TWILIO INC.

TWLO
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TWILIO INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/05/2022 | 04:57pm


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.

Overview

We are the leader in the cloud communications platform category. We enable
developers to build, scale and operate real­time customer engagement within
their software applications. We offer a customer engagement platform with
software designed to address specific use cases like account security and
contact centers, and a set of Application Programming Interfaces ("APIs") that
handles the higher level communication logic needed for nearly every type of
customer engagement. The power, flexibility and reliability offered by our
software building blocks empower companies of virtually every shape and size to
build world-class engagement into their customer experience. For additional
detail on the description of our business and products please refer to Part I,
Item 1, "Business," of our Annual Report on Form 10-K filed with the SEC on
February 22, 2022 ("Annual Report").

We have achieved significant growth in recent periods. In the three months ended
March 31, 2022 and 2021, our revenue was $875.4 million and $590.0 million,
respectively, and our net loss was $221.6 million and $206.5 million,
respectively. In the three months ended March 31, 2022 and 2021, our 10 largest
Active Customer Accounts generated an aggregate of 11% and 12% of our total
revenue, respectively.


Investment in Syniverse Corporation




In February 2021, we entered into a Framework Agreement, as amended, with
Syniverse Corporation ("Syniverse") and Carlyle Partners V Holdings, L.P.,
("Framework Agreement"), pursuant to which Syniverse would issue to us shares of
Syniverse common stock in consideration for an investment by us of
$500.0 million to $750.0 million, subject to certain terms and conditions. The
initial agreements and conditions to closing of this transaction are described
in detail in Note 10(a) to our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.

On February 9, 2022, M-3 Brigade Acquisition II Corp. ("MBAC"), Blue Steel
Merger Sub Inc.
and Syniverse mutually terminated a proposed Agreement and Plan
of Merger because the rate of MBAC shareholder redemptions for the proposed
transaction would have left MBAC with insufficient funds to meet the minimum
cash condition for closing, which occurred as a result of recent changes in
market conditions ("MBAC Transaction Termination"). Consequently, the Company
will not be purchasing any shares of common stock of, or making any investments
in, MBAC.

The Framework Agreement, dated as of February 26, 2021, by and between Twilio,
Syniverse and Carlyle Partners V Holdings, L.P., remains in full force and
effect. The amendment, dated as of August 16, 2021, to the Framework Agreement
terminated on February 9, 2022, as a result of the MBAC Transaction Termination.
Pursuant to the terms and subject to the closing conditions set forth in the
Framework Agreement, the parties thereto are pursuing the alternative
transaction, whereby Twilio will make a minority investment of $500.0 million to
$750.0 million in Syniverse and the parties (or their applicable subsidiaries)
will enter into a wholesale agreement.
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COVID-19 UPDATE

As of the first quarter of 2022, as COVID-19 related restrictions continue to
ease in various geographies, the majority of our offices have reopened. The
broader implications of COVID-19 on our results of operations and overall
financial performance remain uncertain. The COVID-19 pandemic and its adverse
effects on economic and market conditions, including labor shortages, supply
chain disruptions and inflation, have been prevalent in the locations where we,
our customers, our suppliers or our third-party business partners conduct
business. These adverse conditions may continue for an extended period and there
may be additional impacts to the economy and our business as a result of
COVID-19. This could result in decreased business spending by our customers and
prospective customers and business partners and third-party business partners,
reduced demand for our solutions, lower renewal rates by our customers, longer
or delayed sales cycles, including customers and prospective customers delaying
contract signing or contract renewals, or reducing budgets or minimum
commitments related to the product and services that we offer, all of which
could have an adverse impact on our business operations and financial condition.
See the risk factor titled "The global COVID-19 pandemic may adversely impact
our business, results of operations and financial condition" in Part II, Item
1A, "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion
of the possible impact of the COVID-19 pandemic on our business, financial
condition and results of operations.

Key Business Metrics

Three Months Ended March 31,
2022
2021



Number of Active Customer Accounts (as of end date of
period) (1)


268,000 235,000
Total Revenue (in thousands) (2) $ 875,363 $ 589,988
Total Revenue Growth Rate (2) 48 % 62 %
Dollar-Based Net Expansion Rate (3) 127 % 133 %


____________________



(1) Excludes customer accounts from Zipwhip.
(2) Includes revenue from Zipwhip, acquired July 14, 2021, and other smaller acquisitions made after
January 1, 2021.
(3) Excludes the contributions from Zipwhip, acquired July 14, 2021, and other smaller acquisitions made
after January 1, 2021.


Number of Active Customer Accounts. We believe that the number of 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 use of our
platform by 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. In the three months ended March 31, 2022 and
2021, revenue from Active Customer Accounts represented over 99% of total
revenue in each period. A single organization may constitute multiple unique
Active Customer Accounts if it has multiple account identifiers, each of which
is treated as a separate Active Customer Account.

Dollar­Based 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 have historically tracked
performance in this area is by measuring the Dollar-Based Net Expansion Rate for
Active Customer Accounts. Our Dollar-Based Net Expansion Rate increases when
such Active Customer Accounts increase their usage of a product, extend their
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
their 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, when we identify a significant customer organization (defined
as a single customer organization generating more than 1% of 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 that measuring Dollar-Based Net
Expansion Rate 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 all Active
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 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
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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. Revenue from acquisitions does not impact the
Dollar-Based Net Expansion Rate calculation until the quarter following the
one-year anniversary of the applicable acquisition, unless the acquisition
closing date is the first day of a quarter.

Key Components of Statements of Operations

Revenue. We derive our revenue primarily from usage­based fees earned from
customers using the software products within our Channel APIs. These usage­based
software products include offerings such as Programmable Messaging, Programmable
Voice and Programmable Video, among others. Some examples of the usage­based
fees that we charge include fees related to the number of text messages sent or
received using our Programmable Messaging products, minutes of call duration
activity for our Programmable Voice products and the number of authentications
for our Verify product. In the three months ended March 31, 2022 and 2021, we
generated 73% and 71% of our revenue, respectively, from usage­based fees. We
also earn monthly flat fees from certain fee­based products, such as our Email
API, Marketing Campaigns, Twilio Flex, our cloud contact center platform and
Twilio Segment, our customer data platform.

When customers first begin using our platform, they typically pay upfront via
credit card in monthly prepaid amounts and draw down their balances as they
purchase or use our products. 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
revenue, deferred revenue or customer deposits, depending on whether the revenue
recognition criteria have been met. Our deferred revenue and customer deposits
liability balance is not a meaningful indicator of our future revenue at any
point in time because the number of contracts with our invoiced customers that
contain terms requiring any form of prepayment is not significant.

We define U.S. revenue as revenue from customers with IP addresses or mailing
addresses at the time of registration in the United States, and we define
international revenue as revenue from customers with IP addresses or mailing
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, direct costs of personnel, such as salaries and stock­based
compensation for our customer support employees and non­personnel costs, such as
depreciation and amortization expense related to data centers and hosting
equipment, amortization of capitalized internal use software development costs
and acquired intangibles. 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 product mix; our ability to manage our network service provider and cloud
infrastructure­related fees, including A2P SMS fees; the mix of U.S. revenue
compared to international revenue; changes in foreign exchange rates; the timing
of amortization of capitalized software development costs and acquired
intangibles; 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, sales commissions and
bonuses and stock­based compensation. We also incur other non­personnel costs
related to our general overhead expenses. We expect that our operating costs
will increase in absolute dollars as we add additional employees and invest in
our infrastructure to grow our business.

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

We focus our sales and marketing efforts on generating awareness of our company,
platform and products, 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 self­service model with an enterprise sales approach,
expanding our sales channels, driving our go­to­market 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. General and administrative expenses also
include costs related to business acquisitions, legal and other professional
services fees, certain taxes, depreciation and amortization, charitable
contributions 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 our international
expansion. We may also incur higher than usual losses related to deterioration
of quality of certain financial assets caused by the macroeconomic conditions
and uncertainly in the COVID-19 environment.


Our general and administrative expenses include a certain amount of prior
non-income-based taxes in certain domestic and international jurisdictions that
we are subject to based on the manner we sell and deliver our products.
Additional details are provided in Note 10(d) to our condensed consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.




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
full valuation allowance the Company established on the federal, state, and
certain foreign net operating losses and credits.


Non-GAAP Financial Measures:




We use the following non­GAAP financial information, collectively, to evaluate
our ongoing operations and for internal planning and forecasting purposes. We
believe that non­GAAP financial information, when taken collectively, may be
helpful to investors because it provides consistency and comparability with past
financial performance, facilitates period­to­period comparisons of results of
operations and assists in comparisons with other companies, many of which use
similar non­GAAP financial information to supplement their GAAP results.
Non­GAAP financial information is presented for supplemental informational
purposes only, should not be considered a substitute for financial information
presented in accordance with generally accepted accounting principles, and may
be different from similarly­titled non­GAAP measures used by other companies.
Whenever we use a non­GAAP 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 non­GAAP
financial measures to their most directly comparable GAAP financial measures.
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Non­GAAP Gross Profit and Non­GAAP Gross Margin. For the periods presented, we
define non­GAAP gross profit and non­GAAP gross margin as GAAP gross profit and
GAAP gross margin, respectively, adjusted to exclude, as applicable, certain
expenses as presented in the table below:

Three Months Ended March 31,
2022 2021
Reconciliation: (In thousands)
Gross profit $ 425,071 $ 298,304
Gross margin 49 % 51 %
Non-GAAP adjustments:



Stock-based compensation 4,521



2,717



Amortization of acquired intangibles 30,636



26,342




Non-GAAP gross profit $ 460,228


$ 327,363



Non-GAAP gross margin 53 %


55 %





Non­GAAP Operating Expenses. For the periods presented, we define non­GAAP
operating expenses (including categories of operating expenses) as GAAP
operating expenses (and categories of operating expenses) adjusted to exclude,
as applicable, certain expenses as presented in the table below:

Three Months Ended March 31,
2022 2021
Reconciliation: (In thousands)
Operating expenses $ 642,879 $ 495,643
Non-GAAP adjustments:
Stock-based compensation (150,754) (134,438)
Amortization of acquired intangibles (20,830) (18,809)

Acquisition-related expenses (660) (2,764)

Charitable contributions (4,232) (9,405)

Payroll taxes related to stock-based compensation (11,218) (20,171)
Non-GAAP operating expenses $


455,185 $ 310,056





Non­GAAP Income from Operations and Non­GAAP Operating Margin. For the periods
presented, we define non­GAAP income from operations and non­GAAP operating
margin as GAAP loss from operations and GAAP operating margin, respectively,
adjusted to exclude, as applicable, certain expenses as presented in the table
below:

Three Month Ended March 31,
2022 2021
Reconciliation: (In thousands)
Loss from operations $ (217,808) $ (197,339)
Operating margin (25) % (33) %
Non-GAAP adjustments:
Stock-based compensation 155,275 137,155
Amortization of acquired intangibles 51,466 45,151

Acquisition-related expenses 660 2,764

Charitable contributions 4,232 9,405

Payroll taxes related to stock-based compensation 11,218 20,171
Non-GAAP income from operations $ 5,043 $ 17,307
Non-GAAP operating margin 1 % 3 %


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Results of Operations

The following tables set forth our results of operations for the periods
presented and as a percentage of our total revenue for those periods. We have
included Zipwhip in our results of operations prospectively after its closing
date of July 14, 2021, and all other acquisitions from the respective closing
dates of each acquisition. The period-to-period comparison of our historical
results are not necessarily indicative of the results that may be expected in
the future.

Our results of operations may be significantly affected by many factors, such as
uncertainty regarding the impacts of the COVID-19 pandemic, fluctuations in
foreign exchange rates, changes in global economic conditions and customer
demand and spending, inflation, labor market constraints, world events and
existing and new domestic and foreign laws and regulations, as well as those
factors outlined in Part II, Item 1A, "Risk Factors."

Our revenue is primarily derived from usage-based fees we charge for certain of
our products, which can lead to variability and at times create significant
differences between forecasts and actual results. In addition, our product mix
and mix of international and domestic customers may significantly impact our
gross margin. Because usage trends by geographic region and by customer are
inherently difficult to estimate, our actual results could differ significantly
from our estimates.


Three Month Ended March 31,
2022
2021
(In thousands, except share and per share
Condensed Consolidated Statements of Operations Data:


amounts)



Revenue $ 875,363 $ 589,988
Cost of revenue (1) (2) 450,292 291,684
Gross profit 425,071 298,304
Operating expenses:
Research and development (1) (2) 240,611 174,800
Sales and marketing (1) (2) 287,906 210,590
General and administrative (1) (2) 114,362 110,253
Total operating expenses 642,879 495,643
Loss from operations (217,808) (197,339)
Other expenses, net (6,677) (8,313)
Loss before benefit from (provision for) income taxes (224,485) (205,652)
Benefit from (provision for) income taxes 2,858 (890)
Net loss attributable to common stockholders $ (221,627) $ (206,542)
Net loss per share attributable to common
stockholders, basic and diluted $ (1.23) $ (1.24)
Weighted-average shares used in computing net


loss per share attributable to common



stockholders, basic and diluted 180,898,713 167,160,458




____________________________________



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




Three Months Ended March 31,
2022 2021
(In thousands)
Cost of revenue $ 4,521 $ 2,717
Research and development 79,369 56,959
Sales and marketing 47,586 41,636
General and administrative 23,799 35,843
Total $ 155,275 $ 137,155








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____________________________________
(2) Includes amortization of acquired intangibles as follows:

Three Month Ended March 31,
2022 2021
(In thousands)
Cost of revenue $ 30,636 $ 26,342
Research and development 420 -
Sales and marketing 20,403 18,694
General and administrative 7 115
Total $ 51,466 $ 45,151


Three Months Ended March 31,
2022 2021
Consolidated Statements of Operations, as a percentage
of revenue: **
Revenue 100 % 100 %
Cost of revenue 51 49
Gross profit 49 51
Operating expenses:
Research and development 27 30
Sales and marketing 33 36
General and administrative 13 19
Total operating expenses 73 84
Loss from operations (25) (33)
Other expenses, net (1) (1)
Loss before benefit from (provision for) income taxes (26) (35)
Benefit from (provision for) income taxes * *


Net loss attributable to common



stockholders (25 %) (35 %)



____________________________________



* Less than 0.5% of revenue.
** Columns may not add up to 100% due to rounding.

Comparison of the Three Months Ended March 31, 2022 and 2021

Revenue

Three Months Ended March 31,
2022 2021 Change
(Dollars in thousands)

Total Revenue $ 875,363 $ 589,988 $ 285,375 48 %


In 2022, total revenue increased by $285.4 million, or 48%, compared to the same
period last year. This increase was primarily attributable to an increase in the
usage of our products, particularly our Programmable Messaging, Programmable
Voice, Email and Software products; the adoption of additional products by our
existing customers; the additional A2P fees imposed by certain carriers; and
revenue contributions from our acquisition of Zipwhip and other businesses. The
change in usage from our existing customers was reflected in our Dollar­Based
Net Expansion Rate of 127% for the year ended March 31, 2022. The increase in
usage was also attributable to a 14% increase in the number of Active Customer
Accounts, from 235,000 as of March 31, 2021, to over 268,000 as of March 31,
2022
.
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In 2022, U.S. revenue and international revenue represented $570.4 million or
65%, and $305.0 million, or 35%, respectively, of total revenue. In 2021, U.S.
revenue and international revenue represented $421.5 million, or 71%, and $168.5
million
, or 29%, respectively, of total revenue. The increase in international
revenue was attributable to the growth in usage of our products, particularly
our Programmable Messaging and Programmable Voice products, by our existing
international Active Customer Accounts; a 13% 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; and revenue contribution
from our recent acquisitions.


Cost of Revenue and Gross Margin




Three Months Ended March 31,
2022 2021 Change
(Dollars in thousands)
Cost of revenue $ 450,292 $ 291,684 $ 158,608 54 %
Gross margin 49 % 51 %


In 2022, cost of revenue increased by $158.6 million, or 54%, compared to the
same period last year. The increase in cost of revenue was primarily
attributable to a $136.6 million increase in network service providers' costs,
which included the additional A2P fees imposed by certain carriers, and a
$7.8 million increase in cloud infrastructure fees, all to support the growth in
usage of our products. The increase was also due to a $4.3 million increase in
the amortization expense of intangible assets that we acquired through business
combinations. In addition, the three months ended March 31, 2022 included cost
of revenue from our recent acquisitions.

In 2022, the gross margin percentage declined compared to the same period last
year. This decline was primarily driven by continued strong growth of our
international messaging business, the additional A2P fees imposed by certain
carriers and an increase in network service provider fees in certain
geographies, which we pass to our customers at cost. The decline was also due to
an increase in amortization expense related to our acquired intangible assets.
These declines were partially offset by the growth of our other application
services products and certain operational improvements.

Operating Expenses

Three Months Ended March 31,
2022 2021 Change
(Dollars in thousands)



Research and development $ 240,611 $ 174,800 $ 65,811 38 %
Sales and marketing 287,906 210,590 77,316 37 %
General and administrative 114,362 110,253 4,109 4 %
Total operating expenses $ 642,879 $ 495,643 $ 147,236 30 %


In 2022, research and development expenses increased by $65.8 million, or 38%,
compared to the same period last year. The increase was primarily attributable
to a $63.2 million increase in personnel costs, inclusive of a $0.4 million
decrease in capitalized software development costs, largely as a result of a 53%
average increase in our research and development headcount, as we continued to
focus on enhancing our existing products, introducing new products as well as
enhancing product management and other technical functions.

In 2022, sales and marketing expenses increased by $77.3 million, or 37%,
compared to the same period last year. The increase was primarily attributable
to a $58.8 million increase in personnel costs, largely as a result of a 61%
average increase in sales and marketing headcount, as we continued to expand our
sales efforts globally, and a $7.5 million increase in advertising expenses.

In 2022, general and administrative expenses increased by $4.1 million, or 4%,
compared to the same period last year. The increase was primarily attributable
to a $14.0 million, or 46%, increase in personnel costs, exclusive of
stock-based compensation, largely as a result of a 70% average increase in
general and administrative headcount, to support the growth of our business
globally. This increase was partially offset by a $12.0 million decrease in
stock-based compensation expense mainly driven by attrition.


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Liquidity and Capital Resources

Our principal sources of liquidity have been (i) the net proceeds of $979.0
million
, $1.4 billion and $1.8 billion, net of underwriting discounts and
offering expenses paid by us, from our public equity offerings in June 2019,
August 2020 and February 2021, respectively; (ii) the aggregate net proceeds of
approximately $984.7 million, after deducting purchaser discounts and debt
issuance costs paid by us, from the issuance of our 2029 Notes and 2031 Notes in
March 2021; (iii) the net proceeds of $228.4 million, after deducting
transaction costs paid by us, from settlement of our capped call arrangements in
June 2021; and (iv) the payments received from customers using our products.

Our primary uses of cash include operating costs, such as personnel-related
costs, network service provider costs, cloud infrastructure costs,
facility-related spending, as well as acquisitions and investments. Our
principal contractual and other commitments consist of obligations under our
2029 Notes and 2031 Notes, our operating leases for office space, contractual
commitments to our cloud infrastructure and network service providers and our
proposed minority investment in Syniverse Corporation. Refer to Note 8 and Note
10(a) to our condensed consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q for detailed discussions of our obligations
and commitments related to debt, other purchase obligations and our proposed
minority investment in Syniverse Corporation.

We may, from time to time, consider acquisitions of, or investments in,
complementary businesses, products, services, capital infrastructure or
technologies which might affect our liquidity requirements, cause us to secure
additional financing or issue additional equity or debt securities. There can be
no assurance that additional credit lines or financing instruments will be
available in amounts or on terms acceptable to us, if at all.

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 the next 12 months and beyond. 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. Additionally, cash from
operations could also be affected by various risks and uncertainties in
connection with the COVID-19 pandemic, including timing and ability to collect
payments from our customers and other risks detailed in Part II, Item 1A, "Risk
Factors."

Cash Flows



The following table summarizes our cash flows:




Three Months Ended
March 31,
2022 2021
(In thousands)
Cash (used in) provided by operating activities $ (17,575) $ 4,505
Cash provided by (used in) investing activities 150,967 (1,366,021)
Cash provided by financing activities 4,107 2,759,449


Effect of exchange rate changes on cash, cash equivalents and
restricted cash


27 (44)
Net increase in cash, cash equivalents and restricted cash $


137,526 $ 1,397,889



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Cash Flows from Operating Activities




In 2022, cash used in operating activities consisted primarily of our net loss
of $221.6 million adjusted for non-cash items, including $155.3 million of
stock-based compensation expense, $68.1 million of depreciation and amortization
expense, $12.4 million of non-cash reduction to our operating right-of-use
asset, $12.6 million amortization of deferred commissions and $60.7 million of
cumulative changes in operating assets and liabilities. With respect to changes
in operating assets and liabilities, accounts receivable and prepaid expenses
increased $33.8 million primarily due to revenue growth, the timing of cash
receipts and pre-payments for cloud infrastructure fees and certain operating
expenses. Accounts payable and other current liabilities increased $19.4 million
primarily due to increases in transaction volumes. Operating lease liability
decreased $13.1 million due to payments made against our operating lease
obligations. Other long-term assets increased $27.4 million primarily due to an
increase in the sales commissions balances related to the growth of our
business.

In 2021, cash provided by operating activities consisted primarily of our net
loss of $206.5 million adjusted for non-cash items, including $137.2 million of
stock-based compensation expense, $59.6 million of depreciation and amortization
expense, $9.4 million of donated common stock, $7.6 million loss on
extinguishment of our convertible notes, $3.4 million amortization of the debt
discount and issuance costs related primarily to our convertible notes, $11.7
million
of non-cash reduction to our operating right-of-use asset, $5.6 million
amortization of deferred commissions, a $2.0 million increase in our allowance
for credit losses, and $32.7 million of cumulative changes in operating assets
and liabilities. With respect to changes in operating assets and liabilities,
accounts receivable and prepaid expenses increased $24.3 million primarily due
to the timing of cash receipts from certain of our larger customers,
pre-payments for cloud infrastructure fees and certain operating expenses.
Accounts payable and other current liabilities increased $18.0 million primarily
due to increases in transaction volumes. Operating lease liability decreased
$12.1 million due to payments made against our operating lease obligations.
Other long-term assets increased $15.2 million primarily due to an increase in
the sales commissions balances related to the growth of our business.


Cash Flows from Investing Activities




In 2022, cash provided by investing activities was $151.0 million primarily
consisting of $195.9 million of proceeds from sales and maturities of marketable
securities, net of purchases of marketable securities and other investments,
offset by $27.7 million of net cash paid to acquire other businesses, $10.3
million
related to capitalized software development costs and $7.0 million
related to purchases of long-lived assets.

In 2021, cash used in investing activities was $1.4 billion primarily consisting
of $1.3 billion of purchases of marketable securities and other investments, net
of maturities and sales, $66.9 million of net cash paid to acquire other
businesses, $10.4 million related to capitalized software development costs and
$5.0 million related to purchases of long-lived assets.


Cash Flows from Financing Activities



In 2022, cash provided by financing activities was $4.1 million primarily
consisting of $11.7 million in proceeds from stock options exercised by our
employees, offset by $6.5 million in principal payments on debt and finance
leases.



In 2021, cash provided by financing activities was $2.8 billion primarily
consisting of $1.8 billion in net proceeds from our public equity offering,
$987.4 million in net proceeds from the issuance of our 2029 Notes and 2031
Notes and $11.6 million in proceeds from stock options exercised by our
employees. This was offset by $2.8 million in principal payments on finance
leases and $2.8 million related to the value of equity awards withheld to settle
tax liabilities.




Off-Balance Sheet Arrangements


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



Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America
. The preparation of these unaudited 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.
31



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Table of Contents



There have been no changes to our critical accounting policies as described in
our Annual Report on Form 10-K filed with the SEC on February 22, 2022.



Recent Accounting Pronouncements Not Yet Adopted



There are no material recent accounting pronouncements not yet adopted.



Available Information




Our filings are available to be viewed and downloaded free of charge through our
investor relations website after we file them with the Securities and Exchange
Commission
("SEC"). Our filings include our Annual Report on Form 10-K, as
amended, Quarterly Reports on Form 10-Q, our Proxy Statement for our annual
meeting of stockholders, Current Reports on Form 8-K and other filings with the
SEC. Our investor relations website is located at http://investors.twilio.com.
The SEC also maintains an Internet website that contains periodic and current
reports, proxy statements and other information about issuers, like us, that
file electronically with the SEC. The address of that website is www.sec.gov.

We webcast our earnings calls and certain events we participate in or host with
members of the investment community on our investor relations website.
Additionally, we provide notifications of news or announcements regarding our
financial performance, including SEC filings, investor events, press and
earnings releases, and blogs as part of our investor relations website. Further
corporate governance information, including our corporate governance guidelines
and code of business conduct and ethics, is also available on our investor
relations website under the heading "Governance." The contents of our websites
are not intended to be incorporated by reference into this Quarterly Report on
Form 10-Q or in any other report or document we file with the SEC, and any
references to our websites are intended to be inactive textual references only.

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