TWILIO INC 10-Q

Item 2. 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 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. Overview 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, Flex, Email and 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. Together, our Communications and Segment products power our customer engagement platform. 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. 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 the three months ended September 30, 2024 and 2023, our revenue was $1.13 billion and $1.03 billion, respectively, and our net loss was $9.7 million and $141.7 million, respectively. In both the three months ended September 30, 2024 and 2023, our 10 largest Active Customer Accounts generated an aggregate of 10% of our total quarterly 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, enhance Segment data warehouse interoperability and reduce time to value for Segment. We also intend to optimize our business and take measures to reduce costs, including simplifying and further automating 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. 26 Table of Contents 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 migrating part of Segment’s architecture to a new infrastructure provider, which we expect will allow us to recognize greater operational efficiency and scale up new AI-driven products and features. This migration will result in overlapping expenses with our original and new vendors for the fourth quarter of 2024, which we expect to negatively impact Segment gross margins in such quarter. We expect to complete the migration by the end of 2024. We also expect that the wind-down of the software component of our Zipwhip business will negatively impact our revenue growth rates in the fourth quarter of 2024. In 2024, we introduced a company-wide annual cash bonus program to reduce our use of equity compensation. The bonus payout amount for each eligible participant is determined based on Company and individual full year performance metrics. In the three and nine months ended September 30, 2024, we recorded $45.8 million and $94.4 million of expense related to the program, respectively. The third quarter of 2024 included an additional $17.9 million of expense due to a higher anticipated bonus payout as a result of an increased outlook for the Company’s full year performance metrics. The program also provided for a 25% mid-year bonus cash payment in its initial year only, which resulted in a $24.3 million payment in July 2024. As of September 30, 2024, the accrued bonus liability was $70.2 million recorded in the accrued expenses and other current liabilities in our condensed consolidated balance sheet included elsewhere in this Quarterly Report on Form 10-Q. We expect our prior workforce restructurings to reduce our operating expenses in future periods. We also expect the new cash bonus program as described above to continue to increase our expenses in future periods. 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 was subsequently ratified by the Brazilian bankruptcy court and contains various contingencies. As of September 30, 2024, we have $6.4 million in pre-petition receivables recorded in other long-term assets (net of $8.8 million in reserves) and $10.8 million in post-petition accounts receivable due from Oi SA. The customer has been making regular payments on post-petition receivables. 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, 2024 and 2023, and the number of Active Customer Accounts as of September 30, 2024 and 2023. 27 Table of Contents Three Months Ended September 30, 2024 2023 Active Customer Accounts 320,000 306,000 Total Revenue (in thousands) $ 1,133,649 $ 1,033,670 Total Revenue Growth Rate 10 % 5 % Dollar-Based Net Expansion Rate 105 % 101 % Active Customer Accounts We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. A single organization may constitute multiple unique Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account. Active Customer Accounts excludes customer accounts from Zipwhip, Inc. (“Zipwhip”). 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 September 30, 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 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. When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period. Revenue from acquisitions does not impact the Dollar-Based Net Expansion Rate calculation until the quarter following the one-year anniversary of the applicable acquisition, unless the acquisition closing date is the first day of a quarter. As a result, for the quarter ended September 30, 2024, our Dollar-Based Net Expansion Rate excludes the contributions from any acquisitions made after July 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, 2024, our Dollar-Based Net Expansion Rate excludes the contributions from any divestitures made after September 30, 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. 28 Table of Contents 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. 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. Our Dollar-Based Net Expansion Rate increases when such Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product. Our Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce their usage of a product or when we lower usage prices on a product. As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric. Key Components of Statements of Operations Revenue Revenue. We recognize revenue from our products on either a usage basis or a subscription basis, depending on the nature of the product and the type of customer contract. Our reportable segments contain products that may follow either revenue recognition model. 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 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 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 the products used. In the three months ended September 30, 2024 and 2023, we generated 72% and 71% of our revenue, respectively, 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 the three months ended September 30, 2024 and 2023, we generated 28% and 29% of our revenue, respectively, 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. Our deferred revenue and customer deposits liability balance is not a meaningful indicator of our future revenue at any point in time because the number of contracts with our invoiced customers that contain terms requiring any form of prepayment is not significant. We define U.S. revenue as revenue from customers with IP addresses or mailing addresses at the time of registration in the United States. We define international revenue as revenue from customers with IP addresses or mailing addresses at the time of registration outside of the United States. 29 Table of Contents 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, and 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 consumption 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. 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 The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, sales commissions, bonuses and stock‑based compensation. We also incur other non‑personnel costs related to our general overhead expenses. Research and Development. Research and development expenses consist primarily of personnel costs, outsourced engineering services, cloud infrastructure fees for staging and development of our products, depreciation, amortization of capitalized internal-use software development costs and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization. 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 consumption 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. We are investing strategically in alignment with our focus on building a trusted, leading customer engagement platform. Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, including commissions and bonuses to our sales employees. 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. 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 consumption 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. General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel. General and administrative expenses also include costs related to business acquisitions 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 consumption 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. We may also incur higher than usual losses related to deterioration of quality of certain financial assets caused by macroeconomic conditions. 30 Table of Contents Restructuring Costs. 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 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 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, including interest income; and debt-related costs, including interest expense. Provision for Income Taxes 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 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. Whenever we use a non‑GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with GAAP. The users of our consolidated financial statements are encouraged to review the related GAAP financial measures and the reconciliation of these non‑GAAP financial measures to their most directly comparable GAAP financial measures. Non‑GAAP Gross Profit and Non‑GAAP Gross Margin For the periods presented, we define non‑GAAP gross profit and non‑GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude, as applicable, certain expenses as presented in the table below: Three Months Ended September 30, 2024 2023 Reconciliation: (In thousands) GAAP gross profit $ 578,629 $ 516,319 GAAP gross margin 51 % 50 % Non-GAAP adjustments: Stock-based compensation 5,436 7,053 Amortization of acquired intangibles 15,682 29,045 Payroll taxes related to stock-based compensation 257 181 Non-GAAP gross profit $ 600,004 $ 552,598 Non-GAAP gross margin 53 % 53 % 31 Table of Contents Non‑GAAP Operating Expenses For the periods presented, we define non‑GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, certain expenses as presented in the table below: Three Months Ended September 30, 2024 2023 Reconciliation: (In thousands) GAAP operating expenses $ 583,523 $ 625,222 Non-GAAP adjustments: Stock-based compensation (148,395) (177,954) Amortization of acquired intangibles (11,755) (19,827) Acquisition and divestiture related expenses — (183) Payroll taxes related to stock-based compensation (792) (3,156) Charitable contributions (1,301) (1,339) Restructuring costs (3,694) (3,437) Impairment of long-lived assets — (3,162) Non-GAAP operating expenses $ 417,586 $ 416,164 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, 2024 2023 Reconciliation: (In thousands) GAAP loss from operations $ (4,894) $ (108,903) GAAP operating margin — % (11) % Non-GAAP adjustments: Stock-based compensation 153,831 185,007 Amortization of acquired intangibles 27,437 48,872 Acquisition and divestiture related expenses — 183 Payroll taxes related to stock-based compensation 1,049 3,337 Charitable contributions 1,301 1,339 Restructuring costs 3,694 3,437 Impairment of long-lived assets — 3,162 Non-GAAP income from operations $ 182,418 $ 136,434 Non-GAAP operating margin 16 % 13 % 32 Table of Contents 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 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 September 30, 2024 2023 Reconciliation: (In thousands) Net cash provided by operating activities $ 204,329 $ 206,427 Operating cash flow margin 18 % 20 % Non-GAAP adjustments: Capitalized software development costs (14,424) (10,451) Purchases of long-lived and intangible assets (792) (765) Free cash flow $ 189,113 $ 195,211 Free cash flow margin 17 % 19 % Net cash provided by (used in) investing activities $ 267,355 $ (144,032) Net cash used in financing activities $ (642,780) $ (66,865) Results of Operations The following table sets forth our results of operations for the periods presented. 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 Nine Months Ended September 30, September 30, 2024 2023 2024 2023 Condensed Consolidated Statements of Operations Data: (In thousands, except share and per share amounts) Revenue $ 1,133,649 $ 1,033,670 $ 3,263,201 $ 3,077,995 Cost of revenue (1) (2) 555,020 517,351 1,584,686 1,565,231 Gross profit 578,629 516,319 1,678,515 1,512,764 Operating expenses: Research and development (1) (2) 260,903 241,654 756,170 707,145 Sales and marketing (1) (2) 212,576 262,898 644,150 784,383 General and administrative (1) (2) 106,350 114,071 332,300 361,491 Restructuring costs (1) 3,694 3,437 13,330 140,281 Impairment of long-lived assets — 3,162 — 34,278 Total operating expenses 583,523 625,222 1,745,950 2,027,578 Loss from operations (4,894) (108,903) (67,435) (514,814) Other income (expenses), net: Share of losses from equity method investment (25,279) (31,058) (78,794) (93,838) Impairment of strategic investments (803) — (1,470) (46,154) Other income, net 27,325 1 72,644 17,731 Total other income (expenses), net 1,243 (31,057) (7,620) (122,261) Loss before provision for income taxes (3,651) (139,960) (75,055) (637,075) Provision for income taxes (6,075) (1,747) (21,878) (12,958) Net loss attributable to common stockholders $ (9,726) $ (141,707) $ (96,933) $ (650,033) Net loss per share attributable to common stockholders, basic and diluted $ (0.06) $ (0.78) $ (0.57) $ (3.54) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 159,091,110 181,749,309 170,063,452 183,854,526 33 Table of Contents __________________________________ (1) Includes stock-based compensation expense as follows: Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (In thousands) Cost of revenue $ 5,436 $ 7,053 $ 16,830 $ 18,677 Research and development 84,787 94,085 246,926 246,754 Sales and marketing 33,560 51,345 101,664 142,343 General and administrative 30,048 32,524 92,226 90,497 Restructuring costs 730 467 3,178 11,096 Total $ 154,561 $ 185,474 $ 460,824 $ 509,367 ____________________________________ (2) Includes amortization of acquired intangibles as follows: Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (In thousands) Cost of revenue $ 15,682 $ 29,045 $ 47,046 $ 88,675 Research and development — 420 1,867 1,260 Sales and marketing 11,755 19,407 35,647 59,901 Total $ 27,437 $ 48,872 $ 84,560 $ 149,836 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, 2024 2023 2024 2023 Condensed Consolidated Statements of Operations, as a percentage of revenue: ** Revenue 100 % 100 % 100 % 100 % Cost of revenue 49 50 49 51 Gross profit 51 50 51 49 Operating expenses: Research and development 23 23 23 23 Sales and marketing 19 25 20 25 General and administrative 9 11 10 12 Restructuring costs * * * 5 Impairment of long-lived assets — * — 1 Total operating expenses 51 60 54 66 Loss from operations * (11) (2) (17) Other income (expenses), net Share of losses from equity method investment (2) (3) (2) (3) Impairment of strategic investments * — * (1) Other income, net 2 * 2 1 Total other income (expenses), net * (3) * (4) Loss before provision for income taxes * (14) (2) (21) Provision for income taxes (1) * (1) * Net loss attributable to common stockholders (1 %) (14 %) (3 %) (21 %) ____________________________________ * Less than 0.5% of revenue. ** Columns may not add up to 100% due to rounding. 34 Table of Contents Comparison of Three Months Ended September 30, 2024 and 2023 Revenue Three Months Ended September 30, 2024 2023 Change (Dollars in thousands) Twilio Communications $ 1,060,250 $ 960,289 $ 99,961 10 % Twilio Segment 73,399 73,381 18 — % Consolidated total revenue $ 1,133,649 $ 1,033,670 $ 99,979 10 % In the three months ended September 30, 2024, Communications revenue increased by $100.0 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 106%, as well as $51.1 million in revenue derived from our new Communications Active Customer Accounts. In the three months ended September 30, 2024, Segment revenue remained unchanged compared to the same period last year. We recognized $6.9 million in revenue derived from our new Segment Active Customer Accounts, offset by the decreased usage of our products due to churn and contraction affecting our existing customers, as reflected in our Segment Dollar‑Based Net Expansion Rate of 91%. Cost of Revenue and Gross Profit Three Months Ended September 30, 2024 2023 Change (Dollars in thousands) Cost of revenue $ 555,020 $ 517,351 $ 37,669 7 % Gross profit $ 578,629 $ 516,319 $ 62,310 12 % In the three months ended September 30, 2024, cost of revenue increased by $37.7 million, or 7%, compared to the same period last year. The increase was primarily attributable to a $43.9 million increase in network service providers’ costs, net of the impact of hedging instruments, and a $9.1 million increase in hosting fees. These increases were partially offset by a $13.4 million decrease in amortization of intangible assets. In the three months ended September 30, 2024, gross profit increased by $62.3 million, or 12%, compared to the same period last year. This increase was attributable to the factors impacting our revenue and cost of revenue, as described above. 35 Table of Contents Operating Expenses Three Months Ended September 30, 2024 2023 Change (Dollars in thousands) Research and development $ 260,903 $ 241,654 $ 19,249 8 % Sales and marketing 212,576 262,898 (50,322) (19) % General and administrative 106,350 114,071 (7,721) (7) % Restructuring costs 3,694 3,437 257 7 % Impairment of long-lived assets — 3,162 (3,162) (100) % Total operating expenses $ 583,523 $ 625,222 $ (41,699) (7) % In the three months ended September 30, 2024, research and development expenses increased by $19.2 million, or 8%, compared to the same period last year. The increase was primarily attributable to a $14.6 million increase in total personnel costs, net of capitalized costs, despite a 6% decrease in average research and development headcount compared to the same period last year. The increase in personnel costs was primarily driven by a $27.2 million increase in bonus expenses as a result of the introduction of our new cash bonus program, partially offset by a $5.3 million increase in capitalized costs and an $8.0 million decrease in stock-based compensation expense. The increase in research and development expenses was also attributable to a $4.6 million increase in hosting fees to support development and staging of our products. In the three months ended September 30, 2024, sales and marketing expenses decreased by $50.3 million, or 19%, compared to the same period last year. The decrease was primarily attributable to a $20.6 million decrease in total personnel costs, which was primarily driven by a 16% decrease in average sales and marketing headcount compared to the same period last year. The decrease in headcount was primarily due to the restructuring of our workforce in December 2023. Sales and marketing expenses also decreased due to an $8.1 million decrease in advertising expenses, a $7.7 million decrease in amortization of intangible assets and a $6.7 million decrease in expenses related to corporate events. In the three months ended September 30, 2024, general and administrative expenses decreased by $7.7 million, or 7%, compared to the same period last year. The decrease was primarily attributable to a $15.8 million decrease in the provision for doubtful accounts, partially offset by a $7.0 million increase in professional services fees. In the three months ended September 30, 2024, restructuring costs increased by $0.3 million, or 7%, compared to the same period last year. Restructuring costs and related fluctuations were not significant. In the three months ended September 30, 2024, impairment of long-lived assets decreased by $3.2 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 2023. There were no such impairments in the current period. Other (Income) Expenses, net Three Months Ended September 30, 2024 2023 Change (Dollars in thousands) Share of losses from equity method investment $ 25,279 $ 31,058 $ (5,779) (19) % Impairment of strategic investments 803 — 803 100 % Other income, net (27,325) (1) (27,324) (100) % Total other (income) expenses, net $ (1,243) $ 31,057 $ (32,300) (104) % In the three months ended September 30, 2024, other (income) expenses, net, increased by $32.3 million, or 104%, compared to the same period last year. The decrease was primarily attributable to a $27.3 million increase in other income, net, primarily related to the income earned on our securities in the current period and unrealized gains related to fluctuations in foreign currency exchange rates, and a $5.8 million decrease in our share of losses from our equity method investment. 36 Table of Contents 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 September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 Change (Dollars in thousands) Twilio Communications non-GAAP income from operations $ 267,773 $ 220,610 $ 47,163 21 % Twilio Segment non-GAAP loss from operations $ (15,805) $ (17,740) $ 1,935 (11) % In the three months ended September 30, 2024, Communications non-GAAP income from operations increased by $47.2 million, or 21%, compared to the same period last year. The increase was primarily driven by an increase in Communications revenue of $100.0 million, as described in the Revenue section above, and a $15.6 million decrease in the provision for doubtful accounts. This increase was partially offset by a $43.9 million increase in network service providers’ costs, net of the impact of hedging instruments, and a $22.5 million increase in total Communications personnel costs, despite a 9% decrease in average Communications headcount during the period. The $22.5 million increase in total Communications personnel costs was primarily driven by a $26.8 million increase in bonus expenses as a result of the introduction of our new cash bonus program. In the three months ended September 30, 2024, Segment non-GAAP loss from operations decreased by $1.9 million, or 11%, compared to the same period last year. The decrease was driven by a decrease in Segment operating expenses of $5.8 million, partially offset by an increase in hosting fees of $3.0 million. Comparison of Nine Months Ended September 30, 2024 and 2023 Revenue Nine Months Ended September 30, 2024 2023 Change (Dollars in thousands) Twilio Communications $ 3,039,558 $ 2,857,772 $ 181,786 6 % Twilio Segment 223,643 220,223 3,420 2 % Consolidated total revenue $ 3,263,201 $ 3,077,995 $ 185,206 6 % In the nine months ended September 30, 2024, Communications revenue increased by $181.8 million, or 6%, 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 104%, as well as $148.6 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 $52.8 million related to revenue from our Internet of Things and ValueFirst businesses which we divested during the second and third quarters of 2023, respectively. In the nine months ended September 30, 2024, Segment revenue increased by $3.4 million, or 2%, compared to the same period last year. This change was primarily attributable to $23.5 million in revenue derived from our new Segment Active Customer Accounts, partially offset by the decreased usage of our products due to churn and contraction affecting our existing customers, as reflected in our Segment Dollar‑Based Net Expansion Rate of 92%. 37 Table of Contents Cost of Revenue and Gross Profit Nine Months Ended September 30, 2024 2023 Change (Dollars in thousands) Cost of revenue $ 1,584,686 $ 1,565,231 $ 19,455 1 % Gross profit $ 1,678,515 $ 1,512,764 $ 165,751 11 % In the nine months ended September 30, 2024, cost of revenue increased by $19.5 million, or 1%, compared to the same period last year. The increase was primarily attributable to a $30.2 million increase in network service providers’ costs, net of the impact of hedging instruments, and a $30.0 million increase in hosting fees. These increases were partially offset by a $41.6 million decrease in amortization of intangible assets. In the nine months ended September 30, 2024, gross profit increased by $165.8 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 Nine Months Ended September 30, 2024 2023 Change (Dollars in thousands) Research and development $ 756,170 $ 707,145 $ 49,025 7 % Sales and marketing 644,150 784,383 (140,233) (18) % General and administrative 332,300 361,491 (29,191) (8) % Restructuring costs 13,330 140,281 (126,951) (90) % Impairment of long-lived assets — 34,278 (34,278) (100) % Total operating expenses $ 1,745,950 $ 2,027,578 $ (281,628) (14) % In the nine months ended September 30, 2024, research and development expenses increased by $49.0 million, or 7%, compared to the same period last year. The increase was primarily attributable to a $30.7 million increase in total personnel costs, net of capitalized costs, which was primarily driven by a $55.6 million increase in bonus expenses as a result of our new cash bonus program, partially offset by a $20.3 million decrease in salaries expense due to a 17% decrease in average research and development headcount compared to the same period last year as a result of the restructuring of our workforce in February 2023 and December 2023. The increase in research and development expenses was also attributable to a $10.7 million increase in hosting fees to support development and staging of our products and an $8.8 million increase in software subscription expenses. In the nine months ended September 30, 2024, sales and marketing expenses decreased by $140.2 million, or 18%, compared to the same period last year. The decrease was primarily attributable to a $79.4 million decrease in total personnel costs, which was primarily driven by a 21% decrease in average sales and marketing headcount compared to the same period last year. The decrease in headcount was primarily driven by the restructuring of our workforce in February 2023 and December 2023. Sales and marketing expenses also decreased due to a $24.0 million decrease in amortization of intangible assets, a $13.4 million decrease in advertising expenses and an $8.5 million decrease in expenses related to corporate events. In the nine months ended September 30, 2024, general and administrative expenses decreased by $29.2 million, or 8%, compared to the same period last year. The decrease was primarily attributable to the $32.3 million loss on divested net assets recorded in the 2023 period related to the sale of our ValueFirst and Internet of Things businesses and a $22.7 million decrease in the provision for doubtful accounts. The decrease in general and administrative expenses was partially offset by a $14.0 million increase in professional services fees and a $13.9 million increase in charitable contributions that we made through Twilio.org during the first nine months of 2024. In the nine months ended September 30, 2024, restructuring costs decreased by $127.0 million, or 90%, compared to the same period last year. The decrease was primarily attributable to the significant restructuring costs incurred in the 2023 period related to our February 2023 restructuring activities. 38 Table of Contents In the nine months ended September 30, 2024, impairment of long-lived assets decreased by $34.3 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 half of 2023. There were no such impairments in the current period. Other Expenses, net Nine Months Ended September 30, 2024 2023 Change (Dollars in thousands) Share of losses from equity method investment $ 78,794 $ 93,838 $ (15,044) (16) % Impairment of strategic investments 1,470 46,154 (44,684) (97) % Other income, net (72,644) (17,731) (54,913) (310) % Total other expenses, net $ 7,620 $ 122,261 $ (114,641) (94) % In the nine months ended September 30, 2024, other expenses, net, decreased by $114.6 million, or 94%, 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 nine months ended September 30, 2023, a $54.9 million increase in other income, net, primarily related to an increase in income earned on our debt securities, and a $15.0 million decrease in our share of losses from our equity method investment. 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 nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 Change (Dollars in thousands) Twilio Communications non-GAAP income from operations $ 766,713 $ 593,599 $ 173,114 29 % Twilio Segment non-GAAP loss from operations $ (52,613) $ (53,937) $ 1,324 (2) % In the nine months ended September 30, 2024, Communications non-GAAP income from operations increased by $173.1 million, or 29%, compared to the same period last year. The increase was primarily driven by an increase in Communications revenue of $181.8 million, as described in the Revenue section above, a $24.8 million decrease in the provision for doubtful accounts and a $10.9 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 21% decrease in average Communications headcount compared to the same period last year. These drivers were partially offset by a $30.2 million increase in network service providers’ costs, net of the impact of hedging instruments, and a $23.1 million increase in hosting fees. In the nine months ended September 30, 2024, Segment non-GAAP loss from operations decreased by $1.3 million, or 2%, compared to the same period last year. The decrease was driven by a decrease in Segment operating expenses of $7.6 million and an increase in Segment revenue of $3.4 million, as described in the Revenue section above, partially offset by a $9.7 million increase in cost of revenue. 39 Table of Contents Liquidity and Capital Resources As of September 30, 2024, we had cash and cash equivalents of $584.0 million and short-term marketable securities of $2.1 billion. Cash equivalents consist of money market funds and commercial paper. Short-term marketable securities consist primarily of U.S. treasury securities, non-U.S. government securities, high credit quality corporate debt securities and commercial paper. The cash and cash equivalents and short-term marketable securities are held for working capital purposes. Our principal sources of liquidity have been (i) the net proceeds of $979.0 million, $1.4 billion and $1.8 billion, net of underwriting discounts and offering expenses paid by us, from our public equity offerings in June 2019, August 2020 and February 2021, respectively; (ii) the aggregate net proceeds of approximately $984.7 million, after deducting purchaser discounts and debt issuance costs paid by us, from the issuance of our 2029 Notes and 2031 Notes in March 2021 (each, as defined below); (iii) the net proceeds of $228.4 million, after deducting transaction costs paid by us, from settlement of our capped call arrangements in June 2021; and (iv) the payments received from customers using our products. Our primary uses of cash include operating costs, such as personnel-related costs, network service provider costs, cloud infrastructure costs, facility-related spending, as well as, from time to time, acquisitions, investments and share repurchases. 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 10 and Note 12(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. 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. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. 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. 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 September 30, 2024, we have repurchased approximately $2.6 billion of our common stock in the open market under these programs, and approximately $412.0 million 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 programs expire on December 31, 2024. In the three and nine months ended September 30, 2024, we repurchased $633.0 million in aggregate value, or 10.6 million shares, and $1.9 billion in aggregate value, or 32.0 million shares, respectively, 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”). 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. 40 Table of Contents Cash Flows The following table summarizes our cash flows: Nine Months Ended September 30, 2024 2023 (In thousands) Cash provided by operating activities $ 607,795 $ 192,207 Cash provided by investing activities 1,241,739 365,745 Cash used in financing activities (1,903,802) (536,221) Effect of exchange rate changes on cash, cash equivalents and restricted cash — 108 Net (decrease) increase in cash, cash equivalents and restricted cash $ (54,268) $ 21,839 Cash Flows from Operating Activities In the nine months ended September 30, 2024, cash provided by operating activities consisted primarily of our net loss of $96.9 million adjusted for non-cash items, including $460.8 million of stock-based compensation expense, $156.2 million of depreciation and amortization expense, $57.0 million amortization of deferred commissions, $78.8 million of share of losses from equity method investments and $74.0 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses decreased $20.9 million primarily due to timing of cash receipts and pre-payments of certain operating expenses. Accounts payable and other current liabilities decreased $33.2 million, primarily driven by timing of payments to vendors. Operating lease liabilities decreased $35.4 million due to payments made against our operating lease obligations. 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 restructuring activities, $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. Cash Flows from Investing Activities In the nine months ended September 30, 2024, cash provided by investing activities was $1.2 billion, primarily consisting of $1.3 billion of maturities and sales of marketable securities, net of purchases, partially offset by $40.3 million related to capitalized software development costs and $3.5 million related to purchases of long-lived assets. 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. Cash Flows from Financing Activities In the nine months ended September 30, 2024, cash used in financing activities was $1.9 billion, primarily consisting of $1.9 billion of cash paid to repurchase 10.6 million shares of our common stock in the open market, including related costs. 41 Table of Contents 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. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. 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, 2024. Recent Accounting Pronouncements Not Yet Adopted Refer to Note 2 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements not yet adopted. Available Information Our filings are available to be viewed and downloaded free of charge through our investor relations website after we file them with the SEC. Our filings include our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, our Proxy Statement for our annual meeting of stockholders, Current Reports on Form 8-K and other filings with the SEC. Our investor relations website is located at http://investors.twilio.com. The SEC also maintains a website that contains periodic and current reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Further corporate governance information, including our corporate governance guidelines and code of business conduct and ethics, is also available on our investor relations website under the heading “Governance.” The contents of our websites are not intended to be incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.