What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 262 added, 92 removed, 319 unchanged (53% of the section changed)

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Our platform is designed to support all of the most important ways people communicate through technology and our global infrastructure is capable of supporting virtually any business at scale.

In the three months ended March 31, 2023 and 2022, our revenue was $1.0 billion and $875.4 million, respectively, and our net loss was $342.1 million and $221.6 million, respectively.

In the three months ended March 31, 2023 and 2022, our 10 largest Active Customer Accounts generated an aggregate of 10% and 11% of our total revenue, respectively.

In the three months ended June 30, 2023 and 2022, our revenue was $1.0 billion and $943.4 million, respectively, and our net loss was $166.2 million and $322.8 million, respectively.

In the three months ended June 30, 2023 and 2022, our 10 largest Active Customer Accounts generated an aggregate of 11% and 12% of our total revenue, respectively.

Recent Developments

Business Unit Reorganization.

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

Twilio Data & Applications and Twilio Communications (the “Reorganization”).

In connection with the Reorganization, we appointed Elena Donio as President, Twilio Data & Applications, and Khozema Shipchandler as President, Twilio Communications, effective March 1, 2023.

In February 2023, we announced the reorganization (the “Reorganization”) of our business into two business units:

Twilio Communications (“Communications”) and Twilio Data & Applications (“Data & Applications”).

In connection with the Reorganization, we appointed Khozema Shipchandler as President, Twilio Communications, and Elena Donio as President, Twilio Data & Applications, effective March 1, 2023.

We also appointed Aidan Viggiano as our Chief Financial Officer, effective March 1, 2023.

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

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

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

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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.

In connection with the Reorganization, we significantly changed the organizational structure of our business, including the way we will manage the business in the future.

Together, they address adjacent needs and related problems for our customers.

In connection with the Reorganization, we changed the organizational structure of our business, including the way we operate the business now and in the future.

As such, in February 2023, we began making significant realignments to our internal processes and controls to build a financial reporting process within our enterprise reporting system that will enable consistent, comparable and reliable internal reporting on a business unit level.

We expect to substantially complete our internal process realignments during 2023, which will enable us to provide segment level reporting.

Concurrently, we were also in the process of determining the measure of profitability to be used by management to assess performance of its newly formed business units.

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In the second quarter of 2023, we completed certain of the realignment efforts and began presenting non-GAAP gross profit by business unit to the Chief Operating Decision Maker (“CODM”) to be used to assess performance and make resource allocation decisions.

As such, in the second quarter of 2023, our Chief Executive Officer, who is also our CODM, began regularly reviewing discrete financial information for each business unit.

This shift in the way management started operating the business required us to reevaluate our operating segment structure under the applicable accounting guidance.

We determined that as of June 30, 2023, we had two operating and reportable segments:

Twilio Communications and Twilio Data & Applications.

Twilio Communications :

The Communications segment consists of a variety of application programming interfaces (“APIs”) and software solutions to optimize communications between our customers and their end users.

The key products from which the segment derives its revenue are Messaging, Voice and Email.

Twilio Data & Applications :

The Data & Applications segment consists of software products that enable businesses to achieve more effective customer engagement by providing the tools necessary for customers to build direct, personalized relationships with their end users.

The key products from which the segment derives its revenue are Segment, Engage, Flex and Marketing Campaigns.

The shift in our segment structure also resulted in a shift in our reporting unit structure, under the applicable accounting guidance, which required us to assess our goodwill for impairment on a reporting unit level.

We concluded that our goodwill was not impaired and, further, that none of our reporting units was at risk of failing the goodwill impairment test.

Refer to Note 8 and Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on segment reporting and goodwill.

Share Repurchase Program.

In February 2023, our Board of Directors authorized a share repurchase program pursuant to which we may repurchase up to $1.0 billion in aggregate value of our Class A common stock.

In February 2023, our Board of Directors authorized a share repurchase program pursuant to which we may repurchase up to $1.0 billion in aggregate value of our Class A common stock until the program expires on December 31, 2024.

Repurchases under this program can be made through open market, private transactions or other means in compliance with applicable federal securities laws and could include repurchases pursuant to Rule 10b5-1 trading plans.

We have a discretion in determining the conditions under which shares may be repurchased from time to time.

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

In the first quarter of 2023, we repurchased $125.0 million in aggregate value, or 1.9 million shares, of our Class A common stock under this program.

Subsequent to March 31, 2023, we have repurchased additional shares of our Class A common stock for an aggregate purchase price of $125.0 million.

We have discretion in determining the conditions under which shares may be repurchased from time to time.

In the six months ended June 30, 2023, we repurchased $495.0 million in aggregate value, or 8.3 million shares, of our Class A common stock under this program.

Approximately $505.0 million of the originally authorized amount remains available for future repurchases.

Workforce Reduction Plan.

In February 2023, we committed to a workforce restructuring plan (the “February 2023 Plan”) that eliminated approximately 17% of our workforce.

The execution of the February 2023 Plan was substantially completed as of March 31, 2023.

In the first quarter of 2023, we incurred total restructuring expenses of $121.9 million related to employee severances, benefits, vesting of equity awards and facilitation costs.

We are expecting to record an estimated additional $20.0 million of restructuring expenses until the execution of the plan is completed in 2023.

The actual remaining expenses may differ materially from our original estimates.

Previously, in September 2022, we executed a similar workforce reduction plan (the “September 2022 Plan”) that was intended to reduce operating costs, improve operating margins and shift our selling capacity to accelerate software sales.

For further details refer to Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In February 2023, we announced a workforce restructuring plan (the “February 2023 Plan”) to eliminate approximately 17% of our workforce.

The execution of the February 2023 Plan was substantially complete in the first quarter of 2023.

In the three and six months ended June 30, 2023, we incurred $14.9 million and $136.8 million in restructuring expenses, respectively, related to employee severance, benefits, vesting of equity awards and facilitation costs.

The estimated remaining expenses related to the February 2023 Plan are not expected to be significant.

For additional details refer to Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Sabbatical Program.

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The discontinuation of this program and the reduction in force under our February 2023 Plan resulted in a $12.0 million cumulative one-time decrease to our accrued sabbatical liability in the first quarter of 2023.

As of March 31, 2023, the remaining liability of $15.7 million related to the accumulated benefits for employees who remain eligible for this benefit until its expiration on December 31, 2023.

As of June 30, 2023, the remaining liability of $12.6 million related to the accumulated benefits for employees who remain eligible under this program until its expiration on December 31, 2023.

As of December 31, 2022, the accrued sabbatical liability was $30.7 million.

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

As part of our new operating strategy, we permanently closed several of our offices in 2022 and early 2023.

In February 2023, we announced that we will be closing additional offices during 2023.

As part of our new operating strategy, we permanently closed several of our offices in 2022 and the first half of 2023.

These office closures resulted in an impairment of several long-lived assets, including our operating lease assets, leasehold improvements and property and equipment.

In the first quarter of 2023, we recorded a total impairment loss of $21.8 million and we expect to record an estimated additional impairment of approximately $10 million to $20 million in 2023 as the exit activities are finalized in each location.

In the three and six months ended June 30, 2023, we recorded a total impairment loss of $9.3 million and $31.1 million, respectively.

Impairment of Strategic Investment.

In the first quarter of 2023, we recorded a $46.2 million, non-cash impairment charge associated with one of our investments from 2021 to reduce its carrying amount to fair value.

In the first quarter of 2023, we recorded a $46.2 million impairment loss associated with one of our investments from 2021 to reduce its carrying amount to fair value.

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Divestiture of IoT Assets.

In the first quarter of 2023, we signed an agreement to divest our Internet of Things assets and liabilities to a third party.

In connection with this transaction, we recorded a $3.8 million loss on net assets held for sale and an additional $2.2 million in related expenses.

We may realize an additional gain or loss on the transaction closing date that is expected in the second quarter of 2023, which amount is not expected to be material.

In the second quarter of 2023, we completed the sale of our Internet of Things (“IoT”) net assets for a stock consideration of $15.8 million.

The loss on divestiture and related expenses recorded in the three and six months ended June 30, 2023 were not significant.

Divestiture of ValueFirst Business .

In the second quarter of 2023, we entered into an agreement to sell our ValueFirst business, and we subsequently sold it in July 2023 for $45.5 million in cash.

ValueFirst was our enterprise communications platform in India.

As of June 30, 2023, we recorded a $28.8 million loss on ValueFirst net assets held for sale and an additional $3.1 million in related expenses.

For additional details refer to Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Macroeconomic and Geopolitical Factors.

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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 year-over-year revenue growth and Dollar-Based Net Expansion Rate for the three months ended March 31, 2023 and 2022, and the number of Active Customer Accounts as of March 31, 2023 and 2022.

The following table summarizes our year-over-year revenue growth and Dollar-Based Net Expansion Rate for the three months ended June 30, 2023 and 2022, and the number of Active Customer Accounts as of June 30, 2023 and 2022.

Three Months Ended

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Active Customer Accounts excludes customer accounts from Zipwhip, Inc.

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

We 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.

Communications Active Customer Accounts and Data & Applications Active Customer Accounts are calculated using the same methodology, but using only revenue recognized from accounts in the respective segment.

Because an individual Active Customer Account may be counted as both a Communications Active Customer Account and a Data & Applications Active Customer Account, the sum of the segment-level Active Customer Accounts may exceed our total company Active Customer Accounts.

We believe that the number of Active Customer Accounts, on an aggregate basis and at the segment level, 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 months ended March 31, 2023 and 2022, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

In the three months ended June 30, 2023 and 2022, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

Dollar‑Based Net Expansion Rate

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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.

When we calculate Dollar-Based Net Expansion

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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, for the quarter ended March 31, 2023, our Dollar-Based Net Expansion Rate excludes the contributions from acquisitions made after January 1, 2022.

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

Our 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 our platform.

As a result, for the quarter ended June 30, 2023, our Dollar-Based Net Expansion Rate excludes the contributions from acquisitions made after April 1, 2022.

Revenue from divestitures does not impact the Dollar-Based Net Expansion Rate calculation beginning in the quarter the divestiture closed, unless the divestiture closing date is the last day of a quarter.

As a result, for the quarter ended June 30, 2023, our Dollar-Based Net Expansion Rate excludes the contributions from divestitures made after June 30, 2022.

Communications Dollar-Based Net Expansion Rate and Data & Applications Dollar-Based Net Expansion Rate are calculated using the same methodology, but using only revenue attributable to the respective segment and Active Customer Accounts for that respective segment.

We believe that measuring Dollar-Based Net Expansion Rate, on an aggregate basis and at the segment level, 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.

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Key Components of Statements of Operations

We derive the majority of our revenue from usage‑based fees earned from our Twilio 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 three months ended March 31, 2023 and 2022, we generated 71% and 73% of our revenue, respectively, from usage‑based fees.

We earn monthly subscription-based fees from various of our Twilio Data & Applications 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;

as well as certain of our Twilio Communications fee‑based products, such as our Email API.

When our usage-based Twilio Communications products are embedded into our Twilio Data & Applications and other products, we charge for them separately on a usage basis.

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 Messaging, 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 Messaging, minutes of call duration activity for Voice and the number of authentications for Twilio Verify.

In the three months ended June 30, 2023 and 2022, we generated 71% and 73% of our revenue, respectively, from usage‑based fees.

We earn monthly subscription-based fees from various of our Data & Applications products and solutions on our platform, such as our customer data platform Segment, our customer engagement solution Engage, our cloud contact center Flex;

as well as certain of our Communications fee‑based products, such as Email.

When our usage-based Communications products are embedded into our Data & Applications and other products, we charge for them separately on a usage basis.

Revenue is generally directly attributable to each segment.

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;

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

As part of our expected shift to two operating segments in 2023, “Other” revenue, as described in Note 12 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, will be allocated to our two business units—Twilio Data & Applications and Twilio Communications—and in such future periods each business unit will include revenue that was not included in such business unit in the current quarter or in prior periods.

Upon finalizing the shift to two operating segments, prior periods presented for purposes of comparison will be recast accordingly.

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Cost of Revenue and Gross Margin

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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.

Costs of revenue are generally directly attributable to each segment.

Certain costs of revenue are allocated to segments based on methodologies that best reflect the patterns of consumptions of these costs.

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.

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

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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.

Other Income (Expenses), Net

Our other income (expenses), net consist primarily of our share of losses from our equity method investment;

impairment charges and gains and losses related to our strategic investments and marketable securities;

and debt-related costs.

(Provision for) Benefit from Income Taxes

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Non-GAAP gross margin 52 % 51 %

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Non‑GAAP Operating Expenses

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Impairment of long-lived assets 9,332 —

Non-GAAP income from operations $ 103,787 $ 5,043

Non-GAAP income (loss) from operations $ 120,147 $ (7,302)

Non-GAAP operating margin 12 % (1) %

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Results of Operations

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We have included results of operations for acquisitions closed after January 1, 2022, from the closing date of each such acquisition.

We have included results of operations for divestitures closed after January 1, 2022, through the closing date of each such divestiture.

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Condensed Consolidated Statements of Operations Data:

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Restructuring costs (1)

14,902 — 136,844 —

Impairment of long-lived assets 9,332 — 31,116 —

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

(In thousands)

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Total $ 153,094 $ 242,090 $ 323,893 $ 397,365

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____________________________________

(2) Includes amortization of acquired intangibles as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

(In thousands)

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Condensed Consolidated Statements of Operations, as a percentage of revenue:

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

Comparison of the Three Months Ended March 31, 2023 and 2022

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Comparison of the Three Months Ended June 30, 2023 and 2022

Three Months Ended

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(Dollars in thousands)

Total revenue $ 1,006,564 $ 875,363 $ 131,201 15 %

In the three months ended March 31, 2023, total revenue increased by $131.2 million, or 15%, compared to the same period last year.

This increase was attributable to an increase in the usage of our products by our existing customers as reflected in our Dollar‑Based Net Expansion Rate of 106%, as well as a 12% increase in the number of Active Customer Accounts, from over 268,000 as of March 31, 2022, to over 300,000 as of March 31, 2023.

This growth in usage and Active Customer Accounts helped to drive a $103.9 million increase in Communications revenue and a $19.1 million increase in Data & Applications revenue during the three months ended March 31, 2023 compared to the same period last year.

In the three months ended March 31, 2023, U.S.

Twilio Communications $ 913,135 $ 832,305 $ 80,830 10 %

Twilio Data & Applications 124,626 111,049 13,577 12 %

Consolidated total revenue $ 1,037,761 $ 943,354 $ 94,407 10 %

In the three months ended June 30, 2023, Communications revenue increased by $80.8 million, or 10%, compared to the same period last year.

This increase was primarily attributable to the increased usage of our products by our existing customers, as reflected in our Communications Dollar‑Based Net Expansion Rate of 103%, as well as an 11% increase in the number of Communications Active Customer Accounts from over 260,000 as of June 30, 2022 to over 289,000 as of June 30, 2023.

In the three months ended June 30, 2023, Data & Applications revenue increased by $13.6 million, or 12%, compared to the same period last year.

This increase was primarily attributable to a 4% increase in the number of Data & Applications Active Customer Accounts from over 26,000 as of June 30, 2022 to over 27,000 as of June 30, 2023.

Our Data & Applications Dollar‑Based Net Expansion Rate was 99% for the three months ended June 30, 2023.

In the three months ended June 30, 2023, consolidated total revenue increased by $94.4 million, or 10%, compared to the same period last year.

This increase was attributable to the increased usage of our products by our existing customers, as reflected in our Dollar‑Based Net Expansion Rate of 103%, as well as an 11% increase in the number of Active Customer Accounts from over 275,000 as of June 30, 2022 to over 304,000 as of June 30, 2023.

In the three months ended June 30, 2023, U.S.

revenue and international revenue represented $692.6 million or 67%, and $345.1 million, or 33%, respectively, of total revenue.

In the three months ended March 31, 2022, U.S.

In the three months ended June 30, 2022, U.S.

revenue and international revenue represented $616.3 million, or 65%, and $327.0 million, or 35%, respectively, of total revenue.

The increases in revenue in each geographical area were attributable to the growth in usage of our products by our existing customers and Active Customer Accounts as described above.

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Cost of Revenue and Gross Margin

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(Dollars in thousands)

Twilio Communications

Cost of revenue $ 491,894 $ 464,134 $ 27,760 6 %

Gross margin 46 % 44 %

In the three months ended March 31, 2023, cost of revenue increased by $65.6 million, or 15%, compared to the same period last year.

Twilio Data & Applications

Cost of revenue 40,112 33,931 $ 6,181 18 %

Gross margin 68 % 69 %

Consolidated total

Cost of revenue $ 532,006 $ 498,065 $ 33,941 7 %

Gross margin 49 % 47 %

In the three months ended June 30, 2023, Communications cost of revenue increased by $27.8 million, or 6%, compared to the same period last year.

The increase in cost of revenue was primarily attributable to a $32.9 million increase in network service providers’ costs, which support the growth in usage of our products driven by the growth in Communications Active Customer Accounts and the increase in usage of our products by existing customers as described above.

In the three months ended June 30, 2023, Data & Applications cost of revenue increased by $6.2 million, or 18%, compared to the same period last year.

Fluctuations in cost of revenue categories were not significant either individually or in the aggregate.

In the three months ended June 30, 2023, consolidated total cost of revenue increased by $33.9 million, or 7%, compared to the same period last year.

The increase in cost of revenue was primarily attributable to a $32.9 million increase in network service providers’ costs, which support the growth in usage of our products driven by the growth in Active Customer Accounts and the increase in usage of our products by existing customers as described above.

In the three months ended June 30, 2023, Communications gross margin percentage increased compared to the same period last year.

This increase was primarily driven by a 170 basis point increase due to the network service providers’ costs increasing at a lower rate relative to revenue, net of the impact of hedging instruments.

This is due to a higher proportion of revenue being derived from the United States, where margins are higher.

In the three months ended June 30, 2023, Data & Applications gross margin percentage decreased compared to the same period last year.

This decrease was primarily driven by a 160 basis point decrease due to the increase in amortization of capitalized internal-use software development costs.

In the three months ended June 30, 2023, consolidated total gross margin percentage increased compared to the same period last year.

This increase was primarily driven by an increase in the gross margin of the Communications segment, as described above.

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Operating Expenses

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Total operating expenses $ 647,582 $ 757,225 $ (109,643) (14) %

In the three months ended March 31, 2023, research and development expenses decreased by $2.0 million, or 1%, compared to the same period last year.

The decrease was attributable to our efforts to manage our cost structure, including the restructuring of our workforce in September 2022 and February 2023, and sunsetting of the employee sabbatical program in the three months ended March 31, 2023.

As a result, total personnel costs decreased by $5.5 million, despite a 4% average increase in research and development headcount.

In the three months ended June 30, 2023, research and development expenses decreased by $52.7 million, or 19%, compared to the same period last year.

The decrease was attributable to our efforts to manage our cost structure, including the restructuring of our workforce in September 2022 and February 2023, and the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

As a result, total personnel costs decreased by $54.8 million, driven by a 13% average decrease in research and development headcount.

This decrease was partially offset by increases in other operating expense categories that were not significant either individually or in the aggregate.

In the three months ended March 31, 2023, sales and marketing expenses decreased by $28.0 million, or 10%, compared to the same period last year.

As a results, total personnel costs decreased by $18.5 million, driven by a 12% average decrease in sales and marketing headcount.

The lower sales and marketing expenses were also due to a $4.3 million decrease in advertising expenses and a $2.7 million decrease in expenses related to corporate events.

In the three months ended March 31, 2023, general and administrative expenses decreased by $1.8 million, or 2%, compared to the same period last year.

In the three months ended June 30, 2023, sales and marketing expenses decreased by $73.4 million, or 22%, compared to the same period last year.

As a result, total personnel costs decreased by $61.0 million, driven by a 24% average decrease in sales and marketing headcount.

The lower sales and marketing expenses were also due to a $8.3 million decrease in advertising expenses.

In the three months ended June 30, 2023, general and administrative expenses decreased by $7.8 million, or 5%, compared to the same period last year.

As a result, total personnel costs decreased by $34.6 million, driven by a 35% average decrease in general and administrative headcount.

This decrease was partially offset by increases in other operating expense categories that were not significant either individually or in the aggregate.

In the three months ended March 31, 2023, we incurred $121.9 million in restructuring costs primarily as a result of our February 2023 Plan.

This decrease was partially offset by a $28.8 million loss on net assets held for sale related to the sale of our ValueFirst business.

For further detail refer to Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the three months ended March 31, 2023, we incurred $21.8 million in impairment charges related to certain of our operating lease assets and other long-lived assets as a result of our permanent office closure announcements in 2022 and in the first quarter of 2023.

In the three months ended June 30, 2023, we incurred $14.9 million in restructuring costs primarily as a result of our February 2023 Plan.

For further detail refer to Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the three months ended June 30, 2023, we incurred $9.3 million in impairment charges related to certain of our operating lease assets and other long-lived assets as a result of permanently closing several offices in the second quarter of 2023.

For further detail refer to Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Segment Results of Operations

Our CODM evaluates the performance of our Communications and Data & Applications segments based on several factors, of which the primary financial measures of segment profitability are total revenue and non-GAAP gross profit.

The following table presents the non-GAAP gross profit measure for each segment, as presented to our CODM for the three months ended June 30, 2023:

Three Months Ended

(Dollars in thousands)

Twilio Communications $ 440,071 $ 387,294 $ 52,777 14 %

Twilio Data & Applications 101,810 93,469 8,341 9 %

Consolidated total non-GAAP gross profit $ 541,881 $ 480,763 $ 61,118 13 %

In the three months ended June 30, 2023, Communications non-GAAP gross profit increased by $52.8 million, or 14%, compared to the same period last year.

The increase in non-GAAP gross profit was primarily driven by the same factors impacting Communications segment’s total revenue and cost of sales, as described above, adjusted for a $0.3 million net decrease, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

In the three months ended June 30, 2023, Data & Applications non-GAAP gross profit increased by $8.3 million, or 9%, compared to the same period last year.

The increase in non-GAAP gross profit was primarily driven by the same factors impacting Data & Applications segment’s total revenue and cost of sales, as described above, adjusted for a $0.9 million net increase, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

Comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended

2023 2022 Change

(Dollars in thousands)

Twilio Communications $ 1,796,365 $ 1,604,158 $ 192,207 12%

Twilio Data & Applications 247,960 214,559 33,401 16%

Consolidated total revenue $ 2,044,325 $ 1,818,717 $ 225,608 12%

In the six months ended June 30, 2023, Communications revenue increased by $192.2 million, or 12%, compared to the same period last year.

This increase was primarily attributable to the increased usage of our products by our existing customers, as reflected in our Communications Dollar‑Based Net Expansion Rate of 105%, as well as an 11% increase in the number of Communications Active Customer Accounts from over 260,000 as of June 30, 2022 to over 289,000 as of June 30, 2023.

In the six months ended June 30, 2023, Data & Applications revenue increased by $33.4 million, or 16%, compared to the same period last year.

This increase was primarily attributable to the increased usage of our products by our existing customers, as reflected in our Data & Applications Dollar‑Based Net Expansion Rate of 101%, as well as a 4% increase in the number of Data & Applications Active Customer Accounts from over 26,000 as of June 30, 2022 to over 27,000 as of June 30, 2023.

In the six months ended June 30, 2023, consolidated total revenue increased by $225.6 million, or 12%, compared to the same period last year.

This increase was primarily attributable to the increased usage of our products by our existing customers, as reflected in our Dollar‑Based Net Expansion Rate of 105%, as well as an 11% increase in the number of Active Customer Accounts from over 275,000 as of June 30, 2022 to over 304,000 as of June 30, 2023.

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In the six months ended June 30, 2023, U.S.

revenue and international revenue represented $1.4 billion or 66%, and $689.6 million, or 34%, respectively, of total revenue.

In the six months ended June 30, 2022, U.S.

revenue and international revenue represented $1.2 billion, or 65%, and $632.0 million, or 35%, respectively, of total revenue.

Cost of Revenue and Gross Margin

Six Months Ended

2023 2022 Change

(Dollars in thousands)

Twilio Communications

Cost of revenue $ 968,854 $ 882,785 $ 86,069 10 %

Gross margin 46 % 45 %

Twilio Data & Applications

Cost of revenue 79,026 65,572 $ 13,454 21 %

Gross margin 68 % 69 %

Consolidated total

Cost of revenue $ 1,047,880 $ 948,357 $ 99,523 10 %

Gross margin 49 % 48 %

In the six months ended June 30, 2023, Communications cost of revenue increased by $86.1 million, or 10%, compared to the same period last year.

The increase in cost of revenue was primarily attributable to a $91.3 million increase in network service providers’ costs, which support the growth in usage of our products driven by the growth in Communications Active Customer Accounts and the increased usage of our products by existing customers as described above.

In the six months ended June 30, 2023, Data & Applications cost of revenue increased by $13.5 million, or 21%, compared to the same period last year.

Fluctuations in cost of revenue categories were not significant either individually or in the aggregate.

In the six months ended June 30, 2023, consolidated total cost of revenue increased by $99.5 million, or 10%, compared to the same period last year.

The increase in cost of revenue was primarily attributable to a $91.3 million increase in network service providers’ costs, which support the growth in usage of our products driven by the growth in Active Customer Accounts and the increase in usage of our products by existing customers as described above.

In the six months ended June 30, 2023, Communications gross margin percentage increased compared to the same period This increase was primarily driven by a 90 basis point increase due to the network service providers’ costs increasing at a lower rate relative to revenue, net of the impact of hedging instruments.

This is due to a higher proportion of revenue being derived from the United States, where margins are higher.

In the six months ended June 30, 2023, Data & Applications gross margin percentage decreased compared to the same period last year.

This decrease was primarily driven by a 150 basis point decrease due to the increase in amortization of capitalized internal-use software development costs.

In the six months ended June 30, 2023, consolidated total gross margin percentage increased compared to the same period last year.

This increase was primarily driven by an increase in the gross margin of the Communications segment as described above.

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Operating Expenses

Six Months Ended

2023 2022 Change

(Dollars in thousands)

Research and development $ 465,491 $ 520,252 $ (54,761) (11) %

Sales and marketing 521,485 622,864 (101,379) (16) %

General and administrative 247,420 256,988 (9,568) (4) %

Restructuring costs 136,844 — 136,844 100 %

Impairment of long-lived assets 31,116 — 31,116 100 %

Total operating expenses $ 1,402,356 $ 1,400,104 $ 2,252 — %

In the six months ended June 30, 2023, research and development expenses decreased by $54.8 million, or 11%, compared to the same period last year.

The decrease was attributable to our efforts to manage our cost structure, including the restructuring of our workforce in September 2022 and February 2023, and sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

As a result, in the six months ended June 30, 2023, the average research and development headcount.decreased by 2% compared to the same period last year.

Total personnel costs decreased by $57.5 million, primarily driven by a $36.2 million decrease in stock-based compensation expense, an $8.3 million decrease related to the sunsetting of our employee sabbatical program and a $13.0 million decrease in other personnel costs.

These decreases were partially offset by increases in other operating expense categories that were not significant either individually or in the aggregate.

In the six months ended June 30, 2023, sales and marketing expenses decreased by $101.4 million, or 16%, compared to the same period last year.

As a result, total personnel costs decreased by $79.5 million, driven by a 14% average decrease in sales and marketing headcount.

The lower sales and marketing expenses were also due to a $12.5 million decrease in advertising expenses.

In the six months ended June 30, 2023, general and administrative expenses decreased by $9.6 million, or 4%, compared to the same period last year.

As a result, total personnel costs decreased by $38.2 million, driven by a 26% average decrease in general and administrative headcount.

This decrease was partially offset by a $32.3 million loss on net assets held for sale and divestiture related to the sale of our ValueFirst business and our IoT assets and liabilities.

For further detail refer to Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the six months ended June 30, 2023, we incurred $136.8 million in restructuring costs primarily as a result of our February 2023 Plan.

For further detail refer to Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the six months ended June 30, 2023, we incurred $31.1 million in impairment charges related to certain of our operating lease assets and other long-lived assets as a result of permanently closing several offices in the first half of 2023.

For further detail refer to Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Segment Results of Operations

The following table presents the results for non-GAAP gross profit for each of our Communications and Data & Applications segments for the six months ended June 30, 2023:

Six Months Ended

(Dollars in thousands)

Twilio Communications $ 865,211 $ 759,448 $ 105,763 14 %

Twilio Data & Applications 202,806 181,543 21,263 12 %

Consolidated total non-GAAP gross profit $ 1,068,017 $ 940,991 $ 127,026 13 %

In the six months ended June 30, 2023, Communications non-GAAP gross profit increased by $105.8 million, or 14%, compared to the same period last year.

The increase in non-GAAP gross profit was primarily driven by the same factors impacting Communications segment’s total revenue and cost of sales, as described above, adjusted for a $0.4 million net decrease, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

In the six months ended June 30, 2023, Data & Applications non-GAAP gross profit increased by $21.3 million, or 12%, compared to the same period last year.

The increase in non-GAAP gross profit was primarily driven by the same factors impacting Data & Applications segment’s total revenue and cost of sales, as described above, adjusted for a $1.3 million net increase, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

Liquidity and Capital Resources

As of March 31, 2023, we had cash and cash equivalents of $634.8 million and short-term marketable securities of $3.3 billion.

As of June 30, 2023, we had cash and cash equivalents of $675.1 million and short-term marketable securities of $3.0 billion.

In any given period, cash and cash equivalents may consist of money market funds, reverse repurchase agreements and commercial paper.

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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.

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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 expenditure needs, including authorized share repurchases, for the next 12 months and beyond.

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Repurchases under the program will be made through open market, private transactions or other means in compliance with applicable federal securities laws, and could include repurchases pursuant to Rule 10b5-1 trading plans.

We have a discretion in determining the conditions under which shares may be repurchased from time to time.

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

In the first quarter of 2023, we purchased $125.0 million in aggregate value, or 1.9 million shares, of our Class A common stock on the open market under this program.

Subsequent to March 31, 2023, we have repurchased additional shares of our Class A common stock for an aggregate purchase price of $125.0 million.

We have discretion in determining the conditions under which shares may be repurchased from time to time.

The program expires on December 31, 2024.

In the three and six months ended June 30, 2023, we purchased $370.0 million in aggregate value, or 6.4 million shares, and $495.0 million in aggregate value, or 8.3 million shares, respectively, of our Class A common stock on the open market under this program.

Approximately $505.0 million of the originally authorized amount remains available for future repurchases.

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The following table summarizes our cash flows:

Three Months Ended

Six Months Ended

(In thousands)

Cash used in operating activities $ (14,220) $ (80,141)

Cash provided by investing activities 202,465 150,967

Cash provided by (used in) investing activities 509,777 (635,629)

Cash (used in) provided by financing activities (469,356) 34,402

Effect of exchange rate changes on cash, cash equivalents and restricted cash 108 313

Net (decrease) increase in cash, cash equivalents and restricted cash $ (16,900) $ 137,526

Net increase (decrease) in cash, cash equivalents and restricted cash, including cash classified as held for sale $ 26,309 $ (681,055)

Cash, cash equivalents and restricted cash classified as held for sale (7,306) —

Net increase (decrease) in cash, cash equivalents and restricted cash $ 19,003 $ (681,055)

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Cash Flows from Operating Activities

In the three months ended March 31, 2023, cash used in operating activities consisted primarily of our net loss of $342.1 million adjusted for non-cash items, including $170.8 million of stock-based compensation expense which included the impact of our February 2023 Plan, $71.4 million of depreciation and amortization expense, $21.8 million of impairment of operating lease assets and other long-lived assets, $8.6 million of non-cash reduction in our operating right-of-use asset, $17.9 million amortization of deferred commissions, $30.4 million of our share of losses from an equity method investment, $46.2 million of impairment of an investment that we acquired in 2021, and $143.2 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $86.7 million primarily due to revenue growth, timing of cash receipts and pre-payments and certain operating expenses.

Accounts payable and other current liabilities increased $19.1 million primarily driven by a $33.2 million increase in the restructuring liabilities that was offset by a $15.0 million decrease in the sabbatical benefit accrual as a result of lower headcount and sunsetting of the program.

In the six months ended June 30, 2023, cash used in operating activities consisted primarily of our net loss of $508.3 million adjusted for non-cash items, including $323.9 million of stock-based compensation expense which included the impact of our February 2023 Plan, $146.4 million of depreciation and amortization expense, $62.8 million of our share of losses from an equity method investment, $46.2 million of impairment of an investment that we acquired in 2021, $36.1 million amortization of deferred commissions, $31.1 million of impairment of operating lease assets and other long-lived assets, $32.3 million loss on net assets held for sale or divested, $16.1 million of non-cash reduction in our operating right-of-use asset, and $241.2 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $137.2 million primarily due to revenue growth, timing of cash receipts and prepayments and certain operating expenses.

Accounts payable and other current liabilities decreased $57.9 million primarily driven by an $18.1 million decrease in the sabbatical benefit accrual as a result of lower headcount and sunsetting of the program.

Operating lease liabilities decreased $27.9 million due to payments made against our operating lease obligations.

Other long-term assets increased $19.2 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 and the details of the February 2023 Plan are described further in Note 5 and Note 6, respectively, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the three months ended March 31, 2022, cash used in operating activities consisted primarily of our net loss of $221.6 million adjusted for non-cash items, including $155.3 million of stock-based compensation expense, $68.1 million of depreciation and amortization expense, $12.4 million of non-cash reduction to our operating right-of-use asset, $12.6 million amortization of deferred commissions and $60.7 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $33.8 million primarily due to revenue growth, the timing of cash receipts and pre-payments for cloud infrastructure fees and certain operating expenses.

The loss on net assets held for sale and divested, the impairment of operating lease assets and other long lived assets, and the details of the February 2023 Plan are described further in Note 5, Note 6, and Note 7, respectively, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the six months ended June 30, 2022, cash used in operating activities consisted primarily of our net loss of $544.4 million adjusted for non-cash items, including $397.4 million of stock-based compensation expense, $137.7 million of depreciation and amortization expense, $25.5 million of non-cash reduction to our operating right-of-use asset, $26.1 million amortization of deferred commissions and $160.0 million of cumulative changes in operating assets and liabilities.

respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $149.8 million primarily due to revenue growth, the timing of cash receipts and prepayments of our cloud infrastructure fees and certain operating expenses.

Accounts payable and other current liabilities increased $85.1 million primarily due to increases in transaction volumes.

Operating lease liability decreased $13.1 million due to payments made against our operating lease obligations.

Operating lease liabilities decreased $31.1 million due to payments made against our operating lease obligations.

Other long-term assets increased $52.5 million primarily due to an increase in the sales commissions balances related to the growth of our business.

Cash Flows from Investing Activities

In the three months ended March 31, 2023, cash provided by investing activities was $202.5 million primarily consisting of $219.1 million of proceeds from sales and maturities of marketable securities, net of purchases of marketable securities and other investments;

In the six months ended June 30, 2023, cash provided by investing activities was $509.8 million primarily consisting of $538.3 million of proceeds from sales and maturities of marketable securities, net of purchases of marketable securities and other investments;

$20.1 million related to capitalized software development costs and $8.3 million related to purchases of long-lived assets.

In the three months ended March 31, 2022, cash provided by investing activities was $151.0 million primarily consisting of $195.9 million of proceeds from sales and maturities of marketable securities, net of purchases of marketable securities and other investments, offset by $27.7 million of net cash paid to acquire other businesses, $10.3 million related to capitalized software development costs and $7.0 million related to purchases of long-lived assets.

In the six months ended June 30, 2022, cash used in investing activities was $635.6 million primarily consisting of $570.8 million of proceeds from sales and maturities of marketable securities, net of purchases of marketable securities and other investments, which includes $750.0 million paid to acquire our equity method investment in Syniverse;

$31.7 million of net cash paid to acquire other businesses, $22.4 million related to capitalized software development costs and $10.8 million related to purchases of long-lived assets.

Cash Flows from Financing Activities

In the three months ended March 31, 2023, cash used in financing activities was $121.5 million primarily consisting of $115.0 million of cash paid to repurchase 1.9 million shares of our Class A common stock in the open market, including related costs, and $7.4 million in principal payments on debt and finance leases, offset by $3.3 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In the three months ended March 31, 2022, cash provided by financing activities was $4.1 million primarily consisting of $11.7 million in proceeds from stock options exercised by our employees, offset by $6.5 million in principal payments on debt and finance leases.

In the six months ended June 30, 2023, cash used in financing activities was $469.4 million primarily consisting of $485.1 million of cash paid to repurchase 8.3 million shares of our Class A common stock in the open market, including related costs, and $9.8 million in principal payments on debt and finance leases, offset by $28.1 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In the six months ended June 30, 2022, cash provided by financing activities was $34.4 million primarily consisting of $41.7 million in proceeds from stock options exercised by our employees, offset by $6.2 million in principal payments on debt and finance leases.

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Critical Accounting Policies and Estimates

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Our actual results could differ from these estimates.

There have been no changes to our critical accounting policies as described in our Annual Report on Form 10-K filed with the SEC on February 27, 2023, other than the addition of a policy related to our share repurchase program as described in Note 2 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

There have been no changes to our critical accounting policies as described in our Annual Report on Form 10-K filed with the SEC on February 27, 2023.

Recent Accounting Pronouncements Not Yet Adopted

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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-Q

Item 2. Management’s Discussion and Analysis