UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________

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

For the quarterly period ended September 30, 2019

☐ 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)

101 Spear Street, First Floor

San Francisco, California 94105

(Address of principal executive offices) (Zip Code)

(415) 390-2337

(Registrant’s telephone number, including area code)

375 Beale Street, Suite 300

San Francisco, California 94105

(Former name or former address, if changed since last report)

____________________________________________

Securities registered pursuant to Section 12(b) of the act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share	TWLO	The New York Stock Exchange

As of October 25, 2019, 124,601,389 shares of the registrant’s Class A common stock and 12,551,350 shares of registrant’s Class B common stock were outstanding.

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 ý  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ý  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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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 ☐  No ý

TWILIO INC.

Quarterly Report on Form 10-Q

For the Three Months Ended September 30, 2019

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2019 and 2018	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	83
Item 3.	Defaults Upon Senior Securities	83
Item 4.	Mine Safety Disclosures	83
Item 5.	Other Information	83
Item 6.	Exhibits	84
	Signatures	85

1

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (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;

• 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;

• the evolution of technology affecting our products and markets;

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

• our ability to comply with modified or new industry standards, laws and regulations applying to our business, including the General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act of 2018 and other privacy regulations that may be implemented in the future, and Signature-based Handling of Asserted Information Using toKENs ("SHAKEN") and Secure Telephone Identity Revisited ("STIR") standards (together, "SHAKEN/STIR") and other robocalling prevention and anti-spam standards and increased costs associated with such compliance;

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

• our ability to manage changes in network service provider fees that we pay in connection with the delivery of communications on our platform;

• our ability to work closely with email inbox service providers to maintain deliverability rates;

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

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

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

• our ability to form and expand partnerships with technology partners and consulting partners;

• 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;

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

• 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;

2

• our ability to service the interest on our convertible notes and repay such notes, to the extent required;

• our customers' and other platform users' violation of our policies or other misuse of our platform; and

• our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments, including our acquisition of SendGrid, Inc. (“SendGrid”).

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.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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

3

PART I — FINANCIAL INFORMATION

 Item 1. Financial Statements

TWILIO INC.

Condensed Consolidated Balance Sheets

(Unaudited)

	As of September 30,			As of December 31,
	2019			2018
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	330,601		$	487,215
Short-term marketable securities	1,551,175			261,128
Accounts receivable, net	131,193			97,712
Prepaid expenses and other current assets	55,455			26,893
Total current assets	2,068,424			872,948
Restricted cash	75			18,119
Property and equipment, net	118,481			63,534
Operating right of use asset	148,069			—
Intangible assets, net	465,255			27,558
Goodwill	2,283,387			38,165
Other long-term assets	26,477			8,386
Total assets	$	5,110,168		$	1,028,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,949		$	18,495
Accrued expenses and other current liabilities	135,544			96,343
Deferred revenue and customer deposits	26,015			22,972
Operating lease liability, current	22,211			—
Financing lease liability, current	6,509			—
Total current liabilities	216,228			137,810
Operating lease liability, noncurrent	134,755			—
Financing lease liability, noncurrent	8,174			—
Convertible senior notes, net	452,184			434,496
Other long-term liabilities	14,341			18,169
Total liabilities	825,682			590,475
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock	—			—
Class A and Class B common stock	137			100
Additional paid-in capital	4,868,261			808,527
Accumulated other comprehensive income	4,578			1,282
Accumulated deficit	(588,490		)	(371,674		)
Total stockholders’ equity	4,284,486			438,235
Total liabilities and stockholders’ equity	$	5,110,168		$	1,028,710

See accompanying notes to condensed consolidated financial statements.

4

TWILIO INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands, except share and per share amounts)
Revenue	$	295,066		$	168,895		$	803,244		$	445,765
Cost of revenue	136,904			77,031			369,017			204,553
Gross profit	158,162			91,864			434,227			241,212
Operating expenses:
Research and development	104,481			42,340			281,119			119,727
Sales and marketing	100,657			45,949			262,685			116,520
General and administrative	47,690			28,608			166,409			76,213
Total operating expenses	252,828			116,897			710,213			312,460
Loss from operations	(94,666		)	(25,033		)	(275,986		)	(71,248		)
Other income (expense), net	4,377			(1,939		)	2,861			(3,172		)
Loss before provision for income taxes	(90,289		)	(26,972		)	(273,125		)	(74,420		)
Income tax benefit (provision)	2,555			(84		)	56,309			(371		)
Net loss attributable to common stockholders	$	(87,734	)	$	(27,056	)	$	(216,816	)	$	(74,791	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.64	)	$	(0.28	)	$	(1.70	)	$	(0.78	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	136,400,739			98,019,629			127,506,529			96,359,437

See accompanying notes to condensed consolidated financial statements.

5

TWILIO INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Net loss	$	(87,734	)	$	(27,056	)	$	(216,816	)	$	(74,791	)
Other comprehensive income (loss):
Unrealized gain on marketable securities	1,275			291			3,296			126
Foreign currency translation	—			(873		)	—			(771		)
Total other comprehensive income (loss)	1,275			(582		)	3,296			(645		)
Comprehensive loss attributable to common stockholders	$	(86,459	)	$	(27,638	)	$	(213,520	)	$	(75,436	)

See accompanying notes to condensed consolidated financial statements.

6

TWILIO INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

	Common Stock Class A				Common Stock Class B					Additional Paid In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Shares		Amount
	(In thousands, except share amounts)
Balance as of December 31, 2018	80,769,763		$	80	19,310,465		$	20		$	808,527		$	1,282	$	(371,674	)	$	438,235
Net loss	—		—		—		—			—			—		(36,503		)	(36,503		)
Exercises of vested stock options	748,679		1		1,023,984		1			15,326			—		—			15,328
Vesting of early exercised stock options	—		—				—			9			—		—			9
Vesting of restricted stock units	641,406		—		39,360		—			—			—		—			—
Value of equity awards withheld for tax liability	(5,860	)	—		(4,431	)	—			(1,062		)	—		—			(1,062		)
Conversion of shares of Class B common stock into shares of Class A common stock	4,339,519		4		(4,339,519	)	(4		)	—			—		—			—
Shares issued in acquisition	23,555,081		24		—		—			2,658,874			—		—			2,658,898
Equity awards assumed in acquisition	—		—		—		—			191,620			—		—			191,620
Unrealized gain on marketable securities	—		—		—		—			—			1,041		—			1,041
Stock-based compensation	—		—		—		—			59,947			—		—			59,947
Balance as of March 31, 2019	110,048,588		109		16,029,859		17			$	3,733,241		2,323		(408,177		)	3,327,513
Net loss	—		—		—		—			—			—		(92,579		)	(92,579		)
Issuance of common stock in connection with a public offering, net of underwriter discounts	8,064,515		8		—		—			979,992			—		—			980,000
Costs related to the public offering	—		—		—		—			(953		)	—		—			(953		)
Exercises of vested stock options	313,924		—		503,797		1			9,926			—		—			9,927
Vesting of restricted stock units	675,028		1		29,576		—			—			—		—			1
Value of equity awards withheld for tax liability	(5,934	)	—		(5,888	)	—			(1,518		)	—		—			(1,518		)
Conversion of shares of Class B common stock into shares of Class A common stock	2,172,598		2		(2,172,598	)	(2		)	—			—		—			—
Shares issued under ESPP	108,895		—		—		—			8,254			—		—			8,254
Equity awards assumed in acquisition (measurement period adjustment)	—		—		—		—			(7,126		)	—		—			(7,126		)
Unrealized gain on marketable securities	—		—		—		—			—			980		—			980
Stock-based compensation	—		—		—		—			72,361			—		—			72,361
Balance as of June 30, 2019	121,377,614		120		14,384,746		16			4,794,177			3,303		(500,756		)	4,296,860
Net loss	—		—		—		—			—			—		(87,734		)	(87,734		)
Exercises of vested stock options	231,571		—		351,563		—			6,845			—		—			6,845
Vesting of early exercised stock options	—		—		—		—			12			—		—			12
Vesting of restricted stock units	713,904		1		25,291		—			—			—		—			1
Value of equity awards withheld for tax liability	(5,860	)	—		(5,888	)	—			(1,568		)	—		—			(1,568		)
Conversion of shares of Class B common stock into shares of Class A common stock	2,158,562		2		(2,158,562	)	(2		)	—			—		—			—
Equity awards assumed in acquisition (measurement period adjustment)	—		—		—		—			(1,940		)	—		—			(1,940		)
Unrealized gain on marketable securities	—		—		—		—			—			1,275		—			1,275
Stock-based compensation	—		—		—		—			70,735			—		—			70,735
Balance as of September 30, 2019	124,475,791		$	123	12,597,150		$	14		$	4,868,261		$	4,578	$	(588,490	)	$	4,284,486

See accompanying notes to condensed consolidated financial statements.

7

TWILIO INC.

Condensed Consolidated Statements of Stockholders' Equity, continued

(Unaudited)

	Common Stock Class A				Common Stock Class B					Additional Paid In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Shares		Amount
	(In thousands, except share amounts)
Balance as of December 31, 2017	69,906,550		$	70	24,063,246		$	24		$	608,165		$	2,025		$	(250,438	)	$	359,846
Net loss	—		—		—		—			—			—			(23,729		)	(23,729		)
Adjustment to opening retained earnings due to adoption of ASC 606	—		—		—		—			—			—			713			713
Exercises of vested stock options	—		—		1,190,387		1			6,677			—			—			6,678
Vesting of early exercised stock options	—		—				—			21			—			—			21
Vesting of restricted stock units	491,501		—		52,716		—			—			—			—			—
Value of equity awards withheld for tax liability	(8,352	)	—		(4,380	)	—			(371		)	—			—			(371		)
Exercise of unvested stock options	—		—		—		—			—			—			—			—
Conversion of shares of Class B common stock into shares of Class A common stock	1,358,716		1		(1,358,716	)	(1		)	—			—			—			—
Unrealized loss on marketable securities	—		—		—		—			—			(317		)	—			(317		)
Foreign currency translation	—		—		—		—			—			731			—			731
Stock-based compensation	—		—		—		—			18,968			—			—			18,968
Balance as of March 31, 2018	71,748,415		71		23,943,253		24			$	633,460		2,439			(273,454		)	362,540
Net loss	—		—		—		—			—			—			(24,006		)	(24,006		)
Exercises of vested stock options	—		—		960,414		1			7,036			—			—			7,037
Vesting of early exercised stock options	—		—		—		—			4			—			—			4
Vesting of restricted stock units	457,495		—		40,070		—			—			—			—			—
Value of equity awards withheld for tax liability	(5,860	)	—		(5,888	)	—			(539		)	—			—			(539		)
Conversion of shares of Class B common stock into shares of Class A common stock	4,109,726		4		(4,109,726	)	(4		)	—			—			—			—
Shares issued under ESPP	201,581		—		—		—			4,474			—			—			4,474
Issuance of debt conversion option	—		—		—		—			119,435			—			—			119,435
Debt conversion option issuance costs	—		—		—		—			(2,819		)	—			—			(2,819		)
Capped call option issuance costs	—		—		—		—			(58,465		)	—			—			(58,465		)
Unrealized loss on marketable securities	—		—		—		—			—			152			—			152
Foreign currency translation	—		—		—		—			—			(629		)	—			(629		)
Stock-based compensation	—		—		—		—			22,487						—			22,487
Balance as of June 30, 2018	76,511,357		75		20,828,123		21			$	725,073		1,962			(297,460		)	429,671
Net loss	—		—				—			—			—			(27,056		)	(27,056		)
Exercises of vested stock options	—		—		847,528		1			8,862			—			—			8,863
Vesting of early exercised stock options	—		—				—			1			—			—			1
Vesting of restricted stock units	511,713		—		40,069		—			—			—			—			—
Value of equity awards withheld for tax liability	(5,860	)	—		(5,888	)	—			(810		)	—			—			(810		)
Conversion of shares of Class B common stock into shares of Class A common stock	1,982,436		—		(1,982,436	)	—			—			—			—			—
Unrealized loss on marketable securities	—		—				—			—			291			—			291
Foreign currency translation	—		—				—			—			(873		)	—			(873		)
Stock-based compensation	—		—				—			24,266			—			—			24,266
Balance as of September 30, 2018	78,999,646		$	75	19,727,396		$	22		757,392			$	1,380		$	(324,516	)	$	434,353

See accompanying notes to condensed consolidated financial statements.

8

TWILIO INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(216,816	)	$	(74,791	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	79,295			18,246
Right-of-use asset amortization	16,732			—
Net amortization of investment premium and discount	(4,163		)	(845		)
Amortization of debt discount and issuance costs	17,689			8,374
Stock-based compensation	197,332			61,287
Tax benefit related to release of valuation allowance	(55,999		)	—
Other adjustments	3,981			5,198
Changes in operating assets and liabilities:
Accounts receivable	(27,619		)	(39,643		)
Prepaid expenses and other current assets	(20,743		)	(6,600		)
Other long-term assets	(10,756		)	(3,681		)
Accounts payable	4,333			1,641
Accrued expenses and other current liabilities	33,826			39,732
Deferred revenue and customer deposits	3,043			5,092
Operating right of use liability	(15,397		)	—
Long-term liabilities	(2,714		)	(1,177		)
Net cash provided by operating activities	2,024			12,833
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired	146,957			(29,662		)
Purchases of marketable securities and other investments	(1,769,125		)	(213,533		)
Proceeds from sales and maturities of marketable securities	475,260			113,497
Capitalized software development costs	(16,809		)	(15,276		)
Purchases of long-lived assets	(18,994		)	(3,428		)
Net cash used in investing activities	(1,182,711		)	(148,402		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from a public offering, net of underwriting discount	980,000			—
Payments of costs related to the public offering	(850		)	—
Proceeds from issuance of convertible senior notes	—			550,000
Payment of debt issuance costs	—			(12,877		)
Purchase of capped call	—			(58,465		)
Principal payments on notes payable	(5,400		)	—
Principal payments on finance leases	(3,927		)	—
Proceeds from exercises of stock options and issuances under ESPP	40,354			27,052
Value of equity awards withheld for tax liabilities	(4,148		)	(1,720		)
Net cash provided by financing activities	1,006,029			503,990
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			105
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(174,658		)