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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-26 · 200 added, 289 removed, 260 unchanged (65% 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 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.

We offer a customer engagement platform with software designed to address specific use cases like account security and contact centers and a set of APIs that handles the higher level communication logic needed for nearly every type of customer engagement.

These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey.

We also offer a set of APIs that enables 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 that gives our customers access to more foundational components of our platform, like phone numbers.

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 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.

We call this approach our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed.

We established and maintain our leadership position by engaging directly with, and cultivating, our developer community, which has led to the rapid adoption of our platform.

We reach developers through community events and conferences, including our SIGNAL 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‑adopt APIs, extensive self‑service documentation and customer support team, developers build our products into their applications and then test such applications through free trial periods 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.

Historically, we have acquired the substantial majority of our customers through this self‑service model.

As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations.

Once our customers reach a certain spending level with us, we support them with account executives or customer success advocates within our sales organization to ensure their satisfaction and expand their usage of our products.

We also supplement our self‑service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach.

To help increase awareness of our products 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.

We generate the substantial majority of our revenue from customers based on their usage of our software products that they have incorporated into their applications.

Our Flex contact center platform is generally offered on a per user, per month basis or on a usage basis per agent hour.

In addition, our email API is offered on a monthly subscription basis and 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.

Also, customers using our Programmable Messaging or Programmable Voice APIs typically purchase one or more telephone numbers from us, for which we charge a monthly flat fee per number.

Some customers also choose to purchase various levels of premium customer support for a monthly fee.

Customers that register in our self‑service model typically pay upfront via credit card and draw down their balance as they purchase or use our products.

Most of our customers draw down their balance in the same month they pay up front or are charged on a monthly subscription basis for our email-related products.

As a result, our deferred revenue and customer deposits liability at any particular time is not a meaningful indicator of future revenue.

As our customers’ usage grows, some of our customers enter into contracts and are invoiced monthly in arrears.

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.

Historically, the aggregate minimum commitment revenue from customers with whom we have contracts has constituted a minority of our revenue in any period, and we expect this to continue in the future.

Our developer‑focused products are delivered to customers and users through our Super Network, which uses software to optimize communications on our platform.

We interconnect with communications networks and inbox service providers globally to deliver our products, and therefore we have arrangements with network service providers in many regions in the world.

Historically, a substantial majority of our cost of revenue has been network service provider fees.

We continue to optimize our network service provider coverage and connectivity through continuous improvements in routing and sourcing in order to lower the usage expenses we incur for network service provider fees.

As we benefit from our platform optimization efforts, we sometimes pass these savings on to customers in the form of lower usage prices on our products in an effort to drive increased usage and expand the reach and scale of our platform.

In the near term, we intend to operate our business to expand the reach and scale of our platform and to grow our revenue, rather than to maximize our gross margins.

We enable developers to build, scale and operate real‑time customer engagement within their software applications.

We offer a customer engagement platform with software designed to address specific use cases like account security and contact centers, and a set of Application Programming Interfaces (“APIs”) that handles the higher level communication logic needed for nearly every type of customer engagement.

The power, flexibility and reliability offered by our software building blocks empower companies of virtually every shape and size to build world-class engagement into their customer experience.

For additional detail on the description of our business and products please refer to Part I, Item 1, “Business”, included elsewhere on this Annual Report on Form 10-K.

We have achieved significant growth in recent periods.

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, 2021, 2020 and 2019, our revenue was $2.8 billion, $1.8 billion and $1.1 billion, respectively, and our net loss was $949.9 million, $491.0 million and $307.1 million, respectively.

In the years ended December 31, 2021, 2020 and 2019, our 10 largest Active Customer Accounts generated an aggregate of 11%, 14% and 13% of our total revenue, respectively.

Acquisition of Zipwhip, Inc.

In July 2021, we acquired Zipwhip, Inc.

(“Zipwhip”), a leading provider of toll-free messaging in the United States, for a purchase price of $838.8 million.

The purchase price was paid in the form of shares of our Class A common stock and cash and included fair value of pre-combination services of Zipwhip employees that was embedded in the unvested equity awards which we assumed on the acquisition closing date.

Part of the cash was paid to settle the vested stock options of Zipwhip employees that were outstanding on the acquisition closing date.

We assumed all unvested and outstanding stock options and restricted stock units of Zipwhip continuing employees as converted into our own respective equity awards at the conversion ratio provided in the Agreement and Plan of Merger and Reorganization.

Vesting of Class A shares of our common stock and assumed equity awards that were subject to service conditions is recorded into our stock-based compensation expense as the services are provided.

This acquisition is described in detail in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Because the acquisition of Zipwhip occurred during the year ended December 31, 2021, the information presented in this section with respect to the year ended December 31, 2021 includes the contribution of Zipwhip starting from July 14, 2021, the date of acquisition.

The information with respect to the periods prior to the date of acquisition relates to Twilio on a standalone basis, not including Zipwhip.

As a result, comparisons to prior periods may not be indicative of future results or future rates of growth.

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.

(“Segment”), the market-leading customer data platform, for a purchase price of $3.0 billion.

The purchase price was paid in the form of shares of our Class A common stock and cash and included fair value of pre-combination services of Segment employees that was embedded in the unvested equity awards which we assumed on the acquisition closing date.

Part of the cash was paid to settle the vested equity awards of Segment employees that were outstanding on the acquisition closing date.

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

Vesting of Class A shares of our common stock and assumed equity awards that were subject to service conditions is recorded into our stock-based compensation expense over the period the services are provided.

This acquisition is described in detail in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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 $2.7 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.

The information with respect to periods prior to the date of acquisition relates to Twilio on a standalone basis, not including Segment.

The information with respect to year 2021 includes Segment results for the full year.

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

Investment in Syniverse Corporation

In February 2021, we entered into a Framework Agreement, as amended, with Syniverse Corporation (“Syniverse”) and Carlyle Partners V Holdings, L.P., (“Framework Agreement”), pursuant to which Syniverse would issue to us shares of Syniverse common stock in consideration for an investment by us of up to $750.0 million, subject to certain terms and conditions.

The initial agreements and conditions to closing of this transaction are described in detail in Note 13(a) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

On February 9, 2022, Syniverse mutually terminated a proposed Agreement and Plan of Merger with M-3 Brigade Acquisition II Corp.

(“MBAC”) because the rate of MBAC shareholder redemptions for the proposed transaction would have exceeded the minimum cash condition for closing, which occurred as a result of recent changes in market conditions (“MBAC Transaction Termination”).

Because of the MBAC Transaction Termination, Twilio will not purchase any shares of common stock of, or make any investment in, MBAC.

The Framework Agreement, dated as of February 26, 2021, by and between Twilio, Syniverse and Carlyle Partners V Holdings, L.P., remains in full force and effect.

The amendment, dated as of August 16, 2021, to the Framework Agreement terminated on February 9, 2022, as a result of the MBAC Transaction Termination.

Pursuant to the terms and subject to the closing conditions set forth in the Framework Agreement, the parties thereto are pursuing the alternative transaction, whereby Twilio will make a minority investment of $500.0 million to $750.0 million in Syniverse and the parties (or their applicable subsidiaries) will enter into a wholesale agreement.

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.

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

Issuance of 2029 and 2031 Senior Notes

In March 2021, we issued and sold $1.0 billion aggregate principal amount of senior notes, consisting of $500.0 million principal amount of 3.625% notes due 2029 (the “2029 Notes”) and $500.0 million principal amount of 3.875% notes due 2031 (the “2031 Notes,” and together with the 2029 Notes, the “Notes”).

The net proceeds from the offering of these Notes were

approximately $984.7 million, after deducting underwriting discounts and issuance costs paid by us.

These Notes are described in detail in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Redemption of Convertible Senior Notes and Capped Call Transactions

During 2021 we issued a notice of redemption for our convertible senior notes due 2023 (the “Convertible Notes”) and on June 2, 2021, we redeemed all of the remaining outstanding principal amount of the notes.

During 2021 and through the date of the redemption, we converted $343.7 million aggregate principal amount of the Convertible Notes by issuing 4,846,965 shares of our Class A common stock.

The extinguishment of these notes resulted in a $29.0 million loss that is included in other (expenses) income, net, in our consolidated statement of operations included elsewhere in this Annual Report on Form 10-K.

Concurrently with the principal redemption, we settled the related capped call arrangements that were entered into contemporaneously with the Convertible Notes offering in May 2018.

The capped call arrangements were settled for gross cash consideration of $229.8 million that we received and recorded as additional paid-in-capital, net of $1.4 million of transaction costs and a $3.2 million realized gain.

These transactions are described in detail in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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 rapid spread of the COVID-19 globally has disrupted, and may continue to disrupt, our day-to-day operations and the operations of our customers, partners and service providers for an indefinite period of time, including as a result of changing public health recommendations, travel restrictions and limitations, the duration, spread and severity and potential recurrence of the virus and its variants, as well as the efficacy of vaccines and vaccine distribution and the timing and trajectory of the economic recovery, all of which could negatively impact our business and results of operations and financial condition.

Since mid-March 2020, we have taken precautionary measures to protect our employees and contingent workers and to help minimize the spread of the virus by temporarily closing our worldwide offices and minimizing business travel.

We have continued to monitor the progress of vaccination efforts around the world.

In the second half of 2021, as COVID-19 related restrictions have eased in some geographies, we commenced a phased reopening for certain offices.

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.

The COVID-19 pandemic and its adverse effects on economic and market conditions, including labor shortages, supply chain disruptions and inflation, have been prevalent in the locations where we, our customers, our suppliers or our third-party business partners conduct business.

These adverse conditions may continue for an extended period and there may be additional impacts to the economy and our business as a result of COVID-19.

This could result in decreased business spending by our customers and prospective customers and business partners and third-party business partners, reduced demand for our solutions, lower renewal rates by our customers, longer or delayed sales cycles, including customers and prospective customers delaying contract signing or contract renewals, or reducing budgets or minimum commitments related to the product and services that we offer, all of which could have an adverse impact on our business operations and financial condition.

See the risk factor titled “The global COVID-19 pandemic may adversely impact our business, results of operations and financial condition” in Part 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

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(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.

(1) Includes the contributions from our Zipwhip business, acquired July 14, 2021;

Twilio Segment business, acquired November 2, 2020;

Twilio SendGrid business, acquired February 1, 2019;

and other smaller acquisitions from the dates of their respective acquisitions except for the Number of Active Customer Accounts, which excludes customer accounts from our Zipwhip business.

(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”).

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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.

Unless an acquisition closes on the first day of a quarter, revenue from an acquisition will not impact this calculation until the quarter following the one year anniversary of the acquisition.

Number of Active Customer Accounts.

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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.

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As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons.

As such, for reporting periods starting with the three months ended December 31, 2016, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric.

As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric.

We believe that measuring Dollar-Based Net Expansion Rate provides a more meaningful indication of the performance of our efforts to increase revenue from existing customers.

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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.

The Dollar-Based Net Expansion Rate is the quotient obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year.

When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period.

Revenue from acquisitions does not impact the Dollar-Based Net Expansion Rate calculation until the quarter following the one-year anniversary of the applicable acquisition, unless the acquisition closing date is the first day of a quarter.

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

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Key Components of Statements of Operations

We derive our revenue primarily from usage‑based fees earned from customers using the software products within our Solutions APIs and Channel APIs.

These usage‑based software products include offerings, such as Programmable Voice, Programmable Messaging and Programmable Video.

Some examples of the usage‑based fees for which we charge include minutes of call duration activity for our Programmable Voice products, number of text messages sent or received using our Programmable Messaging products and number of authentications for our Account Security products.

We derive our revenue primarily from usage‑based fees earned from customers using the software products within our Channel APIs.

These usage‑based software products include offerings, such as Programmable Messaging, Programmable Voice and Programmable Video, among others.

Some examples of the usage‑based fees that we charge include the number of text messages sent or received using our Programmable Messaging products, minutes of call duration activity for our Programmable Voice products and the number of authentications for our Verify product.

In the years ended December 31, 2021, 2020 and 2019, we generated 72%, 76% and 75% of our revenue, respectively, from usage‑based fees.

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.

We also earn monthly flat fees from certain fee‑based products, such as our Email API, Marketing Campaigns, Twilio Flex, our cloud contact center platform, and Twilio Segment, our customer data platform.

When customers first begin using our platform, they typically pay upfront via credit card in monthly prepaid amounts and draw down their balances as they purchase or use our products.

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

Our larger customers often enter into contracts for at least 12 months, that contain minimum revenue commitments, which may contain more favorable pricing.

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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, including Application to Person SMS 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.

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, including A2P SMS fees;

the mix of U.S.

revenue compared to international revenue;

changes in foreign exchange rates;

the timing of amortization of capitalized software development costs and acquired intangibles;

and the extent to which we periodically choose to pass on our cost savings from platform optimization efforts to our customers in the form of lower usage prices.

Operating Expenses.

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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.

We focus our sales and marketing efforts on generating awareness of our company, platform and products, creating sales leads and establishing and promoting our brand, both domestically and internationally.

We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self‑service model with an enterprise sales approach, expanding our sales channels, driving our go‑to‑market strategies, building our brand awareness and sponsoring additional marketing events.

General and Administrative.

General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel and executives.

General and administrative expenses also include costs related to business acquisitions, legal and other professional services fees, certain taxes, depreciation and amortization and an allocation of our general overhead expenses.

General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel.

General and administrative expenses also include costs related to business acquisitions, legal and other professional services fees, certain taxes, depreciation and amortization, charitable contributions and an allocation of our general overhead expenses.

We expect that we will incur costs associated with supporting the growth of our business and to meet the increased compliance requirements associated with our international expansion.

We may also incur higher than usual losses related to deterioration of quality of certain financial assets caused by the macroeconomic conditions and uncertainly in the COVID-19 environment.

Our general and administrative expenses include a certain amount of 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.

Our general and administrative expenses include a certain amount of prior non-income-based taxes in certain domestic and international jurisdictions that we are subject to based on the manner we sell and deliver our products.

Additional details are provided in Note 13(d) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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 Segment and SendGrid acquisitions.

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

Court of Appeals for the Ninth Circuit overturned the U.S.

Tax Court's decision in Altera Corp.

Commissioner and upheld the portion of the Treasury regulations under Section 482 of the Internal Revenue Code that requires related parties in a cost-sharing arrangement to share expenses related to share-based compensation.

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 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.

Our income tax provision or benefit consists primarily of income taxes, withholding taxes in foreign jurisdictions in which the Company conducts business and the tax benefit related to the release of valuation allowance from acquisitions.

The primary difference between our effective tax rate and the federal statutory rate relates to the full valuation allowance the Company established on the federal, state and certain foreign net operating losses and credits.

Non-GAAP Financial Measures:

We use the following non‑GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes.

We believe that non‑GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period‑to‑period comparisons of results of operations and assists in comparisons with other companies, many of which use similar non‑GAAP financial information to supplement their GAAP results.

Non‑GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly‑titled non‑GAAP measures used by other companies.

Whenever we use a non‑GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non‑GAAP financial measures to their most directly comparable GAAP financial measures.

Non‑GAAP Gross Profit and Non‑GAAP Gross Margin.

For the periods presented, we define non‑GAAP gross profit and non‑GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude, as applicable, certain expenses as presented in the table below:

Year Ended December 31,

2021 2020 2019

Reconciliation:

(In thousands)

Gross profit $ 1,390,713 $ 915,661 $ 608,917

Gross margin 49 % 52 % 54 %

Non-GAAP adjustments:

Stock-based compensation 14,074 8,857 7,123

Amortization of acquired intangibles 114,896 59,501 45,267

Payroll taxes related to stock-based compensation — — 104

Non-GAAP gross profit $ 1,519,683 $ 984,019 $ 661,411

Non-GAAP gross margin 53 % 56 % 58 %

Non‑GAAP Operating Expenses .

For the periods presented, we define non‑GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, certain expenses as presented in the table below:

Year Ended December 31,

2021 2020 2019

Reconciliation:

(In thousands)

Operating expenses $ 2,306,297 $ 1,408,562 $ 978,702

Non-GAAP adjustments:

Stock-based compensation (618,211) (353,054) (257,195)

Amortization of acquired intangibles (83,888) (38,993) (27,540)

Acquisition-related expenses (7,449) (21,765) (15,713)

Charitable contributions (31,169) (18,993) —

Payroll taxes related to stock-based compensation (48,417) (27,389) (15,084)

Non-GAAP operating expenses $ 1,517,163 $ 948,368 $ 663,170

Non‑GAAP Income (Loss) from Operations and Non‑GAAP Operating Margin .

For the periods presented, we define non‑GAAP income (loss) from operations and non‑GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude, as applicable, certain expenses as presented in the table below:

Year Ended December 31,

2021 2020 2019

Reconciliation:

(In thousands)

Loss from operations $ (915,584) $ (492,901) $ (369,785)

Operating margin (32) % (28) % (33) %

Non-GAAP adjustments:

Stock-based compensation 632,285 361,911 264,318

Amortization of acquired intangibles 198,784 98,494 72,807

Acquisition-related expenses 7,449 21,765 15,713

Charitable contributions 31,169 18,993 —

Payroll taxes related to stock-based compensation 48,417 27,389 15,188

Non-GAAP income (loss) from operations $ 2,520 $ 35,651 $ (1,759)

Non-GAAP operating margin — % 2 % — %

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods.

We have included 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.

We have included Zipwhip in our results of operations prospectively after July 14, 2021, Twilio Segment after November 2, 2020;

Twilio SendGrid after February 1, 2019, and all other acquisitions from the respective closing dates of each such acquisition.

The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future.

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

Our revenue is primarily derived from usage-based fees we charge for certain of our products, which can lead to variability and at times create significant differences between forecasts and actual results.

In addition, our product mix and mix of international and domestic customers may significantly impact our gross margin.

Because usage trends by geographic region and by customer are inherently difficult to estimate, our actual results could differ materially from our estimates.

Year Ended December 31,

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Other (expenses) income, net (45,345) (11,525) 7,569

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

Benefit (provision) for income taxes 13,447 55,153 (791)

Loss before benefit for income taxes (960,929) (504,426) (362,216)

Benefit for income taxes 11,029 13,447 55,153

Net loss attributable to common

stockholders $ (949,900) $ (490,979) $ (307,063)

Net loss per share attributed to common

Net loss per share attributable to common

stockholders, basic and diluted $ (5.45) $ (3.35) $ (2.36)

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

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

Benefit (provision) for income taxes * * *

Loss before benefit for income taxes (34) (29) (32)

Benefit for income taxes * 1 5

Net loss attributable to common

10 unchanged sentences

2021 compared to 2020

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 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 2021, total revenue increased by $1.1 billion, or 61%, 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, Programmable Voice products and Email products, the adoption of additional products by our existing customers, the additional A2P fees imposed by certain carriers and revenue contributions from our acquisitions of Twilio Segment, Zipwhip and other businesses.

The change in usage from our existing customers was reflected in our Dollar‑Based Net Expansion Rate of 131% for the year ended December 31, 2021.

The increase in usage was also attributable to a 16% increase in the number of Active Customer Accounts, from 221,000 as of December 31, 2020, to over 256,000 as of December 31, 2021.

In 2021, U.S.

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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.

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 14% 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 Segment business.

and revenue contribution from our recent acquisitions.

2020 compared to 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 the Twilio SendGrid business for the period from February 1, 2019 through December 31, 2019.

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 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.

The changes in usage and prices in 2020 were reflected in our Dollar‑Based Net Expansion Rate of 137%.

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.

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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 the acquisition of our Twilio Segment business.

Cost of Revenue and Gross Margin

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In 2021, cost of revenue increased by $605.0 million, or 72%, compared to the same period last year.

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 in cost of revenue was primarily attributable to a $465.5 million increase in network service providers’ costs, which included the additional A2P fees imposed by certain carriers, and a $44.2 million increase in cloud infrastructure fees, all to support the growth in usage of our products.

The increase was also due to a $55.4 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.

In addition, the year ended December 31, 2021, included cost of revenue from our recent acquisitions.

In 2021, the gross margin percentage declined compared to the same period last year.

This decline was primarily driven by continued strong growth of our international messaging business, the additional A2P fees imposed by certain carriers and an increase in network service provider fees in certain geographies, which we pass to our customers at cost.

The decline was also due to an increase in amortization expense related to our acquired intangible assets, These declines were partially offset by the growth of our other application services products, the impact of the acquisition of our Twilio Segment business and certain operational improvements.

2020 compared to 2019

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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 the same period last year.

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

Operating Expenses

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The increase was primarily attributable to a $225.0 million increase in personnel costs, net of a $15.7 million increase in capitalized software development costs, largely as a result of a 54% 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 addition, the year ended December 31, 2021 included research and development expenses and the impact of growth in headcount from our recent acquisitions.

In 2021, sales and marketing expenses increased by $477.2 million, or 84%, 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 primarily attributable to a $331.5 million increase in personnel costs, largely as a result of a 74% average increase in sales and marketing headcount, as we continued to expand our sales efforts globally.

The increase was also due to a $43.6 million increase related to the amortization of acquired intangible assets and a $31.6 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 addition, the year ended December 31, 2021 included sales and marketing expenses and the impact of growth in headcount from our recent acquisitions.

In 2021, general and administrative expenses increased by $161.9 million, or 52%, 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.

The increase was primarily attributable to a $142.1 million increase in personnel costs, largely as a result of a 75% average increase in general and administrative headcount, to support the growth of our business globally.

The increase was also due to a $12.2 million increase in charitable contributions that we made through Twilio.org, $11.2 million increase in professional service fees incurred in the ordinary course of business, offset by a $14.2 million decrease in professional services related to our acquisitions.

In addition, the year ended December 31, 2021 included general and administrative expenses and the impact of growth in headcount from our recent acquisitions.

2020 compared to 2019

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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 SendGrid business.

The increase was also due to a $16.5 million increase in facilities and depreciation expenses to accommodate the growth in our headcount.

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

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, the year ended December 31, 2020 included research and development expenses and headcount from our recent acquisitions.

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 $117.3 million increase in personnel costs, largely as a result of a 93% average increase in sales and marketing headcount, as we continued to expand our sales efforts in the United States and internationally.

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

The increase was also due to a $26.4 million increase related to the amortization of acquired intangible assets, a $16.4 million increase in advertising expenses and an $11.4 million increase in facilities and related expenses.

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

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, the year ended December 31, 2020, included sales and marketing expenses and headcount from our recent acquisitions.

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 $74.3 million increase in personnel costs, largely as a result of a 64% 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 SendGrid business.

The increase was also due to a $11.7 million increase in professional expenses related to our acquisitions of other business and a $6.5 million increase in facilities and depreciation expenses.

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.

Quarterly Results of Operations

The following tables set forth our unaudited quarterly statements of operations data for each of the eight quarters within the two years ended December 31, 2020, as well as the percentage that each line item represents of our revenue for each quarter presented.

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 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.

The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Consolidated Statements of Operations:

Three Months Ended

(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 (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)

Benefit (provision) for income taxes 51,721 2,033 2,555 (1,156) (977) (294) (648) 15,366

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:

Three Months Ended

(Unaudited, in thousands)

Cost of revenue $ 1,809 $ 1,623 $ 1,674 $ 2,017 $ 1,837 $ 2,143 $ 2,237 $ 2,640

Research and development 25,339 33,701 34,348 32,624 33,209 39,841 46,294 53,959

Sales and marketing 11,749 14,564 16,143 18,430 19,943 23,086 26,573 33,848

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:

Three Months Ended

(Unaudited, in thousands)

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

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:

Research and development 33 36 35 33 31 30 31 29

Sales and marketing 31 33 34 32 32 32 31 33

General and administrative 28 20 16 16 15 15 15 23

Total operating expenses 92 89 86 81 78 78 77 85

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

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 stockholders (16) % (34) % (30) % (27) % (26) % (25) % (26) % (33) %

____________________________________

* Less than 0.5% of revenue.

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

Three Months Ended

(Unaudited, dollars in thousands)

Number of Active Customer Accounts

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

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 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."

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

Quarterly Trends in Revenue and Gross Margin

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.

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 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.

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, the year ended December 31, 2021 included general and administrative expenses and headcount from our recent acquisitions.

Liquidity and Capital Resources

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;

(iii) the net proceeds of approximately $537.0 million, after deducting purchaser discounts and debt issuance costs paid by us, from issuance of the 0.25% convertible senior notes due 2023 (the "Notes"), as described in Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K;

and (iv) the payments received from customers using our products.

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.

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

(ii) the aggregate net proceeds of approximately $537.0 million, after deducting purchaser discounts and debt issuance costs paid by us, from the issuance of our Convertible Notes in May 2018;

(iii) the aggregate net proceeds of approximately $984.7 million, after deducting purchaser discounts and debt issuance costs paid by us, from the issuance of our 2029 Notes and 2031 Notes in March 2021;

(iv) the net proceeds of $228.4 million, after deducting transaction costs paid by us, from settlement of our capped call arrangements in June 2021;

and (v) the payments received from customers using our products.

Our primary uses of cash include operating costs, such as personnel-related costs, network service provider costs, cloud infrastructure costs, facility-related spending, as well as acquisitions and investments.

Refer to Note 6, Note 10, Note 13(a) and Note 18 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for detailed discussions of our obligations and commitments related to leases, debt, other purchase obligations and our proposed minority investment in Syniverse Corporation.

We may, from time to time, consider acquisitions of, or investments in, complementary businesses, products, services, capital infrastructure or technologies which might affect our liquidity requirements, cause us to secure additional financing or issue additional equity or debt securities.

There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all.

We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for the next 12 months and beyond.

However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect.

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(In thousands)

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

Cash (used in) provided by operating activities $ (58,192) $ 32,654 $ 14,048

Cash (used in) investing activities (2,489,996) (845,855) (1,285,792)

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Cash Flows from Operating Activities

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.

In 2021, cash used in operating activities consisted primarily of our net loss of $949.9 million adjusted for non-cash items, including $632.3 million of stock-based compensation expense, $17.2 million of tax benefit related to release of valuation allowance in connection with our Zipwhip and prior acquisitions, $258.4 million of depreciation and amortization expense, $5.8 million amortization of the debt discount and issuance costs related to our long-term debt, $48.8 million of non-cash reduction to our operating right-of-use asset, $31.5 million amortization of deferred commissions and $185.1 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $196.0 million primarily due to revenue growth, the timing of cash receipts and pre-payments for cloud infrastructure fees and certain operating expenses.

Accounts payable and other current liabilities increased $137.7 million primarily due to increases in transaction volumes.

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Other long-term assets increased $121.2 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.

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 long-term debt, $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.

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Operating lease liability decreased $33.9 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.

In 2018, cash provided by operating activities consisted primarily of our net loss of $121.9 million adjusted for non-cash items, including $93.3 million of stock-based compensation expense, $26.1 million of depreciation and amortization expense, $14.1 million amortization of the debt discount and issuance costs related to our Notes and $14.8 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $67.0 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 $52.1 million and deferred revenue and customer deposits increased $6.0 million primarily due to increases in transaction volumes.

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.

Cash Flows from Investing Activities

In 2021, cash used in investing activities was $2.5 billion primarily consisting of $1.9 billion of purchases of marketable securities and other investments, net of maturities and sales, $491.5 million of net cash paid to acquire other businesses as described in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, $44.0 million related to capitalized software development costs and $46.0 million related to purchases of long-lived assets.

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 7 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 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 2021, cash provided by financing activities was $3.1 billion primarily consisting of $1.8 billion in net proceeds from our public equity offering, as described in Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K;

$984.7 million in net proceeds from the issuance of our 2029 Notes and 2031 Notes and $228.4 million in net proceeds from the settlement of the capped call transactions related to our Convertible Notes, which were fully redeemed during 2021, as described in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K;

and $136.2 million in 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 14 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.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Other Commitments

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

(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

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(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) 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.

Segment Information

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Therefore, we consider these to be our critical accounting policies and estimates.

See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our accounting policies.

Revenue Recognition

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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, 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.

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 Twilio Segment business, which acquisition is further described in Note 7 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 from one to three years.

Our arrangements do not contain general rights of return.

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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