UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2018

o TRANSITION 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)

375 Beale Street, Suite 300

San Francisco, California 94105

(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 x No o

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 30, 2018, 71,849,359 shares of the registrant’s Class A common stock and 23,926,240 shares of registrant’s Class B common stock were outstanding.

Table of Contents

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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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, ability to generate positive cash flow and ability to achieve and sustain profitability;

· the impact and expected results from changes in our relationship with our larger customers;

· 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 and retain enterprises and international organizations as customers for our products;

· our ability to form and 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; and

· our ability to comply with modified or new laws and regulations applying to our business, including GDPR and other privacy regulations that may be implemented in the future.

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.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TWILIO INC.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

	As of March 31,			As of December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	117,737		$	115,286
Short-term marketable securities	190,271			175,587
Accounts receivable, net	57,310			43,113
Prepaid expenses and other current assets	16,791			19,279
Total current assets	382,109			353,265
Restricted cash	5,502			5,502
Property and equipment, net	53,694			50,541
Intangible assets, net	18,981			20,064
Goodwill	18,269			17,851
Other long-term assets	4,240			2,559
Total assets	$	482,795		$	449,782
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,924		$	11,116
Accrued expenses and other current liabilities	76,595			53,614
Customer deposits	7,442			—
Deferred revenue	7,343			13,797
Total current liabilities	109,304			78,527
Long-term liabilities	10,951			11,409
Total liabilities	120,255			89,936
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock	—			—
Class A and Class B common stock	95			94
Additional paid-in capital	633,460			608,165
Accumulated other comprehensive income	2,439			2,025
Accumulated deficit	(273,454		)	(250,438		)
Total stockholders’ equity	362,540			359,846
Total liabilities and stockholders’ equity	$	482,795		$	449,782

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TWILIO INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2018			2017
Revenue	$	129,116		$	87,372
Cost of revenue	59,582			37,286
Gross profit	69,534			50,086
Operating expenses:
Research and development	37,576			26,522
Sales and marketing	32,822			21,116
General and administrative	23,393			17,203
Total operating expenses	93,791			64,841
Loss from operations	(24,257		)	(14,755		)
Other income (expenses), net	665			498
Loss before (provision) benefit for income taxes	(23,592		)	(14,257		)
(Provision) benefit for income taxes	(137		)	30
Net loss attributable to common stockholders	$	(23,729	)	$	(14,227	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.25	)	$	(0.16	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	94,673,557			88,612,804

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TWILIO INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2018			2017
				As Adjusted
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(23,729	)	$	(14,227	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	5,631			3,955
Amortization of bond premium	28			63
Stock-based compensation	17,540			9,385
Provision for doubtful accounts	375			72
Write-off of internal-use software	182			26
Gain on lease termination	—			(295		)
Changes in operating assets and liabilities:
Accounts receivable	(14,612		)	(1,950		)
Prepaid expenses and other current assets	2,512			(972		)
Other long-term assets	(1,169		)	(178		)
Accounts payable	6,703			149
Accrued expenses and other current liabilities	22,789			5,221
Customer deposits	7,441			—
Deferred revenue	(6,256		)	885
Long-term liabilities	(499		)	306
Net cash provided by operating activities	16,936			2,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(42,693		)	(170,769		)
Maturities of marketable securities	27,600			—
Capitalized software development costs	(4,795		)	(3,649		)
Purchases of property and equipment	(940		)	(4,971		)
Purchases of intangible assets	(112		)	(8		)
Acquisition, net of cash acquired	—			(22,621		)
Net cash used in investing activities	(20,940		)	(202,018		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of costs related to public offerings	—			(238		)
Proceeds from exercises of stock options	6,678			12,735
Value of equity awards withheld for tax liabilities	(371		)	(155		)
Net cash provided by financing activities	6,307			12,342
Effect of exchange rate changes on cash, cash equivalents and restricted cash	148			11
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	2,451			(187,225		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period	120,788			314,280
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period	$	123,239		$	127,055
Cash paid for income taxes	$	18		$	42
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property, equipment and intangible assets, accrued but not paid	$	473		$	1,184
Stock-based compensation capitalized in software development costs	$	1,428		$	709
Costs related to public offerings, accrued but not paid	$	—		$	192

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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 is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.

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, Bermuda, Spain, Sweden and Australia.

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 our Annual Report on Form 10-K filed with the SEC on March 1, 2018 (“Annual Report”).

The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited financial statements as of that date, but may 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 2018 or any future period.

(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 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; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; 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, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash

Table of Contents

equivalents, marketable securities and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant 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. During the three months ended March 31, 2018, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the three months ended March 31, 2017, one customer organization represented approximately 12% of the Company’s total revenue.

As of March 31, 2018, one customer organization represented 16% of the Company’s gross accounts receivable, and as of December 31, 2017, no customer organization represented more than 10% of the Company’s gross accounts receivable.

(e) Significant Accounting Policies

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, which replaced the existing revenue recognition guidance, ASC 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

The Company adopted ASC 606 using the modified retrospective method with cumulative catch-up adjustment to the opening retained earnings as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the standard, the Company elected to apply the new guidance only to those contracts which were not completed as of the date of the adoption.

The impact of adopting the new standard on the Company’s consolidated financial statements was insignificant. The Company recorded a net cumulative catch-up adjustment to the beginning retained earnings as of January 1, 2018, of $0.7 million.

The primary impact relates to the deferral of incremental commission costs of obtaining new contracts. Under ASC 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortizes these costs on a straight-line basis over the expected term of benefit of the underlying asset, which was determined to be five years.

The impact on the Company’s revenue recognition policies was insignificant. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue according to the usage by its customers in the period in which that usage occurred. ASC 606 continues to support the recognition of revenue over time, and on a usage basis, for the majority of the Company’s contracts due to continuous transfer of control to the customer. The impact on the Company’s balance sheet presentation includes presenting customer refundable prepayments as customer deposit liabilities, whereas under ASC 605 these were included in deferred revenues.

There was not a significant tax impact to the Company’s consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there is a full valuation allowance due to the Company’s history of continued losses.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for credits and any taxes

Table of Contents

collected from customers, which are subsequently remitted to governmental authorities.

The Company determines revenue recognition through the following steps:

· Identification of the contract, or contracts, with a customer

· Identification of the performance obligations in the contract

· Determination of the transaction price

· Allocation of the transaction price to the performance obligations in the contract

· Recognition of revenue when, or as, the Company satisfies a performance obligation

Nature of Products and Services

The Company’s revenue is primarily derived from usage-based fees earned from customers accessing the Company’s enterprise cloud computing services. Platform access is considered a monthly series comprising one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the three months ended March 31, 2018 and 2017, the revenue from usage-based fees represented 84% and 83% of total revenue, respectively.

Subscription-based fees are derived from certain term-based contracts, such as with the sales of short codes and support. Term-based contracts revenue is recognized on a ratable basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer. In the three months ended March 31, 2018 and 2017, the revenue from term-based fees represented 16% and 17% of total revenue, respectively.

No significant judgments are required in determining whether products and services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (“SSP”).

Refer to Note 9, Revenue by Geographic Area, for additional disaggregation.

The Company’s arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.

The reserve for sales credits is included in accounts receivable and is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue.

Deferred Revenue and Customer Deposits

Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancellable contracts. Customer refundable prepayments are recorded as customer deposits. During the three months ended March 31, 2018, the Company recognized $3.6 million of revenue that was included in the deferred revenue balance, as adjusted for ASC 606 at the beginning of the period.

Deferred Sales Commissions

The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts, upsells and renewals and such expense is recognized over the estimated period of benefit of the capitalized commissions, which is determined to be five years. Total net capitalized costs as of March 31, 2018 were $4.1 million and are included in prepaid expenses and other current assets and other long-term assets in the accompanying condensed consolidated balance sheet. Amortization of these assets was $0.2 million during the three months ended March 31, 2018 and is included in sales and marketing expense in the accompanying condensed consolidated statement of operations.

Other than adoption of ASC 606, there were no changes to our significant accounting policies as described in our Annual Report.

Table of Contents

(f) Restricted Cash

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230) — Restricted Cash”. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-18 in the first quarter of 2018 and applied the guidance retrospectively to the prior period’s condensed consolidated statement of cash flows with the following impact (in thousands):

	Three Months Ended March 31, 2017
	As Originally Reported		As Adjusted
Cash, cash equivalents and restricted cash — beginning of period	$	305,665	$	314,280
Cash, cash equivalents and restricted cash — end of period	$	118,440	$	127,055

Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on the Company’s financial position and results of operations.

(g) Recently Issued Accounting Guidance, Not yet Adopted

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2016, the FASB issued 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 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 consolidated financial statements and related disclosures.

Table of Contents

3. Fair Value Measurements

The following tables provide the financial assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in thousands):

	Amortized Cost or Carrying		Gross Unrealized		Gross Unrealized Losses Less Than			Gross Unrealized Losses More Than			Fair Value Hierarchy as of March 31, 2018						Aggregate
	Value		Gains		12 Months			12 Months			Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds	$	93,103	$	—	$	—		$	—		$	93,103	$	—	$	—	$	93,103
Total included in cash and cash equivalents	93,103		—		—			—			93,103		—		—		93,103
Marketable securities:
U.S. Treasury securities	59,973		—		(127		)	(73		)	59,773		—		—		59,773
Corporate debt securities	131,213		—		(715		)	—			—		130,498		—		130,498
Total marketable securities	191,186		—		(842		)	(73		)	59,773		130,498		—		190,271
Total financial assets	$	284,289	$	—	$	(842	)	$	(73	)	$	152,876	$	130,498	—		$	283,374

	Amortized Cost or Carrying		Gross Unrealized		Gross Unrealized Losses Less Than			Gross Unrealized Losses More Than		Fair Value Hierarchy as of December 31, 2017						Aggregate
	Value		Gains		12 Months			12 Months		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds	$	95,432	$	—	$	—		$	—	$	95,432	$	—	$	—	$	95,432
Total included in cash and cash equivalents	95,432		—		—			—		95,432		—		—		95,432
Marketable securities:
U.S. Treasury securities	59,962		—		(216		)	—		59,746		—		—		59,746
Corporate debt securities	116,223		—		(382		)	—		—		115,841		—		115,841
Total marketable securities	176,185		—		(598		)	—		59,746		115,841		—		175,587
Total financial assets	$	271,617	$	—	$	(598	)	$	—	$	155,178	$	115,841	$	—	$	271,019

As the Company views these securities as available to support current operations, it has classified all available for sale securities as short-term. As of March 31, 2018, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of March 31, 2018, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three month ended March 31, 2018. Interest earned on marketable securities in the three months ended March 31, 2018 and 2017, was $0.7 million and $0.5 million, respectively, and is recorded as other income (expense), net, in the accompanying condensed consolidated statements of operations.

Table of Contents

The following table summarizes the contractual maturities of marketable securities as of March 31, 2018 and December 31, 2017 (in thousands):

	March 31, 2018				December 31, 2017
	Amortized Cost		Aggregate Fair Value		Amortized Cost		Aggregate Fair Value
Financial Assets:
Less than one year	$	147,714	$	147,156	$	108,584	$	108,360
One to two years	43,472		43,115		67,601		67,227
Total	$	191,186	$	190,271	$	176,185	$	175,587

4. Property and Equipment

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

	As of March 31,			As of December 31,
	2018			2017
Capitalized internal-use software development costs	$	55,328		$	49,177
Leasehold improvements	14,422			14,246
Office equipment	10,410			9,652
Furniture and fixtures	2,108			1,976
Software	1,765			1,675
Total property and equipment	84,033			76,726
Less: accumulated depreciation and amortization	(30,339		)	(26,185		)
Total property and equipment, net	$	53,694		$	50,541

Depreciation and amortization expense was $4.2 million and $2.8 million for the three months ended March 31, 2018 and 2017, respectively.

The Company capitalized $6.4 million and $4.3 million in internal-use software development costs in the three months ended March 31, 2018 and 2017, respectively, of which $1.4 million and $0.7 million, respectively, was stock-based compensation expense. Amortization of capitalized software development costs was $2.7 million and $1.8 million in the three months ended March 31, 2018 and 2017, respectively.

5. Business Combinations

In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow with a term of 18 months.

Additionally, the Company deposited $2.0 million into a separate escrow that was conditioned upon future service conditions and was recorded ratably into the compensation expense as the services were rendered. As of March 31, 2018, the remaining balance in the escrow was $0.3 million.

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity’s results of operations have been included in the condensed consolidated financial statements of the Company from the date of acquisition.

Table of Contents

The following table presents the purchase price allocation, as adjusted, recorded in the Company’s condensed consolidated balance sheet as of March 31, 2017 (in thousands):

	Total
Net tangible liabilities	$	(3,575	)
Goodwill(1)	12,837
Intangible assets(2)	13,700
Total purchase price	$	22,962

(1) The goodwill is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes.

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

	Total		Estimated life (in years)
Developed technology	$	5,000	4
Customer relationships	6,100		7 - 8
Supplier relationships	2,600		5
Total intangible assets acquired	$	13,700

The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheets.

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 income approaches to estimate the fair values of the identifiable intangible assets.

The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million and $0.4 million were incurred during fiscal years 2017 and 2016, respectively. All acquisition-related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.

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

6. Goodwill and Intangible Assets

Goodwill

Goodwill balance as of March 31, 2018 and December 31, 2017 was as follows (in thousands):

	Total
Balance as of December 31, 2017	$	17,851
Effect of exchange rate	418
Balance as of March 31, 2018	$	18,269

Table of Contents

Intangible assets

Intangible assets consisted of the following (in thousands):

	As of March 31, 2018
	Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Developed technology	$	15,040	$	(6,529	)	$	8,511
Customer relationships	7,280		(1,229		)	6,051
Supplier relationships	2,932		(631		)	2,301
Trade name	60		(60		)	—
Patent	1,947		(124		)	1,823
Total amortizable intangible assets	27,259		(8,573		)	18,686
Non-amortizable intangible assets:
Domain names	32		—			32
Trademarks	263		—			263
Total	$	27,554	$	(8,573	)	$	18,981

	As of December 31, 2017
	Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Developed technology	$	14,941	$	(5,476	)	$	9,465
Customer relationships	7,159		(1,006		)	6,153
Supplier relationships	2,881		(500		)	2,381
Trade name	60		(60		)	—
Patent	1,878		(108		)	1,770
Total amortizable intangible assets	26,919		(7,150		)	19,769
Non-amortizable intangible assets:
Domain names	32		—			32
Trademarks	263		—			263
Total	$	27,214	$	(7,150	)	$	20,064

Amortization expense was $1.4 million and $1.2 million for the three months ended March 31, 2018 and December 31, 2017, respectively.

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

	As of March 31, 2018
2018 (remaining nine months)	$	5,646
2019	5,088
2020	2,658
2021	1,525
2022	929
Thereafter	2,840
Total	$	18,686

Table of Contents

7. Accrued Expenses and Other Liabilities

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

	As of March 31,		As of December 31,
	2018		2017
Accrued payroll and related	$	10,042	$	4,898
Accrued bonus and commission	5,721		4,777
Accrued cost of revenue	18,690		10,876
Sales and other taxes payable	21,227		20,877
ESPP contributions	3,345		1,338
Deferred rent	1,179		1,048
Accrued other expense	16,391		9,800
Total accrued expenses and other current liabilities	$	76,595	$	53,614

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

	As of March 31,		As of December 31,
	2018		2017
Deferred rent	$	8,217	$	8,480
Deferred tax liability, net	2,262		2,452
Accrued other expense	472		477
Total long-term liabilities	$	10,951	$	11,409

8. Supplemental Balance Sheet Information

A roll-forward of the Company’s reserves for the three months ended March 31, 2018 and 2017 is as follows (in thousands):

(a) Allowance for doubtful accounts:

	Three Months Ended March 31,
	2018			2017
Balance, beginning of period	$	1,033		$	1,076
Additions	375			72
Write-offs	(4		)	(378		)
Balance, end of period	$	1,404		$	770

b) Sales credit reserve:

	Three Months Ended March 31,
	2018			2017
Balance, beginning of period	$	1,761		$	544
Additions	1,107			551
Deductions against reserve	(1,166		)	(277		)
Balance, end of period	$	1,702		$	818

Table of Contents

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 March 31,
	2018			2017
Revenue by geographic area:
United States	$	98,635		$	70,098
International	30,481			17,274
Total	$	129,116		$	87,372
Percentage of revenue by geographic area:
United States	76		%	80		%
International	24		%	20		%

Long-lived assets outside the United States were not significant.

10. Commitments and Contingencies

(a) Lease Commitments

The Company entered into various non-cancelable operating lease agreements for its facilities that expire over the next six 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.

Rent expense was $2.1 million and $1.9 million for the three months ended March 31, 2018 and 2017, respectively.

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

Year Ending December 31:	As of March 31, 2018
2018 (remaining nine months)	$	6,607
2019	7,952
2020	7,112
2021	7,033
2022	5,864
Thereafter	10,189
Total minimum lease payments	$	44,757

Additionally, in the three months ended March 31, 2018, the Company entered into a 22 month non-cancellable agreement with a cloud services vendor for a total commitment of $4.5 million. Except for this new commitment, there have been no material changes to the Company’s principle commitments described in the Company’s most recent Annual Report.

(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 (“920”), U.S. Patent No. 8,687,038 (“038”) and U.S. Patent No. 7,945,034 (“034”). The patent infringement allegations in the lawsuit relate to the Company’s Account Security products, its two-factor authentication use case and an API tool to find information about a phone number. The Company petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the patents at issue. On July 8, 2016, the PTO denied the Company’s petition for inter partes review of the ‘920 and ‘038 patents, and on June 26, 2017, it upheld the patentability of the ‘034 patent.

Table of Contents

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 (‘792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the PTO issued an order instituting the inter partes review for the ‘792 patent. On March 6, 2018, the PTO found all claims challenged by Twilio in the inter partes review unpatentable. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the ‘792 patent inter partes review, which the court granted. The Central District of California court lifted the stay on April 13, 2018. With respect to each of the patents asserted in the now-consolidated Telesign I and Telesign II cases, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits. The Telesign I/II litigation is currently ongoing.

On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021 (“021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the Court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the ‘021, ‘465, and ‘376 patents. On March 9, 2018, the PTO denied Telesign’s petition for inter partes review of the ‘021 patent and granted Telesign’s petitions for inter partes review of the ‘465 and ‘376 patents. The Northern District of California litigation is currently stayed pending resolution of the inter partes reviews of the ‘465 and ‘376 patents. The Company is seeking a judgment of infringement, a judgment of willful infringement, monetary and injunctive relief, enhanced damages, and an award of costs and expenses against Telesign.

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 are 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, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Following a period of discovery, the plaintiff filed a motion for class certification on September 20, 2017. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of the Company’s customers that were recorded. The court has not yet finalized a schedule for notice to potential class members, additional discovery, summary judgment motions, or trial.

The Company intends to vigorously defend itself against these lawsuits and believes it has meritorious defenses to each matter in which it is a defendant. 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 litigation matters 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.

Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

(c) Indemnification Agreements

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

Table of Contents

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 its 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 March 31, 2018 and December 31, 2017, no amounts were 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. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included 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. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions, and since then, has expanded the number of jurisdictions where these taxes are being collected. Effective January 2018, the Company began to collect taxes in one additional jurisdiction and accordingly, the Company is no longer recording a provision for its exposure in that jurisdiction. The Company expects to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, the Company was and continues to be in discussions with certain states regarding its prior state sales and other taxes, if any, that the Company may owe.

During 2017, the Company revised its estimates of its tax exposure based on settlements reached with various states indicating that certain revisions to the key assumptions including, but not limited to, the sourcing of revenue and the taxability of the Company’s services were appropriate in the current period. In the year ended December 31, 2017, the total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.4 million. As of March 31, 2018 and December 31, 2017, the liability recorded for these taxes was $21.2 million and $20.9 million, respectively.

In the event other jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates.

11. Stockholders’ Equity

(a) Preferred Stock

As of March 31, 2018 and December 31, 2017, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.

(b) Common Stock

As of March 31, 2018 and December 31, 2017, 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. As of March 31, 2018, 71,748,415 shares of Class A common stock and 23,943,253 shares of Class B common stock were issued and outstanding. As of December 31, 2017, 69,906,550 shares of Class A common stock and 24,063,246 shares of Class B common stock were issued and outstanding.

Table of Contents

The Company had reserved shares of common stock for issuance as follows:

	As of March 31,	As of December 31,
	2018	2017
Stock options issued and outstanding	10,392,199	10,710,427
Nonvested restricted stock units issued and outstanding	7,106,203	5,665,459
Class A common stock reserved for Twilio.org	635,014	635,014
Stock-based awards available for grant under 2016 Plan	12,054,291	10,200,189
Class A common stock committed under 2016 ESPP	249,730	235,372
Total	30,437,437	27,446,461

12. 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 the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder.

2016 Stock Option Plan

The Company’s 2016 Stock Option and 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 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. On January 1, 2018, the shares available for grant under the 2016 Plan were automatically increased by 4,698,490 shares.

Under the 2016 Plan, the stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four-year term from the date of grant, at a rate of 25% after one year, then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period.

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 ESPP. 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. On January 1, 2018, the shares available for grant under the 2016 Plan were automatically increased by 939,698 shares.

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 in May and November of each fiscal year, starting in May 2017.

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 Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.

Table of Contents

In the three months ended March 31, 2018 and 2017, no shares of Class A common stock were purchased under the 2016 ESPP and 249,730 shares are expected to be purchased in the second quarter of 2018. As of March 31, 2018, total unrecognized compensation cost related to the 2016 ESPP was $0.4 million, which will be amortized over a weighted-average period of 0.1 years.

Stock-based awards activity under the 2008 Plan and 2016 Plan 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, 2017	10,155,427		$	10.31	7.12	$	145,763
Granted	1,003,733		33.01
Exercised	(1,190,387	)	5.61
Forfeited and cancelled	(131,574	)	8.83
Outstanding options as of March 31, 2018	9,837,199		$	13.21	7.34	$	245,614
Options vested and exercisable as of March 31, 2018	5,054,924		$	7.71	6.37	$	154,024

Aggregate intrinsic value represents the difference between the fair value of the Company’s Class A common stock as reported on the New York Stock Exchange and the exercise price of outstanding “in-the-money” options. The aggregate intrinsic value of stock options exercised was $31.1 million and $78.2 million during the three months ended March 31, 2018 and 2017, respectively.

The total estimated grant date fair value of options vested was $7.8 million and $4.1 million during the three months ended March 31, 2018 and 2017, respectively. The weighted-average grant-date fair value of options granted was $15.24 and $13.72 during the three months ended March 31, 2018 and 2017, respectively.

On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grant value of $5.9 million. The first half of each award vests upon satisfaction of a performance condition and the remainder vests thereafter in equal monthly installments over a 24-month period. The achievement window expires after 4.3 years from the date of grant and the stock options expire seven years after the date of grant. The stock options are amortized over a derived service period, as adjusted, of 3.1 years, 4.6 years and 5.3 years, respectively. The stock options value and the derived service period were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance options:

	Number of awards 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, 2017	555,000		$	31.72	6.0	$	—
Granted	—		—
Exercised	—		—
Forfeited and cancelled	—		—
Outstanding options as of March 31, 2018	555,000		$	31.72	5.9	$	3,585
Options vested and exercisable as of March 31, 2018	92,500	*	$	31.72	5.9	$	598

*Vesting of these shares is triggered by the filing of the Company’s Quarterly Report on Form 10-Q.

As of March 31, 2018, total unrecognized compensation cost related to nonvested stock options was $44.5 million, which will be amortized over a weighted-average period of 2.3 years.

Table of Contents

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, 2017	5,665,459		$	29.29	$	133,648
Granted	2,160,719		28.37
Vested	(544,217	)	29.32
Forfeited and cancelled	(175,758	)	28.69
Nonvested RSUs as of March 31, 2018	7,106,203		$	29.02	$	271,223

As of March 31, 2018, total unrecognized compensation cost related to nonvested RSUs was $190.9 million, which will be amortized over a weighted-average period of 3.3 years.

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 March 31,
	2018			2017
*Employee Stock Options*
Fair value of common stock	$	33.01		$31.72 - $31.96
Expected term (in years)	6.08			6.08
Expected volatility	44.09		%	47.56	%
Risk-free interest rate	2.74		%	2.07	%
Dividend rate	0		%	0	%

The following assumptions were used in the Monte Carlo simulation model to estimate the fair value and the derived service period of the performance options:

Asset volatility	40		%
Equity volatility	45		%
Discount rate	14		%
Stock price at grant date	$	31.72

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting”, ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 allows companies to make certain changes to awards, such as vesting conditions, without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 should be applied prospectively to awards modified on or after the adoption date. The Company adopted ASU 2017-09 in the first quarter of 2018. The adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

Table of Contents

Stock-Based Compensation Expense

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

	Three Months Ended March 31,
	2018		2017
Cost of revenue	$	222	$	138
Research and development	7,872		4,484
Sales and marketing	3,859		1,995
General and administrative	5,587		2,768
Total	$	17,540	$	9,385

13. 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.

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 March 31,
	2018			2017
Net loss attributable to common stockholders	$	(23,729	)	$	(14,227	)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted	94,673,557			88,612,804
Net loss per share attributable to common stockholders, basic and diluted	$	(0.25	)	$	(0.16	)

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

	Three Months Ended March 31,
	2018	2017
Stock options issued and outstanding	10,392,199	13,545,334
Nonvested restricted stock units issued and outstanding	7,106,203	2,692,636
Class A common stock reserved for Twilio.org	635,014	680,397
Class A common stock committed under 2016 ESPP	249,730	594,218
Unvested shares subject to repurchase	767	38,886
Total	18,383,913	17,551,471

Table of Contents

14. Transactions With Investors

In 2015, two of the Company’s vendors participated in the Company’s Series E convertible preferred stock financing and owned approximately 1.9% and 1.0%, respectively, of the Company’s capital stock, on an as-if converted basis, as of each of March 31, 2018, and December 31, 2017.

During the three months ended March 31, 2018 and 2017, the amounts of software services the Company purchased from the first vendor were $6.3 million and $4.6 million, respectively. The net amount due to this vendor as of March 31, 2018 was $2.8 million.

The amount of services the Company purchased from the second vendor was $0.2 million and $0.2 million in the three months ended March 31, 2018 and 2017, respectively. The net amount due to this vendor as of March 31, 2018 was insignificant.

15. Income Taxes

In October 2016, the FASB issued ASU 2016-16, ‘‘Intra-Entity Transfers Other Than Inventory’’, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted ASU 2016-16 in the first quarter 2018. Adoption of the ASU did not have any impact on the Company’s financial statements.

The Company determines its income tax provision or benefit for interim periods using an estimate of its annual effective tax rate, adjusted for discrete items occurring in the quarter. The primary difference between the Company’s effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance or a zero tax rate.

The Company recorded a (provision) benefit for income taxes of $(0.1) million and $0.03 million for the three months ended March 31, 2018 and 2017, respectively. The provision for income taxes consists primarily of income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business. The Company’s U.S. operations have been in a loss position and the Company maintains a full valuation allowance against its U.S. deferred tax assets.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. The Company has not completed its accounting assessment for the effects of the Tax Act as of March 31, 2018; however, the final accounting assessment will occur no later than one year from the date the Tax Act was enacted. The Company has also considered and estimated a number of provisions of the Tax Act effective January 1, 2018 and, based on the initial assessment, the Company has determined that the Tax Act did not have a material effect on its consolidated financial statements for the three months ended March 31, 2018.

***********

Table of Contents

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. In addition to historical financial information, the following discussion contains forward-looking statements that are 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 Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. 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 their software applications via our simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by our software building blocks empowers companies of virtually every shape and size to build world-class engagement into their customer experience.

Our platform consists of three layers: our Engagement Cloud, Programmable Communications Cloud and Super Network. Our Engagement Cloud software is a set of APIs that handles the higher level communication logic needed for nearly every type of customer engagement. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. Our Programmable Communications Cloud software is a set of APIs that enables developers to embed voice, messaging and video capabilities into their applications. The Programmable Communications Cloud is designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. 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. The Super Network also contains a set of APIs that gives our customers access to more foundational components of our platform, like phone numbers.

As of March 31, 2018, our customers’ applications that are embedded with our products could reach users via voice, messaging and video in nearly every country in the world, and our platform offered customers local telephone numbers in over 100 countries and text-to-speech functionality in 26 languages. We support our global business through 27 cloud data centers in nine regions around the world and have developed contractual relationships with network service providers globally.

Our business model is primarily focused on reaching and serving the needs of software developers, who we believe are becoming increasingly influential in technology decisions in a wide variety of companies. We call this approach our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed. We established and maintain our leadership position by engaging directly with, and cultivating, our developer community, which has led to the rapid adoption of our platform. We reach developers through community events and conferences, including our SIGNAL developer conferences, 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-adopt APIs, extensive self-service documentation and customer support team, developers 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 executives 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, sales force automation and marketing automation that they sell to other businesses.

Table of Contents

We supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach. We augment this sales effort with the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration, and is targeted at the needs of enterprise scale customers. Our sales organization works with 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, sales engineering and customer success personnel.

We generate the substantial majority of our revenue from customers based on their usage of our software products that they have incorporated into their applications. In addition, customers typically purchase one or more telephone numbers from us, for which we charge a monthly flat fee per number. Some customers also choose to purchase various levels of premium customer support for a monthly fee. Customers that register in our self-service model typically pay upfront 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 and customer deposits liability 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 whom 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 in the world. Historically, a substantial majority of our cost of revenue has been network service provider fees. We continue 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 on 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. In the three months ended March 31, 2018 and 2017, our revenue was $129.1 million and $87.4 million, respectively. In the three months ended March 31, 2018 and 2017, our 10 largest Active Customer Accounts generated an aggregate of 18% and 25% of our revenue, respectively. For each of the three months ended March 31, 2018 and 2017, among our 10 largest Active Customer Accounts we had three Variable Customer Accounts representing 8% and 7% of our revenue, respectively. For the three months ended March 31, 2018 and 2017, our Base Revenue was $117.5 million and $80.6 million, respectively. We incurred a net loss of $23.7 million and $14.2 million, for the three months ended March 31, 2018 and 2017, respectively. See the section titled “—Key Business Metrics—Base Revenue” below for a discussion of Base Revenue.

Key Business Metrics

	Three Months Ended March 31,
	2018			2017
Number of Active Customer Accounts (as of end date of period)	53,985			40,696
Base Revenue (in thousands)	$	117,507		$	80,643
Base Revenue Growth Rate	46		%	62		%
Dollar-Based Net Expansion Rate	132		%	141		%

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 our customers 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 organization may constitute multiple unique

Table of Contents

Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account.

In the three months ended March 31, 2018 and 2017, revenue from Active Customer Accounts represented over 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 large Active Customer Accounts 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 have 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 defined a Variable Customer Account as an Active Customer Account that (i) 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 March 31, 2018 and 2017, we had six and seven Variable Customer Accounts, which represented 9% and 8%, 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 existing 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. As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, for reporting periods starting with the three months ended December 31, 2016, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of our revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric. 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.

Table of Contents

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 Engagement Cloud and Programmable Communications Cloud. These usage-based software products include offerings, such as Programmable Voice, Programmable Messaging and Programmable Video. Some examples of the usage-based fees for which we charge include minutes of call duration activity for our Programmable Voice products, number of text messages sent or received using our Programmable Messaging products and number of authentications for our Account Security products. In the three months ended March 31, 2018 and 2017, we generated 84% and 83% of our revenue, respectively, from usage-based fees. We also earn monthly flat fees from certain fee-based products, such as telephone numbers and customer support.

Customers typically pay upfront via credit card in monthly prepaid amounts and draw down their balances as they purchase or use our products. As customers grow their usage of our products they automatically receive tiered usage discounts. Our larger customers often enter into contracts, for at least 12 months, 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, deferred revenue or customer deposits, 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.

We continue to focus our research and development efforts on adding new features and products, including new use cases, improving our platform and increasing the functionality of our existing products.

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 conferences, credit card processing fees, professional services fees and an allocation of our general overhead expenses.

Table of Contents

We focus our sales and marketing efforts on generating awareness of our company, platform and products through our developer evangelist team and self-service model, creating sales leads and establishing and promoting our brand, both domestically and internationally. We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self-service model with an enterprise sales approach, expanding our sales channels, driving our go-to-market strategies, building our brand awareness and sponsoring additional marketing events.

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. Prior to March 2017, we did not collect such taxes from our customers and recorded such taxes as general and administrative expenses. Effective March 2017, we began collecting these taxes from customers in certain jurisdictions and added more jurisdictions throughout 2017 and in the first quarter of 2018 we began to collect these taxes in one additional jurisdiction. We continue expanding the number of jurisdictions where we will be collecting these taxes in the future. We expect that these expenses will decline in future years as we continue collecting these taxes from our customers in more jurisdictions, which would reduce our rate of ongoing accrual.

Provision for Income Taxes. Our income tax provision or benefit for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items occurring in the quarter. The primary difference between our effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance or a zero tax rate.

We have not completed our accounting assessment for the effects of the Tax Act as of March 31, 2018; however, based on our initial assessment, we have determined that the Tax Act did not have a material effect on our condensed consolidated financial statements for the three months ended March 31, 2018.

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. For the periods presented, we define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude stock-based compensation and amortization of acquired intangibles.

Table of Contents

	Three Months Ended March 31,
	2018			2017
	(In thousands)
Reconciliation:
Gross profit	$	69,534		$	50,086
Non-GAAP adjustments:
Stock-based compensation	222			138
Amortization of acquired intangibles	1,198			997
Non-GAAP gross profit	$	70,954		$	51,221
Non-GAAP gross margin	55		%	59		%

Non-GAAP Operating Expenses. For the periods presented, 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, stock-based compensation, amortization of acquired intangibles, acquisition-related expenses, release of tax liability upon obligation settlement, gain on lease termination and payroll taxes related to stock-based compensation.

	Three Months Ended March 31,
	2018			2017
	(In thousands)
Reconciliation:
Operating expenses	$	93,791		$	64,841
Non-GAAP adjustments:
Stock-based compensation	(17,318		)	(9,247		)
Amortization of acquired intangibles	(262		)	(179		)
Acquisition-related expenses	—			(217		)
Release of tax liability upon obligation settlement	—			920
Gain on lease termination	—			295
Payroll taxes related to stock-based compensation	(564		)	(1,450		)
Non-GAAP operating expenses	$	75,647		$	54,963

Non-GAAP Loss from Operations and Non-GAAP Operating Margin. For the periods presented, we define non-GAAP loss from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude stock-based compensation, amortization of acquired intangibles, acquisition-related expenses, release of tax liability upon obligation settlement, gain on lease termination and payroll taxes related to stock-based compensation.

	Three Months Ended March 31,
	2018			2017
	(In thousands)
Reconciliation:
Loss from operations	$	(24,257	)	$	(14,755	)
Non-GAAP adjustments:
Stock-based compensation	17,540			9,385
Amortization of acquired intangibles	1,460			1,176
Acquisition-related expenses	—			217
Release of tax liability upon obligation settlement	—			(920		)
Gain on lease termination	—			(295		)
Payroll taxes related to stock-based compensation	564			1,450
Non-GAAP loss from operations	$	(4,693	)	$	(3,742	)
Non-GAAP operating margin	(4		)%	(4		)%

Table of Contents

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 March 31,
	2018			2017
	(In thousands)
Condensed Consolidated Statements of Operations Data:
Revenue	$	129,116		$	87,372
Cost of revenue(1)(2)	59,582			37,286
Gross profit	69,534			50,086
Operating expenses:
Research and development(1)(2)	37,576			26,522
Sales and marketing(1)(2)	32,822			21,116
General and administrative(1)(2)	23,393			17,203
Total operating expenses	93,791			64,841
Loss from operations	(24,257		)	(14,755		)
Other income (expenses), net	665			498
Loss before (provision) benefit for income taxes	(23,592		)	(14,257		)
(Provision) benefit for income taxes	(137		)	30
Net loss attributable to common stockholders	$	(23,729	)	$	(14,227	)

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

	Three Months Ended March 31,
	2018		2017
	(In thousands)
Cost of revenue	$	222	$	138
Research and development	7,872		4,484
Sales and marketing	3,859		1,995
General and administrative	5,587		2,768
Total	$	17,540	$	9,385

(2) Includes amortization of acquired intangibles as follows:

	Three Months Ended March 31,
	2018		2017
	(In thousands)
Cost of revenue	$	1,198	$	997
Research and development	22		38
Sales and marketing	220		117
General and administrative	20		24
Total	$	1,460	$	1,176

Table of Contents

	Three Months Ended March 31,
	2018		2017
Condensed Consolidated Statements of Operations, as a percentage of revenue:**
Revenue	100	%	100	%
Cost of revenue	46		43
Gross profit	54		57
Operating expenses:
Research and development	29		30
Sales and marketing	25		24
General and administrative	18		20
Total operating expenses	73		74
Loss from operations	(19	)	(17	)
Other income (expenses), net	1		1
Loss before (provision) benefit for income taxes	(18	)	(16	)
(Provision) benefit for income taxes	*		*
Net loss attributable to common stockholders	(18	)%	(16	)%

* Less than 0.5% of revenue.

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

Comparison of the Three Months Ended March 31, 2018 and 2017

Revenue

	Three Months Ended March 31,
	2018		2017		Change
	(Dollars in thousands)
Base Revenue	$	117,507	$	80,643	$	36,864	46	%
Variable Revenue	11,609		6,729		4,880		73	%
Total revenue	$	129,116	$	87,372	$	41,744	48	%

In the three months ended March 31, 2018, Base Revenue increased by $36.9 million, or 46%, compared to the same period last year, and represented 91% and 92% of total revenue in the months ended March 31, 2018 and 2017, 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 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 March 31, 2018 were reflected in our Dollar-Based Net Expansion Rate of 132%. The increase in usage was also attributable to a 33% increase in the number of Active Customer Accounts, from 40,696 as of March 31, 2017, to 53,985 as of March 31, 2018.

In the three months ended March 31, 2018, Variable Revenue increased by $4.9 million, or 73%, compared to the same period last year, and represented 9% and 8% of total revenue in the three months ended March 31, 2018 and 2017, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts, partially offset by the decrease in number of Variable Customer Accounts from seven to six.

U.S. revenue and international revenue represented $98.6 million, or 76%, and $30.5 million, or 24%, respectively, of total revenue in the three months ended March 31, 2018, compared to $70.1 million, or 80%, and $17.3 million, or 20%, respectively, of total revenue in the three months ended March 31, 2017. The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable

Table of Contents

Voice products, by our existing international Active Customer Accounts, and a 39% 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.

Cost of Revenue and Gross Margin

	Three Months Ended March 31,
	2018			2017			Change
	(Dollars in thousands)
Cost of revenue	$	59,582		$	37,286		$	22,296	60	%
Gross margin	54		%	57		%

In the three months ended March 31, 2018, cost of revenue increased by $22.3 million, or 60%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $20.2 million increase in network service providers’ costs and a $1.3 million increase in cloud infrastructure fees to support the growth in usage of our products.

In the three months ended March 31, 2018, gross margin percentage declined primarily as a result of an increasing mix of international product usage and certain price adjustments that were made by us in 2017 as a result of the high volume growth of a large customer.

Operating Expenses

	Three Months Ended March 31,
	2018		2017		Change
	(Dollars in thousands)
Research and development	$	37,576	$	26,522	$	11,054	42	%
Sales and marketing	32,822		21,116		11,706		55	%
General and administrative	23,393		17,203		6,190		36	%
Total operating expenses	$	93,791	$	64,841	$	28,950	45	%

In the three months ended March 31, 2018, research and development expenses increased by $11.1 million, or 42%, compared to the same period last year. The increase was primarily attributable to a $8.0 million increase in personnel costs, net of a $1.8 million increase in capitalized software development costs, largely as a result of a 31% average increase in our research and development headcount, as we continued to focus on enhancing our existing products and introducing new products, as well as enhancing product management and other technical functions. The increase was also due in part to a $0.8 million increase in cloud infrastructure fees to support the staging and development of our products, a $0.3 million increase in outsourced engineering services and a $0.6 million increase in amortization expense related to our internal-use software and the intangible assets acquired through business combinations.

In the three months ended March 31, 2018, sales and marketing expenses increased by $11.7 million, or 55%, compared to the same period last year. The increase was primarily attributable to a $9.0 million increase in personnel costs, largely as a result of a 40% average increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally and a $0.8 million increase in the expenses related to brand awareness programs and events.

In the three months ended March 31, 2018, general and administrative expenses increased by $6.2 million, or 36%, compared to the same period last year. The increase was primarily attributable to a $4.0 million increase in personnel costs, largely as a result of a 25% average increase in general and administrative headcount to support the growth of our business domestically and internationally and a $2.0 million increase in professional services fees primarily related to our operations as a public company and our on-going litigation matters.

Table of Contents

Liquidity and Capital Resources

To date, our principal sources of liquidity have been the net proceeds of $155.5 million and $64.4 million, after deducting underwriting discounts and offering expenses paid or payable by us, from our initial public offering in June 2016 and our follow-on public offering in October 2016, respectively; the net proceeds we received through private sales of equity securities, as well as the payments received from customers using our products. From our inception through March 31, 2016, we completed several rounds of equity financing through the sale of our convertible preferred stock for total net proceeds of $237.1 million. We believe that our cash, cash equivalents and marketable securities balances, as well as 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 Part II, Item 1A, “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

Cash Flows

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

	Three Months Ended March 31,
	2018			2017
Cash provided by operating activities	$	16,936		$	2,440
Cash used in investing activities	(20,940		)	(202,018		)
Cash provided by financing activities	6,307			12,342
Effect of exchange rate changes on cash, cash equivalents and restricted cash	148			11
Net increase (decrease) in cash, cash equivalents and restricted cash	$	2,451		$	(187,225	)

Cash Flows from Operating Activities

In the three months ended March 31, 2018, cash provided by operating activities consisted primarily of our net loss of $23.7 million adjusted for non-cash items, including $17.5 million of stock-based compensation expense, $5.6 million of depreciation and amortization expense and $16.9 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other current liabilities increased $29.5 million primarily due to increases in transaction volumes. Deferred revenue decreased $6.3 million primarily due to a $7.4 million reclassification of customer deposits caused by the implementation of the new accounting guidance for revenue, as described in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This decrease was partially offset by increases due to transaction volumes and timing of customer prepayments receipts. Accounts receivable and prepaid expenses increased $12.1 million, which resulted primarily from the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses.

Cash Flows from Investing Activities

In the three months ended March 31, 2018, cash used in investing activities was $20.9 million primarily consisting of $15.1 million of purchases of marketable securities, net of maturities, and $4.8 million related to capitalized software development costs.

Cash Flows from Financing Activities

In the three months ended March 31, 2018, cash provided by financing activities was $6.3 million primarily consisting of the proceeds from stock options exercised by our employees.

Table of Contents

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, capitalization of our internal-use software development costs and accruals and contingencies have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, which replaced the existing revenue recognition guidance, ASC 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

We adopted ASC 606 using the modified retrospective method with cumulative catch-up adjustment to the opening retained earnings as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting policies prior to adoption. In adopting the standard, we elected to apply the new guidance only to those contracts which were not completed as of the date of the adoption.

The impact of adopting the new standard on our consolidated financial statements was insignificant. We recorded a net cumulative catch-up adjustment to the beginning retained earnings as of January 1, 2018, of $0.7 million.

The primary impact relates to the deferral of incremental commission costs of obtaining new contracts. Under ASC 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract. Under the new standard, we defer all incremental commission costs to obtain the contract and amortize these costs on a straight-line basis over the term of benefit of the underlying asset, which was determined to be five years.

The impact on our revenue recognition policies was insignificant. Prior to the adoption of ASC 606, we recognized the majority of our revenue according to the usage by our customers in the period in which that usage occurred. ASC 606 continues to support the recognition of revenue over time, and on a usage basis, for the majority of our contracts due to continuous transfer of control to the customer. The impact on the Company’s balance sheet presentation includes presenting customer refundable prepayments as customer deposit liabilities, whereas under ASC 605 these were included in deferred revenues.

There was not a significant tax impact to our consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there is a full valuation allowance due to our history of continued losses.

Other than adoption of ASC 606, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our most recent Annual Report on Form 10-K.

Recently Issued Accounting Guidance

See Note 2 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 not yet adopted accounting pronouncements.

Table of Contents

Off-Balance Sheet Arrangements

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

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. In the three months ended March 31, 2018, we entered into a 22 month non-cancellable agreement with a cloud services vendor for a total commitment of $4.5 million. Except for this new commitment, there have been no material changes to our principle commitments described in our most recent Annual Report on Form 10-K.

Item 3. 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 $117.7 million and marketable securities of $190.3 million as of March 31, 2018. Cash and cash equivalents consist of bank deposits and money market funds. Marketable securities consist of U.S. treasury securities and high credit quality corporate debt securities. The cash and cash equivalents and marketable securities 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. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

Currency Exchange Risks

The functional currency of our foreign subsidiaries is the U.S. dollar and the Euro. 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, the Hong Kong dollar and the Swedish Krona. 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 condensed 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 condensed 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

Table of Contents

concluded that as of March 31, 2018, our disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting related to accounting for capitalized software development costs as described in Part II, Item 9A, “Controls and Procedures”, of our most recently filed Annual Report on Form 10-K.

Changes in Internal Control

We are taking actions to remediate the material weakness relating to our internal control over financial reporting, as described above. 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 occurred during the quarter ended March 31, 2018, 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On April 30, 2015, Telesign Corporation (“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 (“920”), U.S. Patent No. 8,687,038 (“038”) and U.S. Patent No. 7,945,034 (“034”). The patent infringement allegations in the lawsuit relate to our Account Security products, our two-factor authentication use case and an API tool to find information about a phone number. We petitioned the U.S. Patent and Trademark Office for inter partes review of the patents at issue. On July 8, 2016, the PTO denied our petition for inter partes review of the ‘920 and ‘038 patents and on June 26, 2017, it upheld the patentability of the ‘034 patent.

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 (“792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the PTO issued an order instituting the inter partes review for the ‘792 patent. On March 6, 2018, the PTO found all claims challenged by Twilio in the inter partes review unpatentable. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the ‘792 patent inter partes review, which the court granted. The Central District of California court lifted the stay on April 13, 2018. With respect to each of the patents asserted in the now-consolidated Telesign I and Telesign II cases, the complaints seek, among other things, to enjoin us from allegedly infringing the patents along with damages for lost profits. The Telesign I/II litigation is currently ongoing.

On December 1, 2016, we filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021 (&!#od;’021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes<

	Three Months Ended March 31,
	2018			2017
Net loss	$	(23,729	)	$	(14,227	)
Other comprehensive income (loss):
Unrealized loss on marketable securities	(317		)	(88		)
Foreign currency translation	731			(102		)
Total other comprehensive income (loss)	414			(190		)
Comprehensive loss attributable to common stockholders	$	(23,315	)	$	(14,417	)

		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	4

	Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	4

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017	5

	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017	6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Mine Safety Disclosures	65

Item 5.	Other Information	65

Item 6.	Exhibits	66

	Signatures	68