. After quarter-end, the court dismissed Telesign II with leave to amend; the court denied Twilio’s demurrer in the privacy case. These matters could lead to damages, injunctions, costs or business disruption.
- Other key risks include reliance on AWS and third-party network providers, service outages and security incidents, regulatory and privacy requirements, international expansion and currency exposure, and the company’s history of losses. The company reported effective disclosure controls; it does not hedge currency exposure currently.
Important facts for investors to verify
- Whether strong revenue growth and customer expansion continue, particularly given variable usage and customer concentration.
- Whether operating expenses and stock-based compensation grow faster or slower than revenue, and whether gross margin holds as usage, pricing and international mix change.
- The composition and durability of positive first-half operating cash flow, including the contribution from increased liabilities and accruals.
- Developments in the sales and telecommunications tax exposure and the Telesign and privacy litigation, including any material change in potential losses.
- IPO-related share dilution, equity-plan overhang and the effect of the dual-class voting structure on shareholder influence.