UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended June 30, 2016

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37806

Twilio Inc.

(Exact name of registrant as specified in its charter)

Delaware	26-2574840
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

645 Harrison Street, Third Floor

San Francisco, California 94107

(Address of principal executive offices) (Zip Code)

(415) 390-2337

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o   No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x  (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of July 31, 2016, 11,677,315 shares of the registrant’s Class A common stock and 72,892,409 shares of registrant’s Class B common stock were outstanding, respectively.

TWILIO INC.

Quarterly Report on Form 10-Q

For the Three Months Ended June 30, 2016

TABLE OF CONTENTS

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	4
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 6.	Exhibits	66
	Signatures	67

1

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

·our future financial performance, including our revenue, cost of revenue, gross margin and operating expenses;

·the sufficiency of our cash and cash equivalents to meet our liquidity needs;

·anticipated technology trends, such as the use of and demand for cloud communications;

·our ability to continue to build and maintain credibility with the global software developer community;

·our ability to attract and retain customers to use our products;

·our ability to attract enterprises and international organizations as customers for our products;

·our ability to expand partnerships with independent software vendors and system integrators;

·the evolution of technology affecting our products and markets;

·our ability to introduce new products and enhance existing products;

·our ability to optimize our network service provider coverage and connectivity;

·our ability to pass on our savings associated with our platform optimization efforts to our customers;

·our ability to successfully enter into new markets and manage our international expansion;

·the attraction and retention of qualified employees and key personnel;

·our ability to effectively manage our growth and future expenses and maintain our corporate culture;

·our anticipated investments in sales and marketing and research and development;

·our ability to maintain, protect and enhance our intellectual property;

·our ability to successfully defend litigation brought against us;

·our ability to comply with modified or new laws and regulations applying to our business; and

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

2

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

3

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TWILIO INC.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

	As of June 30, 2016			As of December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	261,386		$	108,835
Accounts receivable, net	22,981			19,094
Prepaid expenses and other current assets	16,799			8,546
Total current assets	301,166			136,475
Restricted cash	8,611			1,170
Property and equipment, net	20,544			14,058
Intangible assets, net	2,604			2,292
Goodwill	3,165			3,165
Other long-term assets	461			356
Total assets	$	336,551		$	157,516
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,720		$	2,299
Accrued expenses and other current liabilities	42,140			31,998
Deferred revenue	8,707			6,146
Total current liabilities	59,567			40,443
Other long-term liabilities	9,751			448
Total liabilities	69,318			40,891
Commitments and contingencies (Note 11)
Stockholders’ equity:
Convertible preferred stock	—			239,911
Class A and Class B common stock	85			17
Additional paid-in capital	430,016			22,103
Accumulated deficit	(162,868		)	(145,406		)
Total stockholders’ equity	267,233			116,625
Total liabilities and stockholders’ equity	$	336,551		$	157,516

See accompanying notes to condensed consolidated financial statements.

4

TWILIO INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenue	$	64,510		$	37,954		$	123,850		$	71,319
Cost of revenue	28,203			16,827			55,030			32,372
Gross profit	36,307			21,127			68,820			38,947
Operating expenses:
Research and development	17,369			9,388			32,233			17,868
Sales and marketing	18,156			14,164			31,578			24,033
General and administrative	11,635			7,035			22,228			15,300
Total operating expenses	47,160			30,587			86,039			57,201
Loss from operations	(10,853		)	(9,460		)	(17,219		)	(18,254		)
Other expenses, net	(28		)	(83		)	(46		)	(30		)
Loss before (provision) benefit for income taxes	(10,881		)	(9,543		)	(17,265		)	(18,284		)
(Provision) benefit for income taxes	(113		)	(33		)	(197		)	48
Net loss attributable to common stockholders	$	(10,994	)	$	(9,576	)	$	(17,462	)	$	(18,236	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.45	)	$	(0.52	)	$	(0.84	)	$	(1.01	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	24,261,903			18,388,844			20,872,550			18,070,932

See accompanying notes to condensed consolidated financial statements.

5

TWILIO INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(17,462	)	$	(18,236	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,285			1,633
Stock-based compensation	8,001			3,567
Provision for doubtful accounts	847			368
Tax benefit related to acquisition	—			(108		)
Tax benefit related to stock-based compensation	12			—
Write-off of internally developed software	146			87
Changes in operating assets and liabilities:
Accounts receivable	(4,733		)	(4,969		)
Prepaid expenses and other current assets	(10,212		)	(1,815		)
Other long-term assets	(108		)	(86		)
Accounts payable	4,648			(78		)
Accrued expenses and other current liabilities	8,823			6,660
Deferred revenue	2,561			1,040
Other long-term liabilities	9,305			(119		)
Net cash provided by (used in) operating activities	5,113			(12,056		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash	(7,439		)	—
Capitalized software development costs	(5,390		)	(3,775		)
Purchases of property and equipment	(1,945		)	(686		)
Purchases of intangible assets	(310		)	(113		)
Acquisition, net of cash acquired	—			(1,761		)
Net cash used in investing activities	(15,084		)	(6,335		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of underwriting discounts	160,426			—
Payments of costs related to initial public offering	(2,099		)	—
Net proceeds from issuance of convertible preferred stock	—			105,869
Proceeds from exercises of stock options	4,276			1,730
Value of equity awards withheld for tax liabilities	(79		)	—
Repurchases of stock	(2		)	(14		)
Net cash provided by financing activities	162,522			107,585
NET INCREASE IN CASH AND CASH EQUIVALENTS	152,551			89,194
CASH AND CASH EQUIVALENTS—Beginning of period	108,835			32,627
CASH AND CASH EQUIVALENTS—End of period	$	261,386		$	121,821
Cash paid for income taxes	$	96		$	15
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property, equipment and intangible assets, accrued but not paid	$	2,049		$	50
Stock-based compensation capitalized in software development costs	$	688		$	372
Vesting of early exercised options	$	177		$	121
Series E convertible preferred stock issuance costs accrued but not paid	$	—		$	400
Series T convertible preferred stock issued as part of purchase price in the Authy acquisition	$	—		$	3,087
Costs related to the initial public offering, accrued but not paid	$	1,930		$	—

See accompanying notes to condensed consolidated financial statements.

6

TWILIO INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of Business

Twilio Inc. (the “Company”) was incorporated in the state of Delaware on March 13, 2008. The Company provides a Cloud Communications Platform that enables developers to build, scale and operate communications within software applications through the cloud as a pay-as-you-go service. The Company’s product offerings fit four basic categories: Programmable Voice, Programmable Messaging, Programmable Video and recently introduced Programmable Wireless. The Company also provides use case products, such as a two-factor authentication solution.

The Company’s headquarters are located in San Francisco, California and the Company has subsidiaries in the United Kingdom, Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore and Bermuda.

Initial Public Offering

In June 2016, the Company completed an initial public offering (“IPO”) in which the Company sold 11,500,000 shares of its newly authorized Class A common stock, which included 1,500,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $15.00 per share. The Company received net proceeds of $155.7 million, after deducting underwriting discounts and commissions and offering expenses paid and payable by the Company, from sales of its shares in the IPO.  Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock and all shares of convertible preferred stock then outstanding were converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock. See Note 12 for further discussion of Class A and B common stock.

As of June 30, 2016, 11,647,711 shares of the Company’s Class A common stock and 72,878,382 shares of the Company’s Class B common stock were outstanding.

2. Summary of Significant Accounting Policies

(a)Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 23, 2016 (the “Prospectus”).

The condensed consolidated balance sheet as of December 31, 2015, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2016 or any future period.

7

(b)Principles of Consolidation

The condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

(c)Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; valuation of the Company’s stock and stock-based awards; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

(d)Concentration of Credit Risk

Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, restricted cash and accounts receivable. The Company maintains cash, cash equivalents and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure.

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any one of the large customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. As of June 30, 2016 there was one customer organization that represented approximately 12% of the Company’s gross accounts receivable. As of December 31, 2015, two customer organizations represented approximately 11% each of the Company’s gross accounts receivable.

In the three months ended June 30, 2016, one customer organization represented 13% of the Company’s total revenue and in the three months ended June 30, 2015 a different customer organization represented 17% of the Company’s total revenue. In the six months ended June 30, 2016, two customer organizations represented 12% each of the Company’s total revenue, and in the six month ended June 30, 2015 one customer organization represented 18% of the Company’s total revenue.

(e)Significant Accounting Policies

There have been no changes to our significant accounting policies described in the Prospectus.

(f)Recently Issued Accounting Guidance, Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements and related disclosures.

In February, 2016 the FASB issued ASU No. 2016-02, “Leases”. The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. For public companies, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, the Company has not yet determined the full impact that the adoption of this standard will have on its condensed consolidated  financial statements and related disclosures.

8

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This new guidance will replace most existing U.S. GAAP guidance on this topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred, by one year, the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, this guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted beginning January 1, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing”, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients”, which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as the effective date and transition requirements for ASU 2014-09. The Company is evaluating the impact that these ASUs will have on its condensed consolidated financial statements and related disclosures and has not yet selected a transition method.

3. Fair Value Measurements

The following tables provide the assets measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):

	Total Carrying		As of June 30, 2016
	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds (included in cash and cash equivalents)	$	246,315	$	246,315	$	—	$	—	$	246,315
Total financial assets	$	246,315	$	246,315	$	—	$	—	$	246,315

	Total Carrying		As of December 31, 2015
	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds (included in cash and cash equivalents)	$	80,886	$	80,886	$	—	$	—	$	80,886
Total financial assets	$	80,886	$	80,886	$	—	$	—	$	80,886

The fair value of the Company’s Level 1 financial instruments, approximate their carrying amount due to their short term nature.

There were no realized or unrealized losses for the three and six months ended June 30, 2016 and 2015. There were no other-than-temporary impairments for these instruments as of June 30, 2016 and December 31, 2015.

9

4. Property and Equipment

Property and equipment consisted of the following (in thousands):

	As of June 30, 2016			As of December 31, 2015
Capitalized software development costs	$	21,997		$	16,030
Office equipment	3,849			2,662
Furniture and fixtures	438			393
Software	865			755
Leasehold improvements	2,722			568
Total property and equipment	29,871			20,408
Less: accumulated depreciation and amortization	(9,327		)	(6,350		)
Total property and equipment, net	$	20,544		$	14,058

Depreciation and amortization expense was $1.6 million and $3.0 million for the three and six months ended June 30, 2016, respectively, and $0.8 million and $1.4 million for the three and six months ended June 30, 2015, respectively.

The Company capitalized $3.3 million and $6.1 million of software development costs in the three and six months ended June 30, 2016, respectively, of which $0.4 million and $0.7 million, respectively, was stock-based compensation expense. The Company capitalized $2.4 million and $4.1 million of software development costs in the three and six months ended June 30, 2015, respectively, of which $0.2 million and $0.4 million, respectively, was stock-based compensation expense.

5. Acquisition of Authy, Inc.

On February 23, 2015, the Company completed its acquisition of Authy, Inc. (“Authy”), a Delaware corporation with operations in Bogota, Colombia and San Francisco, California. Authy had developed a two-factor authentication online security solution. The Company’s purchase price of $6.1 million for all of the outstanding shares of capital stock of Authy consisted of $3.0 million in cash and $3.1 million representing the fair value of 389,733 shares of the Company’s Series T convertible preferred stock, of which 180,000 shares are held in escrow. This escrow is effective until the first anniversary of the closing date, and has continued beyond that date as a result of certain circumstances. As of June 30, 2016 the Company has not released any shares out of the escrow. Additionally, the Company issued 507,885 shares of its Series T convertible preferred stock, which converted into shares of Class B common stock immediately prior to the closing or the IPO, to a former shareholder of Authy that have a fair value of $4.0 million and are subject to graded vesting over a period of 3.6 years, as amended. Of the 507,885 shares, 127,054 shares are subject to additional performance conditions and can be relinquished, if the performance conditions are not met. As of June 30, 2016, 70,251 shares have vested.

The acquisition has been accounted for as a business combination and, accordingly, the total purchase price is allocated to the identifiable tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. The cost of shares subject to vesting and performance conditions is accounted for as a post-acquisition compensation expense and recorded as research and development expense on a straight-line basis as the shares vests and conditions are satisfied.

Authy’s results of operations have been included in the condensed consolidated financial statements of the Company from the date of acquisition.

This transaction is intended to qualify as a tax-free reorganization under Section 368(a) of the IRS Code.

The fair value of the Series T convertible preferred stock was determined by the board of directors of the Company with input from a third-party valuation consultant.

10

The following table presents the purchase price allocation recorded in the Company’s condensed consolidated balance sheet on the acquisition date (in thousands):

	Total
Net tangible assets(3)	$	1,217
Goodwill(1)(3)	3,113
Intangible assets(2)	1,760
Total purchase price	$	6,090

The Company acquired a net deferred tax liability of $0.1 million in this business combination.

(1)Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer base and the future development initiatives of the assembled workforce. None of the goodwill is deductible for tax purposes.

(2)Identifiable finite-lived intangible assets were comprised of the following:

	Total		Estimated life (in years)
Developed technology	$	1,300	3
Customer relationships	400		5
Trade name	60		2
Total intangible assets acquired	$	1,760

(3)As part of net tangible assets, the Company acquired $66,000 in accounts receivable subject to dispute resolution with a customer. The matter was resolved later in 2015 and $52,000 was deemed uncollectible immediately prior to the date of acquisition. The Company’s adjustment of its initial purchase price allocation resulted in an increase to goodwill and decrease to net tangible assets of $52,000. After the adjustment, the purchase price allocation related to this acquisition became final. Goodwill balance as of June 30, 2016 was as follows:

	Total
Balance as of December 31, 2014	$	—
Goodwill recorded in connection with Authy acquisition	3,113
Subsequent adjustment to purchase price allocation	52
Balance as of December 31, 2015	3,165
Adjustment to goodwill	—
Balance as of June 30, 2016	$	3,165

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used an income approach to measure the fair values of the developed technology and trade names based on the relief-from-royalty method. The Company used an income approach to measure the fair value of the customer relationships based on the multi-period excess earnings method, whereby the fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate.

The Company incurred costs related to this acquisition of $1.5 million, of which $0.3 million and $1.2 million were incurred during the years ended December 31, 2014 and 2015, respectively. All acquisition related costs were expensed as incurred and were recorded in general and administrative expenses in the respective periods.

Pro forma results of operations for this acquisition have not been presented as the financial impact to the Company’s condensed consolidated financial statements is inconsequential.

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6. Intangible Assets

Intangible assets consisted of the following (in thousands):

	As of June 30, 2016
	Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Developed technology	$	1,300	$	(586	)	$	714
Customer relationships	400		(108		)	292
Trade name	60		(41		)	19
Patent	1,351		(35		)	1,316
Total amortizable intangible assets	3,111		(770		)	2,341
Non-amortizable intangible assets:
Trademark	263		—			263
Total	$	3,374	(770		)	$	2,604

	As of December 31, 2015
	Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Developed technology	$	1,300	$	(370	)	$	930
Customer relationships	400		(68		)	332
Trade name	60		(26		)	34
Patent	1,021		(25		)	996
Total	$	2,781	$	(489	)	$	2,292

Amortization expense was $0.1 million and $0.3 million for the three and six months ended June 30, 2016, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively.

Total estimated future amortization expense was as follows (in thousands):

	Total
Years ending December 31:
2016 (remaining six months)	$	288
2017	549
2018	176
2019	112
2020	43
Thereafter	1,173
Total	$	2,341

7. Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

	As of June 30, 2016		As of December 31, 2015
Accrued payroll and related	$	2,790	$	972
Accrued bonus and commission	1,284		1,832
Accrued cost of revenue	7,527		6,496
Sales and other taxes payable	23,346		17,634
Accrued other expense	7,193		5,064
Total accrued expenses and other current liabilities	$	42,140	$	31,998

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Other long-term liabilities consisted of the following (in thousands):

	As of June 30, 2016		As of December 31, 2015
Deferred rent	$	9,515	$	364
Accrued other expense	236		84
Total accrued expenses and other current liabilities	$	9,751	$	448

8. Supplemental Balance Sheet Information

(a) Allowance for doubtful accounts (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Balance, beginning of period	$	651		$	440		$	486		$	210
Additions	544			138			847			368
Write-offs	(400		)	(61		)	(538		)	(61		)
Balance, end of period	$	795		$	517		$	795		$	517

(b)  Sales credit reserve (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Balance, beginning of period	$	649		$	227		$	714		$	312
Additions	357			461			843			529
Deductions against reserve	(354		)	(136		)	(905		)	(289		)
Balance, end of period	$	652		$	552		$	652		$	552

9. Revenue by Geographic Area

Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (dollars in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Revenue by geographic area:
United States	$	54,485	$	32,254	$	104,993	$	60,847
International	10,025		5,700		18,857		10,472
Total	$	64,510	$	37,954	$	123,850	$	71,319

Percentage of revenue by geographic area:
United States	84	%	85	%	85	%	85	%
International	16	%	15	%	15	%	15	%

Long-lived assets outside the United States were insignificant.

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10. Credit Facility

Effective January 2015, the Company entered into a $15.0 million revolving credit agreement. Under this agreement, amounts available to be borrowed are based on the Company’s prior month’s monthly recurring revenue. Advances on the line of credit bear interest payable monthly at Wall Street Journal prime rate plus 1%. Borrowings are secured by substantially all of the Company’s assets, with limited exceptions. If there are borrowings under the credit line, there are certain restrictive covenants with which the Company must comply. The credit facility expires in March 2017. As of June 30, 2016 and December 31, 2015, the total amount available to the Company to be borrowed was $15.0 million and the Company had no outstanding balance on this credit facility in either period presented.

11. Commitments and Contingencies

(a)Lease Commitments

The Company entered into various non-cancelable operating lease agreements for its facilities over the next five years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight-line basis over the term of the lease. The Company’s San Francisco, California facility lease agreement, entered into in January 2016, included a tenant improvement allowance which provided for the landlord to pay for tenant improvements on behalf of the Company for up to $8.3 million. This amount was recorded on the lease inception date into other current assets and current and long-term liabilities in the accompanying condensed consolidated balances sheet. Based on the terms of this landlord incentive and involvement of the Company in the construction process, the leasehold improvements purchased under the landlord incentive were determined to be property of the Company.

Rent expense was $2.0 million and $3.0 million, respectively, for the three and six months ended June 30, 2016, and $1.0 million and $1.9 million, respectively, for the three and six months ended June 30, 2015.

Additionally, the Company has contractual commitments with its cloud infrastructure provider, network service providers and other vendors that are non-cancellable and expire within one to four years.

Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

Year Ending December 31:	Total (1)
2016 (remaining six months)	$	2,824
2017	8,596
2018	6,984
2019	5,673
2020	5,408
Thereafter	20,963
Total minimum lease payments	$	50,448

(1) The future minimum lease payments do not reflect the $8.3 million tenant improvement allowance.

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Future minimum payments under other existing noncancellable purchase obligations were as follows (in thousands).

Year Ending December 31:	Total
2016 (remaining six months)	$	3,871
2017	3,061
2018	97
2019	15
Total payments	$	7,044

(b)Legal Matters

On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against the Company in the United States District Court, Central District of California (“Telesign I”). Telesign alleges that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920, U.S. Patent No. 8,687,038 and U.S. Patent No. 7,945,034. The patent infringement allegations in the lawsuit relate to the Company’s Programmable Authentication products, its two-factor authentication use case and an API tool to find information about a phone number. The Company has petitioned the U.S. Patent and Trademark Office for inter partes review of the patents at issue. On March 9, 2016, the District Court stayed the court case pending the resolution of those proceedings. On June 28, 2016, the Patent and Trademark Office instituted the inter partes review of the '034 patent.  Subsequently, on July 8, 2016, the Patent and Trademark Office denied the Company’s petition for inter partes review of the '920 and '038 patents.  On July 20, 2016, Telesign applied to the court to lift the stay on Telesign I. The Company has opposed the request.

On March 28, 2016, Telesign filed a second lawsuit against the Company in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I, and the infringement allegations in Telesign II relate to the Company’s Programmable Authentication products and its two-factor authentication use case. On May 23, 2016, the Company moved to dismiss the complaint in Telesign II.  On August 3, 2016, the United States District Court, Central District of California, issued an order granting Twilio’s motion to dismiss Telesign’s complaint with leave to amend. Telesign may file an amended complaint by September 2, 2016. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits.

On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, the Company filed a demurrer to the complaint. On August 2, the court issued an order denying the demurrer. Following the denial of the demurrer, the plaintiffs must file an amended complaint by August 18, 2016. Discovery has already begun, and will continue until August 2017, when the plaintiff must file their motion for class certification.

The Company intends to vigorously defend these lawsuits and believes it has meritorious defenses to each.  It is too early in these matters to reasonably predict the probability of the outcomes or to estimate ranges of possible losses.

In addition to the litigations discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations.

(c)Indemnification Agreements

The Company has signed indemnification agreements with all board members and executive officers. The agreements indemnify the members and officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for Indemnifiable Events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the officer was or is acting in his or her capacity as a board member or an officer for the Company or was or is acting or representing the interests of the Company.

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In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or our acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary.

As of June 30, 2016 and December 31, 2015, no amounts had been accrued.

(d)Other taxes

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s operations. Historically, the Company has not billed or collected these taxes and, in accordance with U.S. GAAP, has recorded a provision for its tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. As a result, the Company recorded a liability of $23.3 million and $17.6 million as of June 30, 2016 and December 31, 2015, respectively. These estimates include several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates.

12. Stockholders’ Equity

(a)Convertible Preferred Stock

Immediately prior to the completion of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock.

(b)Preferred Stock

As of June 30, 2016, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were outstanding.

(c)Common Stock

Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock. Shares offered and sold in the IPO were the newly authorized shares of Class A common stock.

As of June 30, 2016 the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share, of which 11,647,711 shares and 72,878,382 shares of Class A and Class B common stock, respectively, were issued and outstanding.  Holders of Class A and Class B common stock are entitled to one vote per share and ten votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. As of June 30, 2016, the outstanding Class B common stock included 617,634 shares related to the Authy acquisition that were held in escrow.

As of December 31, 2015, the Company had 17,324,003 shares of common stock outstanding.

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As of June 30, 2016, and December 31, 2015, the Company had reserved shares of common stock, on an as-if converted basis, for issuance as follows:

	As of June 30, 2016	As of December 31, 2015
Conversion of convertible preferred stock outstanding	—	54,508,441	(1)
Stock options issued and outstanding	16,918,789	16,883,837
Nonvested restricted stock units issued and outstanding	891,008	71,000
Common stock reserved for Twilio.org	780,397	888,022
Stock-based awards available for grant under 2008 Plan	—	14,920
Stock-based awards available for grant under 2016 Plan	11,446,750	—
Common stock reserved for issuance under 2016 ESPP plan	2,400,000	—
Total	32,436,944	72,366,220

(1)Includes 687,885 shares of Series T convertible preferred stock related to the Authy acquisition held in escrow as of December 31, 2015.

(d)Twilio.org

On September 2, 2015, the Company’s board of directors approved the reservation of 888,022 shares of the Company’s common stock, which represented 1% of the Company’s outstanding capital stock on as-converted basis, to fund Twilio.org’s activities. Subsequently, on May 13, 2016, the Company’s board of directors authorized a reduction of 107,625 shares reserved to offset equity grants to Twilio.org employees. As of June 30, 2016, the total remaining shares reserved for Twilio.org was 780,397.

Twilio.org is a part of the Company and not a separate legal entity. The objective for Twilio.org is to further the philanthropic goals of the Company. As of June 30, 2016 and December 31, 2015, none of the reserved shares were issued and outstanding.

13. Stock-Based Compensation

2008 Stock Option Plan

The Company granted options under its 2008 Stock Option Plan (the “2008 Plan”), as amended and restated, until June 22, 2016, when the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under this plan.  The 2008 Plan continues to govern outstanding equity awards granted thereunder.

2016 Stock Option Plan

The Company’s 2016 Equity Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares will automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s Compensation Committee.

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2016 Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee.

The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning each November 16 and May 16 of each fiscal year.

On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s common stock on the offering date or (ii) the fair market value of the Company’s common stock on the purchase date.

For the three months ended June 30, 2016, no shares of common stock were purchased under the 2016 ESPP and 583,950 shares are expected to be purchased at the end of the initial offering period. The Company selected the Black-Scholes option-pricing model as the method for determining the estimated fair value for the Company’s 2016 ESPP. As of June 30, 2016, total unrecognized compensation cost related to 2016 ESPP was $7.4 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 0.87 years.

Stock option activity under the 2008 Plan and the 2016 Plan during the six months ended June 30, 2016 was as follows:

Stock Options

	Number of options outstanding		Weighted- average exercise price (per share)		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value (in thousands)
Outstanding options as of December 31, 2015	16,883,837		$	5.31	8.30	$	80,758
Granted	1,894,850		10.73
Exercised	(1,186,805	)	3.60
Forfeited and cancelled	(673,093	)	5.92
Outstanding options as of June 30, 2016	16,918,789		$	6.01	8.24	$	515,848
Options vested and exercisable as of June 30, 2016	5,903,943		$	3.53	7.20	$	194,670
Options vested and expected to vest as of June 30, 2016	15,910,560		$	5.89	8.19	$	487,073

Aggregate intrinsic value represents the difference between the fair value of the Company’s common stock and the exercise price of outstanding “in-the-money” options. Prior to the IPO, the fair value of the Company’s common stock was estimated by the Company’s board of directors. After the IPO, the fair value of the common stock is the Company’s stock price as reported on the New York Stock Exchange. The aggregate intrinsic value of stock options exercised was $8.3 million and $11.3 million for the three and six months ended June 30, 2016, respectively, and $0.9 million and $6.3 million for the three and six months ended June 30, 2015, respectively.

The total estimated grant date fair value of options vested was $3.1 million and $6.1 million for the three and six months ended June 30, 2016, respectively, and $1.4 million and $2.7 million for the three and six months ended June 30, 2015, respectively. The weighted-average grant-date fair value of options granted was $5.73 and $5.52 for the three and six months ended June 30, 2016, respectively, and $3.97 and $3.82 for the three and six months ended June 30, 2015, respectively.

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As of June 30, 2016, total unrecognized compensation cost related to non-vested stock options was $36.2 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 2.70 years.

No options were granted to nonemployees in the three and six months ended June 30, 2016, respectively. An immaterial number of options were granted to nonemployees in the three and six months ended June 30, 2015, respectively.

Restricted Stock Units

	Number of awards outstanding		Weighted- average grant date fair value (per share)		Aggregate intrinsic value (in thousands)
Nonvested RSUs as of December 31, 2015	71,000		$	9.39	$	716
Granted	833,762		10.75
Vested	(13,754	)	10.09
Forfeited and cancelled	—		—
Nonvested RSUs as of June 30, 2016	891,008		$	10.65	$	32,522

Prior to June 22, 2016, the Company granted RSUs (“Pre-IPO RSUs”) under its 2008 Plan to its employees that vested upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards will be satisfied over four years. The liquidity condition was satisfied upon occurrence of the Company’s IPO in June 2016. As of March 31, 2016 the Company has deferred recognition of $0.3 million of cumulative share-based compensation expense related to these RSUs for which the service condition was satisfied. This amount was recorded into the quarterly period ended June 30, 2016. RSUs granted on or after the completion of the Company’s IPO (“Post-IPO RSUs”) under the 2016 Plan are not subject to a liquidity condition in order to vest. The compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a ratable basis over the applicable service period, net of estimated forfeitures. The majority of Post-IPO RSUs are earned over a service period of two to four years.

As of June 30, 2016, total unrecognized compensation cost related to non-vested RSUs was $7.6 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 3.33 years.

Early Exercises of Nonvested Options

As of June 30, 2016 and December 31, 2015, the Company recorded a liability of $0.7 million and $0.2 million, respectively, for 130,749 and 52,407 unvested shares, respectively, that were early exercised by employees and were subject to repurchase at the respective period end. These amounts are reflected in current and non-current liabilities on the Company’s consolidated balance sheets.

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Valuation Assumptions

The fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black-Scholes option pricing model:

	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2015	2016	2015
Employee Stock Options:
Fair value of common stock	$10.30-$15.00	$7.74	$10.09-$15.00	$7.07 - 7.78
Expected term (in years)	6.08	6.08	6.08	6.08
Expected volatility	51.4%-52.2%	52.0% - 53.7%	51.4%-53.0%	52.0% - 54.9%
Risk-free interest rate	1.3%-1.4%	1.5% - 1.9%	1.3%-1.5%	1.4% - 1.9%
Dividend rate	0%	0%	0%	0%
Employee Stock Purchase Plan:
Expected term (in years)	0.90	—	0.90	—
Expected volatility	52%	—	52%	—
Risk-free interest rate	0.6%	—	0.6%	—
Dividend rate	0%	—	0%	—

Stock-Based Compensation Expense

The Company recorded the total stock-based compensation expense as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Cost of revenue	$	28	$	14	$	51	$	28
Research and development	2,379		796		3,895		1,459
Sales and marketing	1,116		513		1,850		933
General and administrative	1,453		599		2,205		1,147
Total	$	4,976	$	1,922	$	8,001	$	3,567

14. Net Loss per Share Attributable to Common Stockholders

Basic and diluted net loss per common share is presented in conformity with the two-class method required for participating securities.

Class A and Class B common stock are the only outstanding equity in the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions.

Basic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.

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The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except share and per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net loss attributable to common stockholders	$	(10,994	)	$	(9,576	)	$	(17,462	)	$	(18,236	)
Weighted-average shares used to compute basic and diluted net loss per share attributable to common stockholders	24,261,903			18,388,844			20,872,550			18,070,932
Net loss per share attributable to common stockholders, basic and diluted	$	(0.45	)	$	(0.52	)	$	(0.84	)	$	(1.01	)

The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive:

	As of June 30,
	2016	2015
Conversion of convertible preferred stock outstanding	—	53,106,011	(1)
Issued and outstanding options	16,918,789	14,404,793
Issued and outstanding RSUs	891,008	—
Common stock reserved for Twilio.org	780,397	—
Shares committed under 2016 ESPP	583,950	—
Unvested shares subject to repurchase	130,749	49,323
Total	19,304,893	67,560,127

(1)Includes 687,885 shares of Series T convertible preferred stock related to the Authy acquisition held in escrow.

15. Related Party Transactions

In 2015, two of the Company’s vendors participated in the Company’s Series E convertible preferred stock financing and owned approximately 2.1% and 1.1%, respectively, of the Company’s outstanding capital stock as of June 30, 2016, and 2.5% and 1.2%, respectively, of the Company’s capital stock, on as-if converted basis, as of December 31, 2015. During the three and six months ended June 30, 2016, the amount of software services the Company purchased from the first vendor was $3.4 million and $6.5 million, respectively. During the three and six months ended June 30, 2015, the amount of software services the Company purchased from the first vendor was $2.7 million and $5.7 million, respectively. The amounts due to this vendor that were accrued as of June 30, 2016 and December 31, 2015 were $2.5 million and $0, respectively.

The amount of services the Company purchased from the second vendor was $0.1 million and $0.2 million for the three and six months ended June 30, 2016, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively. The amounts due to this vendor that were accrued as of June 30, 2016 and December 31, 2015 were not material.

* * * * * *

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on June 23, 2016 (the “Prospectus”). In addition to historical financial information, the following discussion contains forward-looking statements that is based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in this Quarterly Report on Form 10-Q and in our Prospectus. Our fiscal year ends on December 31.

Overview

We are the leader in the Cloud Communications Platform category. We enable developers to build, scale and operate real-time communications within software applications.

Our developer-first platform approach consists of three things: our Programmable Communications Cloud, Super Network and Business Model for Innovators. Our Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via our simple-to-use Application Programming Interfaces, or APIs. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. The Super Network is our software layer that allows our customers’ software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. Our Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed.

We have relationships with network service providers globally to enable our platform to deliver excellent quality at reasonable cost to our customers. We support our global business through 22 cloud data centers in seven regions around the world and have developed direct relationships with network service providers globally.

Our business model is primarily focused on reaching and serving the needs of developers. We established and maintain our leadership position by engaging directly with, and cultivating, our developer community. We reach developers through community events and conferences, including our SIGNAL developer conference, to demonstrate how every developer can create differentiated applications incorporating communications using our products.

Once developers are introduced to our platform, we provide them with a low-friction trial experience. By accessing our easy-to-configure APIs, extensive self-service documentation and customer support team, developers can build our products into their applications and then test such applications through free trials. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account managers or customer success advocates within our sales organization to ensure their satisfaction and expand their usage of our products.

When potential customers do not have the available developer resources to build their own applications, we refer them to our network of Solution Partners, who embed our products in their solutions, such as software for contact centers and sales force and marketing automation that they sell to other businesses.

We recently began to supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through an enterprise sales approach. Our sales organization targets technical and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications that incorporate our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel.

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We generate the substantial majority of our revenue from charging our customers based on their usage of our software products that they have incorporated into their applications. A smaller portion of our revenue comes from products for which we charge monthly flat fees, such as phone numbers or premium customer support. Customers that register in our self-service model typically pay up-front via credit card, and draw down their balance as they purchase or use our products. Most of our customers draw down their balance in the same month they pay up front and, as a result, our deferred revenue at any particular time is not a meaningful indicator of future revenue. As our customers’ usage grows, some of our customers enter into contracts and are invoiced monthly in arrears. Many of these customer contracts have terms of 12 months and typically include some level of minimum revenue commitment. Most customers with minimum revenue commitment contracts generate a significant amount of revenue in excess of their minimum revenue commitment in any period. Historically, the aggregate minimum commitment revenue from customers with which we have contracts has constituted a minority of our revenue in any period, and we expect this to continue in the future.

Our developer-focused products are delivered to customers and users through our Super Network, which uses software to optimize communications on our platform. We interconnect with communications networks globally to deliver our products, and therefore we have arrangements with network service providers in many regions throughout the world.  Historically, a substantial majority of our cost of revenue has been network service provider fees. We seek to optimize our network service provider coverage and connectivity through continuous improvements in routing and sourcing in order to lower the usage expenses we incur for network service provider fees. As we benefit from our platform optimization efforts, we sometimes pass these savings on to customers in the form of lower usage prices for our products in an effort to drive increased usage and expand the reach and scale of our platform. In the near term, we intend to operate our business to expand the reach and scale of our platform and to grow our revenue, rather than to maximize our gross margins.

We have achieved significant growth in recent periods. For the three months ended June 30, 2016 and 2015 our revenue was $64.5 million and $38.0 million, respectively, and our Base Revenue was $56.4 million and $30.7 million, respectively. In the three months ended June 30, 2016 and 2015, our 10 largest Active Customer Accounts generated an aggregate of 31% and 32% of our revenue, respectively. For the three months ended June 30, 2016 and 2015, among our 10 largest Active Customer Accounts we had three and four Variable Customer Accounts, respectively, representing 12% and 19% of our revenue, respectively. We incurred a net loss of $11.0 million and $9.6 million for the three months ended June 30, 2016 and 2015, respectively. See “—Key Business Metrics—Base Revenue” for a discussion of Base Revenue.

Initial Public Offering

In June 2016, we closed our initial public offering (“IPO”), at which time we sold a total of 11,500,000 shares of our Class A common stock.  We received net cash proceeds of $155.7 million, net of underwriting discounts and commissions and other costs associated with the offering paid or payable by us.

Key Business Metrics

	Three Months Ended June 30,
	2016			2015
Number of Active Customer Accounts (as of end date of period)	30,780			21,226
Base Revenue (in thousands)	$	56,370		$	30,694
Base Revenue Growth Rate	84		%	75		%
Dollar-Based Net Expansion Rate	164		%	149		%

Number of Active Customer Accounts.  We believe that the number of our Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. We believe that the use of our platform by Active Customer Accounts at or above the $5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below $5 per month. A single customer may constitute multiple Active Customer Accounts if it has multiple unique account identifiers, each of which is treated as a separate Active Customer Account.

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In the three months ended June 30, 2016 and 2015, revenue from Active Customer Accounts represented approximately 99% of total revenue in each period.

Base Revenue.  We monitor Base Revenue as one of the more reliable indicators of future revenue trends. Base Revenue consists of all revenue other than revenue from Active Customer Accounts with large customers that have never entered into 12-month minimum revenue commitment contracts with us, which we refer to as Variable Customer Accounts. While almost all of our customer accounts exhibit some level of variability in the usage of our products, based on our experience, we believe that Variable Customer Accounts are more likely to exhibit significant fluctuations in usage of our products from period to period, and therefore that revenue from Variable Customer Accounts may also fluctuate significantly from period to period. This behavior is best evidenced by the decision of such customers not to enter into contracts with us that contain minimum revenue commitments, even though they may spend significant amounts on the use of our products and they may be foregoing more favorable terms often available to customers that enter into committed contracts with us. This variability adversely affects our ability to rely upon revenue from Variable Customer Accounts when analyzing expected trends in future revenue.

For historical periods, through March 31, 2016, we define a Variable Customer Account as a customer account that (i) was with a customer that had never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) had met or exceeded 1% of our revenue in any quarter in the periods presented through March 31, 2016. To allow for consistent period-to-period comparisons, in the event a customer account qualified as a Variable Customer Account as of March 31, 2016, or a previously Variable Customer Account ceased to be an Active Customer Account as of such date, we included such customer account as a Variable Customer Account in all periods presented. For reporting periods starting with the three months ended June 30, 2016, we define a Variable Customer Account as a customer account that (a) has been categorized as a Variable Customer Account in any prior quarter, as well as (b) any new customer account that (i) is with a customer that has never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) meets or exceeds 1% of our revenue in a quarter. Once a customer account is deemed to be a Variable Customer Account in any period, it remains a Variable Customer Account in subsequent periods unless such customer enters into a minimum revenue commitment contract with us for a term of at least 12 months.

In the three months ended June 30, 2016 and 2015, we had nine Variable Customer Accounts, which represented 13% and 19%, respectively, of our total revenue.

Dollar-Based Net Expansion Rate.  Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers that have Active Customer Accounts and to increase their use of the platform. An important way in which we track our performance in this area is by measuring the Dollar-Based Net Expansion Rate for our Active Customer Accounts, other than our Variable Customer Accounts. Our Dollar-Based Net Expansion Rate increases when such Active Customer Accounts increase usage of a product, extend usage of a product to new applications or adopt a new product. Our Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce usage of a product or when we lower usage prices on a product. We believe measuring our Dollar-Based Net Expansion Rate on revenue generated from our Active Customer Accounts, other than our Variable Customer Accounts, provides a more meaningful indication of the performance of our efforts to increase revenue from existing customers.

Our Dollar-Based Net Expansion Rate compares the revenue from Active Customer Accounts, other than Variable Customer Accounts, in a quarter to the same quarter in the prior year. To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts, other than Variable Customer Accounts, that were Active Customer Accounts in the same quarter of the prior year. The Dollar-Based Net Expansion Rate is the quotient obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period.

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In the three months ended June 30, 2016, our Dollar-Based Net Expansion Rate was 164%, compared to 149% in the three months ended June 30, 2015.

Key Components of Statements of Operations

Revenue.  We derive our revenue primarily from usage-based fees earned from customers using the software products within our Programmable Communications Cloud. These usage-based software products include our Programmable Voice, Programmable Messaging, Programmable Video and the recently introduced Programmable Wireless products. We also earn monthly flat fees from certain fee-based products, such as telephone numbers and customer support. We do not generate any revenue directly from our Super Network or Business Model for Innovators.

Customers typically pay up-front via credit card in monthly prepaid amounts and draw down their balances as they purchase or use our products. As customers grow they automatically receive tiered usage discounts. Our larger customers often enter into contracts that contain minimum revenue commitments, which may contain more favorable pricing. Customers on such contracts typically are invoiced monthly in arrears for products used.

Amounts that have been charged via credit card or invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on whether the revenue recognition criteria have been met. Given that our credit card prepayment amounts tend to be approximately equal to our credit card consumption amounts in each period, and that we do not have many invoiced customers on pre-payment contract terms, our deferred revenue at any particular time is not a meaningful indicator of future revenue.

We define U.S. revenue as revenue from customers with IP addresses at the time of registration in the United States, and we define international revenue as revenue from customers with IP addresses at the time of registration outside of the United States.

Cost of Revenue and Gross Margin.  Cost of revenue consists primarily of fees paid to network service providers. Cost of revenue also includes cloud infrastructure fees, personnel costs, such as salaries and stock-based compensation for our customer support employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs. Our arrangements with network service providers require us to pay fees based on the volume of phone calls initiated or text messages sent, as well as the number of telephone numbers acquired by us to service our customers. Our arrangements with our cloud infrastructure provider require us to pay fees based on our server capacity consumption.

Our gross margin has been and will continue to be affected by a number of factors, including the timing and extent of our investments in our operations, our ability to manage our network service provider and cloud infrastructure-related fees, the mix of U.S. revenue compared to international revenue, the timing of amortization of capitalized software development costs and the extent to which we periodically choose to pass on our cost savings from platform optimization efforts to our customers in the form of lower usage prices.

Operating Expenses.

The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, stock-based compensation and compensation expenses related to stock repurchases from employees. We also incur other non-personnel costs related to our general overhead expenses. We expect that our operating costs will increase in absolute dollars.

Research and Development.  Research and development expenses consist primarily of personnel costs, outsourced engineering services, cloud infrastructure fees for staging and development, amortization of capitalized internal-use software development costs and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization.

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Sales and Marketing.  Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees. Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities and developer evangelism, costs related to our SIGNAL developer conference, credit card processing fees, professional services fees and an allocation of our general overhead expenses.

General and Administrative.  General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel and executives. General and administrative expenses also include costs related to business acquisitions, legal and other professional services fees, sales and other taxes, depreciation and amortization and an allocation of our general overhead expenses. We expect that we will incur costs associated with supporting the growth of our business and to meet the increased compliance requirements associated with both our international expansion and our transition to, and operation as, a public company.

Our general and administrative expenses include a significant amount of sales and other taxes to which we are subject based on the manner we sell and deliver our products. Historically, we have not collected such taxes from our customers and have therefore recorded such taxes as general and administrative expenses. We expect that these expenses will decline in future years as we continue to implement our sales tax collection mechanisms and start collecting these taxes from our customers.

Provision for Income Taxes.  Our provision for income taxes has not been historically significant to our business as we have incurred operating losses to date. Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business.

Non-GAAP Financial Measures

We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes.  We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations, and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results. Non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly-titled non-GAAP measures used by other companies.  Whenever we use a non-GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Non-GAAP Gross Profit and Non-GAAP Gross Margin.  We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude share-based compensation and amortization of acquired intangibles.

	Three Months Ended June 30,
	2016			2015
	(In thousands)
Reconciliation:
Gross profit	$	36,307		$	21,127
Non-GAAP Adjustments:
Stock-based compensation	28			14
Amortization of acquired intangible assets	70			21
Non-GAAP gross profit	$	36,405		$	21,162
GAAP gross margin	56		%	56		%
Non-GAAP gross margin	56		%	56		%

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Non-GAAP Operating Expenses.  We define non-GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, share-based compensation, amortization of acquired intangibles, expenses related to stock repurchase and acquisition-related expenses.

	Three Months Ended June 30,
	2016			2015
	(In thousands)
Reconciliation:
Operating expenses	$	47,160		$	30,587
Non-GAAP Adjustments:
Stock-based compensation	(4,948		)	(1,908		)
Amortization of acquired intangible assets	(66		)	(115		)
Acquisition related expenses	—			(38		)
Non-GAAP operating expenses	$	42,146		$	28,526

Non-GAAP Operating Loss and Non-GAAP Operating Margin.  We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, respectively, adjusted to exclude share-based compensation, amortization of acquired intangibles, expenses related to stock repurchase and acquisition-related expenses.

	Three Months Ended June 30,
	2016			2015
	(In thousands)
Reconciliation:
Loss from operations	$	(10,853	)	$	(9,460	)
Non-GAAP Adjustments:
Stock-based compensation	4,976			1,922
Amortization of acquired intangible assets	136			136
Acquisition related expenses	—			38
Non-GAAP loss from operations	$	(5,741	)	$	(7,364	)
GAAP operating margin	(17		)%	(25		)%
Non-GAAP operating margin	(9		)%	(19		)%

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Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future.

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Revenue	$	64,510		$	37,954		$	123,850		$	71,319
Cost of revenue(1) (2)	28,203			16,827			55,030			32,372
Gross profit	36,307			21,127			68,820			38,947
Operating expenses:
Research and development(1) (2)	17,369			9,388			32,233			17,868
Sales and marketing(1)	18,156			14,164			31,578			24,033
General and administrative(1) (2)	11,635			7,035			22,228			15,300
Total operating expenses	47,160			30,587			86,039			57,201
Loss from operations	(10,853		)	(9,460		)	(17,219		)	(18,254		)
Other expenses, net	(28		)	(83		)	(46		)	(30		)
Loss before (provision) benefit for income taxes	(10,881		)	(9,543		)	(17,265		)	(18,284		)
(Provision) benefit for income taxes	(113		)	(33		)	(197		)	48
Net loss attributable to common stockholders	$	(10,994	)	$	(9,576	)	$	(17,462	)	$	(18,236	)

(1)Includes stock-based compensation expense as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(In thousands)
Cost of revenue	$	28	$	14	$	51	$	28
Research and development	2,379		796		3,895		1,459
Sales and marketing	1,116		513		1,850		933
General and administrative	1,453		599		2,205		1,147
Total	$	4,976	$	1,922	$	8,001	$	3,567

(2)Includes amortization of acquired intangible assets as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(In thousands)
Cost of revenue	$	70	$	21	$	140	$	49
Research and development	38		87		76		104
General and administrative	28		28		55		39
Total	$	136	$	136	$	271	$	192

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Consolidated Statements of Operations, as a percentage of revenue:**
Revenue	100	%	100	%	100	%	100	%
Cost of revenue	44		44		44		45
Gross profit	56		56		56		55
Operating expenses:
Research and development	27		25		26		25
Sales and marketing	28		37		25		34
General and administrative	18		19		18		21
Total operating expenses	73		81		69		80
Loss from operations	(17	)	(25	)	(14	)	(26	)
Other expenses, net	*		*		*		*
Loss before (provision) benefit for income taxes	(17	)	(25	)	(14	)	(26	)
(Provision) benefit for income taxes	*		*		*		*
Net loss attributable to common stockholders	(17	)%	(25	)%	(14	)%	(26	)%

*Less than 0.5% of revenue.

**         Columns may not add up to 100% due to rounding.

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Comparison of the Three Months Ended June 30, 2016 and 2015

Revenue

	Three Months Ended June 30,
	2016		2015		Change
	(Dollars in thousands)
Base Revenue	$	56,370	$	30,694	$	25,676	84	%
Variable Revenue	8,140		7,260		880		12	%
Total revenue	$	64,510	$	37,954	$	26,556	70	%

In the three months ended June 30, 2016, Base Revenue increased by $25.7 million, or 84%, compared to the same period last year, and represented 87% and 81% of total revenue in the three months ended June 30, 2016 and 2015, respectively. This increase was primarily attributable to an increase in the usage of all of our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was partially offset by pricing decreases that we have implemented over time for our customers in the form of lower usage prices in an effort to increase the reach and scale of our platform. The changes in usage and price in the three months ended June 30, 2016 were reflected in our Dollar-Based Net Expansion Rate of 164%. The increase in usage was also attributable to a 45% increase in the number of Active Customer Accounts, from 21,226 as of June 30, 2015 to 30,780 as of June 30, 2016.

In the three months ended June 30, 2016, Variable Revenue increased by $0.9 million, or 12%, compared to the same period last year, and represented 13% and 19% of total revenue in the three months ended June 30, 2016 and 2015, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts.

U.S. revenue and international revenue represented $54.5 million, or 84%, and $10.0 million, or 16%, respectively, of total revenue in the three months ended June 30, 2016, compared to $32.3 million, or 85%, and $5.7 million, or 15%, respectively, of total revenue in the three months ended June 30, 2015. The increase in international revenue in absolute dollars and as a percentage of total revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international customers and to a 62% increase in the number of international Active Customer Accounts, driven in part by our focus on expanding our sales to customers outside of the United States. We opened two offices outside of the United States between June 30, 2015 and June 30, 2016.

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Cost of Revenue and Gross Margin

	Three Months Ended June 30,
	2016			2015			Change
	(Dollars in thousands)
Cost of revenue	$	28,203		$	16,827		$	11,376	68	%
Gross margin	56		%	56		%

In the three months ended June 30, 2016, cost of revenue increased by $11.4 million, or 68%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $10.0 million increase in network service providers’ fees, a $0.7 million increase in cloud infrastructure fees, each to support the growth in usage of our products and a $0.4 million increase in amortization expense related to our internal-use software and acquired intangible assets.

Operating Expenses

	Three Months Ended June 30,
	2016		2015		Change
	(Dollars in thousands)
Research and development	$	17,369	$	9,388	7,981	85	%
Sales and marketing	18,156		14,164		3,992	28	%
General and administrative	11,635		7,035		4,600	65	%
Total operating expenses	$	47,160	$	30,587	16,573	54	%

In the three months ended June 30, 2016, research and development expenses increased by $8.0 million, or 85%, compared to the same period last year. The increase was primarily attributable to a $6.1 million increase in personnel costs, net of a $1.1 million increase in capitalized software development costs, largely as a result of a 67% increase in our research and development headcount and our continued focus on product development and enhancement. The increase was also due in part to a $0.6 million increase in facilities expenses to accommodate our headcount growth, a $0.2 million increase in cloud infrastructure fees and a $0.2 million increase in amortization expense related to our internal-use software and acquired intangibles assets.

In the three months ended June 30, 2016, sales and marketing expenses increased by $4.0 million, or 28%, compared to the same period last year. The increase was primarily attributable to a $2.3 million increase in personnel costs, largely as a result of a 28% increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $0.4 million increase related to our SIGNAL conference, a $0.3 million increase in credit card processing fees, a $0.2 million increase in outside consulting services, a $0.2 million increase related to our brand awareness programs and events other than SIGNAL and a $0.2 million increase in facilities expenses to accommodate our headcount growth.

In the three months ended June 30, 2016, general and administrative expenses increased by $4.6 million, or 65%, compared to the same period last year. The increase was primarily attributable to a $1.8 million increase in personnel costs, largely as a result of a 36% increase in headcount to support the growth of our business, a $1.4 million increase in sales and other taxes, a $0.6 million increase in professional services fees, a $0.2 million increase in facilities expenses and a $0.2 million increase in depreciation expense.

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Comparison of the Six Months Ended June 30, 2016 and 2015

Revenue

	Six Months Ended June 30,
	2016		2015		Change
	(Dollars in thousands)
Base Revenue	$	106,204	$	56,623	$	49,581	88	%
Variable Revenue	17,646		14,696		2,950		20	%
Total revenue	$	123,850	$	71,319	$	52,531	74	%

In the six months ended June 30, 2016, Base Revenue increased by $49.6 million, or 88%, compared to the same period last year, and represented 86% and 79% of total revenue in the six months ended June 30, 2016 and 2015, respectively. This increase was primarily attributable to an increase in the usage of all our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was partially offset by pricing decreases that we have implemented over time for our customers in the form of lower usage prices in an effort to increase the reach and scale of our platform. The changes in usage and price in the six months ended June 30, 2016 were reflected in our Dollar-Based Net Expansion Rate of 170%. The increase in usage was also attributable to a 45% increase in the number of Active Customer Accounts, from 21,226 as of June 30, 2015 to 30,780 as of June 30, 2016.

In the six months ended June 30, 2016, Variable Revenue increased by $3.0 million, or 20%, compared to the same period last year, and represented 14% and 21% of total revenue in in the six months ended June 30, 2016 and 2015, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts.

U.S. revenue and international revenue represented $105.0 million, or 85%, and $18.9 million, or 15%, respectively, of total revenue in the six months ended June 30, 2016 compared to $60.8 million, or 85%, and $10.5 million, or 15%, respectively, of total revenue in the six months ended June 30, 2015. The increase in international revenue in absolute dollars was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts and to a 62% increase in the number of international Active Customer Accounts, driven in part by our focus on expanding our sales to customers outside of the United States. We opened two offices outside of the United States between June 30, 2015 and June 30, 2016.

Cost of Revenue and Gross Margin

	Six Months Ended June 30,
	2016			2015			Change
	(Dollars in thousands)
Cost of revenue	$	55,030		$	32,372		22,658	70	%
Gross margin	56		%	55		%

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In the six months ended June 30, 2016, cost of revenue increased by $22.7 million, or 70%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $20.1 million increase in network service providers’ fees, a $1.1 million increase in cloud infrastructure fees to support the growth in usage of our products and a $0.8 million increase in amortization expense for our internal-use software and acquired intangible assets.

In the six months ended June 30, 2016, gross margin improved primarily as a result of cost savings from our continued platform optimization efforts.

Operating Expenses

	Six Months Ended June 30,
	2016		2015		Change
	(Dollars in thousands)
Research and development	$	32,233	$	17,868	14,365	80	%
Sales and marketing	31,578		24,033		7,545	31	%
General and administrative	22,228		15,300		6,928	45	%
Total operating expenses	$	86,039	$	57,201	28,838	50	%

In the six months ended June 30, 2016, research and development expenses increased by $14.4 million, or 80%, compared to the same period last year. The increase was primarily attributable to a $11.4 million increase in personnel costs, net of a $2.2 million increase in capitalized software development costs, largely as a result of a 73% increase in our research and development headcount as a result of our continued focus on product development and enhancement. The increase was also due in part to a $0.7 million increase in our facilities expenses to accommodate our headcount growth, a $0.5 million increase in amortization expense related to our internal-use software and acquired intangible assets and a $0.5 million increase related to amortization of software licenses.

In the six months ended June 30, 2016, sales and marketing expenses increased by $7.5 million, or 31%, compared to the same period last year. The increase was primarily attributable to a $4.2 million increase in personnel costs, largely as a result of a 33% increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $0.7 million increase in credit card processing fees, a $0.6 million increase related to our SIGNAL developer conference, a $0.5 million increase in professional services expense, a $0.4 million increase in expenses for brand awareness programs and events other than SIGNAL, a $0.3 million increase related to amortization of software licenses and a $0.2 million increase in facilities expenses to accommodate our headcount growth.

In the six months ended June 30, 2016, general and administrative expenses increased by $6.9 million, or 45%, compared to the same period last year. The increase was primarily attributable to a $2.9 million increase in personnel costs, largely as a result of a 50% increase in headcount to support the growth of our business, a $2.5 million increase in sales and other taxes, a $1.2 million increase in professional service fees unrelated to Authy acquisition, a $0.3 million increase in depreciation expense and a $0.2 million increase in facilities expenses.  These increases were partially offset by a $1.2 million decrease in professional service fees related to the acquisition of Authy.

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Liquidity and Capital Resources

To date, our principal sources of liquidity have been the net proceeds of $155.7 million, after deducting underwriting discounts and offering expenses paid or payable by us, from our initial public offering in June 2016, the net proceeds we received through private sales of equity securities, as well as payments received from customers using our products. From our inception through March 31, 2016, we had completed several rounds of equity financing through the sales of our convertible preferred stock for total net proceeds of $237.1 million. We believe that our cash and cash equivalents balances, our credit facility and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of this Quarterly Report on Form 10-Q titled “Risk Factors.” We cannot assure you that we will be able to raise additional capital on acceptable terms or at all. In addition, if we fail to meet our operating plan during the next 12 months, our liquidity could be adversely affected.

Credit Facility

On March 19, 2015, we entered into a $15.0 million revolving line of credit with SVB. Under this credit facility, outstanding borrowings are based on our prior month’s monthly recurring revenue. Advances on the line of credit bear interest payable monthly at Wall Street Journal prime rate plus 1%. Borrowings are secured by substantially all of our assets, with limited exceptions. In order to be able to borrow against the credit line, we must comply with certain restrictive covenants. We are currently in compliance with these covenants. This credit facility expires in March 2017. As of June 30, 2016, the total amount available to be borrowed by us was $15.0 million and we had no outstanding balance on this credit facility.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

	Six Months Ended June 30,
	2016			2015
Cash provided by (used in) operating activities	$	5,113		$	(12,056	)
Cash used in investing activities	(15,084		)	(6,335		)
Cash provided by financing activities	162,522			107,585
Net increase in cash and cash equivalents	$	152,551		$	89,194

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Cash Flows from Operating Activities

In the six months ended June 30, 2016, cash provided by operating activities consisted primarily of our net loss of $17.5 million adjusted for non-cash items, including $8.0 million of stock-based compensation expense, $3.3 million of depreciation and amortization expense and $10.3 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other liabilities increased $13.5 million and deferred revenue increased $2.6 million, primarily due to increases in transaction volumes and additional accruals of sales and other taxes. Other long-term liabilities increased $9.3 million, primarily due to the $8.3 million increase in the deferred rent related to the tenant improvement allowance available to us under our new San Francisco, California office lease.  These increases were partially offset by an increase in accounts receivable and prepaid expenses of $14.9 million, which resulted from the growth of our business, the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses and an $8.3 million increase related to the tenant improvement allowance discussed above.

In the six months ended June 30, 2015, cash used in operating activities consisted primarily of our net loss of $18.2 million adjusted for non-cash items, including $3.6 million of stock-based compensation expense, $1.6 million of depreciation and amortization expense and $0.6 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other liabilities increased $6.6 million and deferred revenue increased $1.0 million, primarily due to increases in transaction volumes and additional accruals of sales and other taxes. This was offset by an increase in accounts receivable and prepaid expenses of $6.8 million, which primarily resulted from the growth of our business and the timing of cash receipts from certain of our larger customers, as well as pre-payments for cloud infrastructure fees and certain operating expenses.

Cash Flows from Investing Activities

In the six months ended June 30, 2016, cash used in investing activities was $15.1 million, primarily consisting of a $7.4 million increase in restricted cash to secure our new San Francisco, California office lease, $5.4 million of payments for capitalized software development as we continued to build new products and enhance our existing products, and a $1.9 million increase in purchases of capital assets primarily related to the leasehold improvements under our new office lease.

In the six months ended June 30, 2015, cash used in investing activities was $6.3 million, primarily consisting of $3.8 million of payments for capitalized software development as we continued to build new products and enhance our existing products, $1.8 million of payments related to the acquisition of Authy, net of $1.2 million of cash acquired, and $0.7 million of payments related to purchases of property and equipment as we continued to expand our offices and grow our headcount to support the growth of our business.

Cash Flows from Financing Activities

In the six months ended June 30, 2016, cash provided by financing activities was $162.5 million, primarily consisting of $160.4 million of proceeds raised in our initial public offering, net of underwriting discounts and $4.3 million of proceeds from stock options exercises by our employees, which was partially offset by $2.1 million of costs paid in connection with our initial public offering.

In the six months ended June 30, 2015, cash provided by financing activities was $107.6 million, primarily consisting of $105.9 million proceeds from our sales of Series E convertible preferred stock, net of issuance expenses, and $1.7 million proceeds from stock option exercises by our employees

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Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, internal-use software development costs, accruals and legal contingencies have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the Prospectus.

Recently Issued Accounting Guidance

See Note 1 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently issued and adopted accounting pronouncements

Contractual Obligations and Other Commitments

Our principal commitments consist of obligations under our operating leases for office space and contractual commitments to our cloud infrastructure and network service providers.

See Note 11 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of our commitments under contractual obligations.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Item 3.         Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities as follows:

Interest Rate Risk

We had cash and cash equivalents of $261.4 million as of June 30, 2016, which consisted of bank deposits and money market funds. The cash and cash equivalents are held for working capital purposes. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. The interest rate on our outstanding credit facility is fixed. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

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Currency Exchange Risks

The functional currency of our foreign subsidiaries is the U.S. dollar. Therefore, we are exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars. The local currencies of our foreign subsidiaries are the British pound, the euro, the Colombian peso, the Singapore dollar and the Hong Kong dollar. Our subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiaries’ financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our consolidated statements of operations. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Item 4.         Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control

There were no changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occured during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against us in the United States District Court, Central District of California (“Telesign I”). Telesign alleges that we are infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920, U.S. Patent No. 8,687,038 and U.S. Patent No. 7,945,034. The patent infringement allegations in the lawsuit relate to our Programmable Authentication products, our two-factor authentication use case and an API tool to find information about a phone number. We have petitioned the U.S. Patent and Trademark Office for inter partes review of the patents at issue. On March 9, 2016, the District Court stayed the court case pending the resolution of those proceedings. On June 28, 2016, the Patent and Trademark Office instituted the inter partes review of the '034 patent.  Subsequently, on July 8, 2016, the Patent and Trademark Office denied our petition for inter partes review of the '920 and '038 patents.  On July 20, 2016, Telesign applied to the court to lift the stay on Telesign I. We opposed the request.

On March 28, 2016, Telesign filed a second lawsuit against us in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I, and the infringement allegations in Telesign II relate to our Programmable Authentication products and our two-factor authentication use case. On May 23, 2016, we moved to dismiss the complaint in Telesign II.  On August 3, 2016, the United States District Court, Central District of California, issued an order granting Twilio’s motion to dismiss Telesign’s complaint with leave to amend. Telesign may file an amended complaint by September 2, 2016. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin us from allegedly infringing the patents along with damages for lost profits.

On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that our products permit the interception, recording and disclosure of communications at a customer’s request and in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, we filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer.  Following the denial of the demurrer, the plaintiffs must file an amended complaint by August 18, 2016. Discovery has already begun, and will continue until August 2017, when the plaintiff must file their motion for class certification.

We intend to vigorously defend these lawsuits and believe we have meritorious defenses to each. However,