TWILIO INC, 10-Q filed on 5/10/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
Apr. 30, 2018
Entity Registrant Name TWILIO INC  
Entity Central Index Key 0001447669  
Document Type 10-Q  
Document Period End Date Mar. 31, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
Common Class A    
Entity Common Stock, Shares Outstanding   71,849,359
Common Class B    
Entity Common Stock, Shares Outstanding   23,926,240
v3.8.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 117,737 $ 115,286
Short-term marketable securities 190,271 175,587
Accounts receivable, net 57,310 43,113
Prepaid expenses and other current assets 16,791 19,279
Total current assets 382,109 353,265
Restricted cash 5,502 5,502
Property and equipment, net 53,694 50,541
Intangible assets, net 18,981 20,064
Goodwill 18,269 17,851
Other long-term assets 4,240 2,559
Total assets 482,795 449,782
Current liabilities:    
Accounts payable 17,924 11,116
Accrued expenses and other current liabilities 76,595 53,614
Customer deposits 7,442  
Deferred revenue 7,343 13,797
Total current liabilities 109,304 78,527
Long-term liabilities 10,951 11,409
Total liabilities 120,255 89,936
Commitments and contingencies (Note 10)
Stockholders' equity:    
Preferred stock
Class A and Class B common stock 95 94
Additional paid-in capital 633,460 608,165
Accumulated other comprehensive income 2,439 2,025
Accumulated deficit (273,454) (250,438)
Total stockholders' equity 362,540 359,846
Total liabilities and stockholders' equity $ 482,795 $ 449,782
v3.8.0.1
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Condensed Consolidated Statements of Operations    
Revenue $ 129,116 $ 87,372
Cost of revenue 59,582 37,286
Gross profit 69,534 50,086
Operating expenses:    
Research and development 37,576 26,522
Sales and marketing 32,822 21,116
General and administrative 23,393 17,203
Total operating expenses 93,791 64,841
Loss from operations (24,257) (14,755)
Other income (expenses), net 665 498
Loss before (provision) benefit for income taxes (23,592) (14,257)
(Provision) benefit for income taxes (137) 30
Net loss attributable to common stockholders $ (23,729) $ (14,227)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.25) $ (0.16)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares) 94,673,557 88,612,804
v3.8.0.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Condensed Consolidated Statements of Comprehensive Loss    
Net loss $ (23,729) $ (14,227)
Other comprehensive income (loss):    
Unrealized loss on marketable securities (317) (88)
Foreign currency translation 731 (102)
Total other comprehensive income (loss) 414 (190)
Comprehensive loss attributable to common stockholders $ (23,315) $ (14,417)
v3.8.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (23,729) $ (14,227)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 5,631 3,955
Amortization of bond premium 28 63
Stock-based compensation 17,540 9,385
Provision for doubtful accounts 375 72
Write-off of internal-use software 182 26
Gain on lease termination   (295)
Changes in operating assets and liabilities:    
Accounts receivable (14,612) (1,950)
Prepaid expenses and other current assets 2,512 (972)
Other long-term assets (1,169) (178)
Accounts payable 6,703 149
Accrued expenses and other current liabilities 22,789 5,221
Customer deposits 7,441  
Deferred revenue (6,256) 885
Long-term liabilities (499) 306
Net cash provided by operating activities 16,936 2,440
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of marketable securities (42,693) (170,769)
Maturities of marketable securities 27,600  
Capitalized software development costs (4,795) (3,649)
Purchases of property and equipment (940) (4,971)
Purchases of intangible assets (112) (8)
Acquisition, net of cash acquired   (22,621)
Net cash used in investing activities (20,940) (202,018)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Payments of costs related to public offerings   (238)
Proceeds from exercises of stock options 6,678 12,735
Value of equity awards withheld for tax liabilities (371) (155)
Net cash provided by financing activities 6,307 12,342
Effect of exchange rate changes on cash, cash equivalents and restricted cash 148 11
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 2,451 (187,225)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH-Beginning of period 120,788 314,280
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -End of period 123,239 127,055
Cash paid for income taxes 18 42
NON-CASH INVESTING AND FINANCING ACTIVITIES:    
Purchases of property, equipment and intangible assets, accrued but not paid 473 1,184
Stock-based compensation capitalized in software development costs $ 1,428 709
Costs related to public offerings, accrued but not paid   $ 192
v3.8.0.1
Organization and Description of Business
3 Months Ended
Mar. 31, 2018
Organization and Description of Business  
Organization and Description of Business

 

1. Organization and Description of Business

 

Twilio Inc. (the “Company”) was incorporated in the state of Delaware on March 13, 2008. The Company is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.

 

The Company’s headquarters are located in San Francisco, California and the Company has subsidiaries in the United Kingdom, Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore, Bermuda, Spain, Sweden and Australia.

 

v3.8.0.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

 

2. Summary of Significant Accounting Policies

 

(a)Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018 (“Annual Report”).

 

The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited financial statements as of that date, but may not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.

 

(b)Principles of Consolidation

 

The condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

(c)Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

 

(d)Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, marketable securities and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.

 

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the three months ended March 31, 2018, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the three months ended March 31, 2017, one customer organization represented approximately 12% of the Company’s total revenue.

 

As of March 31, 2018, one customer organization represented 16% of the Company’s gross accounts receivable, and as of December 31, 2017, no customer organization represented more than 10% of the Company’s gross accounts receivable.

 

(e)Significant Accounting Policies

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, which replaced the existing revenue recognition guidance, ASC 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

 

The Company adopted ASC 606 using the modified retrospective method with cumulative catch-up adjustment to the opening retained earnings as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the standard, the Company elected to apply the new guidance only to those contracts which were not completed as of the date of the adoption.

 

The impact of adopting the new standard on the Company’s consolidated financial statements was insignificant. The Company recorded a net cumulative catch-up adjustment to the beginning retained earnings as of January 1, 2018, of $0.7 million.

 

The primary impact relates to the deferral of incremental commission costs of obtaining new contracts. Under ASC 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortizes these costs on a straight-line basis over the expected term of benefit of the underlying asset, which was determined to be five years.

 

The impact on the Company’s revenue recognition policies was insignificant. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue according to the usage by its customers in the period in which that usage occurred. ASC 606 continues to support the recognition of revenue over time, and on a usage basis, for the majority of the Company’s contracts due to continuous transfer of control to the customer. The impact on the Company’s balance sheet presentation includes presenting customer refundable prepayments as customer deposit liabilities, whereas under ASC 605 these were included in deferred revenues.

 

There was not a significant tax impact to the Company’s consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there is a full valuation allowance due to the Company’s history of continued losses.

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.

 

The Company determines revenue recognition through the following steps:

 

·

Identification of the contract, or contracts, with a customer

·

Identification of the performance obligations in the contract

·

Determination of the transaction price

·

Allocation of the transaction price to the performance obligations in the contract

·

Recognition of revenue when, or as, the Company satisfies a performance obligation

 

Nature of Products and Services

 

The Company’s revenue is primarily derived from usage-based fees earned from customers accessing the Company’s enterprise cloud computing services. Platform access is considered a monthly series comprising one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the three months ended March 31, 2018 and 2017, the revenue from usage-based fees represented 84% and 83% of total revenue, respectively.

 

Subscription-based fees are derived from certain term-based contracts, such as with the sales of short codes and support. Term-based contracts revenue is recognized on a ratable basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer. In the three months ended March 31, 2018 and 2017, the revenue from term-based fees represented 16% and 17% of total revenue, respectively.

 

No significant judgments are required in determining whether products and services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (“SSP”).

 

Refer to Note 9, Revenue by Geographic Area, for additional disaggregation.

 

The Company’s arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.

 

The reserve for sales credits is included in accounts receivable and is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue.

 

Deferred Revenue and Customer Deposits

 

Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancellable contracts. Customer refundable prepayments are recorded as customer deposits. During the three months ended March 31, 2018, the Company recognized $3.6 million of revenue that was included in the deferred revenue balance, as adjusted for ASC 606 at the beginning of the period.

 

Deferred Sales Commissions

 

The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts, upsells and renewals and such expense is recognized over the estimated period of benefit of the capitalized commissions, which is determined to be five years. Total net capitalized costs as of March 31, 2018 were $4.1 million and are included in prepaid expenses and other current assets and other long-term assets in the accompanying condensed consolidated balance sheet. Amortization of these assets was $0.2 million during the three months ended March 31, 2018 and is included in sales and marketing expense in the accompanying condensed consolidated statement of operations.

 

Other than adoption of ASC 606, there were no changes to our significant accounting policies as described in our Annual Report.

 

(f)Restricted Cash

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230) — Restricted Cash”. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-18 in the first quarter of 2018 and applied the guidance retrospectively to the prior period’s condensed consolidated statement of cash flows with the following impact (in thousands):

 

 

 

Three Months Ended
March 31, 2017

 

 

 

As Originally
Reported

 

As Adjusted

 

Cash, cash equivalents and restricted cash — beginning of period

 

$

305,665

 

$

314,280

 

Cash, cash equivalents and restricted cash — end of period

 

$

118,440

 

$

127,055

 

 

Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on the Company’s financial position and results of operations.

 

(g)Recently Issued Accounting Guidance, Not yet Adopted

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. For public companies, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, the Company has not yet determined the full impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

 

v3.8.0.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2018
Fair Value Measurements  
Fair Value Measurements

 

3. Fair Value Measurements

 

The following tables provide the financial assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

Amortized
Cost or
Carrying

 

Gross
Unrealized

 

Gross
Unrealized
Losses
Less Than

 

Gross
Unrealized
Losses More
Than

 

Fair Value Hierarchy as of
March 31, 2018

 

Aggregate

 

 

 

Value

 

Gains

 

12 Months

 

12 Months

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

93,103

 

$

 

$

 

$

 

$

93,103

 

$

 

$

 

$

93,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total included in cash and cash equivalents

 

93,103

 

 

 

 

93,103

 

 

 

93,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

59,973

 

 

(127

)

(73

)

59,773

 

 

 

59,773

 

Corporate debt securities

 

131,213

 

 

(715

)

 

 

130,498

 

 

130,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

191,186

 

 

(842

)

(73

)

59,773

 

130,498

 

 

190,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

284,289

 

$

 

$

(842

)

$

(73

)

$

152,876

 

$

130,498

 

 

$

283,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized
Cost or
Carrying

 

Gross
Unrealized

 

Gross
Unrealized
Losses
Less Than

 

Gross
Unrealized
Losses More
Than

 

Fair Value Hierarchy as of
December 31, 2017

 

Aggregate

 

 

 

Value

 

Gains

 

12 Months

 

12 Months

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

95,432

 

$

 

$

 

$

 

$

95,432

 

$

 

$

 

$

95,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total included in cash and cash equivalents

 

95,432

 

 

 

 

95,432

 

 

 

95,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

59,962

 

 

(216

)

 

59,746

 

 

 

59,746

 

Corporate debt securities

 

116,223

 

 

(382

)

 

 

115,841

 

 

115,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

176,185

 

 

(598

)

 

59,746

 

115,841

 

 

175,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

271,617

 

$

 

$

(598

)

$

 

$

155,178

 

$

115,841

 

$

 

$

271,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As the Company views these securities as available to support current operations, it has classified all available for sale securities as short-term. As of March 31, 2018, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of March 31, 2018, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three month ended March 31, 2018. Interest earned on marketable securities in the three months ended March 31, 2018 and 2017, was $0.7 million and $0.5 million, respectively, and is recorded as other income (expense), net, in the accompanying condensed consolidated statements of operations.

 

The following table summarizes the contractual maturities of marketable securities as of March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Amortized
Cost

 

Aggregate
Fair Value

 

Amortized
Cost

 

Aggregate
Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Less than one year

 

$

147,714

 

$

147,156

 

$

108,584

 

$

108,360

 

One to two years

 

43,472

 

43,115

 

67,601

 

67,227

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

191,186

 

$

190,271

 

$

176,185

 

$

175,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

v3.8.0.1
Property and Equipment
3 Months Ended
Mar. 31, 2018
Property and Equipment  
Property and Equipment

 

4. Property and Equipment

 

Property and equipment consisted of the following (in thousands):

 

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2018

 

2017

 

Capitalized internal-use software development costs

 

$

55,328

 

$

49,177

 

Leasehold improvements

 

14,422

 

14,246

 

Office equipment

 

10,410

 

9,652

 

Furniture and fixtures

 

2,108

 

1,976

 

Software

 

1,765

 

1,675

 

 

 

 

 

 

 

Total property and equipment

 

84,033

 

76,726

 

Less: accumulated depreciation and amortization

 

(30,339

)

(26,185

)

 

 

 

 

 

 

Total property and equipment, net

 

$

53,694

 

$

50,541

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense was $4.2 million and $2.8 million for the three months ended March 31, 2018 and 2017, respectively.

 

The Company capitalized $6.4 million and $4.3 million in internal-use software development costs in the three months ended March 31, 2018 and 2017, respectively, of which $1.4 million and $0.7 million, respectively, was stock-based compensation expense. Amortization of capitalized software development costs was $2.7 million and $1.8 million in the three months ended March 31, 2018 and 2017, respectively.

 

v3.8.0.1
Business Combinations
3 Months Ended
Mar. 31, 2018
Business Combinations  
Business Combinations

 

5. Business Combinations

 

In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow with a term of 18 months.

 

Additionally, the Company deposited $2.0 million into a separate escrow that was conditioned upon future service conditions and was recorded ratably into the compensation expense as the services were rendered. As of March 31, 2018, the remaining balance in the escrow was $0.3 million.

 

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity’s results of operations have been included in the condensed consolidated financial statements of the Company from the date of acquisition.

 

The following table presents the purchase price allocation, as adjusted, recorded in the Company’s condensed consolidated balance sheet as of March 31, 2017 (in thousands):

 

 

 

Total

 

Net tangible liabilities

 

$

(3,575

)

Goodwill(1)

 

12,837

 

Intangible assets(2)

 

13,700

 

 

 

 

 

Total purchase price

 

$

22,962

 

 

 

 

 

 

 

 

(1)

The goodwill is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes.

 

(2)

Identifiable finite-lived intangible assets were comprised of the following (in thousands):

 

 

 

Total

 

Estimated
life
(in years)

 

Developed technology

 

$

5,000

 

4

 

Customer relationships

 

6,100

 

7 - 8

 

Supplier relationships

 

2,600

 

5

 

 

 

 

 

 

 

Total intangible assets acquired

 

$

13,700

 

 

 

 

 

 

 

 

 

 

 

The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheets.

 

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets.

 

The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million and $0.4 million were incurred during fiscal years 2017 and 2016, respectively. All acquisition-related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s condensed consolidated financial statements is immaterial.

 

v3.8.0.1
Goodwill and Intangible Assets
3 Months Ended
Mar. 31, 2018
Goodwill and Intangible Assets  
Goodwill and Intangible Assets

6. Goodwill and Intangible Assets

 

Goodwill

 

Goodwill balance as of March 31, 2018 and December 31, 2017 was as follows (in thousands):

 

 

 

Total

 

Balance as of December 31, 2017

 

$

17,851

 

Effect of exchange rate

 

418

 

 

 

 

 

Balance as of March 31, 2018

 

$

18,269

 

 

 

 

 

 

 

Intangible assets

 

Intangible assets consisted of the following (in thousands):

 

 

 

As of March 31, 2018

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Developed technology

 

$

15,040

 

$

(6,529

)

$

8,511

 

Customer relationships

 

7,280

 

(1,229

)

6,051

 

Supplier relationships

 

2,932

 

(631

)

2,301

 

Trade name

 

60

 

(60

)

 

Patent

 

1,947

 

(124

)

1,823

 

 

 

 

 

 

 

 

 

Total amortizable intangible assets

 

27,259

 

(8,573

)

18,686

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

Domain names

 

32

 

 

32

 

Trademarks

 

263

 

 

263

 

 

 

 

 

 

 

 

 

Total

 

$

27,554

 

$

(8,573

)

$

18,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Developed technology

 

$

14,941

 

$

(5,476

)

$

9,465

 

Customer relationships

 

7,159

 

(1,006

)

6,153

 

Supplier relationships

 

2,881

 

(500

)

2,381

 

Trade name

 

60

 

(60

)

 

Patent

 

1,878

 

(108

)

1,770

 

 

 

 

 

 

 

 

 

Total amortizable intangible assets

 

26,919

 

(7,150

)

19,769

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

Domain names

 

32

 

 

32

 

Trademarks

 

263

 

 

263

 

 

 

 

 

 

 

 

 

Total

 

$

27,214

 

$

(7,150

)

$

20,064

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense was $1.4 million and $1.2 million for the three months ended March 31, 2018 and December 31, 2017, respectively.

 

Total estimated future amortization expense was as follows (in thousands):

 

 

 

As of
March 31,
2018

 

2018 (remaining nine months)

 

$

5,646

 

2019

 

5,088

 

2020

 

2,658

 

2021

 

1,525

 

2022

 

929

 

Thereafter

 

2,840

 

 

 

 

 

Total

 

$

18,686

 

 

 

 

 

 

 

v3.8.0.1
Accrued Expenses and Other Liabilities
3 Months Ended
Mar. 31, 2018
Accrued Expenses and Other Liabilities  
Accrued Expenses and Other Liabilities

7. Accrued Expenses and Other Liabilities

 

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2018

 

2017

 

Accrued payroll and related

 

$

10,042

 

$

4,898

 

Accrued bonus and commission

 

5,721

 

4,777

 

Accrued cost of revenue

 

18,690

 

10,876

 

Sales and other taxes payable

 

21,227

 

20,877

 

ESPP contributions

 

3,345

 

1,338

 

Deferred rent

 

1,179

 

1,048

 

Accrued other expense

 

16,391

 

9,800

 

 

 

 

 

 

 

Total accrued expenses and other current liabilities

 

$

76,595

 

$

53,614

 

 

 

 

 

 

 

 

 

 

Long-term liabilities consisted of the following (in thousands):

 

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2018

 

2017

 

Deferred rent

 

$

8,217

 

$

8,480

 

Deferred tax liability, net

 

2,262

 

2,452

 

Accrued other expense

 

472

 

477

 

 

 

 

 

 

 

Total long-term liabilities

 

$

10,951

 

$

11,409

 

 

 

 

 

 

 

 

 

 

v3.8.0.1
Supplemental Balance Sheet Information
3 Months Ended
Mar. 31, 2018
Supplemental Balance Sheet Information  
Supplemental Balance Sheet Information

8. Supplemental Balance Sheet Information

 

A roll-forward of the Company’s reserves for the three months ended March 31, 2018 and 2017 is as follows (in thousands):

 

(a)Allowance for doubtful accounts:

 

 

 

Three Months
Ended March 31,

 

 

 

2018

 

2017

 

Balance, beginning of period

 

$

1,033

 

$

1,076

 

Additions

 

375

 

72

 

Write-offs

 

(4

)

(378

)

 

 

 

 

 

 

Balance, end of period

 

$

1,404

 

$

770

 

 

 

 

 

 

 

 

 

 

b)Sales credit reserve:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Balance, beginning of period

 

$

1,761

 

$

544

 

Additions

 

1,107

 

551

 

Deductions against reserve

 

(1,166

)

(277

)

 

 

 

 

 

 

Balance, end of period

 

$

1,702

 

$

818

 

 

 

 

 

 

 

 

 

 

v3.8.0.1
Revenue by Geographic Area
3 Months Ended
Mar. 31, 2018
Revenue by Geographic Area  
Revenue by Geographic Area

9. Revenue by Geographic Area

 

Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (dollars in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Revenue by geographic area:

 

 

 

 

 

United States

 

$

98,635

 

$

70,098

 

International

 

30,481

 

17,274

 

 

 

 

 

 

 

Total

 

$

129,116

 

$

87,372

 

 

 

 

 

 

 

 

 

Percentage of revenue by geographic area:

 

 

 

 

 

United States

 

76

%

80

%

International

 

24

%

20

%

 

Long-lived assets outside the United States were not significant.

 

v3.8.0.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2018
Commitments and Contingencies  
Commitments and Contingencies

 

10. Commitments and Contingencies

 

(a)Lease Commitments

 

The Company entered into various non-cancelable operating lease agreements for its facilities that expire over the next six years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight-line basis over the term of the lease.

 

Rent expense was $2.1 million and $1.9 million for the three months ended March 31, 2018 and 2017, respectively.

 

Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

 

Year Ending December 31:

 

As of
March 31,
2018

 

2018 (remaining nine months)

 

$

6,607

 

2019

 

7,952

 

2020

 

7,112

 

2021

 

7,033

 

2022

 

5,864

 

Thereafter

 

10,189

 

 

 

 

 

Total minimum lease payments

 

$

44,757

 

 

 

 

 

 

 

Additionally, in the three months ended March 31, 2018, the Company entered into a 22 month non-cancellable agreement with a cloud services vendor for a total commitment of $4.5 million. Except for this new commitment, there have been no material changes to the Company’s principle commitments described in the Company’s most recent Annual Report.

 

(b)Legal Matters

 

On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against the Company in the United States District Court, Central District of California (“Telesign I”). Telesign alleges that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (“920”), U.S. Patent No. 8,687,038 (“038”) and U.S. Patent No. 7,945,034 (“034”). The patent infringement allegations in the lawsuit relate to the Company’s Account Security products, its two-factor authentication use case and an API tool to find information about a phone number. The Company petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the patents at issue. On July 8, 2016, the PTO denied the Company’s petition for inter partes review of the ‘920 and ‘038 patents, and on June 26, 2017, it upheld the patentability of the ‘034 patent.

 

On March 28, 2016, Telesign filed a second lawsuit against the Company in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 (‘792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the PTO issued an order instituting the inter partes review for the ‘792 patent. On March 6, 2018, the PTO found all claims challenged by Twilio in the inter partes review unpatentable. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the ‘792 patent inter partes review, which the court granted. The Central District of California court lifted the stay on April 13, 2018. With respect to each of the patents asserted in the now-consolidated Telesign I and Telesign II cases, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits. The Telesign I/II litigation is currently ongoing.

 

On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021 (“021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the Court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the ‘021, ‘465, and ‘376 patents. On March 9, 2018, the PTO denied Telesign’s petition for inter partes review of the ‘021 patent and granted Telesign’s petitions for inter partes review of the ‘465 and ‘376 patents.  The Northern District of California litigation is currently stayed pending resolution of the inter partes reviews of the ‘465 and ‘376 patents. The Company is seeking a judgment of infringement, a judgment of willful infringement, monetary and injunctive relief, enhanced damages, and an award of costs and expenses against Telesign.

 

On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, the Company filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Following a period of discovery, the plaintiff filed a motion for class certification on September 20, 2017. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of the Company’s customers that were recorded. The court has not yet finalized a schedule for notice to potential class members, additional discovery, summary judgment motions, or trial.

 

The Company intends to vigorously defend itself against these lawsuits and believes it has meritorious defenses to each matter in which it is a defendant. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate ranges of possible losses.

 

In addition to the litigation matters discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations.

 

Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

(c)Indemnification Agreements

 

The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company.

 

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary.

 

As of March 31, 2018 and December 31, 2017, no amounts were accrued.

 

(d)Other Taxes

 

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s operations. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions, and since then, has expanded the number of jurisdictions where these taxes are being collected. Effective January 2018, the Company began to collect taxes in one additional jurisdiction and accordingly, the Company is no longer recording a provision for its exposure in that jurisdiction. The Company expects to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, the Company was and continues to be in discussions with certain states regarding its prior state sales and other taxes, if any, that the Company may owe.

 

During 2017, the Company revised its estimates of its tax exposure based on settlements reached with various states indicating that certain revisions to the key assumptions including, but not limited to, the sourcing of revenue and the taxability of the Company’s services were appropriate in the current period. In the year ended December 31, 2017, the total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.4 million. As of March 31, 2018 and December 31, 2017, the liability recorded for these taxes was $21.2 million and $20.9 million, respectively.

 

In the event other jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates.

 

v3.8.0.1
Stockholders' Equity
3 Months Ended
Mar. 31, 2018
Stockholders' Equity  
Stockholders' Equity

 

11. Stockholders’ Equity

 

(a)Preferred Stock

 

As of March 31, 2018 and December 31, 2017, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.

 

(b)Common Stock

 

As of March 31, 2018 and December 31, 2017, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share. As of March 31, 2018, 71,748,415 shares of Class A common stock and 23,943,253 shares of Class B common stock were issued and outstanding. As of December 31, 2017, 69,906,550 shares of Class A common stock and 24,063,246 shares of Class B common stock were issued and outstanding.

 

The Company had reserved shares of common stock for issuance as follows:

 

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2018

 

2017

 

Stock options issued and outstanding

 

10,392,199

 

10,710,427

 

Nonvested restricted stock units issued and outstanding

 

7,106,203

 

5,665,459

 

Class A common stock reserved for Twilio.org

 

635,014

 

635,014

 

Stock-based awards available for grant under 2016 Plan

 

12,054,291

 

10,200,189

 

Class A common stock committed under 2016 ESPP

 

249,730

 

235,372

 

 

 

 

 

 

 

Total

 

30,437,437

 

27,446,461

 

 

 

 

 

 

 

 

v3.8.0.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2018
Stock-Based Compensation  
Stock-Based Compensation

 

12. Stock-Based Compensation

 

2008 Stock Option Plan

 

The Company granted options under its 2008 Stock Option Plan (the “2008 Plan”), as amended and restated, until June 22, 2016, when the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder.

 

2016 Stock Option Plan

 

The Company’s 2016 Stock Option and Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2018, the shares available for grant under the 2016 Plan were automatically increased by 4,698,490 shares.

 

Under the 2016 Plan, the stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four-year term from the date of grant, at a rate of 25% after one year, then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period.

 

2016 Employee Stock Purchase Plan

 

The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2018, the shares available for grant under the 2016 Plan were automatically increased by 939,698 shares.

 

The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year, starting in May 2017.

 

On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.

 

In the three months ended March 31, 2018 and 2017, no shares of Class A common stock were purchased under the 2016 ESPP and 249,730 shares are expected to be purchased in the second quarter of 2018. As of March 31, 2018, total unrecognized compensation cost related to the 2016 ESPP was $0.4 million, which will be amortized over a weighted-average period of 0.1 years.

 

Stock-based awards activity under the 2008 Plan and 2016 Plan was as follows:

 

Stock Options

 

 

 

Number of
options
outstanding

 

Weighted-
average
exercise
price
(per share)

 

Weighted-
average
remaining
contractual
term
(in years)

 

Aggregate
intrinsic
value
(in thousands)

 

Outstanding options as of December 31, 2017

 

10,155,427

 

$

10.31

 

7.12

 

$

145,763

 

Granted

 

1,003,733

 

33.01

 

 

 

 

 

Exercised

 

(1,190,387

)

5.61

 

 

 

 

 

Forfeited and cancelled

 

(131,574

)

8.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding options as of March 31, 2018

 

9,837,199

 

$

13.21

 

7.34

 

$

245,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable as of March 31, 2018

 

5,054,924

 

$

7.71

 

6.37

 

$

154,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate intrinsic value represents the difference between the fair value of the Company’s Class A common stock as reported on the New York Stock Exchange and the exercise price of outstanding “in-the-money” options. The aggregate intrinsic value of stock options exercised was $31.1 million and $78.2 million during the three months ended March 31, 2018 and 2017, respectively.

 

The total estimated grant date fair value of options vested was $7.8 million and $4.1 million during the three months ended March 31, 2018 and 2017, respectively. The weighted-average grant-date fair value of options granted was $15.24 and $13.72 during the three months ended March 31, 2018 and 2017, respectively.

 

On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grant value of $5.9 million. The first half of each award vests upon satisfaction of a performance condition and the remainder vests thereafter in equal monthly installments over a 24-month period. The achievement window expires after 4.3 years from the date of grant and the stock options expire seven years after the date of grant. The stock options are amortized over a derived service period, as adjusted, of 3.1 years, 4.6 years and 5.3 years, respectively. The stock options value and the derived service period were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance options:

 

 

 

Number of
awards
outstanding

 

Weighted-
average
exercise
price
(per share)

 

Weighted-
average
remaining
contractual
term
(in years)

 

Aggregate
intrinsic
value
(in thousands)

 

Outstanding options as of December 31, 2017

 

555,000

 

$

31.72

 

6.0

 

$

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited and cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding options as of March 31, 2018

 

555,000

 

$

31.72

 

5.9

 

$

3,585

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable as of March 31, 2018

 

92,500

*

$

31.72

 

5.9

 

$

598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Vesting of these shares is triggered by the filing of the Company’s Quarterly Report on Form 10-Q.

 

As of March 31, 2018, total unrecognized compensation cost related to nonvested stock options was $44.5 million, which will be amortized over a weighted-average period of 2.3 years.

 

Restricted Stock Units

 

 

 

Number of
awards
outstanding

 

Weighted-
average
grant date
fair value
(per share)

 

Aggregate
intrinsic
value
(in thousands)

 

Nonvested RSUs as of December 31, 2017

 

5,665,459

 

$

29.29

 

$

133,648

 

Granted

 

2,160,719

 

28.37

 

 

 

Vested

 

(544,217

)

29.32

 

 

 

Forfeited and cancelled

 

(175,758

)

28.69

 

 

 

 

 

 

 

 

 

 

 

Nonvested RSUs as of March 31, 2018

 

7,106,203

 

$

29.02

 

$

271,223

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018, total unrecognized compensation cost related to nonvested RSUs was $190.9 million, which will be amortized over a weighted-average period of 3.3 years.

 

Valuation Assumptions

 

The fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black-Scholes option pricing model:

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Employee Stock Options

 

 

 

 

 

Fair value of common stock

 

$

33.01

 

$31.72 - $31.96

 

Expected term (in years)

 

6.08

 

6.08

 

Expected volatility

 

44.09

%

47.56

%

Risk-free interest rate

 

2.74

%

2.07

%

Dividend rate

 

0

%

0

%

 

The following assumptions were used in the Monte Carlo simulation model to estimate the fair value and the derived service period of the performance options:

 

Asset volatility

 

40

%

Equity volatility

 

45

%

Discount rate

 

14

%

Stock price at grant date

 

$

31.72

 

 

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting”, ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 allows companies to make certain changes to awards, such as vesting conditions, without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 should be applied prospectively to awards modified on or after the adoption date. The Company adopted ASU 2017-09 in the first quarter of 2018. The adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

 

Stock-Based Compensation Expense

 

The Company recorded total stock-based compensation expense as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Cost of revenue

 

$

222

 

$

138

 

Research and development

 

7,872

 

4,484

 

Sales and marketing

 

3,859

 

1,995

 

General and administrative

 

5,587

 

2,768

 

 

 

 

 

 

 

Total

 

$

17,540

 

$

9,385

 

 

 

 

 

 

 

 

 

 

v3.8.0.1
Net Loss Per Share Attributable to Common Stockholders
3 Months Ended
Mar. 31, 2018
Net Loss Per Share Attributable to Common Stockholders  
Net Loss Per Share Attributable to Common Stockholders

 

13. Net Loss Per Share Attributable to Common Stockholders

 

Basic and diluted net loss per common share is presented in conformity with the two-class method required for participating securities.

 

Class A and Class B common stock are the only outstanding equity in the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions.

 

Basic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.

 

The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except share and per share data):

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Net loss attributable to common stockholders

 

$

(23,729

)

$

(14,227

)

 

 

 

 

 

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

 

94,673,557

 

88,612,804

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.25

)

$

(0.16

)

 

 

 

 

 

 

 

 

 

The following outstanding shares of common stock equivalents were excluded from the calculation of the diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

Stock options issued and outstanding

 

10,392,199

 

13,545,334

 

Nonvested restricted stock units issued and outstanding

 

7,106,203

 

2,692,636

 

Class A common stock reserved for Twilio.org

 

635,014

 

680,397

 

Class A common stock committed under 2016 ESPP

 

249,730

 

594,218

 

Unvested shares subject to repurchase

 

767

 

38,886

 

 

 

 

 

 

 

Total

 

18,383,913

 

17,551,471

 

 

 

 

 

 

 

 

v3.8.0.1
Transactions with Investors
3 Months Ended
Mar. 31, 2018
Transactions with Investors  
Transactions with Investors

 

14. Transactions With Investors

 

In 2015, two of the Company’s vendors participated in the Company’s Series E convertible preferred stock financing and owned approximately 1.9% and 1.0%, respectively, of the Company’s capital stock, on an as-if converted basis, as of each of March 31, 2018, and December 31, 2017.

 

During the three months ended March 31, 2018 and 2017, the amounts of software services the Company purchased from the first vendor were $6.3 million and $4.6 million, respectively. The net amount due to this vendor as of March 31, 2018 was $2.8 million.

 

The amount of services the Company purchased from the second vendor was $0.2 million and $0.2 million in the three months ended March 31, 2018 and 2017, respectively. The net amount due to this vendor as of March 31, 2018 was insignificant.

 

v3.8.0.1
Income Taxes
3 Months Ended
Mar. 31, 2018
Income Taxes  
Income Taxes

 

15. Income Taxes

 

In October 2016, the FASB issued ASU 2016-16, ‘‘Intra-Entity Transfers Other Than Inventory’’, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted ASU 2016-16 in the first quarter 2018. Adoption of the ASU did not have any impact on the Company’s financial statements.

 

The Company determines its income tax provision or benefit for interim periods using an estimate of its annual effective tax rate, adjusted for discrete items occurring in the quarter. The primary difference between the Company’s effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance or a zero tax rate.

 

The Company recorded a (provision) benefit for income taxes of $(0.1) million and $0.03 million for the three months ended March 31, 2018 and 2017, respectively. The provision for income taxes consists primarily of income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business. The Company’s U.S. operations have been in a loss position and the Company maintains a full valuation allowance against its U.S. deferred tax assets.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

 

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. The Company has not completed its accounting assessment for the effects of the Tax Act as of March 31, 2018; however, the final accounting assessment will occur no later than one year from the date the Tax Act was enacted.  The Company has also considered and estimated a number of provisions of the Tax Act effective January 1, 2018 and, based on the initial assessment, the Company has determined that the Tax Act did not have a material effect on its consolidated financial statements for the three months ended March 31, 2018.

 

v3.8.0.1
Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2018
Summary of Significant Accounting Policies  
Basis of Presentation

 

(a)Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018 (“Annual Report”).

 

The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited financial statements as of that date, but may not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.

 

Principles of Consolidation

 

(b)Principles of Consolidation

 

The condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

(c)Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

 

Concentration of Credit Risk

 

(d)Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, marketable securities and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.

 

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the three months ended March 31, 2018, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the three months ended March 31, 2017, one customer organization represented approximately 12% of the Company’s total revenue.

 

As of March 31, 2018, one customer organization represented 16% of the Company’s gross accounts receivable, and as of December 31, 2017, no customer organization represented more than 10% of the Company’s gross accounts receivable.

 

Revenue Recognition

(e)Significant Accounting Policies

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, which replaced the existing revenue recognition guidance, ASC 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

 

The Company adopted ASC 606 using the modified retrospective method with cumulative catch-up adjustment to the opening retained earnings as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the standard, the Company elected to apply the new guidance only to those contracts which were not completed as of the date of the adoption.

 

The impact of adopting the new standard on the Company’s consolidated financial statements was insignificant. The Company recorded a net cumulative catch-up adjustment to the beginning retained earnings as of January 1, 2018, of $0.7 million.

 

The primary impact relates to the deferral of incremental commission costs of obtaining new contracts. Under ASC 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortizes these costs on a straight-line basis over the expected term of benefit of the underlying asset, which was determined to be five years.

 

The impact on the Company’s revenue recognition policies was insignificant. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue according to the usage by its customers in the period in which that usage occurred. ASC 606 continues to support the recognition of revenue over time, and on a usage basis, for the majority of the Company’s contracts due to continuous transfer of control to the customer. The impact on the Company’s balance sheet presentation includes presenting customer refundable prepayments as customer deposit liabilities, whereas under ASC 605 these were included in deferred revenues.

 

There was not a significant tax impact to the Company’s consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there is a full valuation allowance due to the Company’s history of continued losses.

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.

 

The Company determines revenue recognition through the following steps:

 

·

Identification of the contract, or contracts, with a customer

·

Identification of the performance obligations in the contract

·

Determination of the transaction price

·

Allocation of the transaction price to the performance obligations in the contract

·

Recognition of revenue when, or as, the Company satisfies a performance obligation

 

Nature of Products and Services

 

The Company’s revenue is primarily derived from usage-based fees earned from customers accessing the Company’s enterprise cloud computing services. Platform access is considered a monthly series comprising one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the three months ended March 31, 2018 and 2017, the revenue from usage-based fees represented 84% and 83% of total revenue, respectively.

 

Subscription-based fees are derived from certain term-based contracts, such as with the sales of short codes and support. Term-based contracts revenue is recognized on a ratable basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer. In the three months ended March 31, 2018 and 2017, the revenue from term-based fees represented 16% and 17% of total revenue, respectively.

 

No significant judgments are required in determining whether products and services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (“SSP”).

 

Refer to Note 9, Revenue by Geographic Area, for additional disaggregation.

 

The Company’s arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.

 

The reserve for sales credits is included in accounts receivable and is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue.

 

Deferred Revenue and Customer Deposits

 

Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancellable contracts. Customer refundable prepayments are recorded as customer deposits. During the three months ended March 31, 2018, the Company recognized $3.6 million of revenue that was included in the deferred revenue balance, as adjusted for ASC 606 at the beginning of the period.

 

Deferred Sales Commissions

 

The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts, upsells and renewals and such expense is recognized over the estimated period of benefit of the capitalized commissions, which is determined to be five years. Total net capitalized costs as of March 31, 2018 were $4.1 million and are included in prepaid expenses and other current assets and other long-term assets in the accompanying condensed consolidated balance sheet. Amortization of these assets was $0.2 million during the three months ended March 31, 2018 and is included in sales and marketing expense in the accompanying condensed consolidated statement of operations.

 

Other than adoption of ASC 606, there were no changes to our significant accounting policies as described in our Annual Report.

Restricted Cash

 

(f)Restricted Cash

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230) — Restricted Cash”. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-18 in the first quarter of 2018 and applied the guidance retrospectively to the prior period’s condensed consolidated statement of cash flows with the following impact (in thousands):

 

 

 

Three Months Ended
March 31, 2017