What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-22 · 250 added, 229 removed, 231 unchanged (67% of the section changed)

2 unchanged sentences

In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.

Our fiscal year ends on December 31.

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.

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, 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.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part II, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.

We enable businesses to reinvent how they engage with their customers.

We have seen customer expectations evolve over time whereas the customers have been increasingly requiring more personalized and seamless experiences when they interact with a business.

We believe that these experiences are achievable if the businesses understand their customers on a deeper level and communicate with them in the manner and over the channels the customers prefer.

We believe that it is no longer sufficient to think about customer engagement in separate contexts of marketing, customer support and product.

Our leading customer engagement platform (“CEP”) solves this problem.

Our customer engagement platform empowers businesses to create the exact solutions they need to engage their customers at every step of the customer journey through real-time, relevant, personalized communications over a customer preferred communications channel and fuel these communications with real-time comprehensive customer data.

With our platform, businesses can personalize every transaction with their customers, build lasting loyalty, cut customer acquisition costs and increase customer lifetime value.

For a comprehensive overview of our business, our platform and our products refer to Part I, Item 1, “Business,” included elsewhere on this Annual Report on Form 10-K.

As we announced on February 13, 2023, moving forward we will operate as two separate business units:

Twilio Communications and Twilio Data & Applications (previously referred to as Software).

For future periods, we will refer to our products and revenue that were previously termed as “Software products and revenue” as “Data & Applications products and revenue.”

We have experienced substantial growth in our business since inception.

Our growth has predominantly been organic and from time to time we complemented it with strategic business acquisitions.

In the years ended December 31, 2022, 2021, and 2020, our revenue was $3.8 billion, $2.8 billion and $1.8 billion, respectively, and our net loss was $1.3 billion, $949.9 million and $491.0 million, respectively.

In the years ended December 31, 2022, 2021, and 2020, our 10 largest Active Customer Accounts generated an aggregate of 12%, 11% and 14% 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.

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 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 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

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 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

We review a number of operational and financial metrics, including Active Customer Accounts and Dollar-Based Net Expansion Rate, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.

The following table summarizes our revenue growth, our number of Active Customer Accounts and Dollar-Based Net Expansion Rate for 2022, 2021 and 2020.

Year Ended December 31,

2022 2021 2020

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

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

290,000 256,000 221,000

6 unchanged sentences

____________________

(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”).

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

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

(1) Excludes Active Customer Accounts from Zipwhip in 2021 and 2022.

(2) Includes revenue from Zipwhip, acquired July 14, 2021, Twilio Segment, acquired November 2, 2020, and other smaller acquisitions starting from the date of each respective acquisition.

Total revenue growth rate measures year-over-year revenue growth.

(3) 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.

We believe that the number of Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends.

Active Customer Accounts

We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period.

We believe that use of our platform by customers at or above the $5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below $5 per month.

In the years ended December 31, 2021, 2020 and 2019, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

A single organization may constitute multiple unique Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account.

We believe that the number of Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends.

The number of Active Customer Accounts is rounded down to the nearest thousand .

In the three years ended December 31, 2022, 2021 and 2020, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

Dollar‑Based Net Expansion Rate

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing Active Customer Accounts and to increase their use of the platform.

Our Dollar-Based Net Expansion Rate compares the total revenue from all Active Customer Accounts in a quarter to the same quarter in the prior year.

To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts that were Active Customer Accounts in the same quarter of the prior year.

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

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.

An important way in which we have historically tracked performance in this area is by measuring the Dollar-Based Net Expansion Rate for Active Customer Accounts.

3 unchanged sentences

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.

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

For reporting periods starting with the three months ended March 31, 2020, our Dollar-Based Net Expansion Rate compares the revenue from all Active Customer Accounts in a quarter to the same quarter in the prior year.

To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts that were Active Customer Accounts in the same quarter of the prior year.

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.

Net Loss Carryforwards

At December 31, 2021, we had federal, state and foreign net operating loss carryforwards of approximately $4.2 billion, $2.7 billion and $268.7 million, respectively, and federal and state tax credits of approximately $132.9 million and $84.9 million, respectively.

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

The state tax credits can be carried forward indefinitely.

At present, we believe that it is more likely than not that the federal and state net operating loss and credit carryforwards will not be realized.

Accordingly, a full valuation allowance has been established for these tax attributes, as well as the rest of the federal and state deferred tax assets.

Key Components of Statements of Operations

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.

We derive the majority of our revenue from usage‑based fees earned from our communications products when customers access our cloud-based platform.

Our usage‑based products primarily include offerings, such as Programmable Messaging, Programmable Voice, Twilio Verify and others.

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

In the years ended December 31, 2022, 2021 and 2020, we generated 73%, 72% and 76% 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, Twilio Flex, our cloud contact center platform, and Twilio Segment, our customer data platform.

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

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

Customers on such contracts typically are invoiced monthly in arrears for products used.

We earn monthly subscription-based fees from more complex software products and solutions on our platform, such as our customer data platform Twilio Segment, our customer engagement solution Twilio Engage, our cloud contact center Twilio Flex and certain other fee‑based products, such as our Email API.

Our communications products that are embedded into our complex software products are charged separately on a usage basis.

Customers gain access to our products and solutions either through an e-commerce self service sign-up format which requires an upfront prepayment via credit card that is drawn down as they use our products;

or for our larger customers, including enterprise customers, a negotiated contract is established for at least 12 months that contain minimum revenue commitments and which may contain more favorable pricing.

Customers on such contracts are typically either invoiced monthly in arrears for products used or invoiced in advance at the start of the term.

Amounts that have been charged via credit card or invoiced are recorded in revenue, deferred revenue or customer deposits, depending on whether the revenue recognition criteria have been met.

1 unchanged sentence

We define U.S.

revenue as revenue from customers with IP addresses or mailing addresses at the time of registration in the United States, and we define international revenue as revenue from customers with IP addresses or mailing addresses at the time of registration outside of the United States.

revenue as revenue from customers with IP addresses or mailing addresses at the time of registration in the United States.

We define international revenue as revenue from customers with IP addresses or mailing addresses at the time of registration outside of the United States.

Cost of Revenue and Gross Margin

Cost of Revenue .

Cost of revenue consists primarily of fees paid to network service providers.

Cost of revenue also includes cloud infrastructure fees, direct costs of personnel, such as salaries and stock‑based compensation for our customer support employees, and non‑personnel costs, such as depreciation and amortization expense related to data centers and hosting equipment, amortization of capitalized internal use software development costs and acquired intangibles.

Cost of revenue also includes cloud infrastructure fees, direct costs of personnel, such as salaries and stock‑based compensation for our customer support employees, and other non‑personnel costs, such as depreciation and amortization expense related to data centers and hosting equipment, amortization of capitalized internal-use software development costs and acquired intangible assets.

Our arrangements with network service providers require us to pay fees based on the volume of phone calls initiated or text messages sent, as well as the number of telephone numbers acquired by us to service our customers.

Our arrangements with our cloud infrastructure provider require us to pay fees based on our server capacity consumption.

Gross Margin.

Gross margin is gross profit expressed as a percentage of revenue.

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;

5 unchanged sentences

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.

and the extent to which we periodically choose to adjust prices of our products.

Operating Expenses

1 unchanged sentence

We also incur other non‑personnel costs related to our general overhead expenses.

We expect that our operating costs will increase in absolute dollars as we add additional employees and invest in our infrastructure to grow our business.

Research and Development.

Research and development expenses consist primarily of personnel costs, outsourced engineering services, cloud infrastructure fees for staging and development, amortization of capitalized internal use software development costs, depreciation and an allocation of our general overhead expenses.

Research and development expenses consist primarily of personnel costs, outsourced engineering services, cloud infrastructure fees for staging and development of our products, depreciation, amortization of capitalized internal-use software development costs and an allocation of our general overhead expenses.

We capitalize the portion of our software development costs that meets the criteria for capitalization.

We continue to focus our research and development efforts on adding new features and products, including new use cases, improving our platform and increasing the functionality of our existing products.

We are focusing our research and development investment in the highest impact product areas for our future.

We are investing strategically in alignment with our focus on building a trusted leading customer engagement platform.

Sales and Marketing.

Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees.

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

Sales and marketing expenses consist primarily of personnel costs, including commissions and bonuses to our sales employees.

Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, costs related to our SIGNAL customer and developer conferences, credit card processing fees, professional services fees, depreciation, amortization of acquired intangible assets and an allocation of our general overhead expenses.

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

We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our 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.

2 unchanged sentences

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

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

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

Additional details are provided in Note 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 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.

We may also incur higher than usual losses related to deterioration of quality of certain financial assets caused by the macroeconomic conditions.

Restructuring Costs.

Restructuring costs consist primarily of personnel costs, such as employee severance payments, benefits and certain facilitation costs, associated with our workforce reductions, which are described in Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Restructuring costs also include stock-based compensation expense related to vesting of stock-based awards of the impacted employees.

Impairment of Long-Lived Assets.

Impairment of long-lived assets consists primarily of impairment charges allocated to the carrying amount of certain operating right-of-use assets and the associated leasehold improvements and property and equipment when the carrying amounts exceed their respective fair values.

(Provision for) Benefits From Income Taxes

Our (provision for) benefit from income taxes consists primarily of income taxes, withholding taxes in foreign jurisdictions in which the Company conducts business and tax benefits related to the release of valuation allowance from historically completed 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.

1 unchanged sentence

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 financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP 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 GAAP.

The users of our consolidated financial statements 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

4 unchanged sentences

(In thousands)

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

Gross margin 49 % 52 % 54 %

GAAP gross profit $ 1,813,577 $ 1,390,713 $ 915,661

GAAP gross margin 47 % 49 % 52 %

Non-GAAP adjustments:

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

Share-based compensation 21,136 14,074 8,857

Amortization of acquired intangibles 122,653 114,896 59,501

8 unchanged sentences

(In thousands)

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

GAAP operating expenses $ 3,018,885 $ 2,306,297 $ 1,408,562

Non-GAAP adjustments:

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

Share-based compensation (763,149) (618,211) (353,054)

Amortization of acquired intangibles (83,528) (83,888) (38,993)

Acquisition related expenses (2,621) (7,449) (21,765)

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

Payroll taxes related to stock-based compensation (23,293) (48,417) (27,389)

Charitable contribution (9,541) (31,169) (18,993)

Restructuring costs (76,636) — —

Impairment of long-lived assets (97,722) — —

Non-GAAP operating expenses $ 1,962,395 $ 1,517,163 $ 948,368

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:

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

For the periods presented, we define non‑GAAP (loss) income from operations (which we may refer to as “non-GAAP operating profit” or “non-GAAP profit 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,

2 unchanged sentences

(In thousands)

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

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

GAAP loss from operations $ (1,205,308) $ (915,584) $ (492,901)

GAAP operating margin (32) % (32) % (28) %

Non-GAAP adjustments:

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

Share-based compensation 784,285 632,285 361,911

Amortization of acquired intangibles 206,181 198,784 98,494

Acquisition related expenses 2,621 7,449 21,765

Charitable contributions 31,169 18,993 —

Payroll taxes related to stock-based compensation 23,832 48,417 27,389

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

Charitable contribution 9,541 31,169 18,993

Restructuring costs 76,636 — —

Impairment of long-lived assets 97,722 — —

Non-GAAP (loss) income from operations $ (4,490) $ 2,520 $ 35,651

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 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.

Factors Affecting Our Performance

We believe that the future success of our business and our results of operations may be significantly affected by many factors, including the factors described below and those outlined in Part II, Item 1A, “Risk Factors.”

Usage-Based Fees.

The majority of our revenue is derived from usage-based fees that we charge primarily for our communications 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.

Because usage trends by geographic region and by customer are inherently difficult to estimate, our actual results could differ significantly from our estimates, particularly if market and industry specific conditions continue to shift.

Macroeconomic and Geopolitical Factors.

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

Key Developments

Share Repurchase Program.

In February 2023, our board of directors authorized a share repurchase program to repurchase $1.0 billion of our Class A common stock over time.

Under the program, we may purchase shares from time to time through open market transactions, privately negotiated transactions and other means in compliance with applicable securities laws, including through Rule 10b5-1 plans.

The program is set to expire on December 31, 2024.

The timing, manner, price and amount of any repurchases are determined by us at our discretion and depend on a variety of factors, including legal requirements, price and economic market conditions.

Business Unit Reorganization .

In February 2023, we announced the reorganization of our business into two business units:

Twilio Communications and Twilio Data & Applications.

We believe that this strategic realignment will enable us to better execute on the key priorities for each side of our business—driving efficiencies for Communications and accelerating growth for Data & Applications—while accounting for each business unit’s unique economic, customer, and product needs.

These two business units can execute toward their respective financial goals with more focus and independence—but they are also highly complementary.

Our Data & Applications business benefits from our underlying communications platform and our substantial active customer base.

Our success in Data & Applications also drives more intelligence for our Communications products.

Together, they address adjacent buyers and related problems that our customers have.

We also believe that driving efficiencies in our Communications business and establishing it as our major profit engine will allow us to continue to invest in our Data & Applications business to drive growth, capture market share, and increase our gross margin.

Workforce Reduction Plans.

In September 2022, the compensation and talent management committee of our board of

directors approved a restructuring plan that was designed to reduce operating costs, improve operating margins and shift our selling capacity to accelerate software sales (the “September Plan”).

The September Plan eliminated approximately 11% of our global workforce.

During 2022, we recorded an aggregate restructuring expense of $76.6 million in our consolidated statement of operations in connection with the September Plan, consisting of employee transition, notice period and severance payments, employee benefits, and related facilitation costs.

The execution of the September Plan was substantially complete as of December 31, 2022.

For further details on this event refer to Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In February 2023, we committed to a workforce reduction plan (the “February Plan”), that in addition to the September Plan, is intended to reduce operating costs, improve operating margins, and accelerate profitability.

The February Plan included the elimination of approximately 17% of our workforce.

We estimate that we will incur approximately $100.0 to $135.0 million in charges in connection with the February Plan, consisting of cash expenditures for employee transition, notice period and severance payments, employee benefits, and related facilitation costs.

We expect that the majority of the restructuring charges related to the February Plan will be incurred in the first quarter of 2023 and that the execution of the February Plan, including cash payments, will be substantially complete by the end of the second quarter of 2023.

Remote-First Company.

In May 2022, we announced our decision to become a remote-first company, giving employees the flexibility to work remotely on a permanent basis.

As part of our new operating strategy, in the third quarter, we permanently closed several of our office locations (the “2022 Closures”), which resulted in an impairment of several long-lived assets, including our operating leases, leasehold improvement and property and equipment.

During 2022, we recorded a total impairment loss of $97.7 million and expect to record an estimated additional loss of approximately $7.0 million to $10.0 million in the first quarter of 2023 related to the 2022 Closures.

In February 2023, we announced that we will permanently close additional office locations.

The February announcement will result in an additional impairment of approximately $10.0 to $25.0 million that will be recorded during 2023 as the exit activities are finalized in each location.

Investment in Syniverse Corporation.

In May 2022, we acquired 44.55% equity interests in Syniverse Corporation (“Syniverse”) for $750.0 million in cash.

We do not have a controlling financial interest in Syniverse but we can exercise significant influence and therefore, the investment was accounted for under the equity method.

In our statement of operations we record our proportional share of Syniverse net earnings or losses as they occur.

We also record the amortization of basis difference in certain intangible assets that we valued to fair value on the transaction closing date, as required by the accounting standards.

For more details on the nature of this transaction, accounting treatment and the impact to our financial statements refer to Note 2(w) and Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Sabbatical Program.

In February 2023, we announced that we will be sunsetting our employee sabbatical program that we introduced effective July 1, 2022.

The sabbatical program was intended to provide our tenured employees with a paid sabbatical leave of four consecutive weeks.

Employees who had already accumulated more than three years of tenure with us as of the program’s effective date became immediately eligible for their sabbatical leaves.

As of December 31, 2022, we carried a $30.7 million liability related to this program.

Sunsetting of this program will result in an estimated $10.0 million one-time non-cash benefit that will be recorded in the first quarter of 2023.

Results of Operations

The following table sets forth our results of operations for the periods presented.

We have included Zipwhip in our results of operations prospectively after its closing date of July 14, 2021;

Twilio Segment after its closing date of November 2, 2020;

and all other acquisitions from the respective closing dates of each acquisition.

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

Year Ended December 31,

13 unchanged sentences

517,414 472,460 310,607

Restructuring costs (1)

Impairment of long-lived assets 97,722 — —

Total operating expenses 3,018,885 2,306,297 1,408,562

Loss from operations (1,205,308) (915,584) (492,901)

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

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)

Other expenses, net:

Share of losses from equity method investment (35,315) — —

Other expenses, net (3,009) (45,345) (11,525)

Total other expenses, net (38,324) (45,345) (11,525)

Loss before (provision for) benefit from income taxes (1,243,632) (960,929) (504,426)

(Provision for) benefit from income taxes (12,513) 11,029 13,447

Net loss attributable to common stockholders $ (1,256,145) $ (949,900) $ (490,979)

Net loss per share attributable to common

12 unchanged sentences

General and administrative 148,194 146,188 76,301

Restructuring costs 14,275 — —

Total $ 798,560 $ 632,285 $ 361,911

9 unchanged sentences

Total $ 206,181 $ 198,784 $ 98,494

The following table sets forth our results of operations for each of the periods presented as a percentage of our total revenue:

Year Ended December 31,

8 unchanged sentences

General and administrative 14 17 18

Restructuring costs 2 — —

Impairment of long-lived assets 3 — —

Total operating expenses 79 81 80

Loss from operations (32) (32) (28)

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

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

Benefit for income taxes * 1 5

Other expenses, net

Share of losses from equity method investment (1) — —

Other expenses, net * (2) (1)

Total other expenses, net (1) (2) (1)

Loss before (provision for) benefit from income taxes (33) (34) (29)

(Provision for) benefit from income taxes * * 1

Net loss attributable to common

3 unchanged sentences

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

Comparison of the Fiscal Years Ended December 31, 2021, 2020 and 2019

Comparison of Fiscal Years Ended December 31, 2022, 2021 and 2020

Year Ended December 31,

2021 2020 2019 2020 to 2021

Change 2019 to 2020

2022 2021 2020 2021 to 2022 Change 2020 to 2021 Change

(Dollars in thousands)

1 unchanged sentence

2022 compared to 2021

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 2022, total revenue increased by $984.5 million, or 35%, compared to the same period last year.

This increase was primarily attributable to an increase in the usage of our products by our existing customers as reflected in our Dollar-Based Net Expansion Rate of 121%, as well as a 13% increase in the number of Active Customer Accounts, from over 256,000 as of December 31, 2021, to over 290,000 as of December 31, 2022.

This growth in usage and Active Customer Accounts helped to drive a $650.0 million increase in Programmable Messaging revenue, a $46.3 million increase in Programmable Voice revenue, a $56.1 million increase in Email revenue and a $115.5 million increase in revenue related to our software products.

In 2022, U.S.

revenue and international revenue represented $1.9 billion or 66%, and $960.0 million, or 34%, respectively, of total revenue.

revenue and international revenue represented $2.5 billion, or 66%, and $1.3 billion, or 34%, respectively, of total revenue.

In 2021, U.S.

revenue and international revenue represented $1.9 billion, or 68%, and $914.5 million, or 32%, 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 recent acquisitions.

The increase in international revenue was attributable to the growth in usage of our products by our existing customers as reflected in our overall Dollar-Based Net Expansion Rate of 121%, as well as a 13% increase in the number of international Active Customer Accounts.

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 prices 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 the acquisition of our Twilio Segment business.

In 2021, total revenue increased by $1.1 billion, or 61%, compared to the same period in the prior year.

This increase was primarily attributable to increases in the usage of our products by our existing customers, as reflected in our Dollar‑Based Net Expansion Rate of 131%, as well as 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.

This growth in usage and Active Customer Accounts helped to drive a $403.4 million increase in Programmable Messaging revenue, exclusive of A2P fees and revenue contributions from recent acquisitions;

a $83.4 million increase in Programmable Voice revenue;

a $58.7 million increase in Email revenue;

and a $74.7 million increase from the additional A2P fees imposed by certain carriers, exclusive of Zipwhip A2P fees.

The increase in total revenue was also due to the increases in revenue contributions from our acquisitions, including, $178.0 million from Twilio Segment, $55.4 million from Zipwhip and $63.2 million from other businesses.

In 2021, U.S.

1 unchanged sentence

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.

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 the acquisition of our Twilio Segment business.

and revenue contribution from our recent acquisitions.

Cost of Revenue and Gross Margin

Year Ended December 31,

2021 2020 2019 2020 to 2021

Change 2019 to 2020

2022 2021 2020 2021 to 2022 Change 2020 to 2021 Change

(Dollars in thousands)

3 unchanged sentences

In 2022, cost of revenue increased by $561.6 million, or 39%, compared to the same period last year.

The increase in cost of revenue was primarily attributable to a $449.7 million increase in network service providers’ costs and a $36.5 million increase in cloud infrastructure fees, all to support the growth in usage of our products.

In 2022, gross margin declined compared to the same period last year.

This decline was primarily driven by a 120 basis point decrease in our messaging margins, driven by strong growth in our lower margin international messaging business.

2021 compared to 2020

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

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.

1 unchanged sentence

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

In 2020, cost of revenue increased by $320.6 million, or 61%, 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 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.

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, which we pass to our customers at cost.

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

In 2021, gross margin declined compared to the same period in the prior year.

This decline was primarily driven by a 150 basis point decrease caused by strong growth in our lower margin international messaging business, a 150 basis point decrease caused by the additional A2P fees imposed by certain carriers and a 110 basis point decrease caused primarily by an increase in network service provider fees in certain geographies.

We pass both A2P fees and network service provider fees to our messaging customers at cost, resulting in decreases to gross margin.

The decline was offset by a 120 basis point increase due to the impact of the acquisition of our Twilio Segment business.

The remaining change in gross margin was driven by items with smaller impacts, including a 70 basis point decrease due to amortization expense related to our acquired intangible assets and a 50 basis point increase due to certain operational improvements and the growth of our other application services products.

Operating Expenses

Year Ended December 31,

2021 2020 2019 2020 to 2021

Change 2019 to 2020

2022 2021 2020 2021 to 2022 Change 2020 to 2021 Change

(Dollars in thousands)

2 unchanged sentences

General and administrative 517,414 472,460 310,607 44,954 10 % 161,853 52 %

Restructuring costs 76,636 — — 76,636 100 % — — %

Impairment of long-lived assets 97,722 — — 97,722 100 % — — %

Total operating expenses $ 3,018,885 $ 2,306,297 $ 1,408,562 $ 712,588 31 % $ 897,735 64 %

1 unchanged sentence

In 2022, research and development expenses increased by $289.9 million, or 37%, compared to the same period last year.

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.

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

The increase was primarily attributable to a $264.4 million increase in personnel costs, net of capitalized costs, largely as a result of a 33% average increase in our research and development headcount as we continued to focus on enhancing our Twilio Segment and Flex products and strengthening our platform infrastructure.

In 2022, sales and marketing expenses increased by $203.4 million, or 19%, compared to the same period last year.

The increase was primarily attributable to a $175.5 million increase in personnel costs, largely as a result of a 26% 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, the year ended December 31, 2021 included sales and marketing expenses and the impact of growth in headcount from our recent acquisitions.

The increase was also due to a $13.4 million increase in advertising expenses.

In 2022, general and administrative expenses increased by $45.0 million, or 10%, compared to the same period last year.

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.

The increase was primarily attributable to a $32.0 million increase in personnel costs, comprised of a $29.9 million, or 20%, increase in personnel costs before stock-based compensation, and a $2.0 million increase in stock-based compensation.

The increase in personnel costs were largely a result of a 21% average increase in general and administrative headcount to support the growth of our business globally.

The increase was also attributable to a $28.3 million increase in our bad debt expense.

These increases were partially offset by a $21.6 million decrease in charitable contribution expense that we made through Twilio.org.

In 2022, we incurred $76.6 million in restructuring costs as a result of the September Plan approved by the compensation and talent management committee of our board of directors during the third quarter of 2022.

For further detail refer to Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In 2022, we incurred $97.7 million in impairment charges related to our operating lease assets and other long-lived assets.

The impairment charges were triggered by the office closures in 2022.

For further detail refer to Note 5 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

2021 compared to 2020

In 2020, research and development expenses increased by $139.2 million, or 36%, compared to the same period last year.

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.

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 $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.

In 2021, research and development expenses increased by $258.7 million, or 49%, compared to the same period in the prior year.

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, including as a result of acquisitions, as we continued to focus on enhancing our existing products, introducing new products as well as enhancing product management and other technical functions.

In 2021, sales and marketing expenses increased by $477.2 million, or 84%, compared to the same period in the prior year.

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, including as a result of acquisitions, 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, 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 $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 globally.

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.

In 2021, general and administrative expenses increased by $161.9 million, or 52%, compared to the same period in the prior year.

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, including as a result of acquisitions, to support the growth of our business globally.

Liquidity and Capital Resources

As of December 31, 2022, we had cash and cash equivalents of $651.8 million and short-term marketable securities of $3.5 billion.

Cash and cash equivalents consist of money market funds, reverse repurchase agreements and commercial paper.

Short-term marketable securities consist primarily of U.S.

treasury securities, non-U.S.

government securities, high credit quality corporate debt securities and commercial paper.

The cash and cash equivalents and short-term marketable securities are held for working capital purposes.

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.

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

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

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

Our principal contractual and other commitments consist of obligations under our 2029 Notes and 2031 Notes, our operating leases for office space that we occupy, sublease or hold to sublease, and contractual commitments to our cloud infrastructure and network service providers.

Refer to Note 8, Note 13 and Note 16(a) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for discussions of our obligations and commitments related to leases, debt and other purchase obligations.

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.

2 unchanged sentences

If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

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

Additionally, cash from operations could also be affected by various risks and uncertainties in connection with the impact of an economic downturn or recession, significant market volatility in the global economy, timing and ability to collect payments from our customers and other risks detailed in Part I, Item 1A, “Risk Factors.”

Share Repurchase Program

In February 2023, our board of directors authorized a share repurchase program to repurchase $1.0 billion of our Class A common stock over time.

Under the program, we may purchase shares from time to time through open market transactions, privately negotiated transactions, and other means in compliance with applicable securities laws, including through Rule 10b5-1 plans.

The program is set to expire on December 31, 2024.

The timing, manner, price and amount of any repurchases are determined by us at our discretion and depend on a variety of factors, including legal requirements, price and economic market conditions.

2029 Notes and 2031 Notes

These Notes are described in detail in Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The following table summarizes our cash flows:

6 unchanged sentences

Effect of exchange rate changes on cash, cash equivalents and restricted cash 60 (191) 40

Net increase (decrease) in cash, cash equivalents and restricted cash $ 547,946 $ 680,150 $ (251,599)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (825,753) $ 547,946 $ 680,150

Cash Flows from Operating Activities

In 2022, cash used in operating activities consisted primarily of our net loss of $1.3 billion adjusted for non-cash items, including $798.6 million of stock-based compensation expense reflecting the impact of the September Plan, $279.1 million of depreciation and amortization expense, $97.7 million of impairment of operating lease assets and other long-lived assets, $57.9 million amortization of deferred commissions, $47.2 million of non-cash reduction in our operating right-of-use asset, $35.3 million of share of losses from equity method investments, $35.0 million of allowance for credit losses, $33.2 million of net amortization of investment premium and discount and $396.6 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $289.0 million primarily due to revenue growth, timing of cash receipts and pre-payments of our cloud infrastructure fees and certain operating expenses.

Accounts payable and other current liabilities increased $105.8 million primarily due to increases in transaction volumes, the impact from the new sabbatical employee benefit that we introduced effective July 1, 2022.

Operating lease liabilities decreased $54.5 million due to payments made against our operating lease obligations.

Other long-term assets increased $146.5 million primarily due to an increase in the sales commissions balances related to the growth of our business.

The impairment of operating lease assets and other long lived assets is described further in Note 5 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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.

3 unchanged sentences

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 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.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $92.9 million primarily due to the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses.

Accounts payable and other current liabilities increased $98.4 million primarily due to increases in transaction volumes.

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

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

Cash Flows from Investing Activities

In 2022, cash used in investing activities was $616.5 million primarily consisting of $498.9 million of purchases of marketable securities and other investments, net of maturities and sales, $45.8 million related to capitalized software development costs, $37.4 million of net cash paid to acquire other businesses and $34.4 million related to purchases of long-lived assets.

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 9 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.

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.

Off-Balance Sheet Arrangements

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

In 2022, cash provided by financing activities was $45.0 million primarily consisting of $59.6 million in proceeds from stock options exercised by our employees and shares issued under our 2016 Employee Stock Purchase Plan (the “ESPP”), offset by $13.4 million in principal payments on debt and finance leases.

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 17 to the 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 senior notes due 2023, which were fully redeemed during 2021, as described in Note 13 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 ESPP.

Segment Information

1 unchanged sentence

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America.

Our consolidated financial statements are prepared in accordance with U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

4 unchanged sentences

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.

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

Revenue Recognition

2 unchanged sentences

Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Our revenue is primarily derived from usage-based fees earned from customers accessing our enterprise cloud computing services.

Our revenue is primarily derived from usage-based fees earned from our communications products when customers access our cloud-based platform.

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 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.

Subscription-based fees are derived from our complex software products, such as Twilio Segment, Twilio Engage, Twilio Flex and certain non-usage-based contracts, such as with the sales of short codes and customer support.

Non-usage-based contracts revenue is recognized on a ratable basis over the contractual term which is generally from one to three years.

5 unchanged sentences

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed.

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to the estimated acquisition date fair value of tangible and intangible assets acquired and liabilities assumed.

We use our best estimates and assumptions to accurately determine the fair value of the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

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

existing customer relationships;

uncertain tax positions and tax related valuation allowances assumed;

and discount rates.

expected growth and longevity of existing customer relationships;

expected outcomes related to uncertain tax positions and tax related valuation allowances assumed;

and selected discount rates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Recent Accounting Pronouncements Not Yet Adopted

See Note 2(ac) to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements not yet adopted.

See Note 2(af) to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements not yet adopted.

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