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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-09 · 211 added, 338 removed, 251 unchanged (69% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024.

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 II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.

We enable businesses of all sizes and across numerous industries to revolutionize how they engage their customers.

Our leading customer engagement platform is comprised of a suite of flexible software and communications solutions that allow businesses to deliver seamless, trusted and engaging customer experiences at scale.

In order to deliver the personalized experiences through digital communication channels that their customers have come to expect, businesses seek a comprehensive view of their customers across multiple digital touchpoints that reveals what their needs are and which communications methods they prefer.

Our platform, which combines our highly customizable communications Application Programming Interfaces (“APIs”) with leading customer data management capabilities, allows businesses to break down data silos and build a comprehensive view of customers 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 the customers’ preferred communication channels.

With our platform, businesses can personalize every transaction with real-time data, build lasting loyalty, reduce customer acquisition costs and increase customer lifetime value.

Our customized software products are designed to address specific use cases, including our customer data platform, virtual contact centers, personalized yet scalable marketing campaigns and advanced account security systems.

Our leading communications solutions, including our APIs, are highly customizable and enable developers to embed numerous forms of voice, messaging and email interactions into their customer-facing applications.

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 September 30, 2023 and 2022, our revenue was $1.0 billion and $983.0 million, respectively, and our net loss was $141.7 million and $482.3 million, respectively.

In the three months ended September 30, 2023 and 2022, our 10 largest Active Customer Accounts generated an aggregate of 10% and 13% of our total revenue, respectively.

Recent Developments

Business Unit Reorganization.

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”).

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.

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 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.

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.

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 the end of the second quarter 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.

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

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

In the nine months ended September 30, 2023, we repurchased $551.0 million in aggregate value, or 9.2 million shares, of our Class A common stock under this program.

As of September 30, 2023, approximately $449.0 million of the originally authorized amount remained available for future repurchases.

Workforce Reduction Plan.

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 months ended September 30, 2023, the restructuring expenses were not significant.

In the nine months ended September 30, 2023, the cumulative restructuring expenses incurred under the February 2023 Plan were $140.3 million and were 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.

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 leave of four consecutive weeks after every three years of service.

Employees who had accumulated more than three years of service as of the program’s effective date became eligible for their benefit immediately.

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 September 30, 2023, the remaining liability of $8.3 million relates to the accumulated benefits for employees who remain eligible under this program until its expiration.

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

Remote-First Company.

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 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 three and nine months ended September 30, 2023, we recorded a total impairment loss of $3.2 million and $34.3 million, respectively, related to our permanent office closures.

Impairment of Strategic Investment.

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.

Divestiture of IoT Assets.

In the second quarter of 2023, we completed the sale of our IoT net assets for a stock consideration of $15.8 million.

The loss on divestiture and related expenses recorded in the nine months ended September 30, 2023 were not significant.

Divestiture of ValueFirst Business .

In the third quarter of 2023, we completed the sale of our ValueFirst business for a total cash sales price of $45.5 million, or $38.2 million in proceeds, net of cash divested.

ValueFirst was our enterprise communications platform in India.

In the nine months ended September 30, 2023, we recorded a $28.8 million loss on divestiture and an additional $3.3 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.

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, and existing and new domestic and foreign laws and regulations, as well as those factors outlined in Part II, Item 1A, “Risk Factors.”

We enable businesses of all sizes to revolutionize how they engage with their customers by delivering seamless, trusted and personalized customer experiences at scale.

Our leading customer engagement platform comprises communications APIs that enable developers to embed numerous forms of messaging, voice, and email interactions into their customer-facing applications, as well as software products that target specific engagement needs, including our customer data platform, digital engagement centers, marketing campaigns and advanced account security solutions.

This combination of flexible APIs and software solutions helps businesses of all sizes and across numerous industries to benefit from smarter and more streamlined engagement at every step of the customer journey, including reduced customer acquisition costs, lasting loyalty and increased customer value.

Our platform, which combines our highly customizable communications APIs with customer data management capabilities, allows businesses to break down data silos and build a comprehensive single source for their customer data that is organized into unique profiles that are easily accessible by all their business teams.

Empowered with this information and the insights it enables, businesses using our platform can provide robust, personalized and effective communications to their customers at every stage of their customer relationships.

The value proposition of our offerings has become stronger and our products have become more strategic to our customers as more and more businesses have prioritized building more personalized and more differentiated customer engagement experiences through digital channels.

We operate our business in two business units:

Communications and Segment.

Our Communications business consists of a variety of APIs and software solutions to optimize communications between our customers and their end users.

Our key Communications offerings include Messaging, Voice, Email, Flex, Marketing Campaigns, and User Identity and Authentication.

Our Segment business consists of software products that enable businesses to leverage their first-party data to create unique customer profiles and achieve more effective customer engagement.

Our key Segment offerings are Segment and Engage.

Together, our Communications and Segment products power our customer engagement platform.

We believe that our two business units are complementary and address adjacent needs and related problems for our customers.

Our goal is to create a flywheel for effective customer engagement by combining Segment’s user profiles with our rich Communications data to drive more personalized and intelligent customer interactions.

We believe that our business unit structure enables each business unit to execute toward its respective goals with appropriate focus and independence, best positioning us to achieve our long-term plan of creating the leading customer engagement platform.

In 2023, we revealed CustomerAI, our predictive and generative AI layer, which couples the power of large language models with the rich customer data that flows through our Customer Engagement Platform to help brands unlock enhanced consumer experiences.

We believe that our CustomerAI capabilities and initiatives have the potential to increase the power and reach of our platform, make every interaction between our customers and their end users more personalized and intelligent, and accelerate our data and communications flywheel described above, benefiting both our Communications and Segment products.

In January 2024, our co-founder, Jeff Lawson, resigned as Chief Executive Officer and as a member of our board of directors, and Khozema Shipchandler, our former President, Twilio Communications, was appointed as Chief Executive Officer and as a member of our board of directors.

In the three months ended March 31, 2024 and 2023, our revenue was $1.05 billion and $1.01 billion, respectively, and our net loss was $55.3 million and $342.1 million, respectively.

In each of the three months ended March 31, 2024 and 2023, our 10 largest Active Customer Accounts generated an aggregate of 10% of our total revenue.

Factors Affecting Our Results of Operations

We are focused on profitable growth.

To increase revenue and grow market share, we intend to drive product innovation, leverage predictive and generative AI, further enhance our ISV, reseller and other partner relationships, improve our self-service capabilities, cross-sell our products, expand internationally, and enhance Segment data warehouse interoperability.

We also intend to optimize our business and take measures to reduce costs, including simplifying our business processes, modernizing our infrastructure, focusing on self-service, leveraging AI, and implementing other initiatives targeted at improving efficiencies in our business.

Our revenue is primarily derived from usage-based fees, which can lead to variability in our results of operations and at times create differences between our forecasts and actual results.

Our usage-based revenue is also more immediately impacted by changes in consumer spending and macroeconomic conditions than our subscription-based revenue.

Our gross margin is impacted by a number of factors, including the timing and extent of our investments in our operations;

our product mix;

our ability to manage our cloud infrastructure‑related and network service provider fees, including A2P SMS fees;

the mix of U.S.

messaging termination compared to international messaging termination (which has lower gross margins);

changes in foreign exchange rates;

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

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

Our gross profit is impacted by our product mix.

Our cost of revenue and gross profit are also impacted by changes in hosting fees and network service providers’ fees and our ability to pass these costs through to our customers.

We also experience seasonal trends due to increased consumer activity in the fourth quarter, which may result in lower sequential revenue in the first quarter.

We are winding down the software component of our Zipwhip business in 2024, which we expect will negatively impact revenue growth rates in 2024.

While we previously announced the end of life of our video product, we have extended this timeline to December 2026.

As a result, we no longer expect a significant impact to our revenue growth rates in 2024 resulting from the end of life of our video product.

We are also migrating part of Segment’s architecture to a new infrastructure provider in 2024, which we expect to allow us to recognize greater operational efficiency and scale up new AI-driven products and features.

We expect this migration will take several quarters and result in overlapping expenses with our original and new vendors for much of 2024, which we expect to negatively impact Segment gross margins until we complete the migration.

We expect to complete the migration by the end of 2024.

We expect our prior workforce restructurings to reduce our operating expenses in future periods.

We also expect that the new cash bonus program that we introduced in 2024 to reduce or eliminate our use of equity compensation for certain employees will impact our expenses commencing in the current period.

In February 2023, one of our customers, Oi SA, a Brazilian telecom company, initiated reorganization proceedings in a Brazilian bankruptcy court and exposed us to risks on collections of pre-petition receivables and ongoing revenue.

In April 2024, the creditors of Oi SA approved a Judicial Reorganization Plan (the “Oi Reorganization Plan”) that aims to ensure Oi SA’s operational feasibility and continuity of activities and further provides extended and discounted payment terms for pre-petition receivables.

The Oi Reorganization Plan is subject to ratification by the Brazilian bankruptcy court and contains contingencies including but not limited to Oi SA’s completion of financing by July 16, 2024.

As of March 31, 2024, we have $10.8 million in pre-petition accounts receivable (net of $4.4 million in reserves) and $16.7 million in post-petition accounts receivable due from Oi SA.

The customer has been making regular payments on post-petition receivables.

If the Oi Reorganization Plan is not ratified, if Oi SA fails to comply with its obligations under the Oi Reorganization Plan, if the contingencies contained in the Oi Reorganization Plan are not timely resolved, or if the customer ceases to make payment on post-petition receivables, we may incur additional bad debt expense or reductions in revenue in future periods.

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 year-over-year revenue growth and Dollar-Based Net Expansion Rate for the three months ended September 30, 2023 and 2022, and the number of Active Customer Accounts as of September 30, 2023 and 2022.

The following table summarizes our year-over-year revenue growth and Dollar-Based Net Expansion Rate for the three months ended March 31, 2024 and 2023, and the number of Active Customer Accounts as of March 31, 2024 and 2023.

Three Months Ended

September 30,

Active Customer Accounts (as of end date of period) 306,000 280,000

Active Customer Accounts 313,000 300,000

Total Revenue (in thousands)

Total Revenue Growth 5 % 33 %

$ 1,047,050 $ 1,006,564

Total Revenue Growth Rate

Dollar-Based Net Expansion Rate

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Active Customer Accounts excludes customer accounts from Zipwhip, Inc.

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.

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.

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

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

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

When presented in this Quarterly Report on Form 10-Q, (i) the number of Active Customer Accounts is rounded down to the nearest thousand, (ii) the number of Communications Active Customer Accounts is rounded down to the nearest thousand, and (iii) the number of Segment Active Customer Accounts is rounded down to the nearest hundred.

Our business and customer relationships have grown since we began reporting the number of Active Customer Accounts using the above definition, which is anchored to a minimum $5 monthly revenue figure.

We have a large number of Active Customer Accounts with relatively low individual spend that in the aggregate do not drive a significant portion of our revenue.

Due to this dynamic, we believe that the number of Active Customer Accounts, as currently defined, is less informative now as an indicator of the growth of our business and future revenue trends than it has been in prior periods.

In the three months ended March 31, 2024 and 2023, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

Dollar‑Based Net Expansion Rate

Our Dollar-Based Net Expansion Rate compares the total revenue from all Active Customer Accounts and customer accounts from Zipwhip, Inc.

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 and customer accounts from Zipwhip, Inc.

that were Active Customer Accounts or customer accounts from Zipwhip, Inc.

in the same quarter of the prior year.

Our Dollar-Based Net Expansion Rate compares the total revenue from all Active Customer Accounts and customer accounts from Zipwhip 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 and customer accounts from Zipwhip that were Active Customer Accounts or customer accounts from Zipwhip 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.

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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 September 30, 2023, our Dollar-Based Net Expansion Rate excludes the contributions from acquisitions made after July 1, 2022.

As a result, for the quarter ended March 31, 2024, our Dollar-Based Net Expansion Rate excludes the contributions from any acquisitions made after January 1, 2023.

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 September 30, 2023, our Dollar-Based Net Expansion Rate excludes the contributions from divestitures made after September 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 and customer accounts from Zipwhip, Inc.

for that respective segment.

Revenue from customer accounts from Zipwhip, Inc., which we acquired on July 14, 2021, has been included in our Dollar-Based Net Expansion Rate beginning in the quarter ended December 31, 2022.

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.

As a result, for the quarter ended March 31, 2024, our Dollar-Based Net Expansion Rate excludes the contributions from any divestitures made after March 31, 2023.

Communications Dollar-Based Net Expansion Rate and Segment Dollar-Based Net Expansion Rate are calculated using the same methodology, but using only revenue attributable to the respective segment and Active Customer Accounts and customer accounts from Zipwhip for that respective segment.

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

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Our reportable segments contain products that may follow either revenue recognition model.

The majority of the revenue in our Communications segment is derived from usage‑based fees.

These fees are earned when customers access our cloud-based platform.

The majority of our Communications reportable segment revenue is derived from usage-based fees.

The usage-based fees are earned when customers access our cloud-based platform and start using the products.

Some examples of our usage-based products are Messaging and Voice.

For our Messaging products, we primarily charge fees related to the number of text messages sent or received.

For our Voice products, we primarily charge fees for minutes of call duration.

In the three months ended September 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 products in both Communications and Data & Applications segments.

Some examples of our primarily subscription-based products are Segment, Engage, Flex and Email.

For our subscription-based products we recognize revenue evenly over the contract term.

When our usage-based Communications products are embedded into our subscription-based products, such as into Flex, we charge for those separately on a usage basis and record the revenue into the reportable segment in which the usage-based product resides.

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, through a negotiated contract established for at least 12 months that typically contains minimum revenue commitments and 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.

For Messaging products, we primarily charge fees related to the number of text messages sent or received.

For Voice products, we primarily charge fees for minutes of call duration.

Some examples of the subscription-based Communications products are Email, Marketing Campaigns and Flex.

For these products we recognize revenue evenly over the contract term.

Our Segment reportable segment revenue is derived from Segment and Engage products that are subscription-based.

For these products we recognize revenue evenly over the contract term.

When our usage-based products are embedded into our subscription-based products, we charge for each product separately on a usage or subscription basis, respectively, and record the revenue in the reportable segment in which each product resides.

Most of our usage-based customers gain access to our products and solutions through our e-commerce self-service sign-up format, which requires an upfront prepayment via credit card that is drawn down as they use our products.

Pricing is generally based on a publicly available, self-serve pricing matrix that generally allows customers to receive tiered discounts as their usage of our products increases.

Many of our larger usage-based customers enter into contractual arrangements with us for a period of at least 12 months.

These contracts may include negotiated terms and typically include minimum revenue commitments of varying durations.

Usage-based customers subject to such contracts are typically invoiced monthly in arrears for products used.

In each of the three months ended March 31, 2024 and 2023, we generated 71% of our revenue from usage-based fees.

Subscription-based fees are earned in accordance with subscription pricing terms.

For our subscription-based products, customers generally enter into negotiated contracts, which are typically one to three years in duration.

Subscription customers are generally invoiced in advance at the start of the contract term.

In each of the three months ended March 31, 2024 and 2023, we generated 29% of our revenue from non-usage‑based fees.

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.

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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.

Cost of Revenue and Gross Margin

Cost of Revenue and Gross Profit

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 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.

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, and amortization of capitalized internal-use software development costs and acquired intangible assets.

Costs of revenue are generally directly attributable to each segment.

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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;

our product mix;

our ability to manage our network service provider and cloud infrastructure‑related fees, including A2P SMS fees;

the mix of U.S.

revenue compared to international revenue;

changes in foreign exchange rates;

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

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

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

Gross Profit .

Gross profit represents revenue less cost of revenue.

Operating Expenses

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

Research and development expenses are generally directly attributable to each segment.

Certain research and development expenses are allocated to segments based on methodologies that best reflect the patterns of consumptions of these costs.

A small percentage of research and development costs, such as costs related to digital architecture and information security, are not allocated to segments because they support company-wide processes and are managed on a company-wide level.

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

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Sales and marketing expenses also include expenditures related to advertising, marketing, 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.

Sales and marketing expenses are generally directly attributable to each segment.

Certain sales and marketing expenses are allocated to segments based on methodologies that best reflect the patterns of consumptions of these costs.

A small percentage of sales and marketing costs, such as costs related to corporate communications and global brand awareness, are not allocated to segments because they support company-wide processes and are managed on a company-wide level.

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

General and Administrative.

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

General and administrative expenses are allocated to each segment when they are directly attributable to each segment or are allocated to segments based on methodologies that best reflect the patterns of consumptions of these costs.

A significant portion of general and administrative costs, such as costs related to corporate governance, and certain legal, human resources, finance and accounting functions, support company-wide processes and are managed on a company-wide level and, therefore, are considered corporate costs and are not allocated to segments.

We expect that we will incur costs associated with supporting the growth of our business.

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

Restructuring costs consist primarily of personnel costs, such as employee severance payments, benefits and certain facilitation costs, associated with our workforce reductions.

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.

Impairment of long-lived assets consists of impairment of intangible assets and 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 Expenses, Net

Our other 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.

Our other 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, including interest income;

and debt-related costs, including interest expense.

Provision for Income Taxes

Our provision for income taxes consists primarily of income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business.

Our provision for income taxes consists primarily of federal, state and foreign income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business.

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

Non-GAAP Financial Measures

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

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

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

We believe that this non‑GAAP financial information 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 results of operations reported in accordance with generally accepted accounting principles (“GAAP”).

We believe free cash flow and free cash flow margin provide useful supplemental information to help investors understand underlying trends in our business and our liquidity.

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.

4 unchanged sentences

Three Months Ended

September 30,

Reconciliation:

11 unchanged sentences

Three Months Ended

September 30,

Reconciliation:

5 unchanged sentences

Acquisition and divestiture related expenses — (2,235)

Loss on net assets held for sale — (3,824)

Payroll taxes related to stock-based compensation (6,431) (5,052)

Charitable contribution (1,339) (1,911)

Charitable contributions (1,295) (1,599)

Restructuring costs (9,946) (121,942)

1 unchanged sentence

Non-GAAP operating expenses $ 406,349 $ 422,349

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

Non‑GAAP Income from Operations and Non‑GAAP Operating Margin

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

Three Months Ended

September 30,

Reconciliation:

6 unchanged sentences

Acquisition and divestiture related expenses — 2,235

Loss on net assets held for sale — 3,824

Payroll taxes related to stock-based compensation 6,776 5,247

Charitable contribution 1,339 1,911

Charitable contributions 1,295 1,599

Restructuring costs 9,946 121,942

Impairment of long-lived assets — 21,784

Non-GAAP income (loss) from operations $ 136,434 $ (35,097)

Non-GAAP income from operations

$ 159,610 $ 103,787

Non-GAAP operating margin 15 % 10 %

Free Cash Flow and Free Cash Flow Margin

For the periods presented, we define free cash flow and free cash flow margin as net cash provided by (used in) operating activities and operating cash flow margin, respectively, less capitalized software development costs and purchases of long-lived and intangible assets, as presented in the table below:

Three Months Ended

Reconciliation:

(In thousands)

Net cash provided by (used in) operating activities $ 190,123 $ (97,866)

Operating cash flow margin

Non-GAAP adjustments:

Capitalized software development costs (11,154) (9,860)

Purchases of long-lived and intangible assets (1,671) (6,751)

Free cash flow $ 177,298 $ (114,477)

Free cash flow margin

Results of Operations

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

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

Three Months Ended Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

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

Condensed Consolidated Statements of Operations Data:

19 unchanged sentences

Impairment of strategic investments — (46,154)

Other income (expenses), net 1 (8,374) 17,731 (23,290)

Other income, net 27,918 8,985

Total other expenses, net (1,657) (67,588)

11 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

Three Months Ended

(In thousands)

7 unchanged sentences

(2) Includes amortization of acquired intangibles as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

Three Months Ended

(In thousands)

2 unchanged sentences

Sales and marketing 12,137 20,393

General and administrative — — — 7

Total $ 28,939 $ 50,774

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 Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

Three Months Ended

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

13 unchanged sentences

Impairment of strategic investments — (5)

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

Other income, net 3 1

Total other expenses, net — (7)

Loss before provision for income taxes

(14) (49) (21) (37)

Provision for income taxes

1 unchanged sentence

____________________________________

* Less than 0.5% of revenue.

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

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

Comparison of Three Months Ended March 31, 2024 and 2023

Three Months Ended

September 30,

2024 2023 Change

1 unchanged sentence

Twilio Communications $ 972,005 $ 932,948 $ 39,057 4 %

Twilio Data & Applications 126,956 116,837 10,119 9 %

Twilio Segment 75,045 73,616 1,429 2 %

Consolidated total revenue $ 1,047,050 $ 1,006,564 $ 40,486 4 %

In the three months ended September 30, 2023, Communications revenue increased by $40.5 million, or 5%, compared to the same period last year.

This increase was primarily attributable to a 10% increase in the number of Communications Active Customer Accounts from over 264,000 as of September 30, 2022 to over 291,000 as of September 30, 2023, as well as the increased usage of our products by our existing customers, as reflected in our Communications Dollar‑Based Net Expansion Rate of 101%.

These increases were offset by a decrease of $28.5 million related to revenue from our ValueFirst and IoT businesses, which we divested during 2023.

In the three months ended September 30, 2023, Data & Applications revenue increased by $10.1 million, or 9%, compared to the same period last year.

This increase was primarily attributable to a 6% increase in the number of Data & Applications Active Customer Accounts from over 31,000 as of September 30, 2022 to over 33,000 as of September 30, 2023 1 .

Our Data & Applications Dollar‑Based Net Expansion Rate was 96% for the three months ended September 30, 2023 due to higher contraction and customer churn compared to the same period last year.

In the three months ended September 30, 2023, consolidated total revenue increased by $50.6 million, or 5%, compared to the same period last year.

This increase was primarily attributable to a 9% increase in the number of Active Customer Accounts from over 280,000 as of September 30, 2022 to over 306,000 as of September 30, 2023, as well as the increased usage of our products by our existing customers, as reflected in our Dollar‑Based Net Expansion Rate of 101%.

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

revenue and international revenue represented $688.1 million, or 67%, and $345.5 million, or 33%, respectively, of total revenue.

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

revenue and international revenue represented $650.5 million, or 66%, and $332.5 million, or 34%, respectively, of total revenue.

1 In our Quarterly Report on Form 10-Q for the three months ended June 30, 2023 (the “Q2’23 10-Q”), we disclosed that we had over 27,000 Data & Applications Active Customer Accounts as of June 30, 2023, an increase of 4% compared to over 26,000 Data & Applications Active Customer Accounts as of June 30, 2022.

Due to an inadvertent exclusion of certain accounts, the number of Data & Applications Active Customer Accounts as of June 30, 2023 and June 30, 2022 was understated.

Including the inadvertently excluded accounts, we had over 33,000 Data & Applications Active Customer Accounts as of June 30, 2023, an increase of 6% compared to over 31,000 Data & Applications Active Customer Accounts as of June 30, 2022.

Our consolidated Active Customer Accounts as of June 30, 2023 and June 30, 2022, and our Data & Applications Dollar-Based Net Expansion Rate for the three and six months ended June 30, 2023, in each case as disclosed in our Q2’23 10-Q, were not affected by the above understatement.

Cost of Revenue and Gross Margin

In the three months ended March 31, 2024, Communications revenue increased by $39.1 million, or 4%, 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 $48.9 million in revenue derived from our new Communications Active Customer Accounts and new customer accounts from Zipwhip.

These increases were partially offset by a decrease of $28.0 million related to revenue from our ValueFirst and Internet of Things businesses which we divested after the first quarter of 2023.

In the three months ended March 31, 2024, Segment revenue increased by $1.4 million, or 2%, compared to the same period last year.

This change was primarily attributable to the decreased usage of our products due to churn and contraction affecting our existing customers in 2023, as reflected in our Segment Dollar‑Based Net Expansion Rate of 92%;

partially offset by $8.5 million in revenue derived from our new Segment Active Customer Accounts.

Cost of Revenue and Gross Profit

Three Months Ended

September 30,

2024 2023 Change

(Dollars in thousands)

Twilio Communications

Cost of revenue $ 503,009 $ 515,874 $ (12,865) (2) %

Gross margin 48 % 44 %

Twilio Data & Applications

Cost of revenue 43,668 35,888 $ 7,780 22 %

Gross margin 66 % 69 %

Consolidated total

Cost of revenue $ 517,351 $ 520,955 $ (3,604) (1) %

Gross margin 50 % 47 %

In the three months ended September 30, 2023, Communications cost of revenue decreased by $11.4 million, or 2%, 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 September 30, 2023, Data & Applications cost of revenue increased by $7.8 million, or 22%, compared to the same period last year.

The increase was primarily attributable to a $4.5 million increase in hosting fees, a $1.3 million increase in stock-based compensation, and a $1.2 million increase in amortization of capitalized internal-use software development costs.

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

This increase was primarily driven by a 300 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, as a result of a higher proportion of revenue being derived from the United States, where margins are higher.

The increase was also partially driven by a 70 basis point increase due to the divestiture of our ValueFirst and IoT businesses during the first half of 2023, which historically had lower gross margins than Communications as a whole.

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

This decrease was primarily driven by a 350 basis point decrease due to an increase in hosting costs, a 110 basis point decrease due to an increase in stock-based compensation, and a 100 basis point decrease due to an increase in amortization of capitalized internal-use software development costs, partially offset by a 9% increase in total revenue, as discussed in the Revenue section above.

Gross profit $ 544,041 $ 490,690 $ 53,351 11 %

In the three months ended March 31, 2024, cost of revenue decreased by $12.9 million, or 2%, compared to the same period last year.

The decrease was primarily attributable to a $14.3 million decrease in amortization of intangible assets and an $8.9 million decrease in network service providers’ costs, net of the impact of hedging instruments.

These decreases were partially offset by a $6.6 million increase in hosting fees and a $4.4 million increase in amortization of internal-use software development costs.

In the three months ended March 31, 2024, gross profit increased by $53.4 million, or 11%, compared to the same period last year.

This increase was attributable to the factors impacting our revenue and cost of revenue, as described above.

Operating Expenses

Three Months Ended

September 30,

2024 2023 Change

6 unchanged sentences

Total operating expenses $ 587,545 $ 754,774 $ (167,229) (22) %

In the three months ended September 30, 2023, research and development expenses decreased by $43.1 million, or 15%, compared to the same period last year.

The decrease was primarily attributable to a $46.5 million decrease in total personnel costs compared to the prior period, which was primarily attributable to the restructuring of our workforce in September 2022 and February 2023, which contributed to a 25% decrease in average research and development headcount during the period, and to the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

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 September 30, 2023, sales and marketing expenses decreased by $65.9 million, or 20%, compared to the same period last year.

The decrease was primarily attributable to a $63.1 million decrease in total personnel costs compared to the prior period, which was primarily attributable to the restructuring of our workforce in September 2022 and February 2023, which contributed to a 31% decrease in average sales and marketing headcount during the period, and to the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

The impacts of other operating expense categories were not significant either individually or in the aggregate.

In the three months ended September 30, 2023, general and administrative expenses decreased by $21.3 million, or 16%, compared to the same period last year.

The decrease was primarily attributable to a $21.2 million decrease in total personnel costs compared to the prior period, which was primarily attributable to the restructuring of our workforce in September 2022 and February 2023, which contributed to a 39% decrease in average general and administrative headcount during the period, and to the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

The impacts of other operating expense categories were not significant either individually or in the aggregate.

In the three months ended September 30, 2023, restructuring costs decreased by $69.0 million, or 95%, compared to the same period last year.

The decrease is due to costs incurred in the prior period related to the workforce reduction effected during September 2022.

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 September 30, 2023, impairment of long-lived assets decreased $94.6 million, or 97%, compared to the same period last year.

The decrease is due to a larger number of office closures that occurred in the three months ended September 30, 2022, which was the first period in which we incurred such charges.

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

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 are total revenue and non-GAAP gross profit, o ur segment profitability measure.

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

Three Months Ended

September 30,

(Dollars in thousands)

Twilio Communications $ 451,330 $ 401,236 $ 50,094 12 %

Twilio Data & Applications 101,268 97,897 3,371 3 %

Consolidated total non-GAAP gross profit $ 552,598 $ 499,133 $ 53,465 11 %

In the three months ended September 30, 2023, Communications non-GAAP gross profit increased by $50.1 million, or 12%, compared to the same period last year.

The increase in Communications non-GAAP gross profit was primarily driven by the same factors impacting Communications revenue and Communications cost of revenue, as described in the Revenue and Cost of Revenue and Gross Margin sections above, adjusted for a $1.8 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 September 30, 2023, Data & Applications non-GAAP gross profit increased by $3.4 million, or 3%, compared to the same period last year.

The increase in Data & Applications non-GAAP gross profit was primarily driven by the same factors impacting Data & Applications revenue and Data & Applications cost of revenue, as described in the Revenue and Cost of Revenue and Gross Margin sections above, adjusted for a $1.0 million net increase, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Nine Months Ended

September 30,

2023 2022 Change

(Dollars in thousands)

Twilio Communications $ 2,703,079 $ 2,470,350 $ 232,729 9%

Twilio Data & Applications 374,916 331,397 43,519 13%

Consolidated total revenue $ 3,077,995 $ 2,801,747 $ 276,248 10%

In the nine months ended September 30, 2023, Communications revenue increased by $232.7 million, or 9%, compared to the same period last year.

These increases were partially offset by a decrease of $29.9 million related to revenue from our ValueFirst and IoT businesses, which we divested during 2023.

In the nine months ended September 30, 2023, Data & Applications revenue increased by $43.5 million, or 13%, compared to the same period last year.

This increase was attributable to a 6% increase in the number of Data & Applications Active Customer Accounts from over 31,000 as of September 30, 2022 to over 33,000 as of September 30, 2023 2 .

Our Data & Applications Dollar‑Based Net Expansion Rate was 100% for the nine months ended September 30, 2023.

2 In our Q2’23 10-Q, we disclosed that we had over 27,000 Data & Applications Active Customer Accounts as of June 30, 2023, an increase of 4% compared to over 26,000 Data & Applications Active Customer Accounts as of June 30, 2022.

Due to an inadvertent exclusion of certain accounts, the number of Data & Applications Active Customer Accounts as of June 30, 2023 and June 30, 2022 was understated.

In the nine months ended September 30, 2023, consolidated total revenue increased by $276.2 million, or 10%, compared to the same period last year.

In the nine months ended September 30, 2023, U.S.

revenue and international revenue represented $2.0 billion, or 66%, and $1.0 billion, or 34%, respectively, of total revenue.

In the nine months ended September 30, 2022, U.S.

revenue and international revenue represented $1.8 billion, or 66%, and $964.4 million, or 34%, respectively, of total revenue.

Cost of Revenue and Gross Margin

Nine Months Ended

September 30,

2023 2022 Change

(Dollars in thousands)

Twilio Communications

Cost of revenue $ 1,442,536 $ 1,367,852 $ 74,684 5 %

Gross margin 47 % 45 %

Twilio Data & Applications

Cost of revenue 122,695 101,460 $ 21,235 21 %

Gross margin 67 % 69 %

Consolidated total

Cost of revenue $ 1,565,231 $ 1,469,312 $ 95,919 7 %

Gross margin 49 % 48 %

In the nine months ended September 30, 2023, Communications cost of revenue increased by $74.7 million, or 5%, compared to the same period last year.

This increase was primarily attributable to a $62.3 million increase in network service providers’ costs, net of the impact of hedging instruments, which support the growth in usage of our products driven by the growth of Communications Active Customer Accounts and the increased usage of our products by our existing customers.

In the nine months ended September 30, 2023, Data & Applications cost of revenue increased by $21.2 million, or 21%, compared to the same period last year.

The increase was primarily driven by an $8.1 million increase in hosting fees, a $5.4 million increase in support and professional service fees, and a $4.9 million increase in amortization of capitalized internal-use software development costs.

In the nine months ended September 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.

The increase was also partially driven by a 30 basis point increase due to the divestiture of our ValueFirst and IoT businesses during the first half of 2023, which historically had lower gross margins than Communications as a whole.

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

This decrease was primarily driven by a 220 basis point decrease due to an increase in hosting fees, a 140 basis point decrease due to an increase in support and professional service fees, and a 130 basis point decrease due to an increase in amortization of capitalized internal-use software development costs, partially offset by a 13% increase in total revenue, as discussed in the Revenue section above.

Operating Expenses

Nine Months Ended

September 30,

2023 2022 Change

(Dollars in thousands)

Research and development $ 707,145 $ 804,987 $ (97,842) (12) %

Sales and marketing 784,383 951,697 (167,314) (18) %

General and administrative 361,491 392,319 (30,828) (8) %

Restructuring costs 140,281 72,451 67,830 94 %

Impairment of long-lived assets 34,278 97,722 (63,444) (65) %

Total operating expenses $ 2,027,578 $ 2,319,176 $ (291,598) (13) %

In the nine months ended September 30, 2023, research and development expenses decreased by $97.8 million, or 12%, compared to the same period last year.

The decrease was primarily attributable to a $99.5 million decrease in total personnel costs compared to the prior period, which was primarily attributable to the restructuring of our workforce in September 2022 and February 2023, which contributed to a 10% decrease in average research and development headcount during the period, and to the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

In the nine months ended September 30, 2023, sales and marketing expenses decreased by $167.3 million, or 18%, compared to the same period last year.

The decrease was primarily attributable a $142.6 million decrease in total personnel costs compared to the prior period, which was primarily attributable to the restructuring of our workforce in September 2022 and February 2023, which contributed to a 19% decrease in average sales and marketing headcount during the period, and to the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

The lower sales and marketing expenses were also partially due to a $17.4 million decrease in advertising expenses.

In the nine months ended September 30, 2023, general and administrative expenses decreased by $30.8 million, or 8%, compared to the same period last year.

The decrease was primarily attributable to a $59.4 million decrease in total personnel costs compared to the prior period, which was primarily attributable to the restructuring of our workforce in September 2022 and February 2023, which contributed to a 27% decrease in average general and administrative headcount during the period, and to the sunsetting of our employee sabbatical program in the three months ended March 31, 2023.

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

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

In the nine months ended September 30, 2023, restructuring costs increased by $67.8 million, or 94%, as compared to the same period last year.

The increase was primarily a result of our February 2023 Plan, which had a more substantial impact than our September 2022 restructuring plan in the comparable period.

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 nine months ended September 30, 2023, impairment of long-lived assets decreased by $63.4 million, or 65%, as compared to the same period last year.

The decrease was primarily driven by a larger number of office closures that occurred in 2022 when our remote-first policy was initially enacted.

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

In the three months ended March 31, 2024, research and development expenses increased by $13.0 million, or 5%, compared to the same period last year.

The increase was primarily attributable to a $6.4 million increase in total personnel costs, despite a 23% decrease in average research and development headcount during the period.

The $6.4 million increase in total personnel costs was primarily driven by a $14.5 million increase in bonus expenses as a result of the introduction of our new cash bonus program, a $3.8 million increase in stock-based compensation expense, and a $5.3 million increase related to our employee sabbatical program due to the reversal of certain expenses that occurred upon discontinuation of the program in the first quarter of 2023.

These increases were partially offset by a $14.6 million decrease in salaries expense and a $3.2 million decrease in employee benefits expense due to our lower headcount.

The increase in research and development expenses was also attributable to a $4.1 million increase in software subscription expenses.

In the three months ended March 31, 2024, sales and marketing expenses decreased by $45.9 million, or 18%, compared to the same period last year.

The decrease was primarily attributable to a $34.2 million decrease in total personnel costs, which was mostly driven by the restructuring of our workforce in February 2023 and December 2023, that contributed to a 24% decrease in average sales and marketing headcount during the period.

Sales and marketing expenses also decreased due to a $8.3 million decrease in amortization of intangible assets and a $3.4 million decrease in advertising expenses.

In the three months ended March 31, 2024, general and administrative expenses decreased by $0.6 million, or 1%, compared to the same period last year.

Fluctuations in general and administrative expense categories were not significant either individually or in the aggregate.

In the three months ended March 31, 2024, restructuring costs decreased by $112.0 million, or 92%, compared to the same period last year.

The decrease was primarily attributable to restructuring activities undertaken in February 2023, which had a more substantial financial impact than the restructuring activities undertaken in the first quarter of 2024.

In the three months ended March 31, 2024, impairment of long-lived assets decreased by $21.8 million, or 100%, compared to the same period last year.

The prior year charges were related to the impairment of certain of our operating leases and other long-lived assets as a result of permanent office closures in the first quarter of 2023.

There were no such impairments in the current period.

Other Expenses, net

Nine Months Ended

September 30,

Three Months Ended

2024 2023 Change

2 unchanged sentences

Impairment of strategic investments — 46,154 (46,154) (100) %

Other (income) expenses, net

Other income, net

(27,918) (8,985) (18,933) (211) %

Total other expenses, net $ 1,657 $ 67,588 $ (65,931) (98) %

In the nine months ended September 30, 2023, other expenses, net increased by $85.6 million, or 233%, compared to the same period last year.

The increase is primarily related to an increase of $80.5 million in our share of losses from our equity method investment.

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 nine months ended September 30, 2023:

Nine Months Ended

September 30,

In the three months ended March 31, 2024, other expenses, net, decreased by $65.9 million, or 98%, compared to the same period last year.

The decrease was primarily attributable to a $46.2 million impairment of a strategic investment that occurred during the first quarter of 2023 and a $18.9 million increase in income related to our investments in the first quarter of 2024 compared to the same period in 2023.

Results of Operations by Segment

The following table presents the results for non-GAAP income (loss) from operations, as reviewed by our CODM, for each of our Communications and Segment reportable segments for the three months ended March 31, 2024 and 2023:

Three Months Ended

2024 2023 Change

(Dollars in thousands)

Twilio Communications $ 249,010 $ 180,464 $ 68,546 38 %

Twilio Data & Applications 304,074 279,441 24,633 9 %

Consolidated total non-GAAP gross profit $ 1,620,615 $ 1,440,124 $ 180,491 13 %

In the nine months ended September 30, 2023, Communications non-GAAP gross profit increased by $155.9 million, or 13%, compared to the same period last year.

The increase in Communications non-GAAP gross profit was primarily driven by the same factors impacting Communications revenue and cost of revenue in the nine months ending September 30, 2023, as described above, adjusted for a $2.2 million net decrease, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

In the nine months ended September 30, 2023, Data & Applications non-GAAP gross profit increased by $24.6 million, or 9%, compared to the same period last year.

The increase in Data & Applications non-GAAP gross profit was primarily driven by the same factors impacting Data & Applications revenue and cost of revenue in the nine months ending September 30, 2023, as described above, adjusted for a $2.3 million net increase, in aggregate, in stock-based compensation, payroll taxes related to stock-based compensation and amortization of acquired intangibles.

Twilio Segment $ (20,994) $ (17,217) $ (3,777) 22 %

In the three months ended March 31, 2024, Communications non-GAAP income from operations increased by $68.5 million, or 38%, compared to the same period last year.

The increase was primarily driven by an increase in Communications revenue of $39.1 million, as described in the Revenue section above, and a decrease in Communications operating expenses and cost of revenue.

The decrease in operating expenses was primarily attributable to a $23.2 million decrease in total Communications personnel costs, which was mainly due to the restructuring of our workforce in February 2023 and December 2023.

These restructurings contributed to a 27% decrease in average Communications headcount compared to the same period last year.

Communications non-GAAP income from operations also increased due to an $8.9 million decrease in network service providers’ costs, net of the impact of hedging instruments.

In the three months ended March 31, 2024, Segment non-GAAP loss from operations increased by $3.8 million, or 22%, compared to the same period last year.

The increase was driven by an increase in Segment operating expenses of $3.5 million and an increase in Segment cost of revenue of $1.7 million, partially offset by an increase in Segment revenue of $1.4 million, as described in the Revenue section above.

Liquidity and Capital Resources

As of September 30, 2023, we had cash and cash equivalents of $677.9 million and short-term marketable securities of $3.2 billion.

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

As of March 31, 2024, we had cash and cash equivalents of $672.6 million and short-term marketable securities of $3.2 billion.

Cash equivalents consist of money market funds and commercial paper.

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

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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 12 and Note 14(a) to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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.

Refer to Note 9 and Note 11(a) to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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 or 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.

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

Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part II, Item 1A, “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements.

We may be required to seek additional equity or debt financing in order to meet our future capital requirements.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

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 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 II, Item 1A, “Risk Factors.”

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.

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.

Our future capital requirements, the adequacy of our available funds and our cash from operations depend on many factors and are affected by various risks and uncertainties, including those set forth in Part II, Item 1A, “Risk Factors.”

Share Repurchase Programs

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 common stock.

In March 2024, our board of directors authorized a second share repurchase program for an additional $2.0 billion in aggregate value of our common stock.

As of March 31, 2024, we have repurchased $1.1 billion of our common stock in the open market under these programs, and approximately $1.9 billion of the aggregate authorized amount remained available for future repurchases.

Repurchases under these programs 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 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 nine months ended September 30, 2023, we purchased $56.0 million in aggregate value, or 0.9 million shares, and $551.0 million in aggregate value, or 9.2 million shares, respectively, of our Class A common stock on the open market under this program.

As of September 30, 2023, approximately $449.0 million of the originally authorized amount remains available for future repurchases.

The programs expire on December 31, 2024.

In the three months ended March 31, 2024, we repurchased $384.3 million in aggregate value, or 6.1 million shares, of our common stock on the open market under these programs.

2029 Notes and 2031 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 Notes are described in detail in Note 13 to our Annual Report on Form 10-K filed with the SEC on February 27, 2023.

These Notes are described in detail in Note 14 to our Annual Report on Form 10-K filed with the SEC on February 27, 2024.

The following table summarizes our cash flows:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

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$ 190,123 $ (97,866)

Cash provided by (used in) investing activities 365,745 (682,153)

Cash (used in) provided by financing activities (536,221) 33,252

Cash provided by investing activities 189,770 202,465

Cash used in financing activities (363,229) (121,538)

Effect of exchange rate changes on cash, cash equivalents and restricted cash — 39

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Cash Flows from Operating Activities

In the nine months ended September 30, 2023, cash provided by operating activities consisted primarily of our net loss of $650.0 million adjusted for non-cash items, including $509.4 million of stock-based compensation expense which included the impact of our February 2023 Plan, $219.0 million of depreciation and amortization expense, $93.8 million of our share of losses from an equity method investment, $54.4 million of amortization of deferred commissions, $46.2 million of impairment of an investment that we acquired in 2021, $34.3 million of impairment of operating lease assets and other long-lived assets, $32.3 million loss on net assets divested, $21.8 million of non-cash reduction in our operating right-of-use asset, and $240.3 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $125.6 million primarily due to revenue growth, timing of cash receipts and prepayments and certain operating expenses.

Accounts payable and other current liabilities decreased $62.3 million primarily driven by a $22.3 million decrease in the sabbatical benefit accrual as a result of lower headcount and sunsetting of the program, and a decrease in personnel-related accruals due to lower headcount.

Operating lease liabilities decreased $41.4 million due to payments made against our operating lease obligations.

Other long-term assets increased $15.4 million primarily due to an increase in the sales commissions balances related to the growth of our business.

The loss on net assets 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 nine months ended September 30, 2022, cash used in operating activities consisted primarily of our net loss of $1.0 billion adjusted for non-cash items, including $606.3 million of stock-based compensation expense, $207.9 million of depreciation and amortization expense, $100.7 million of impairment of operating lease assets and other long-lived assets, $38.7 million of non-cash reduction in our operating right-of-use asset, $41.3 million of amortization of deferred commissions, $27.9 million of net amortization of investment premium and discount, and $235.8 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $202.4 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 $134.0 million primarily due to increases in transaction volumes, the impacts from our September 2022 restructuring plan and the sabbatical employee benefit, which was introduced during 2022.

In the three months ended March 31, 2024, cash provided by operating activities consisted primarily of our net loss of $55.3 million adjusted for non-cash items, including $158.6 million of stock-based compensation expense, $53.3 million of depreciation and amortization expense, $18.8 million amortization of deferred commissions, $29.6 million of share of losses from equity method investments and $25.1 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses decreased $32.5 million primarily due to timing of cash receipts and pre-payments of certain operating expenses.

Accounts payable and other current liabilities decreased $50.2 million primarily driven by timing of payments to vendors.

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, $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.

Operating lease liabilities decreased $13.7 million due to payments made against our operating lease obligations.

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Cash Flows from Investing Activities

In the nine months ended September 30, 2023, cash provided by investing activities was $365.7 million primarily consisting of $372.9 million of proceeds from sales and maturities of marketable securities, net of purchases of marketable securities and other investments, and $38.2 million of proceeds from divestitures, net of cash divested, partially offset by $30.5 million related to capitalized software development costs and $9.0 million related to purchases of long-lived assets.

In the nine months ended September 30, 2022, cash used in investing activities was $682.2 million primarily consisting of $584.8 million of purchases of marketable securities and other investments, net of maturities and sales, $32.9 million of net cash paid to acquire other businesses, $35.9 million related to capitalized software development costs and $28.6 million related to purchases of long-lived assets.

In the three months ended March 31, 2024, cash provided by investing activities was $189.8 million, primarily consisting of $202.6 million of maturities and sales of marketable securities, net of purchases, partially offset by $11.2 million related to capitalized software development costs and $1.7 million related to purchases of long-lived assets.

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;

partially offset by $9.9 million related to capitalized software development costs and $6.8 million related to purchases of long-lived assets.

Cash Flows from Financing Activities

In the nine months ended September 30, 2023, cash used in financing activities was $536.2 million primarily consisting of $548.9 million of cash paid to repurchase 9.2 million shares of our Class A common stock in the open market, including related costs, and $13.8 million in principal payments on debt and finance leases, offset by $28.9 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.

In the nine months ended September 30, 2022, cash provided by financing activities was $33.3 million primarily consisting of $43.8 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan, offset by $9.4 million in principal payments on debt and finance leases.

In the three months ended March 31, 2024, cash used in financing activities was $363.2 million, primarily consisting of $356.9 million of cash paid to repurchase 6.1 million shares of our common stock in the open market, including related costs.

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.

Critical Accounting Policies and Estimates

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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