Twilio(TWLO) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2023, show a decrease in total assets to $11.90 billion from $12.56 billion at the end of 2022, with a net loss of $166.2 million for Q2 2023, an improvement from the $322.8 million loss in Q2 2022 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $4,664,500 | $4,984,086 | | Total assets | $11,904,486 | $12,564,304 | | Total current liabilities | $759,803 | $808,158 | | Total liabilities | $1,927,927 | $2,005,262 | | Total stockholders' equity | $9,976,559 | $10,559,042 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Revenue | $1,037,761 | $943,354 | | Gross Profit | $505,755 | $445,289 | | Loss from operations | $(141,827) | $(311,936) | | Net loss | $(166,187) | $(322,769) | | Net loss per share, basic and diluted | $(0.91) | $(1.77) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,220) | $(80,141) | | Net cash provided by (used in) investing activities | $509,777 | $(635,629) | | Net cash (used in) provided by financing activities | $(469,356) | $34,402 | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies and recent events impacting the financial statements, including the company's reorganization into two reportable segments, restructuring activities, divestitures, impairment charges, and share repurchase program - In February 2023, the company announced a reorganization into two business units: Twilio Communications and Twilio Data & Applications, concluding it had two operating and reportable segments as of June 30, 2023[66][67] - A workforce reduction plan announced in February 2023 eliminated approximately 17% of the workforce, resulting in cumulative restructuring charges of $136.8 million for the six months ended June 30, 2023[63] - The company agreed to sell its ValueFirst business in June 2023, completed in July 2023 for $45.5 million in cash, resulting in a loss of $28.8 million on assets held for sale, while the IoT business was also sold in Q2 2023 for $15.8 million in stock[57][59][60] - In February 2023, the Board authorized a share repurchase program of up to $1.0 billion, with the company repurchasing 8.3 million shares for an aggregate price of $495.0 million in the six months ended June 30, 2023[105][106] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting the recent reorganization into two business units, 10% year-over-year revenue growth to $1.04 billion for Q2 2023, significant cost-saving measures, a slowed Dollar-Based Net Expansion Rate of 103%, and a strong liquidity position with $3.68 billion in cash and marketable securities Recent Developments Twilio has undergone significant strategic changes, including reorganizing into two business units, initiating a $1.0 billion share repurchase program, implementing a major workforce reduction, sunsetting its employee sabbatical program, closing offices, and divesting its IoT and ValueFirst businesses - The company reorganized its business into two units: Twilio Communications and Twilio Data & Applications, leading to a change to two reportable segments as of Q2 2023[131][134] - A share repurchase program of up to $1.0 billion was authorized in February 2023, with the company repurchasing $495.0 million worth of its Class A common stock by June 30, 2023[138][139] - A workforce restructuring plan in February 2023 eliminated approximately 17% of the workforce, incurring $136.8 million in expenses for the first six months of 2023[140] - The company divested its Internet of Things (IoT) assets in Q2 2023 and its ValueFirst business in July 2023 to allocate resources to other strategic priorities[144][145] Key Business Metrics In Q2 2023, Twilio's Active Customer Accounts grew by 11% year-over-year to 304,000, but the Dollar-Based Net Expansion Rate decreased significantly to 103% from 123% in the prior year, reflecting a slowdown in customer spending growth Key Business Metrics Comparison | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Active Customer Accounts | 304,000 | 275,000 | | Total Revenue Growth | 10% | 41% | | Dollar-Based Net Expansion Rate | 103% | 123% | Results of Operations For the three months ended June 30, 2023, total revenue increased 10% year-over-year to $1.04 billion, with gross margin improving to 49% and operating expenses decreasing by 14% due to cost controls, leading to a substantially smaller operating loss Revenue by Segment (in thousands) | Segment | Q2 2023 | Q2 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Twilio Communications | $913,135 | $832,305 | $80,830 | 10% | | Twilio Data & Applications | $124,626 | $111,049 | $13,577 | 12% | | Consolidated total revenue | $1,037,761 | $943,354 | $94,407 | 10% | Operating Expenses (in thousands) | Expense Category | Q2 2023 | Q2 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Research and development | $226,896 | $279,641 | $(52,745) | (19)% | | Sales and marketing | $261,600 | $334,958 | $(73,358) | (22)% | | General and administrative | $134,852 | $142,626 | $(7,774) | (5)% | | Restructuring costs | $14,902 | $— | $14,902 | 100% | | Impairment of long-lived assets | $9,332 | $— | $9,332 | 100% | | Total operating expenses | $647,582 | $757,225 | $(109,643) | (14)% | - The decrease in operating expenses was primarily driven by cost management efforts, including workforce reductions in September 2022 and February 2023, and the sunsetting of the employee sabbatical program[197][198][199] Liquidity and Capital Resources As of June 30, 2023, Twilio maintained a strong liquidity position with $675.1 million in cash and cash equivalents and $3.0 billion in short-term marketable securities, with primary cash uses including operating costs, acquisitions, and $495.0 million in share repurchases - As of June 30, 2023, the company had cash and cash equivalents of $675.1 million and short-term marketable securities of $3.0 billion[225] - In the first six months of 2023, the company repurchased 8.3 million shares of its Class A common stock for an aggregate value of $495.0 million under its $1.0 billion share repurchase program[232][240] Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Cash used in operating activities | $(14,220) | $(80,141) | | Cash provided by (used in) investing activities | $509,777 | $(635,629) | | Cash (used in) provided by financing activities | $(469,356) | $34,402 | Quantitative and Qualitative Disclosures About Market Risk Twilio is exposed to market risks, primarily interest rate and currency exchange risk, though a hypothetical 10% change in either would not materially impact financial statements due to short-term investments, fixed-rate debt, and hedging strategies - The company's primary market risks are interest rate risk and foreign currency exchange risk[248] - Interest rate risk is considered minimal due to the short-term nature of investments and fixed-rate debt, with a hypothetical 10% change in interest rates having no material impact[248] - Foreign currency risk exists from international operations, mitigated by derivative hedging transactions, and a hypothetical 10% change in exchange rates would not have had a material impact[252][253] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with modifications made to internal controls over financial reporting to accommodate the new two-segment business structure - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[255] - In Q2 2023, the company modified the design of certain internal controls over financial reporting to accommodate the new two-segment business structure[256] PART II - OTHER INFORMATION Legal Proceedings The company is involved in a material legal dispute with the City and County of San Francisco over a $38.8 million tax assessment for Telephone Users Tax and Access Line Tax from 2009 through 2018, which Twilio is challenging in court - The company is involved in a legal dispute with the City and County of San Francisco regarding a $38.8 million assessment for Telephone Users Tax (TUT) and Access Line Tax for the years 2009 through 2018[89] - Twilio paid the assessment under protest in Q3 2020 and filed a lawsuit in May 2021 to challenge the assessment and seek a refund[89][90] Risk Factors The company outlines significant risks including macroeconomic uncertainties, intense market competition, challenges in executing business restructuring, reliance on AWS, and the need to comply with complex and evolving global regulations, particularly around data privacy and telecommunications - Global economic conditions and macroeconomic uncertainties may continue to adversely impact business by decreasing customer spending, reducing demand, and leading to longer sales cycles[267] - The company's recent business reorganization and workforce reductions may be disruptive, may not be as effective as anticipated, and could lead to unintended consequences such as employee attrition and damage to corporate culture[274][279] - The business is substantially reliant on Amazon Web Services (AWS) to operate its platform, making it vulnerable to service interruptions, capacity constraints, or unfavorable terms from AWS[336] - The company is subject to numerous and increasingly stringent domestic (e.g., CCPA) and foreign (e.g., GDPR) laws related to privacy and data security, with non-compliance potentially leading to significant fines and loss of business[339] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2023, Twilio issued 22,102 shares of unregistered Class A common stock valued at $1.0 million for philanthropic goals and repurchased 6.374 million shares for approximately $370 million under its $1.0 billion repurchase program, leaving about $505 million available - In Q2 2023, the company issued 22,102 shares of unregistered Class A common stock valued at $1.0 million for philanthropic purposes[441] Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share | Approximate Dollar Value Remaining Under Plan (millions) | | :--- | :--- | :--- | :--- | | April 2023 | 1,636 | $58.06 | $780 | | May 2023 | 2,991 | $53.52 | $620 | | June 2023 | 1,747 | $65.85 | $505 | | Total | 6,374 | | $505 | Other Information This section discloses the adoption and termination of Rule 10b5-1 trading plans by directors and executive officers, including former director Richard Dalzell's termination and Chief Legal Officer Dana Wagner's adoption of a new plan for the sale of up to 94,379 shares - Former director Richard Dalzell terminated a Rule 10b5-1 trading plan on May 11, 2023, upon his departure from the board[443] - Chief Legal Officer Dana Wagner adopted a new Rule 10b5-1 trading plan on June 5, 2023, for the sale of up to 94,379 shares of Class A common stock[444]