What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-02 · 212 added, 152 removed, 337 unchanged (52% of the section changed)

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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 (“APIs”).

We enable developers to build, scale and operate real‑time customer engagement within their software applications via our simple‑to‑use Application Programming Interfaces (“APIs”).

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.

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Our customers’ applications are able to reach users via voice, messaging, video and email in nearly every country in the world by utilizing our platform.

We support our global business through more than 25 cloud data centers in nine regions around the world and have developed contractual relationships with network service providers globally.

We support our global business through over 25 cloud data centers across more than seven 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.

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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 customer and developer conferences, to demonstrate how every developer can create differentiated applications incorporating communications using our products.

We reach developers through community events and conferences, including our SIGNAL customer and developer conference, to demonstrate how every developer can create differentiated applications incorporating communications using our products.

Once developers are introduced to our platform, we provide them with a low friction trial experience.

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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 of these customer contracts have terms of approximately 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.

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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.

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.

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We have achieved significant growth in recent periods.

In the years ended December 31, 2019, 2018 and 2017, our revenue was $1,134.5 million, $650.1 million and $399.0 million, respectively.

In the years ended December 31, 2019, 2018, and 2017, our 10 largest Active Customer Accounts generated an aggregate of 13%, 18% and 19%, respectively, of our total revenue.

Among our 10 largest Active Customer Accounts we had three Variable Customer Accounts representing 6% , 8% and 8% of our total revenue for the years ended December 31, 2019, 2018 and 2017, respectively.

In the years ended December 31, 2019, 2018 and 2017, our Base Revenue was $1,059.8 million , $593.0 million and $365.5 million , respectively, and our net loss was $307.1 million , $121.9 million and $63.7 million , respectively.

See the section titled “Key Business Metrics-Base Revenue” for a discussion of Base Revenue.

In the years ended December 31, 2020, 2019 and 2018, our revenue was $1.8 billion, $1.1 billion and $650.1 million, respectively, and our net loss was $491.0 million, $307.1 million and $121.9 million, respectively.

In the years ended December 31, 2020, 2019 and 2018, our 10 largest Active Customer Accounts generated an aggregate of 14%, 13% and 18% of our total revenue, respectively.

Acquisition of Segment.io, Inc.

In November 2020, we acquired Segment.io, Inc.

("Segment"), the market-leading customer data platform, for a purchase price of $3.0 billion, consisting of 9.5 million shares of our Class A common stock with a total value of $2.5 billion and $413.3 million in cash.

Part of the cash consideration was paid to settle the vested equity awards of Segment employees.

The estimated transaction value of $3.2 billion, as previously announced, includes certain shares of Class A common stock and assumed equity awards that are subject to future vesting.

We assumed all unvested and outstanding equity awards of Segment's continuing employees as converted into our equity awards at the conversion ratio provided in the Agreement and Plan of Reorganization.

The total value of Class A shares of our common stock and assumed equity awards that are subject to future vesting was $316.0 million on the acquisition closing date, which will be recorded into our stock-based compensation expense over the period the services are provided.

Because the acquisition of Twilio Segment occurred during the year ended December 31, 2020, the information presented in this section with respect to the year ended December 31, 2020 includes the contribution of Twilio Segment starting from November 2, 2020, the date of acquisition.

The information with respect to the prior-year comparable periods relates to Twilio on a standalone basis.

As a result, comparisons to the prior-year period may not be indicative of future results or future rates of growth.

Acquisition of SendGrid, Inc.

In February 2019, we acquired SendGrid, Inc.

("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of $2,658.9 million.

We also assumed all of the outstanding stock options and restricted stock units of SendGrid as converted into stock options and restricted stock units, respectively, of the Company based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended.

We have included Twilio SendGrid in our results of operations prospectively after February 1, 2019, the date of acquisition.

Because the acquisition of Twilio SendGrid occurred during the year ended December 31, 2019, the information presented in this section with respect to the year ended December 31, 2019 includes the contribution of Twilio SendGrid starting on the date of the acquisition on February 1, 2019, and the information presented in this section with respect to the prior-year comparable periods relates to Twilio on a standalone basis.

As a result, comparisons to the prior-year period may not be indicative of future results or future rates of growth

Public Equity Offering

In June 2019, we completed a public equity offering in which we sold 8,064,515 shares of our Class A common stock, which included 1,051,893 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $124.00 per share.

We received aggregate proceeds of $979.0 million after deducting underwriting discounts and offering expenses paid and payable by us.

("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of $2.7 billion.

We also assumed all of the outstanding stock options and restricted stock units of SendGrid as converted into our stock options and restricted stock units, respectively,based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended.

Public Equity Offerings

In February 2021, August 2020 and June 2019 we completed public equity offerings in which we sold 4,312,500 shares, 5,819,838 shares and 8,064,515 shares, respectively, of our Class A common stock at public offering prices of $409.60 per share, $247.00 per share and $124.00 per share, respectively.

We received aggregate proceeds of $1.8 billion, $1.4 billion and $979.0 million, respectively, after deducting underwriting discounts and offering expenses paid and payable by us.

COVID-19 UPDATE

A novel coronavirus disease (“COVID-19”) was declared a global pandemic during the first quarter of 2020 and has resulted in the imposition of numerous, unprecedented, national and international measures to try to contain the virus, including travel bans and restrictions, shutdowns, quarantines, shelter-in-place and social distancing orders.

To prioritize the health and safety of our employees, customers and our community at large, we have either cancelled or shifted other planned events to virtual-only experiences and may determine to alter, postpone or cancel additional customer, employee or industry events in the future.

Since mid-March 2020, we have also taken several precautionary measures to protect our employees and contingent workers and help minimize the spread of the virus, including temporarily closing our worldwide offices, requiring all employees and contingent workers to work from home and suspending all business travel worldwide for our employees for the time being.

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 have become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business.

In the three months ended December 31, 2020, we experienced a modest rebound in usage levels from customers in the travel and hospitality industry, while the ridesharing industry remained below pre-COVID-19 levels.

We also continued to experience increased usage in other areas, including healthcare, education, consumer on-demand, and retail.

We acknowledge that there may be additional impacts to the economy and our business as a result of COVID-19.

We expect that there may be some volatility in customer demand and buying habits as the pandemic continues, and we may experience constrained supply or curtailed customer demand that could materially and adversely impact our business, results of operations and financial performance in future periods.

Specifically, we may experience impact from delayed sales cycles, including customers and prospective customers delaying contract signing or contract renewals, or reducing

budgets or minimum commitments related to the products and services that we offer and changes to consumer behavior that may affect customers who use our products and service for confirmations, notifications, and other use cases.

While we are continuing our recruiting efforts, it is possible that the pace of our hiring may slow during the COVID-19 pandemic.

See the risk factor titled "The global COVID-19 pandemic may adversely impact our business, results of operations and financial performance" in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition and results of operations.

Key Business Metrics

Year Ended December 31,

2020 2019 2018

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

Base Revenue (in thousands) (1)

Base Revenue Growth Rate (1)

221,000 179,000 64,286

Total Revenue (in thousands) (1)

$ 1,761,776 $ 1,134,468 $ 650,067

Total Revenue Growth Rate (1)

55 % 75 % 63 %

Dollar-Based Net Expansion Rate (2)

(1) For the year ended December 31, 2019 , Active Customer Accounts, Base Revenue, and Base Revenue Growth Rate include the contribution from our Twilio SendGrid acquisition, which closed on February 1, 2019.

137 % 135 % 143 %

____________________

(1) Includes the contributions from our Twilio Segment business, acquired November 2, 2020, and Twilio SendGrid business, acquired February 1, 2019, from the dates of their respective acquisitions.

Effective December 31, 2019, we round down the number of Active Customer Accounts to the nearest thousand.

(2) As previously announced in our Annual Report on Form 10-K filed with the SEC on March 2, 2020, commencing with the three-month period ended March 31, 2020, we calculate our Dollar-Based Net Expansion Rate by comparing total revenue from a cohort of Active Customer Accounts in a period to the same period in the prior year (the "New DBNE Definition").

To facilitate comparison between the periods presented, Dollar-Based Net Expansion Rate as presented in the table above has been calculated as if the New DBNE Definition had been in effect during that period.

As a result of the New DBNE Definition, unless specifically identified as being calculated using total revenue, any Dollar-Based Net Expansion Rates disclosed by us in our SEC filings, press releases and presentations prior to the date of our press release for the three months ended March 31, 2020, will not be directly comparable to our Dollar-Based Net Expansion Rates going forward.

Revenue from Twilio Segment will not impact this calculation until the one-year anniversary of the acquisition.

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 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 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 Active Customer Accounts if it has

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

Effective December 31, 2019, we round down the number of Active Customer Accounts to the nearest thousand.

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 years ended December 31, 2020, 2019 and 2018, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

Base Revenue.

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 the experience of our management, 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.

With the growth of our business in recent years, including through revenue contribution from the acquisition of Twilio SendGrid, revenue from Variable Customer Accounts has become less meaningful as a percentage of total revenue.

As a result, for reporting periods starting with the three months ending March 31, 2020, we will only disclose Total Revenue and will cease to disclose Base Revenue as an operating metric.

For historical periods through March 31, 2016, we defined a Variable Customer Account as an Active Customer Account that (i) has never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) has 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, they remain a Variable Customer Account in subsequent periods unless they enter into a minimum revenue commitment contract with us for a term of at least 12 months.

In the years ended December 31, 2019 , 2018 and 2017 , we had six Variable Customer Accounts, which represented 7% , 9% , and 8% , respectively, of our total revenue.

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.

Effective December 31, 2019, we round down the number of Active Customer Accounts to the nearest thousand.

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 have historically tracked performance in this area is by measuring the Dollar-Based Net Expansion Rate for Active Customer Accounts, other than Variable Customer Accounts.

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.

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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.

For historical periods through December 31, 2019, 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.

For reporting periods starting with the three months ending March 31, 2020, Twilio's Dollar-Based Net Expansion Rate will compare the revenue from all Active Customer Accounts, including 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 through December 31, 2019) 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, it uses the average of the applicable

quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period.

Given that we will no longer disclose Base Revenue as an operating metric for reporting periods starting with the three months ending March 31, 2020, our Dollar-Based Net Expansion Rate will compare the revenue from all Active Customer Accounts, including Variable Customer Accounts, in a quarter to the same quarter in the prior year.

For historical periods through December 31, 2019, our Dollar-Based Net Expansion Rate compared the revenue from Active Customer Accounts, other than large Active Customer Accounts that have never entered into 12-month minimum revenue commitment contracts with us, in a quarter to the same quarter in the prior year.

For reporting periods starting with the three months ended March 31, 2020, 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.

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.

As a result of the change in calculation of Dollar-Based Net Expansion Rate, unless specifically identified as being calculated based on total revenue, any Dollar-Based Net Expansion Rates disclosed by us in our SEC filings, press releases and presentations prior to the date of our press release for the three months ended March 31, 2020, will not be directly comparable to our Dollar-Based Net Expansion Rates going forward.

The table below sets forth our historical Dollar-Based Net Expansion Rates as calculated based on total revenue.

Three Months Ended

Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018

125 % 132 % 141 % 142 % 150 % 147 % 138 % 138 %

Three Months Ended

Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016 Sep 30, 2016 Jun 30, 2016

123 % 125 % 132 % 128 % 141 % 140 % 148 %

Net Loss Carryforwards

At December 31, 2019, we had federal, state and foreign net operating loss carryforwards of approximately $1,159.3 million , $630.2 million and $13.8 million respectively, and federal and state tax credits of approximately $58.4 million and $38.8 million , respectively.

At December 31, 2020, we had federal, state and foreign net operating loss carryforwards of approximately $2.7 billion, $1.8 billion and $27.9 million respectively, and federal and state tax credits of approximately $79.8 million and $57.7 million, respectively.

If not utilized, the federal and state loss carryforwards will expire at various dates beginning in 2029 and 2025, respectively, and the federal tax credits will expire at various dates beginning in 2029.

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We also earn monthly flat fees from certain fee‑based products, such as our Email API, Marketing Campaigns, Flex seats, telephone numbers, short codes 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.

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.

As customers grow their usage of our products, they automatically receive tiered usage discounts.

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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.

Our deferred revenue and customer deposits liability balance is not a meaningful indicator of our future revenue at any point in time because very few of our contracts with invoiced customers contain terms requiring any form of prepayment.

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.

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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 stock‑based compensation for our customer support employees, and non‑personnel costs, such as depreciation and amortization expense related to data centers and hosting equipment, amortization of capitalized internal use software development costs and amortization of 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 infrastructure‑related fees, the mix of U.S.

revenue compared to international revenue, changes in foreign exchange rates and 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.

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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 and an allocation of our general overhead expenses.

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 through our developer evangelist team and self‑service model, creating sales leads and establishing and promoting our brand, both domestically and internationally.

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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.

Our general and administrative expenses include a certain 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 since then we have expanded to most jurisdictions where these taxes are now being collected.

We continue expanding the number of jurisdictions where we will be collecting these taxes in the future.

We expect that these expenses will continue to decline in future years as we continue collecting these taxes from our customers in additional jurisdictions, which would further reduce our rate of ongoing accrual.

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 sales and other taxes to which we are subject in the United States and internationally based on the manner we sell and deliver our products.

Prior to March 2017, we did not collect sales or other taxes from our customers and recorded such taxes as general and administrative expenses.

Effective March 2017, we began collecting most of these taxes from customers in certain jurisdictions and since then we have expanded the number of jurisdictions where we currently collect.

We expect that these expenses will gradually decline in future years as we continue to expand the jurisdictions where we collect these taxes from our customers.

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, and the income tax benefit recorded in connection with the SendGrid, Inc.

("SendGrid") acquisition.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act).

The Tax Act reduces the U.S.

statutory corporate tax rate to 21%, effective January 1, 2018.

Consequently, we recorded a decrease to the Company's federal deferred tax assets of $28.0 million, which was fully offset by a reduction of our valuation allowance for the year ended December 31, 2017.

The other provisions of the Tax Act, including the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, did not have a material impact on our financial statements as of December 31, 2018.

In December 2017, the SEC staff issued Staff Accounting Bulletin No.

118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

Our accounting for the Tax Act is complete and we did not have any significant adjustments to provisional amounts recorded as of December 31, 2017.

On June 7, 2019, a three-judge panel from the U.S.

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As a result of this decision, our gross unrecognized tax benefits increased to reflect the impact of including share-based compensation in cost-sharing arrangements.

On July 22, 2019, Altera filed a petition for a rehearing before the full Ninth Circuit.

On November 12, 2019, the Ninth Circuit Court denied Altera’s request for rehearing.

Altera has appealed to the Supreme Court.

On July 22, 2019, Altera filed a petition for a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019.

On February 10, 2020, Altera filed a petition to appeal the decision to the Supreme Court, and on June 22, 2020, the Supreme Court denied the petition.

We will continue to monitor future developments and their potential effects on our consolidated financial statements.

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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 Twilio Segment in our results of operations prospectively after November 2, 2020, and Twilio SendGrid in our results of operations prospectively after February 1, 2019, 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.

Year Ended December 31,

2020 2019 2018

Consolidated Statements of Operations Data:

(In thousands, except share and per share amounts)

Revenue $ 1,761,776 $ 1,134,468 $ 650,067

Cost of revenue (1) (2)

846,115 525,551 300,841

Gross profit 915,661 608,917 349,226

Operating expenses:

Research and development (1) (2)

530,548 391,355 171,358

Sales and marketing (1) (2)

567,407 369,079 175,555

General and administrative (1) (2)

310,607 218,268 117,548

Total operating expenses 1,408,562 978,702 464,461

Loss from operations (492,901) (369,785) (115,235)

Other income (expenses), net

Other (expenses) income, net (11,525) 7,569 (5,923)

Loss before benefit (provision) for income taxes (504,426) (362,216) (121,158)

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Net loss attributable to common

stockholders (490,979) (307,063) (121,949)

Net loss per share attributed to common

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Year Ended December 31,

2020 2019 2018

(In thousands)

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General and administrative 76,301 70,297 26,254

Total $ 361,911 $ 264,318 $ 93,273

____________________________________

(2) Includes amortization of acquired intangibles as follows:

Year Ended December 31,

2020 2019 2018

(In thousands)

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General and administrative 78 — 375

Consolidated Statements of Operations, as a percentage of revenue:

Total $ 98,494 $ 72,807 $ 7,170

Year Ended December 31,

2020 2019 2018

Consolidated Statements of Operations, as a percentage of revenue:

Revenue 100 % 100 % 100 %

Cost of revenue 48 46 46

Gross profit 52 54 54

Operating expenses:

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Loss from operations (28) (33) (18)

Other income (expenses), net

Other (expenses) income, net (1) 1 (1)

Loss before benefit (provision) for income taxes (29) (32) (19)

Benefit (provision) for income taxes * * *

Net loss attributable to common stockholders

Net loss attributable to common

stockholders (28 %) (27 %) (19) %

____________________________________

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Year Ended December 31,

2020 2019 2018 2019 to 2020

Change 2018 to 2019

(Dollars in thousands)

Variable Revenue

Total Revenue $ 1,761,776 $ 1,134,468 $ 650,067 $ 627,308 55 % $ 484,401 75 %

2020 compared to 2019

In 2019, Base Revenue increased by $466.8 million , or 79% , compared to the same period last year, and represented 93% and 91% of total revenue in 2019 and 2018, respectively.

This increase was primarily attributable to an increase in the usage of our products, particularly our Programmable Messaging products and Programmable Voice products, the adoption of additional products by our existing customers, and revenue contribution from our acquisition of the Twilio SendGrid business for the period from February 1, 2019 through December 31, 2019.

In 2020, total revenue increased by $627.3 million, or 55%, 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 products and Programmable Voice products, the adoption of additional products by our existing customers, and revenue contribution from our acquisition of our Twilio Segment business for the period from November 2, 2020 through December 31, 2020.

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 2020, were reflected in our Dollar‑Based Net Expansion Rate of 137%.

The increase in usage was also attributable to a 178% increase in the number of Active Customer Accounts, from 64,286 as of December 31, 2018, to over 179,000 as of December 31, 2019, which was also positively impacted by the customer accounts added through our acquisition of the Twilio SendGrid business.

In 2019, Variable Revenue increased by $17.6 million , or 31% , compared to the same period last year, and represented 7% and 9% of total revenue in the years ended December 31, 2019 and 2018, respectively.

This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts.

The increase in usage was also attributable to a 23% increase in the number of Active Customer Accounts, from 179,000 as of December 31, 2019, to over 221,000 as of December 31, 2020, which was also positively impacted by the customer accounts added through our acquisition of the Twilio Segment business.

In 2020, U.S.

revenue and international revenue represented $808.9 million or 71% , and $325.6 million , or 29% , respectively, of total revenue.

revenue and international revenue represented $1.3 billion or 73%, and $479.6 million, or 27%, respectively, of total revenue.

In 2019, U.S.

revenue and international revenue represented $808.9 million, or 71%, and $325.6 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 products and Programmable Voice products, by our existing international Active Customer Accounts;

a 23% 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 acquisition of the Twilio SendGrid business.

and revenue contribution from our acquisition of the Twilio Segment business.

2019 compared to 2018

In 2018, Base Revenue increased by $227.5 million, or 62%, compared to the same period last year, and represented 91% and 92% of total revenue in 2018 and 2017, respectively.

This increase was primarily attributable to an increase in the usage of our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers.

In 2019, total revenue increased by $484.4 million, or 75%, compared to the same period last year.

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 2019, were reflected in our Dollar‑Based Net Expansion Rate of 135%.

The increase in usage was also attributable to a 31% increase in the number of Active Customer Accounts, from 48,979 as of December 31, 2017, to 64,286 as of December 31, 2018.

In 2018, Variable Revenue increased by $23.5 million, or 70%, compared to the same period last year, and represented 9% and 8% of total revenue in 2018 and 2017, respectively.

This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts.

In 2019, U.S.

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revenue and international revenue represented $484.8 million, or 75%, and $165.3 million, or 25%, respectively, of total revenue.

The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts, and a 57% 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.

a 167% 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 acquisition of the Twilio SendGrid business.

Cost of Revenue and Gross Margin

Year Ended December 31,

2020 2019 2018 2019 to 2020

Change 2018 to 2019

(Dollars in thousands)

Cost of revenue $ 846,115 $ 525,551 $ 300,841 $ 320,564 61 % $ 224,710 75 %

Gross margin 52 % 54 % 54 %

2020 compared to 2019

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The increase in cost of revenue was primarily attributable to a $246.2 million increase in network service providers’ costs and a $32.3 million increase in cloud infrastructure fees, both to support the growth in usage of our products.

The increase was also due to a $39.6 million increase in depreciation and amortization expense primarily related to the acquired intangible assets and our internally developed software.

In 2019, gross margin percentage remained stable compared to 2018.

Changes in product mix, which includes the impact of the acquisition of the Twilio SendGrid business, and some operational improvements were largely offset by an increase in amortization expense related to acquired intangible assets, the impact of an increasing mix of international product usage, and an increase in network service provider fees in certain geographies.

The increase was also due to a $14.2 million increase in the amortization expense of intangible assets that we acquired through business combinations.

In 2020, gross margin percentage declined compared to 2019.

This decline was primarily driven by a re-acceleration in growth of our messaging business, an increase in amortization expense related to acquired intangible assets, the impact of an increasing mix of international product usage and an increase in network service provider fees in certain geographies.

These declines were partially offset by the impact of the acquisition of the Twilio Segment business and certain operational improvements.

2019 compared to 2018

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The increase in cost of revenue was primarily attributable to a $133.1 million increase in network service providers’ costs and a $18.6 million increase in cloud infrastructure fees, both to support the growth in usage of our products.

The increase was also due to a $39.6 million increase in depreciation and amortization expense primarily related to the acquired intangible assets and our internally developed software.

In 2019, gross margin percentage remained stable compared to 2018.

Higher network service provider costs related to foreign currency fluctuations, certain price adjustments that were made by us in 2017 as a result of the high volume growth of

a large customer, an increasing mix of international product usage and an increase in network service provider fees in certain geographies were largely offset by operational improvements and changes in product mix.

Operating Expenses

Year Ended December 31,

2020 2019 2018 2019 to 2020

Change 2018 to 2019

(Dollars in thousands)

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The increase was primarily attributable to a $128.3 million increase in personnel costs, net of a $17.8 million increase in capitalized software development costs, largely as a result of a 63% 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.

This increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio Segment business on November 2, 2020.

The increase was also due to a $13.3 million increase in our cloud infrastructure fees related to staging and development of our products.

In addition, 2020 included research and development expenses from our acquired Twilio Segment business for the period from November 2, 2020 through December 31, 2020.

In 2020, sales and marketing expenses increased by $198.3 million, or 54%, compared to the same period last year.

The increase was primarily attributable to a $137.4 million increase in personnel costs, largely as a result of a 88% average increase in sales and marketing headcount, as we continued to expand our sales efforts in the United States and abroad.

The increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio Segment business on November 2, 2020.

The increase was also due to a $11.4 million increase related to the amortization of acquired intangible assets, and a $20.1 million increase in advertising expenses.

In addition, 2020 included sales and marketing expenses from our acquired Twilio Segment business for the period from November 2, 2020 through December 31, 2020.

In 2020, general and administrative expenses increased by $92.3 million, or 42%, compared to the same period last year.

The increase was primarily attributable to a $25.4 million increase in personnel costs, largely as a result of a 66% average increase in general and administrative headcount, to support the growth of our business domestically and internationally.

The increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio Segment business on November 2, 2020.

The increase was also due to a $19.0 million increase in charitable contributions due to several donations made by Twilio.org, a $10.7 million increase in our allowance for estimated credit losses partially impacted by the COVID-19 environment, and a $5.8 million increase in professional expenses related to our acquisitions of other business.

Additionally, certain of our taxes increased by $7.9 million primarily in foreign jurisdictions and our professional services fees increased by $6.6 million.

In addition, 2020 included general and administrative expenses from our acquired Twilio Segment business for the period from November 2, 2020 through December 31, 2020.

2019 compared to 2018

In 2019, research and development expenses increased by $220.0 million, or 128%, compared to the same period last year.

The increase was primarily attributable to a $183.3 million increase in personnel costs, net of a $5.0 million increase in capitalized software development costs, largely as a result of a 71% 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.

This increase also reflected the impact of growth in the headcount as a result of the acquisition of our Twilio SendGrid business.

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In addition, 2019 included general and administrative expenses from our acquired Twilio SendGrid business for the period from February 1, 2019 through December 31, 2019.

2018 compared to 2017

In 2018, research and development expenses increased by $50.6 million, or 42%, compared to the same period last year.

The increase was primarily attributable to a $37.0 million increase in personnel costs, net of a $3.3 million increase in capitalized software development costs, largely as a result of an 32% 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 to a $2.9 million increase in cloud infrastructure fees to support the staging and development of our products, a $2.1 million increase in professional services fees, a $1.3 million increase in outsourced engineering services and a $1.8 million increase in amortization expense.

In 2018, sales and marketing expenses increased by $74.9 million, or 74%, compared to the same period last year.

The increase was primarily attributable to a $48.6 million increase in personnel costs, largely as a result of a 52% average increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $5.7 million increase in advertising expenses, $4.7 million increase related to our annual developer conference SIGNAL, a $3.5

million increase in the expenses related to brand awareness programs and $2.3 million increase in credit card fees due to increased transaction volumes.

In 2018, general and administrative expenses increased by $56.8 million , or 93% , compared to the same period last year.

The increase was partially attributable to the non-recurrence of $13.4 million release of previously accrued tax liability upon certain obligation settlements and estimate revisions.

The remaining increase was primarily attributable to a $18.8 million increase in personnel costs, largely as a result of a 49% average increase in general and administrative headcount to support the growth of our business domestically and internationally and a $8.4 million increase in professional services fees primarily related to our operations as a public company and our on-going litigation matters, including legal settlements/accruals, and a $4.7 million increase in professional expenses specifically related to our business acquisitions as described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Quarterly Results of Operations

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The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements.

For the three months ended March 31, 2019 and subsequent quarterly periods in 2019, our revenue also includes the contribution from our Twilio SendGrid business since the date of our acquisition of this business on February 1, 2019.

For the three months ended December 31, 2020, our revenue also includes the contribution from our Twilio Segment business since the date of our acquisition of this business on November 2, 2020.

For the three months ended March 31, 2019 and all subsequent periods thereafter, our revenue also includes the contribution from our Twilio SendGrid business since the date of our acquisition of this business on February 1, 2019.

Our historical results are not necessarily indicative of the results that may be expected in the future.

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(Unaudited, in thousands)

Revenue $ 233,139 $ 275,039 $ 295,066 $ 331,224 $ 364,868 $ 400,849 $ 447,969 $ 548,090

Cost of revenue (1) (2)

107,089 125,024 136,904 156,534 171,333 191,718 217,095 265,969

Gross profit 126,050 150,015 158,162 174,690 193,535 209,131 230,874 282,121

Operating expenses:

Research and development (1) (2)

77,855 98,783 104,481 110,236 114,339 120,701 136,652 158,856

Sales and marketing (1) (2)

71,607 90,421 100,657 106,394 116,722 129,823 140,875 179,987

General and administrative (1) (2)

64,176 54,543 47,690 51,859 55,170 61,251 65,617 128,569

Total operating expenses 213,638 243,747 252,828 268,489 286,231 311,775 343,144 467,412

Loss from operations (87,588) (93,732) (94,666) (93,799) (92,696) (102,644) (112,270) (185,291)

Other income (expenses), net

Other (expenses) income, net (636) (880) 4,377 4,708 (1,118) 3,015 (3,996) (9,426)

Loss before benefit (provision) for income taxes (88,224) (94,612) (90,289) (89,091) (93,814) (99,629) (116,266) (194,717)

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Net loss attributable to common stockholders $ (36,503) $ (92,579) $ (87,734) $ (90,247) $ (94,791) $ (99,923) $ (116,914) $ (179,351)

____________________________________

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

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General and administrative 19,427 20,852 16,103 13,915 14,036 14,317 14,306 33,642

Total $ 58,324 $ 70,740 $ 68,268 $ 66,986 $ 69,025 $ 79,387 $ 89,410 $ 124,089

____________________________________

(2) Includes amortization of acquired intangibles as follows:

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Cost of revenue $ 8,460 $ 11,857 $ 12,549 $ 12,401 $ 12,381 $ 12,695 $ 12,540 $ 21,885

Research and development

Sales and marketing 5,003 7,329 7,322 7,886 7,864 7,889 7,876 15,286

General and administrative 153 62 121 (336) 47 11 10 10

Total $ 13,616 $ 19,248 $ 19,992 $ 19,951 $ 20,292 $ 20,595 $ 20,426 $ 37,181

Consolidated Statement of Operations, as a percentage of revenue **

Three Months Ended

Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Cost of revenue 46 45 46 47 47 48 48 49

Gross profit 54 55 54 53 53 52 52 51

Operating expenses:

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Loss from operations (38) (34) (32) (28) (25) (26) (25) (34)

Other income (expenses), net

Other (expenses) income, net — — 1 1 * 1 (1) (2)

Loss before benefit (provision) for income taxes (38) (34) (31) (27) (26) (25) (26) (36)

Benefit (provision) for income taxes 22 1 1 * * * * *

Net loss attributable to common

Net loss attributable to common stockholders (16) % (34) % (30) % (27) % (26) % (25) % (26) % (33) %

____________________________________

* Less than 0.5% of revenue.

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(as of end date of period) (1) (2) (3)

Base Revenue (in thousands) (1) (3)

Base Revenue Growth Rate (1)

154,797 161,869 172,092 179,000 190,000 200,000 208,000 221,000

Total Revenue (in thousands) (1) (2)

$ 233,139 $ 275,039 $ 295,066 $ 331,224 $ 364,868 $ 400,849 $ 447,969 $ 548,090

Total Revenue Growth Rate (1) (2)

81 % 86 % 75 % 62 % 57 % 46 % 52 % 65 %

Dollar-Based Net Expansion Rate (4)

142 % 141 % 132 % 125 % 143 % 132 % 137 % 139 %

(1) For the three months ended March 31, 2019 and subsequent quarterly periods in 2019, Active Customer Accounts, Base Revenue and Base Revenue Growth Rate include the contribution from the Twilio SendGrid acquisition, which closed on February 1, 2019.

____________________________________

(1) For the three months ended December 31, 2020, Active Customer Accounts, Total Revenue and Total Revenue Growth Rate include the contribution from the Twilio Segment acquisition, which closed on November 2, 2020.

Effective December 31, 2019, we round down the number of Active Customer Accounts to the nearest thousand.

(2) For the three months ended March 31, 2019 and all subsequent quarterly periods thereafter, Active Customer Accounts, Total Revenue and Total Revenue Growth Rate include the contribution from the Twilio SendGrid acquisition, which closed on February 1, 2019.

(3) See the section titled "Key Business Metrics—Number of Active Customer Accounts."

(3) See the section titled "Key Business Metrics—Base Revenue."

(4) See the section titled "Key Business Metrics—Dollar-Based Net Expansion Rate."

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Our quarterly revenue increased in each period presented primarily due to an increase in the usage of our products, the adoption of additional products by our existing customers, as evidenced by our Dollar-Based Net Expansion Rates and an increase in our new customers.

For the three months ended December 31, 2020, our revenue also includes the contribution from our Twilio Segment business since the date of our acquisition of this business on November 2, 2020.

For the three months ended March 31, 2019 and all subsequent quarterly periods thereafter, our revenue also includes the contribution from our Twilio SendGrid business since the date of our acquisition of this business on February 1, 2019.

In the first three quarters of 2020, the gross margin stayed relatively consistent due to continued platform optimization, offset by continued international product usage.

In the fourth quarter of 2020, international usage continued to increase at a higher rate than domestic usage, causing a slight decline in the gross margin percentage.

In the first three quarters of 2019 the gross margin stayed relatively consistent due to continued platform optimization, offset by continued international product usage.

In the fourth quarter of 2019, international usage continued to increase at a higher rate than domestic usage, causing a slight decline in gross margin percentage.

In the first three quarters of 2018 the gross margin improved due to continued platform optimization, along with changes in our product and geographic mix.

In the fourth quarter of 2018, an increasing mix of international product usage offset the continued platform optimization drove a modest decline in gross margin percentage.

Quarterly Trends in Operating Expenses

Our operating expenses have generally increased sequentially on a dollar basis as a result of our growth, primarily related to our acquisition of SendGrid, increased personnel costs to support our expanded operations, our continued investment in our products, our operations as a public company and ongoing litigations.

In the first quarter of 2019, our general and administrative expenses included $12.4 million of costs related to the acquisition of our Twilio SendGrid business on February 1, 2019.

Our operating expenses have generally increased sequentially on a dollar basis as a result of our growth, primarily related to our acquisitions of our Segment and SendGrid businesses, increased personnel costs to support our expanded operations, our continued investment in our products, our operations as a public company and our litigation costs.

In the fourth quarter of 2020, our general and administrative expenses included $20.7 million of costs related to the acquisition of our Twilio Segment business on November 2, 2020.

The fourth quarter general and administrative expense also included $31.7 million of stock-based compensation expense related to vesting of equity awards of Twilio Segment that we assumed, and vesting of certain shares of our Class A common stock that we issued subject to service conditions on the acquisition closing date.

In the first and second quarters of 2019, our general and administrative expenses included $20.7 million and $26.0 million, respectively, of additional stock-based compensation expense related to vesting of equity awards of Twilio SendGrid that we assumed on the acquisition closing date.

The first quarter general and administrative expenses also included $12.4 million of costs related to the acquisition of SendGrid on February 1, 2019.

In the third quarter of 2019, our sales and marketing expenses included $9.4 million of costs related to our SIGNAL customer and developer conference, which occurred in the third quarter of 2019.

In the third and fourth quarters of 2018, our sales and marketing expenses included $1.5 million and $6.8 million, respectively, of expenses related to our SIGNAL customer and developer conference.

In the third quarter of 2018, our general and administrative expenses increased by $1.5 million due to a preliminary settlement reached in an outstanding class action case.

In the fourth quarter of 2018, our general and administrative expenses further increased by $2.8 million due to the expenses related to our acquisition of Twilio SendGrid business.

Liquidity and Capital Resources

To date, our principal sources of liquidity have been (i) the net proceeds of $155.5 million, $64.4 million, and $979.0 million , net of underwriting discounts and offering expenses, from our initial public offering in June 2016 and our subsequent public offerings in October 2016 and June 2019, respectively;

To date, our principal sources of liquidity have been (i) the net proceeds of $155.5 million, $64.4 million, $979.0 million,$1.4 billion, and $1.8 billion, net of underwriting discounts and offering expenses paid by us, from our initial public offering in June 2016 and our subsequent public offerings in October 2016, June 2019, August 2020, and February 2021, respectively;

(ii) the net proceeds we received through private sales of equity securities;

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and (iv) 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.

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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 I, Item 1A, “Risk Factors.”

The following table summarizes our cash flows:

Year Ended December 31,

2020 2019 2018

(In thousands)

Cash provided by (used in) operating activities

Cash provided by operating activities $ 32,654 $ 14,048 $ 7,983

Cash used in investing activities (845,855) (1,285,792) (139,419)

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Effect of exchange rate changes on cash, cash equivalents and restricted cash 40 — 163

Net (decrease) increase in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash $ 680,150 $ (251,599) $ 384,546

Cash Flows from Operating Activities

In 2019, cash provided by operating activities consisted primarily of our net loss of $307.1 million adjusted for non-cash items, including $264.3 million of stock-based compensation expense, $55.7 million of tax benefit related to release of valuation allowance in connection with our acquisitions of other businesses, $110.4 million of depreciation and amortization expense, $23.7 million amortization of the debt discount and issuance costs related to our Notes, $23.2 million amortization of our operating right-of-use asset and $48.0 million of cumulative changes in operating assets and liabilities.

In 2020, cash provided by operating activities consisted primarily of our net loss of $491.0 million adjusted for non-cash items, including $360.9 million of stock-based compensation expense, $16.5 million of tax benefit related to release of valuation allowance in connection with our acquisitions of other businesses, $149.7 million of depreciation and amortization expense, $23.8 million amortization of the debt discount and issuance costs related to our Notes, $38.4 million of non-cash reduction to our operating right-of-use asset, $13.3 million amortization of deferred commissions, a $13.2 million increase in our allowance for credit losses, and $97.4 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $92.9 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 $98.4 million primarily due to increases in transaction volumes.

Operating right-of-use liability decreased $21.1 million due to payments made against our operating lease obligations.

Operating lease liability decreased $33.9 million due to payments made against our operating lease obligations.

Other long-term assets increased $81.9 million primarily due to an increase in the sales commissions balances related to the growth of our business.

In 2019, cash provided by operating activities consisted primarily of our net loss of $307.1 million adjusted for non-cash items, including $264.3 million of stock-based compensation expense, $55.7 million of tax benefit related to release of valuation allowance in connection with our acquisitions of other businesses, $110.4 million of depreciation and amortization expense, $23.7 million amortization of the debt discount and issuance costs related to our Notes, $23.2 million of non-cash reduction to our operating right-of-use asset and $48.0 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $71.7 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 $63.4 million primarily due to increases in transaction volumes.

Operating lease liability decreased $21.1 million due to payments made against our operating lease obligations.

Other long-term assets increased $18.0 million primarily due to an increase in the deferred sales commissions balances related to the growth of our business.

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Accounts payable and other current liabilities increased $52.1 million and deferred revenue and customer deposits increased $6.0 million primarily due to increases in transaction volumes.

In 2017, cash used in operating activities consisted primarily of our net loss of $63.7 million adjusted for non-cash items, including $49.6 million of stock-based compensation expense, $18.8 million of depreciation and amortization expense and $10.2 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $13.1 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.

Accounts payable and other current liabilities increased $2.1 million and deferred revenue increased $3.6 million due to increases in transaction volumes, which were partially offset by the $13.4 million release of tax liability upon certain obligation settlements and estimate revisions as discussed further in detail in Note 12 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash Flows from Investing Activities

In 2020, cash used in investing activities was $845.9 million primarily consisting of $453.1 million of purchases of marketable securities and other investments, net of maturities and sales, $333.6 million of net cash paid to acquire other businesses as described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, $33.3 million related to capitalized software development costs and $25.8 million related to purchases of long-lived assets.

In 2018, cash used in investing activities was $139.4 million, primarily consisting of $84.2 million of purchases of marketable securities, net of maturities, $30.6 million of net cash paid to acquire other businesses, as described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K , and $19.5 million related to capitalized software development costs.

In 2017, cash used in investing activities was $226.7 million, primarily consisting of $177.3 million of purchases of marketable securities, net of maturities, $22.6 million of net cash paid to acquire other businesses, as described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K , $17.3 million related to capitalized software development costs and $9.5 million related to purchases of long-lived assets.

In 2019, cash used in investing activities was $1.3 billion, primarily consisting of $1.3 billion of purchases of marketable securities and other investments, net of maturities and sales, $122.7 million of net cash paid to acquire other businesses, $21.9 million related to capitalized software development costs and $45.4 million related to purchases of long-lived assets.

In 2018, cash used in investing activities was $139.4 million, primarily consisting of $84.2 million of purchases of marketable securities, net of maturities, $30.6 million of net cash paid to acquire other businesses and $19.5 million related to capitalized software development costs.

Cash Flows from Financing Activities

In 2019, cash provided by financing activities was $1,020.1 million primarily consisting of $979.1 million in net proceeds from our public equity offering, as described in Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K , and $57.5 million proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In 2018, cash provided by financing activities was $515.8 million, primarily consisting of $537.1 million net proceeds from our Notes, net of purchaser discounts and issuance costs paid in the period, and $40.0 million proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In 2020, cash provided by financing activities was $1.5 billion primarily consisting of $1.4 billion in net proceeds from our public equity offering, as described in Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and $104.8 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In 2019, cash provided by financing activities was $1.0 billion primarily consisting of $979.1 million in net proceeds from our public equity offering and $57.5 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In 2018, cash provided by financing activities was $515.8 million, primarily consisting of $537.1 million in net proceeds from our Notes, net of purchaser discounts and issuance costs paid in the period, and $40.0 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

This was partially offset by a $58.5 million payment for capped call transactions.

In 2017, cash provided by financing activities was $36.4 million, primarily consisting of $37.6 million proceeds from stock options exercises by our employees and shares issued under our employee stock purchase plan.

Off-Balance Sheet Arrangements

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The following table summarizes our contractual obligations as of December 31, 2020:

Less Than One Year

One to Three Years

Three to Five Years

Five Years or More

Total Payments

Less Than One Year One to Three Years Three to Five Years Five Years or More Total Payments

(In thousands)

Operating leases (1)

$ 60,220 $ 109,281 $ 76,664 $ 75,410 $ 321,575

Finance leases (2)

9,866 14,429 3,920 518 28,733

Convertible senior notes (3)

— 343,702 — — 343,702

Noncancelable purchase obligations (4)

81,988 57,049 — — 139,037

Total payments $ 152,074 $ 524,461 $ 80,584 $ 75,928 $ 833,047

____________________________________

(1) Operating leases represent total future minimum rent payments under noncancelable operating lease agreements.

(2) Finance leases represent total future minimum payments under a noncancelable financing lease agreements.

(1) Operating leases represent total future minimum rent payments under noncancellable operating lease agreements.

(2) Finance leases represent total future minimum payments under a noncancellable financing lease agreements.

(3) See Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our convertible senior notes.

(4) Noncancelable purchase obligations represent total future minimum payments under contracts with our cloud infrastructure provider, network service providers and other vendors.

Purchase obligations exclude agreements that are cancelable without penalty.

(4) Noncancellable purchase obligations represent total future minimum payments under contracts with our cloud infrastructure provider, network service providers and other vendors.

Purchase obligations exclude agreements that are cancellable without penalty.

Unrecognized tax benefits are not included in the table above because any amounts expected to be settled in cash are not material.

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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.

Subscription-based fees are derived from certain non-usage-based contracts, such as with the sales of short codes and customer support.

Non-usage-based contracts revenue is recognized on a ratable basis over the contractual term which is generally one year or less.

Subscription-based fees are derived from certain non-usage-based contracts, such as with the sales of short codes, customer support, and fees charged to access the cloud-based platform of our recently acquired Twilio Segment business that is further described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report of Form 10-K.

Non-usage-based contracts revenue is recognized on a ratable basis over the contractual term which is generally one year or less for our legacy products and one to three years for the contracts acquired with Segment.

Our arrangements do not contain general rights of return.

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Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to future expected cash flows from acquired developed technologies;

the acquired company’s trade name and existing customer relationships, as well as assumptions about the period of time the acquired trade name will continue to be used in our offerings;

existing customer relationships;

uncertain tax positions and tax related valuation allowances assumed;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis