TWILIO INC 10-K

Item 1. Business Overview Software developers are reinventing nearly every aspect of business today. Yet as developers, we repeatedly encountered an area where we could not innovate—communications. Because communication is a fundamental human activity and vital to building great businesses, we wanted to incorporate communications into our software applications, but the barriers to innovation were too high. Twilio was started to solve this problem in 2008. Twilio spent the last 12 years building the leading cloud communication platform, but communications is just the beginning. Twilio's vision is to be the leading customer engagement platform, ultimately providing businesses with the holy grail—a single view of the customer journey. We believe the future of customer engagement will be written in software, by the developers of the world—our customers. Cloud platforms are a category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure. These platforms have arisen to enable a fast pace of innovation across a range of categories, such as computing and storage. We are the leader in the cloud communications platform category. We enable developers to build, scale and operate real-time customer engagement within 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. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. We also offer a set of APIs that enable developers to embed voice, messaging, video and email capabilities into their applications, and are designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. The Super Network is our software layer that allows our customers' software to communicate with connected devices globally. It interconnects with communications networks and inbox service providers around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of APIs giving our customers access to more foundational components of our platform, like phone numbers. In February 2019 we acquired SendGrid, Inc. ("SendGrid"), the leading email API platform. Email is an important channel for businesses to communicate with their customers. Incorporating SendGrid's products into our platform allows us to enable businesses to engage with their customers via email effectively and at scale. In November 2020 we acquired Segment io, Inc. ("Segment"), the market-leading customer data platform. Segment provides businesses a unified customer view to better understand their customers and engage more effectively. The acquisition expands and strengthens use cases across customer service, marketing, sales, product and analytics and accelerates Twilio’s journey to build the world’s leading customer engagement platform. We had over 221,000 Active Customer Accounts as of December 31, 2020, representing organizations big and small, old and young, across nearly every industry, with one thing in common: they are competing by using the power of software to build differentiated customer engagement experiences. With our customer engagement platform, our customers are disrupting existing industries and creating new ones. For example, our customers' software applications use our platform to notify a diner when a table is ready, provide enhanced application security through two-factor authentication, connect potential buyers to real estate agents, and power large, omni-channel contact centers. The range of applications that developers build with the Twilio platform has proven to be nearly limitless. Our goal is for Twilio to be in the toolkit of every software developer in the world. Because big ideas often start small, we encourage developers to experiment and iterate on our platform. We love when developers explore what they can do with Twilio, because one day they may have a business problem that they will use our products to solve. 5 As our customers succeed, we share in their success primarily through our usage-based revenue model. Our revenue grows as customers increase their usage of a product, extend their usage of a product to new applications or adopt a new product. We believe the most useful indicator of this increased activity from our existing customer accounts is our Dollar-Based Net Expansion Rate, which for historical periods through December 31, 2019, compares the revenue from a cohort of Active Customer Accounts, other than Variable Customer Accounts, in a period to the same period in the prior year. 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"). Under the new DBNE Definition, our Dollar-Based Net Expansion Rate was 137% and 135% for the years ended December 31, 2020 and 2019, respectively. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Expansion Rate." Our Platform Approach Twilio's mission is to be the leading customer engagement platform. We enable developers to build, scale and operate real-time communications within software applications, ultimately empowering every developer and company to improve their interactions with their customers through software. We believe that by giving developers the power to build with software at every level of their business we enable businesses to create novel and creative new consumer experiences that delight their customers and enable them to differentiate from their competitors. Our platform approach enables developers to build this future. Using our software, developers are able to incorporate communications into applications that span a range of industries and functionalities. Our technology partner customers also embed our products in solutions they sell to other businesses. Part of our core strategy is to provide a broad set of lower-level building blocks that can be used to build practically any digital experience. By doing this, we allow developers' creativity to flourish across the widest set of use cases—some of which have not even been invented yet. What are some of the common customer problems we are solving? • Contact Center. Twilio gives companies complete control and flexibility to rapidly deploy remote agents, digital channels, self-service and integrations for lower costs and higher productivity. • Alerts & Notifications. From delivery notifications to critical emergency alerts, Twilio provides the building blocks to develop critical communications across short message service ("SMS"), voice and email channels. • User Verification. Customers can use a globally optimized multi-channel user verification solution to combat fraud, reduce fake user sign-ups and authorize sensitive account actions. • Field services & contactless delivery. Our customers can use Twilio Conversations to ensure privacy with masked communications, provide granular session control over user permissions, session duration and roles and keep private information private. • Customer Loyalty. Customers can send reminders about reward programs through email or SMS to drive repeat purchases through loyalty incentives. • Twilio For Good. Twilio partners with nonprofit organizations through Twilio.org, our social impact division, to use the power of communications to help solve social challenges, such as an SMS hotline to fight human trafficking, an emergency volunteer dispatch system, appointment reminders for medical visits in developing nations and more. 6 Our Platform Segment Customer Data Platform Our acquisition of Segment added the leading customer data platform to Twilio's platform. While every business needs a complete view of their customers, data is typically siloed across many disparate systems. Segment's platform and APIs allow companies to collect, clean and control their customer data, providing a single view of customers across channels for more effective engagement. This insight enables businesses to delight their customers with personalized, timely and impactful communications on the right channel at the right time. The Segment platform includes: • Connections. Collect event data from mobile apps, websites and servers with one API, then pull in contextual data from cloud-based apps like customer relationship management (“CRM”), payment systems and internal databases to build a unified picture of the customer. • Personas. Use identity resolutions to take event data from across devices and channels, merge the data together, and create unified customer profiles to build and enrich audiences, and activate audiences across marketing tools with a single view of the customer. • Privacy. Comply with laws and regulations, such as General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018 ("CCPA"), using Segment’s privacy tools. • Protocols. Standardize data collection to create a single source of truth for customer data that is clean, consistent, and compliant, and adheres to a well thought out tracking plan. Channel APIs Our Channel APIs consist of software products that can be used individually or in combination to build rich contextual communications within applications. We do not aim to provide complete business solutions, rather to offer flexible building blocks that enable our customers to build what they need. Our easy-to-use developer APIs provide a programmatic channel to access our software. Developers can utilize our intuitive programming language, TwiML, to specify application functions, such as <Dial>, <Record> and <Play>, leveraging our software to manage the complexity of executing the specified functions. Our Channel APIs include: Messaging Twilio Programmable Messaging is an API to send and receive SMS, multimedia message service ("MMS") and over-the-top ("OTT") (WhatsApp and Facebook Messenger) messages globally. It uses intelligent sending features to ensure messages reliably reach end users wherever they are. Our customers build use cases, such as appointment reminders, delivery notifications, order confirmations and customer care. Programmable Messaging includes: • SMS. Programmatically send and receive SMS messages around the world, supporting localized languages in nearly every market. This includes support for the new 10-digit long code routes in the United States ("U.S."). • MMS. Exchange picture messages and more over U.S. and Canadian phone numbers from customer applications with built-in image transcoding and media storage. • Toll-Free SMS. Send and receive text messages with the same toll-free number used for voice calls in the U.S. and Canada. • High-Throughput Toll-Free SMS. Starting at 25 messages per second, High-Throughput Toll Free SMS lets you send and receive a higher volume of messages with the same toll-free number used for voice calls in the U.S. and Canada. • OTT channels. Programmatically send, receive and track messages to messaging apps such as WhatsApp and Facebook Messenger globally. We charge on a per-message basis for most of our Programmable Messaging products. 7 Voice Twilio Programmable Voice allows developers to build solutions to make and receive phone calls globally. They can make, manage and route calls to a browser, an app, a phone or anywhere else one can take a call. Developers can also incorporate advanced voice functionality such as text-to-speech, conferencing, recording and transcription. Through advanced call control software, developers can build customized applications that address use cases such as contact centers, call tracking and analytics solutions and anonymized communications. Our voice software works over both the traditional public switched telephone network ("PSTN") and over Internet Protocol ("VoIP"). Programmable Voice includes: • Twilio Voice. Initiate, receive and manage phone calls globally, end to end through traditional voice technology or between web browsers and landlines or mobile phones. • Call Recording. Securely record, store, transcribe and retrieve voice calls in the cloud. • Global Conference. Integrate audio conferencing that intelligently routes calls through cloud data centers in the closest geographic region to reduce latency. • Voice Insights. Call quality and performance data at your fingertips. Beyond details of a single call, every account on Twilio has access to the Voice Insights Dashboard, a powerful tool in Twilio Console that provides out-of-the-box visibility to key performance indicators and data to understand changes in call behavior. • Media Streams. Allows for real-time access to the raw audio stream of your phone calls. Through Media Streams you can fork the media of a phone call in real-time, effectively creating a copy of the initial audio stream that can be routed to your own application or to a third party to power advanced capabilities of your choosing. • SHAKEN/STIR. Signature-based Handling of Asserted Information Using toKENs ("SHAKEN") and Secure Telephone Identity Revisited ("STIR") standards (together, "SHAKEN/STIR") is a protocol mandated by the Federal Communications Commission ("FCC") to combat the rise in unwanted robocalls and unlawful caller ID spoofing. When adopted, carriers can present a trust indicator, like “Caller Verified”, to recipients’ phones. SHAKEN/STIR is free to all Twilio customers and allows them to increase answer rates for their calls by giving their calls the highest attestation under the SHAKEN and STIR caller authentication framework. • Programmable Voice Session Initiation Protocol (" SIP") Interfaces. Enables voice infrastructure to be augmented with cloud capabilities. • Emergency Calling. Twilio’s Emergency Calling for SIP API enables emergency call routing to Public Safety Answering Points ("PSAPs") in the U.S., Canada and the United Kingdom ("UK"). • Bring Your Own Carrier Trunking ("BYOC"). Enables connection of customer’s PSTN carrier to Twilio’s programmable platform. Email The Twilio SendGrid Email API solves email delivery challenges at scale and ensures our customers’ email program lives up to their product experience. Our Email API provides the flexibility for our customers to build customized solutions, as well as helpful shortcuts to streamline integration and optimize their inbox placement. Businesses use our email products for both marketing messages as well as transactional emails, including shipping notifications, friend requests, password resets and sign-up confirmations. Twilio SendGrid Email API includes: • Integrations. Businesses can integrate our email API with multiple leading development frameworks and client libraries, including Node.js, Ruby, Python, Go, Hypertext Preprocessor, Java and C#. • Internet Protocol (“IP”) Management. Domains and links can be customized, whether sending from shared IP address pools or from a dedicated IP address, to improve reputation management and delivery. • Deliverability. Our real-time email address validation API checks email address legitimacy before sending to improve deliverability. 8 • Sender Authentication. Our custom Sender Policy Framework and DomainKeys Identified Mail record creation is designed to eliminate domain spoofing and phishing. • Mobile support. Our deep linking functionality enables email engagement for mobile apps. • Security. Our two-factor authentication, API key permissions and Event Webhook Security helps enable secure management of our Email API by our customers. Conversations Twilio Conversations is a unified conversational API that is pre-integrated with SMS, MMS, WhatsApp and Chat and supports cross-channel, multiparty conversations. It includes software that support groups, cross-channel orchestration and conversation durations. This extends the functionality of our Messaging channels and enables developers to use one API regardless of the channel their end-users support. Video Programmable Video provides developers with the building blocks to add voice and video to web and mobile applications. Developers can address multiple use cases such as video consultations, telemedicine, distance learning, recruiting, social networking and more by using Programmable Video’s global cloud infrastructure to build on WebRTC. They can use our JavaScript, iOS or Android SDKs, quickstarts and open source sample code to launch applications in minutes, then customize them to meet the unique needs of their use case. Solutions As we observe the customer use cases that are most common and the workflows our customers find most challenging, we create Solutions. We bring these Solutions to a broader audience, including non-technical customers, in the form of higher level APIs. These solutions are built on top of our Channel APIs to offer more fully implemented functionality for a specific purpose, such as contact center or two-factor authentication. This saves developers significant time in building their applications. The higher level APIs in this layer of our platform are focused on addressing a massive opportunity to recreate and modernize the field of customer engagement. We charge on a per-seat or per-use basis for our Solutions, which include: Contact Center Businesses must continually adapt to stay ahead of customers’ changing expectations. Twilio Flex is the industry’s only fully programmable contact center platform that allows companies to deploy a broad array of customer engagement channels while providing the tools to easily create, change or extend any part of their custom solution. Twilio Flex enables businesses to rapidly deploy tailored cloud contact centers free from the limitations of software-as-a-service ("SaaS") applications. User Verification Online fraud has exploded from a minor nuisance to a major factor in how businesses operate today. Twilio Verify is a managed solution that takes care of channel orchestration and management as well as security and business logic. Using our two-factor authentication APIs ("Twilio Authy"), developers can add an extra layer of security to their applications with second-factor passwords sent to a user via SMS, voice, email or push notifications. Twilio Authy provides user authentication codes through a variety of formats based on the developer’s needs. Codes can be delivered through the Authy app on registered mobile phones, desktop or smart devices or via SMS and voice automated phone calls. In addition, authentication can be determined through a push notification on registered smartphones. To allow developers to know exactly who they are sending messages to, Twilio Lookup allows developers to validate number format, device type and provider prior to sending messages or initiating calls. Marketing Campaigns Marketing Campaigns help digital marketers build and send email campaigns at scale and faster than ever. With drag and drop editing, approachable automation and powerful contacts management, Marketing Campaigns help marketers attract and retain customers more efficiently. Marketing Campaigns include email design and templates, list management, dynamic content and email testing. 9 Super Network While developers build applications with our software, Twilio manages the connections between the internet and the global telecommunications network. We call this the Twilio Super Network and it is a global network of connections with numerous carriers globally to provide connectivity in approximately 80 countries. We do not own any physical network infrastructure. We use software to build a high performance network that optimizes performance for our customers, provides resiliency and redundancy to our platform and helps to minimize disruption from carrier delays or outages. Through handling massive volumes of traffic, we are able to detect issues often before our customers or carrier partners do. We receive real-time feedback on handset deliverability through a number of carriers and destinations and we use this data for our own routing decisions. The Twilio Super Network operates a 24/7 global operations center that constantly monitors the carrier networks, alongside Twilio’s dedicated communications engineers who optimize for changing traffic patterns. The Super Network also contains a set of APIs giving our customers access to more foundational components of our platform, like phone numbers, and SIP Trunking. The Super Network features include: • Phone Number Provisioning. Acquire local, national, mobile and/or toll-free phone numbers on demand in approximately 80 countries and connect them into the customers’ applications. • Short Codes. Typically five to six digit phone number used to send and receive a high-volume of messages per second. • Elastic SIP Trunking. Connect legacy voice applications to our Super Network over IP infrastructure with globally available phone numbers and pay-as-you-go pricing. Twilio’s Emergency Calling for SIP Trunking feature enables emergency call routing to PSAPs in the US, Canada and the UK. • Interconnect. Connect privately to Twilio to enable enterprise grade security and quality of service for Twilio Voice and Elastic SIP Trunking. We charge on a per-minute or per-phone number basis for most of our Super Network products. IoT The most challenging aspect of connecting previously unconnected devices lies in making the connection reliable and secure enough to perform and add value for years on end. Twilio’s IoT offerings therefore make connectivity simpler and coding of connected devices more reliable so that our customers can focus on building differentiated IoT experiences versus building and maintaining the required infrastructure underneath. Our customers use Twilio IoT for use cases, such as asset or fleet tracking, smart building management, consumer wearables (often pulling in other Twilio products such as Voice, Video, and Flex), predictive maintenance and inventory management. Our Business Model for Innovators Our goal is to include Twilio in the toolkit of every developer in the world. Because big ideas often start small, developers need the freedom and tools to experiment and iterate on their ideas. In order to empower developers to experiment, our developer-first business model is low friction, eliminating the upfront costs, time and complexity that typically hinder innovation. Additionally, our model encourages experimentation and enables developers to grow as customers as their ideas succeed. Developers can begin building with a free trial. They have access to self-service documentation and free customer support to guide them through the process. Once developers determine that our software meets their needs, they can flexibly increase consumption and pay based on usage. In short, we acquire developers like consumers and enable them to spend like enterprises. 10 Our Growth Strategy We are the leader in the cloud communications platform category based on revenue, market share and reputation and intend to continue to set the pace for innovation. We will continue to invest aggressively in our platform approach, which prioritizes increasing our reach and scale. We intend to pursue the following growth strategies: • Continue Significant Investment in our Technology Platform. We will continue to invest in building new software capabilities and extending our platform to bring the power of contextual customer engagement to a broader range of applications, geographies and customers. We have a substantial research and development team, comprising approximately 42% of our headcount as of December 31, 2020. • Grow Our Developer Community and Accelerate Adoption. We will continue to enhance our relationships with developers globally and seek to increase the number of developers on our platform. In addition to adding new developers, we believe there is significant opportunity for revenue growth from developers who already have registered accounts with us but have not yet built their software applications with us, or whose applications are in their infancy and will grow with Twilio into an Active Customer Account. As of December 31, 2020, we had more than 221,000 Active Customer Accounts on our platform. • Increase Our International Presence. Our platform serves over 180 countries today, making it as simple to communicate from São Paulo as it is from San Francisco. Customers outside the U.S. are increasingly adopting our platform, and for the years ended December 31, 2020 and 2019, revenue from international customer accounts accounted for 27% and 29% of our total revenue, respectively. We are investing to meet the requirements of a broader range of global developers and enterprises. We plan to grow internationally by continuing to expand our operations outside of the U.S. and collaborating with international strategic partners. • Further Penetrate the Enterprises. We plan to drive greater awareness and adoption of Twilio from enterprises across industries. We intend to further increase our investment in sales and marketing to meet evolving enterprise needs globally, in addition to extending our enterprise-focused use cases and platform capabilities, like our Twilio Enterprise Plan. Additionally, we believe there is significant opportunity to expand our relationships with existing enterprise customers. • Expand Our Partner Channel. Our Twilio Build partner program is focused on growing our community of technology and consulting partners. Twilio Build's ecosystem of partners offers customers both packaged applications and consulting expertise that make it possible for any customer to innovate with Twilio regardless of region, industry, business model or development resources. To help our partners grow their businesses and innovate for their customers, this program provides go-to-market support, certification and training programs and a partner success team. We have relationships with a number of technology partner customers that embed our products in the solutions that they sell to other businesses. We intend to expand our relationships with existing technology partner customers and to add new technology partner customers. We plan to invest in a range of initiatives to encourage increased collaboration with, and generation of revenue from, technology partner customers. We have started developing relationships with consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications. We intend to continue to invest in and develop the ecosystem for our solutions in partnership with consulting partners to accelerate awareness and adoption of our platform. • Selectively Pursue Acquisitions and Strategic Investments. We may selectively pursue acquisitions and strategic investments in businesses and technologies that strengthen our platform. From 2015 through 2020, we made several acquisitions which have allowed us to expand our platform and service offerings to include features such as a cloud-based API to seamlessly embed two-factor authentication and phone verification into any application, Web Real-Time-Communication ("Web RTC") media processing technologies, contact center analytics, software mobile network infrastructure and language recognition capabilities. In addition, our acquisition of SendGrid in February 2019 allowed us to add a leading e-mail API platform to our product offerings and our acquisition of Segment in November 2020 allowed us to add the market-leading customer data platform to our product offerings. 11 The Twilio Magic We believe there's a unique spirit to Twilio, manifested in who we are and how we work together. These are the principles we use to build an impactful, high growth business while staying true to ourselves. Collectively, these principles guide how we act, how we make decisions and how we win. How We Act Be an Owner. Owners know their business, embracing the good news and the bad. Owners sweat the details and "pick up the trash." Owners think long term and spend money wisely. Empower Others. We believe that unleashing human potential—both inside and outside our company—is the key to our success. Be humble and realize it's not just about us. Invest in each other. No Shenanigans. Always act in an honest, direct and transparent way. How We Make Decisions Wear the Customer's Shoes. Spend the time to deeply understand customers and solve problems from their perspective. Earn trust through every interaction. Write It Down. Our business is complex, so take the time to express yourself in prose—for your sake and for the folks with whom you're collaborating. Ruthlessly Prioritize. Prioritization helps break down complex problems and provides clarity in the face of uncertainty. Decisions are progress, so make decisions with available information and keep learning. How We Win Be Bold. We're driven by a hunger to build a meaningful and impactful company. Embrace crazy ideas and remember, every big idea starts small. Be Inclusive. To achieve our goals, we need a diverse set of voices in the room. Build diverse teams and seek out unique points of view. Draw the Owl. There's no instruction book, it's ours to write. Figure it out, ship it and iterate. Invent the future, but don't wing it. Don't Settle. Expect the best from yourself and others, because there's no feeling greater than being proud of our work. Hire the best people for every role. Twilio.org We believe we can create greater social good through better communications. Through Twilio.org, which is a part of our company and not a separate legal entity, we donate and discount our products to nonprofits who use our products to engage their audience, expand their reach and focus on making a meaningful change in the world. Twilio.org's mission is to fuel communications that give hope, power, and freedom with a 10-year goal to help one billion people every year. In 2015, we reserved 1% of our common stock to fund our social impact at Twilio.org. In March 2019, we increased the Twilio.org share reserve by 203,658 shares of Class A common stock to account for a similar program previously operated by SendGrid, Inc., one of our wholly owned subsidiaries, which we acquired in February 2019. Since 2015, Twilio.org has made several donations consistent with its philanthropic goals, which were treated as charitable contributions and recorded in general and administrative expenses in our consolidated statements of operations included elsewhere in this Annual Report on Form 10-K. As of December 31, 2020, the total remaining shares of Class A common stock reserved for Twilio.org was 707,265. 12 Our Employees and Human Capital Resources As of December 31, 2020, we had a total of 4,629 employees, including 1,369 employees located outside of the U.S. None of our U.S. employees are represented by a labor union with respect to their employment. Employees in certain of our non-U.S. subsidiaries have the benefits of collective bargaining arrangements at the national level. We consider our relations with our employees to be good and have not experienced interruptions of operations or work stoppages due to labor disagreements. Diversity and Inclusion At Twilio, we strive to build a diverse workforce, promote equity in our practices, and create inclusive communities for all Twilions to thrive. Our mission is to foster an equitable approach to hiring, delivering on a promise of equality for all in career development, compensation and growth, and to continuously improve a sense of inclusion for everyone at Twilio. In the wake of this summer's racial injustices, which continue to plague the country, we created a Racial Justice and Equity accountability priority that included a commitment to becoming an anti-racist company. We believe that a company culture focused on equity and driving toward being anti-racist is a key driver in being better corporate citizens, creating a more inclusive workplace, attracting the best talent, and ultimately delivering better business performance. Some of the programs that came out of this accountability priority included “Be Inclusive” diversity and inclusion training for People Managers. We also developed a “RiseUp” professional development program for our top Black and Latinx managers. Our Black and Latinx managers also received an opportunity for professional coaching through the “Better Up Coaching” platform as a way to continue career development. This platform provided access to coaches of color and various backgrounds to offer support and development. We were also able to hire our first Chief Diversity Officer who sits on the executive team, with a reporting line to our CEO. In addition, we work hard to maintain and enhance our diverse and inclusive environment, creating a workplace where people are highly valued and are empowered to do their best work. Our employee resource groups, such as Black Twilions, Latinx @ Twilio, Remoties, Asians @ Twilio, Spectrum, the Family Nest, Warriors, Twilipinos, Women @ Twilio, and Wonder offer our employees support, mentoring and networking opportunities and help to foster a friendly and diverse workplace. Compensation and Benefits Twilio is committed to delivering a comprehensive compensation and benefits program that provides support for all of our employees’ well-being. We provide competitive compensation and benefits to attract and retain talented employees, including offering market-competitive salary, bonuses or sales commissions, and equity. We generally offer full-time employees equity at the time of hire and through annual equity grants, as well as provide an employee stock purchase plan, to foster a strong sense of ownership and engage our employees in being committed to our long-term success. We ensure that our compensation is fair for all employees, regardless of classifications, such as race and gender. We routinely run a rigorous statistical analysis to ensure compensation is fair, taking into account factors that should impact pay, like role, level, location and performance. Our full-time employees are eligible to receive, subject to the satisfaction of certain eligibility requirements, our comprehensive benefits package including our medical, dental and vision insurance and life and disability insurance plans. In addition, we provide time off, as well as maintain a tax-qualified 401(k) retirement plan that provides eligible U.S employees with an opportunity to save for retirement on a tax-advantaged basis. In 2020, we matched 50% of the first 6% of contributions by plan participants, subject to annual contribution limits set forth in the Internal Revenue Code of 1986, as amended. In structuring these benefit plans, we seek to provide an aggregate level of benefits that are comparable to those provided by similar companies. COVID-19 Response To support employee well-being, Twilio established a number of new programs in response to the COVID-19 pandemic and the transition to full-time work from home. We established No Meeting Fridays, created flexible work schedule options, gave employees a home office stipend, a caregiver stipend, free Care.com membership and paid time off through our COVID-19 Support Leave to care for themselves or family members impacted by COVID-19. 13 Research and Development Our research and development efforts are focused on building a trusted communications platform and enhancing our existing products and developing new products. Our research and development organization is built around small development teams. Our small development teams foster greater agility, which enables us to develop new, innovative products and make rapid changes to our infrastructure that increase resiliency and operational efficiency. Our development teams designed, built and continue to expand our customer engagement platform and Super Network. As of December 31, 2020, we had 1,931 employees in our research and development organization. We intend to continue to invest in our research and development capabilities to extend our platform and bring the power of contextual communications to a broader range of applications, geographies and customers. Sales and Marketing Our sales and marketing teams work together closely to drive awareness and adoption of our platform, accelerate customer acquisition and generate revenue from customers. Our go-to-market model is primarily focused on reaching and serving the needs of developers. We are a pioneer of developer evangelism and education and have cultivated a large global developer community. We reach developers through community events and conferences, including our annual 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. By accessing our easy-to-configure APIs, extensive self-service documentation and customer support team, developers can build our products into their applications and then test such applications during an initial free trial period that we provide. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products, for a majority of our products. Our Flex contact center platform is generally offered on a per user, per month basis or on a usage basis per agent hour. Our email API is offered on a monthly subscription basis, while our Marketing Campaigns product is priced based on the number of email contacts stored on our platform and the number of monthly emails sent to those contacts through our email API. Our self-serve pricing matrix is publicly available and it allows for customers to receive tiered discounts as their usage of our products increases. As customers' use of our products grows larger, some enter into negotiated contracts with terms that dictate pricing, and typically include some level of minimum revenue commitments. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account managers or customer success advocates to ensure their satisfaction and expand their usage of our products. We also supplement our self-service model with a sales effort aimed at engaging larger potential customers and existing customers through a direct sales approach. To help increase our awareness in the enterprise, we have expanded our marketing efforts through programs like our Twilio Engage roadshow, where we seek to bring business leaders and developers together to discuss the future of customer engagement. We have developed products to support this effort as well, like the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration. Our sales organization targets technical leaders and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel. When potential customers do not have the available developer resources to build their own applications, we refer them to either our technology partners who embed our products in the solutions that they sell to other businesses (such as contact centers and sales force and marketing automation), or our consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications. As of December 31, 2020, we had 2,093 employees in our sales and marketing organization. 14 Customer Support We have designed our products and platform to be self-service and to require minimal customer support. To enable this, we provide all of our users with helper libraries, comprehensive documentation, how-tos and tutorials. We supplement and enhance these tools with the participation of our engaged developer community. In addition, we provide support options to address the individualized needs of our customers. All developers get free support and system status notifications. Our developers can also engage with the broader Twilio community to resolve issues. We also offer three paid tiers of support with increasing levels of availability and guaranteed response times. Our highest tier plan, intended for our largest customers, includes a dedicated support engineer, duty manager coverage and quarterly status reviews. Our support model is global, with 24x7 coverage and support offices located in the U.S., Ireland, Colombia, India, and Singapore. We currently derive an insignificant amount of revenue from fees for customer support. We also offer professional services which provide in-depth, hands-on, fee-based packages of advisory, software architecture, integration and coding services to existing and prospective customers and partners to optimize their use of the Twilio platform. Our goal is to help our customers achieve business results faster. Offerings include services for implementing contact center solutions, email implementation and deliverability, and configuration and integration of communications capabilities. Competition The market for cloud communication platforms is rapidly evolving and increasingly competitive. We believe that the principal competitive factors in our market are: • completeness of offering; • credibility with developers; • global reach; • ease of integration and programmability; • product features; • platform scalability, reliability, security and performance; • brand awareness and reputation; • the strength of sales and marketing efforts; • customer support; and, • the cost of deploying and using our products. We believe that we compete favorably on the basis of the factors listed above. We believe that none of our competitors currently competes directly with us across all of our product offerings. Our competitors fall into four primary categories: • legacy on-premises vendors; • regional network service providers that offer limited developer functionality on top of their own physical infrastructure; • smaller software companies that compete with portions of our product line; and, • SaaS companies and cloud platform vendors that offer prepackaged applications and platforms. 15 Some of our competitors have greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets and larger intellectual property portfolios. As a result, certain of our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. With the introduction of new products and services and new market entrants, we expect competition to intensify in the future. Moreover, as we expand the scope of our platform, we may face additional competition. Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws in the U.S. and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand. As of December 31, 2020, in the U.S., we had been issued 157 patents, which expire between 2029 and 2039. As of such date, we also had 33 issued patents in foreign jurisdictions, all of which are related to U.S. patents and patent applications. We have also filed various applications for protection of certain aspects of our intellectual property in the U.S. and internationally. In addition, as of December 31, 2020, we had 41 trademarks registered in the U.S. and 257 trademarks registered in foreign jurisdictions. We further seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law. Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, we intend to continue to expand our international operations, and effective intellectual property, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Further, companies in the communications and technology industries may own large numbers of patents, copyrights and trademarks and may frequently threaten litigation, or file suit against us based on allegations of infringement or other violations of intellectual property rights. We currently are subject to, and expect to face in the future, allegations that we have infringed the intellectual property rights of third parties, including our competitors and non-practicing entities. Regulatory We are subject to a number of U.S. federal and state and foreign laws and regulations that involve matters central to our business. These laws and regulations may involve privacy, data protection, intellectual property, competition, telecommunications, broadband, Voice over Internet Protocol ("VoIP"), consumer protection, export taxation or other subjects. Many of the laws and regulations to which we are subject are still evolving and being tested in courts and by regulatory authorities and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industry in which we operate. Because U.S., federal, state and foreign laws and regulations have continued to develop and evolve rapidly, it is possible that we or our products or our platform may not be, or may not have been, compliant with each such applicable law or regulation. 16 For example, the General Data Protection Regulation ("GDPR"), which took full effect on May 25, 2018, enhanced data protection obligations for businesses and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to the greater of €20 million or 4% of global annual revenue. Given the breadth and depth of changes in data protection obligations, meeting the requirements of GDPR has required significant time and resources, including a review of our technology and systems currently in use against the requirements of GDPR. We have taken steps to comply with GDPR, including integrating GDPR-compliant privacy protections into our products and platform, commercial agreements and record-keeping practices to help us and our customers meet the compliance obligations of GDPR. However, additional EU laws and regulations (and member states' implementations thereof) further govern the protection of consumers and of electronic communications. If our efforts to comply with GDPR or other applicable U.S., federal, state or foreign laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and results of operations, and our ability to conduct business in the EU or other regions could be significantly impaired. In addition, the Telephone Consumer Protection Act of 1991 ("TCPA"), restricts telemarketing and the use of automatic text messages without proper consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws, or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face direct liability. Compliance with these laws and regulations has not had, and is not expected to have, a material effect on our capital expenditures, results of operations and competitive position as compared to prior periods, and we do not currently anticipate material capital expenditures for environmental control facilities, of which we currently have none. For additional information about government regulation applicable to our business, see Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K. Corporate Information Twilio Inc. was incorporated in Delaware in March 2008. Our principal executive offices are located at 101 Spear Street, First Floor, San Francisco, California 94105, and our telephone number is (415) 390-2337. Our website address is www.twilio.com. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K. Twilio, the Twilio logo and other trademarks or service marks of Twilio appearing in this Annual Report on Form 10-K are the intellectual property of Twilio. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the intellectual property of their respective holders. Information about Geographic Revenue Information about geographic revenue is set forth in Note 11 of our Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 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, 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 Annual Report on Form 10-K 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. 17 Table of Contents