TWILIO INC, 10-Q filed on 8/8/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2018
Jul. 31, 2018
Entity Registrant Name TWILIO INC  
Entity Central Index Key 0001447669  
Document Type 10-Q  
Document Period End Date Jun. 30, 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 Q2  
Common Class A    
Entity Common Stock, Shares Outstanding   76,857,136
Common Class B    
Entity Common Stock, Shares Outstanding   20,589,110
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 493,510 $ 115,286
Short-term marketable securities 301,136 175,587
Accounts receivable, net 67,572 43,113
Prepaid expenses and other current assets 21,812 19,279
Total current assets 884,030 353,265
Restricted cash 5,505 5,502
Property and equipment, net 56,721 50,541
Intangible assets, net 17,108 20,064
Goodwill 17,506 17,851
Other long-term assets 4,978 2,559
Total assets 985,848 449,782
Current liabilities:    
Accounts payable 23,765 11,116
Accrued expenses and other current liabilities 82,171 53,614
Customer deposits 7,843  
Deferred revenue 9,056 13,797
Total current liabilities 122,835 78,527
Convertible senior notes, net 423,099  
Other long-term liabilities 10,243 11,409
Total liabilities 556,177 89,936
Commitments and contingencies (Note 11)
Stockholders' equity:    
Preferred stock
Class A and Class B common stock 96 94
Additional paid-in capital 725,073 608,165
Accumulated other comprehensive income 1,962 2,025
Accumulated deficit (297,460) (250,438)
Total stockholders' equity 429,671 359,846
Total liabilities and stockholders' equity $ 985,848 $ 449,782
v3.10.0.1
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Jun. 30, 2018
Jun. 30, 2017
Condensed Consolidated Statements of Operations        
Revenue $ 147,754 $ 95,870 $ 276,870 $ 183,242
Cost of revenue 67,940 42,333 127,522 79,619
Gross profit 79,814 53,537 149,348 103,623
Operating expenses:        
Research and development 39,811 29,714 77,387 56,236
Sales and marketing 37,749 26,153 70,571 47,269
General and administrative 24,212 4,740 47,605 21,943
Total operating expenses 101,772 60,607 195,563 125,448
Loss from operations (21,958) (7,070) (46,215) (21,825)
Other income (expenses), net (1,898) 471 (1,233) 969
Loss before provision for income taxes (23,856) (6,599) (47,448) (20,856)
Provision for income taxes (150) (510) (287) (480)
Net loss attributable to common stockholders $ (24,006) $ (7,109) $ (47,735) $ (21,336)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.25) $ (0.08) $ (0.50) $ (0.24)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares) 96,348,356 90,873,305 95,515,583 89,722,874
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Jun. 30, 2018
Jun. 30, 2017
Condensed Consolidated Statements of Comprehensive Loss        
Net loss $ (24,006) $ (7,109) $ (47,735) $ (21,336)
Other comprehensive income (loss):        
Unrealized gain (loss) on marketable securities 152 (106) (165) (194)
Foreign currency translation (629) 1,583 102 1,481
Total other comprehensive income (loss) (477) 1,477 (63) 1,287
Comprehensive loss attributable to common stockholders $ (24,483) $ (5,632) $ (47,798) $ (20,049)
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (47,735) $ (21,336)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 11,392 8,480
Net amortization of investment premium and discount (237) 107
Amortization of debt issuance costs 211  
Accretion of debt discount on convertible senior notes 2,484  
Stock-based compensation 38,546 21,785
Amortization of deferred commissions 478 140
Provision for doubtful accounts 1,515 282
Write-off of internal-use software 515 96
Gain on lease termination   (295)
Changes in operating assets and liabilities:    
Accounts receivable (26,048) (9,365)
Prepaid expenses and other current assets (2,847) 1,933
Other long-term assets (1,908) (932)
Accounts payable 12,566 (1,282)
Accrued expenses and other current liabilities 28,040 (6,311)
Customer deposits 7,842  
Deferred revenue (4,542) 2,353
Long-term liabilities (1,047) 296
Net cash provided by (used in) operating activities 19,225 (4,049)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of marketable securities (184,364) (220,914)
Maturities of marketable securities 58,520 23,000
Capitalized software development costs (9,958) (8,000)
Purchases of property and equipment (2,066) (6,772)
Purchases of intangible assets (249) (154)
Acquisition, net of cash acquired   (22,621)
Net cash used in investing activities (138,117) (235,461)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from issuance of convertible senior notes 550,000  
Payment of debt issuance costs (12,513)  
Purchase of capped call (58,465)  
Payments of costs related to public offerings   (430)
Proceeds from exercises of stock options 13,715 18,154
Proceeds from shares issued under ESPP 4,474 7,404
Value of equity awards withheld for tax liabilities (910) (311)
Net cash provided by financing activities 496,301 24,817
Effect of exchange rate changes on cash, cash equivalents and restricted cash 818 42
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 378,227 (214,651)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH-Beginning of period 120,788 314,280
CASH, CASH EQUIVALENTS AND RESTRICTED CASH -End of period 499,015 99,629
Cash paid for income taxes 321 373
NON-CASH INVESTING AND FINANCING ACTIVITIES:    
Purchases of property, equipment and intangible assets, accrued but not paid 572 376
Stock-based compensation capitalized in software development costs 2,909 $ 1,557
Debt offering costs, accrued but not paid $ 467  
v3.10.0.1
Organization and Description of Business
6 Months Ended
Jun. 30, 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 States, the United Kingdom, Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore, Bermuda, Spain, Sweden and Australia.

 

v3.10.0.1
Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 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 June 30, 2018 and 2017, and six months ended June 30, 2018, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the six months ended June 30, 2017, one customer organization represented approximately 11% of the Company’s total revenue.

 

As of June 30, 2018 and 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; and

·

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 each of the three and six months ended June 30, 2018, the revenue from usage-based fees represented 84% of total revenue; and in each of the three and six months ended June 30, 2017, the revenue from usage-based fees represented 83% of total revenue.

 

Subscription-based fees are derived from certain term-based contracts, such as with the sales of telephone numbers, short codes and customer 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 and six months ended June 30, 2018, the revenue from term-based fees represented 16% of total revenue; and in the three and six months ended June 30, 2017, the revenue from term-based fees represented 17% of total revenue.

 

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 10, 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 and six months ended June 30, 2018, the Company recognized $3.6 million and $7.2 million of revenue, respectively, that was included in the deferred revenue balance, as adjusted for ASC 606 on January 1, 2018.

 

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 June 30, 2018 were $5.2 million and are included in prepaid expenses and other current and long-term assets in the accompanying condensed consolidated balance sheet. Amortization of these assets was $0.3 million and $0.5 million in the three and six months ended June 30, 2018, respectively, 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):

 

 

 

Six Months Ended
June 30, 2017

 

 

 

As Originally
Reported

 

As Adjusted

 

Cash used in investing activities

 

$

(234,291

)

$

(235,461

)

Cash, cash equivalents and restricted cash — beginning of period

 

$

305,665

 

$

314,280

 

Cash, cash equivalents and restricted cash — end of period

 

$

92,184

 

$

99,629

 

 

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 July 2018, the FASB issued ASU 2018-09, “Codification Improvements”, which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company is currently evaluating this guidance to determine the impact it may have on its statements of financial position, results of operations and cash flows.

 

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which aligns the measurement and classification for share-based payments to non-employees with the accounting guidance for share-based payments to employees. Among other requirements, the measurement of non-employee awards will now be fixed at the grant date, rather than remeasured at every reporting date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. 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 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 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 2016-02, “Leases”, which was further clarified by ASU 2018-10, “Codification Improvements to Topic 842, Leases”, and ASU 2018-11, “Leases - Targeted Improvements”, both issued in July 2018. ASU 2016-02 affects 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. ASU 2018-10 clarifies or corrects unintended application of guidance related to ASU 2016-02. The amendments affects narrow aspects of ASU 2016-02 related to the implicit rate in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU 2018-11 adds a transition option for all entities and a practical expedient only for lessors. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components. The new standards are 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 these standards 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.

 

v3.10.0.1
Fair Value Measurements
6 Months Ended
Jun. 30, 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 June 30, 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
June 30, 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

 

$

434,136

 

$

 

$

 

$

 

$

434,136

 

$

 

$

 

$

434,136

 

Commercial paper

 

29,905

 

 

 

 

 

29,905

 

 

29,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total included in cash and cash equivalents

 

464,041

 

 

 

 

434,136

 

29,905

 

 

464,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

69,898

 

 

(59

)

(51

)

69,788

 

 

 

69,788

 

Corporate debt securities and commercial paper

 

232,001

 

 

(653

)

 

 

231,348

 

 

231,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

301,899

 

 

(712

)

(51

)

69,788

 

231,348

 

 

301,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

765,940

 

$

 

$

(712

)

$

(51

)

$

503,924

 

$

261,253

 

$

 

$

765,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 and commercial paper

 

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 of June 30, 2018, the fair value of the 0.25% convertible senior notes due 2023 (the “Notes”), as further described in Note 8 below, was approximately $571.6 million. The fair value was determined based on the closing price for the Notes on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.

 

As the Company views its marketable securities as available to support current operations, it has classified all available for sale securities as short-term. As of June 30, 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 June 30, 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 and six month ended June 30, 2018. Interest earned on marketable securities was $0.7 million and $1.4 million in the three and six months ended June 30, 2018, respectively; and $0.6 million and $1.1 million in the three and six months ended June 30, 2017, respectively.  The interest 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 June 30, 2018 and December 31, 2017 (in thousands):

 

 

 

As of June 30, 2018

 

As of December 31, 2017

 

 

 

Amortized
Cost

 

Aggregate
Fair Value

 

Amortized
Cost

 

Aggregate
Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Less than one year

 

$

280,947

 

$

280,339

 

$

108,584

 

$

108,360

 

One to two years

 

20,952

 

20,797

 

67,601

 

67,227

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

301,899

 

$

301,136

 

$

176,185

 

$

175,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
Property and Equipment
6 Months Ended
Jun. 30, 2018
Property and Equipment  
Property and Equipment

 

4. Property and Equipment

 

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

 

 

 

As of
June 30,

 

As of
December 31,

 

 

 

2018

 

2017

 

Capitalized internal-use software development costs

 

$

61,726

 

$

49,177

 

Leasehold improvements

 

14,495

 

14,246

 

Office equipment

 

11,119

 

9,652

 

Furniture and fixtures

 

2,201

 

1,976

 

Software

 

1,848

 

1,675

 

 

 

 

 

 

 

Total property and equipment

 

91,389

 

76,726

 

Less: accumulated depreciation and amortization

 

(34,668

)

(26,185

)

 

 

 

 

 

 

Total property and equipment, net

 

$

56,721

 

$

50,541

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense was $4.3 million and $8.5 million for the three and six months ended June 30, 2018, respectively, and $3.1 million and $5.9 million for the three and six months ended June 30, 2017, respectively.

 

The Company capitalized $6.7 million and $13.1 million in internal-use software development costs in the three and six months ended June 30, 2018, respectively, and $5.2 million and $9.5 million in the three and six months ended June 30, 2017, respectively. Of this amount, stock-based compensation expense was $1.5 million and $2.9 million in the three and six months ended June 30, 2018, respectively, and $0.9 million and $1.6 million in the three and six months ended June 30, 2017, respectively.

 

Amortization of capitalized software development costs was $3.0 million and $5.7 million in the three and six months ended June 30, 2018, respectively, and $1.9 million and $3.7 million in the three and six months ended June 30, 2017, respectively.

 

v3.10.0.1
Business Combinations
6 Months Ended
Jun. 30, 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 subject to future service conditions and was recorded ratably into the compensation expense as the services were rendered. As of June 30, 2018, the remaining balance in the escrow was $0.2 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 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 the income approach 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 consolidated financial statements is immaterial.

 

v3.10.0.1
Goodwill and Intangible Assets
6 Months Ended
Jun. 30, 2018
Goodwill and Intangible Assets  
Goodwill and Intangible Assets

 

6. Goodwill and Intangible Assets

 

Goodwill

 

Goodwill balance as of June 30, 2018 and December 31, 2017 was as follows (in thousands):

 

 

 

Total

 

Balance as of December 31, 2017

 

$

17,851

 

Effect of exchange rate

 

(345

)

 

 

 

 

Balance as of June 30, 2018

 

$

17,506

 

 

 

 

 

 

 

Intangible assets

 

Intangible assets consisted of the following (in thousands):

 

 

 

As of June 30, 2018

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Developed technology

 

$

14,706

 

$

(7,412

)

$

7,294

 

Customer relationships

 

6,874

 

(1,384

)

5,490

 

Supplier relationships

 

2,759

 

(717

)

2,042

 

Trade name

 

60

 

(60

)

 

Patent

 

2,127

 

(140

)

1,987

 

 

 

 

 

 

 

 

 

Total amortizable intangible assets

 

26,526

 

(9,713

)

16,813

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

Domain names

 

32

 

 

32

 

Trademarks

 

263

 

 

263

 

 

 

 

 

 

 

 

 

Total

 

$

26,821

 

$

(9,713

)

$

17,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $2.8 million for the three and six months ended June 30, 2018, respectively, and $1.5 million and $2.7 million for the three and six months ended June 30, 2017, respectively

 

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

 

 

 

As of
June 30,
2018

 

2018 (remaining six months)

 

$

3,595

 

2019

 

5,092

 

2020

 

2,661

 

2021

 

1,529

 

2022

 

933

 

Thereafter

 

3,003

 

 

 

 

 

Total

 

$

16,813

 

 

 

 

 

 

 

v3.10.0.1
Accrued Expenses and Other Liabilities
6 Months Ended
Jun. 30, 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
June 30,

 

As of
December 31,

 

 

 

2018

 

2017

 

Accrued payroll and related

 

$

10,284

 

$

4,898

 

Accrued bonus and commission

 

6,479

 

4,777

 

Accrued cost of revenue

 

21,649

 

10,876

 

Sales and other taxes payable

 

21,945

 

20,877

 

ESPP contributions

 

1,814

 

1,338

 

Deferred rent

 

1,251

 

1,048

 

Accrued other expense

 

18,749

 

9,800

 

 

 

 

 

 

 

Total accrued expenses and other current liabilities

 

$

82,171

 

$

53,614

 

 

 

 

 

 

 

 

 

 

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

 

 

 

As of
June 30,

 

As of
December 31,

 

 

 

2018

 

2017

 

Deferred rent

 

$

7,886

 

$

8,480

 

Deferred tax liability, net

 

1,886

 

2,452

 

Accrued other expenses

 

471

 

477

 

 

 

 

 

 

 

Total other long-term liabilities

 

$

10,243

 

$

11,409

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
Convertible Senior Notes and Capped Call Transactions
6 Months Ended
Jun. 30, 2018
Convertible Senior Notes and Capped Call Transactions  
Convertible Senior Notes and Capped Call Transactions

 

8. Convertible Senior Notes and Capped Call Transactions

 

In May 2018, the Company issued $550.0 million aggregate principal amount of 0.25% convertible senior notes due 2023 in a private placement, including $75.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.

 

The Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture relating to the issuance of Notes (the “indenture”) or if the Notes are not freely tradeable as required by the indenture. The Notes will mature on June 1, 2023, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable by us, were approximately $537.0 million.

 

Each $1,000 principal amount of the Notes is initially convertible into 14.1040 shares of the Company’s Class A common stock par value $0.001, which is equivalent to an initial conversion price of approximately $70.90 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.

 

Prior to the close of business on the business day immediately preceding March 1, 2023, the Notes may be convertible at the option of the holders only under the following circumstances:

 

(1) during any calendar quarter commencing after September 30, 2018, and only during such calendar quarter, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is more than or equal to 130% of the conversion price on each applicable trading day;

 

(2) during the five business days period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Class A common stock and the conversion rate on each such trading day;

 

(3) upon the Company’s notice that it is redeeming any or all of the Notes; or

 

(4) upon the occurrence of specified corporate events.

 

On or after March 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may, at their option, convert all or a portion of their Notes regardless of the foregoing conditions.

 

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A common stock, or a combination of cash and shares of Class A Common Stock, at the Company’s election.  It is the Company’s current intent to settle the principal amount of the Notes with cash.

 

During the three months ended June 30, 2018, the conditions allowing holders of the Notes to convert were not met. The Company may redeem the Notes, in whole or in part, at its option, on or after June 1, 2021 but before the 35th scheduled trading day before the maturity date, at a cash redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, if the last reported sale price of the Class A Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the redemption notices were sent; and the trading day immediately before such notices were sent.

 

No sinking fund is provided for the Notes. Upon the occurrence of a fundamental change (as defined in the Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

 

The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.

 

The foregoing description is qualified in its entirety by reference to the text of the indenture and the form of 0.25% convertible senior notes due 2023, which are attached as Exhibits 4.1 and 4.2 to this Quarterly Report on Form 10-Q and are incorporated herein by reference.

 

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.  The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $119.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an effective interest rate over the contractual terms of the Notes.

 

In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $10.2 million,  were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

 

The net carrying amount of the liability component of the Notes was as follows (in thousands):

 

 

 

As of
June 30,
2018

 

Principal

 

$

550,000

 

Unamortized discount

 

(116,951

)

Unamortized issuance costs

 

(9,950

)

 

 

 

 

Net carrying amount

 

$

423,099

 

 

 

 

 

 

 

The net carrying amount of the equity component of the Notes was as follows (in thousands):

 

 

 

As of
June 30,
2018

 

Proceeds allocated to the conversion options (debt discount)

 

$

119,435

 

Issuance costs

 

(2,819

)

 

 

 

 

Net carrying amount

 

$

116,616

 

 

 

 

 

 

 

The following table sets forth the interest expense recognized related to the Notes (in thousands):

 

 

 

Three Months
Ended June 30,
2018

 

Contractual interest expense

 

$

164

 

Amortization of debt issuance costs

 

211

 

Amortization of debt discount

 

2,484

 

 

 

 

 

Total interest expense related to the Notes

 

$

2,859

 

 

 

 

 

 

 

In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $70.90 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $105.04 per share, subject to certain adjustments. The capped calls cover, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A Common Stock. The capped calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The capped calls expire on the earlier of (i) the last day on which any convertible securities remain outstanding and (ii) June 1, 2023, subject to earlier exercise. The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the  capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including changes in law, insolvency filings, and hedging disruptions. The capped call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $58.5 million incurred to purchase the capped call transactions was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.

 

v3.10.0.1
Supplemental Balance Sheet Information
6 Months Ended
Jun. 30, 2018
Supplemental Balance Sheet Information  
Supplemental Balance Sheet Information

 

9. Supplemental Balance Sheet Information

 

A roll-forward of the Company’s reserves is as follows (in thousands):

 

(a)Allowance for doubtful accounts:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Balance, beginning of period

 

$

1,404

 

$

770

 

$

1,033

 

$

1,076

 

Additions

 

1,140

 

210

 

1,515

 

282

 

Write-offs

 

(8

)

(57

)

(12

)

(435

)

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

2,536

 

$

923

 

$

2,536

 

$

923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b)Sales credit reserve:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Balance, beginning of period

 

$

1,702

 

$

818

 

$

1,761

 

$

544

 

Additions

 

1,544

 

421

 

2,651

 

972

 

Deductions against reserve

 

(621

)

(505

)

(1,787

)

(782

)

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

2,625

 

$

734

 

$

2,625

 

$

734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
Revenue by Geographic Area
6 Months Ended
Jun. 30, 2018
Revenue by Geographic Area  
Revenue by Geographic Area

 

10. 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
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenue by geographic area:

 

 

 

 

 

 

 

 

 

United States

 

$

111,244

 

$

75,103

 

$

209,879

 

$

145,201

 

International

 

36,510

 

20,767

 

66,991

 

38,041

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

147,754

 

$

95,870

 

$

276,870

 

$

183,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of revenue by geographic area:

 

 

 

 

 

 

 

 

 

United States

 

75

%

78

%

76

%

79

%

International

 

25

%

22

%

24

%

21

%

 

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

 

v3.10.0.1
Commitments and Contingencies
6 Months Ended
Jun. 30, 2018
Commitments and Contingencies  
Commitments and Contingencies

 

11. 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 $4.2 million for the three and six months ended June 30, 2018, respectively, and $2.1 million and $4.0 million for the three and six months ended June 30, 2017, respectively.

 

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

 

Year Ending December 31:

 

As of
June 30,
2018

 

2018 (remaining six months)

 

$

4,604

 

2019

 

8,070

 

2020

 

7,102

 

2021

 

7,033

 

2022

 

5,864

 

Thereafter

 

10,189

 

 

 

 

 

Total minimum lease payments

 

$

42,862

 

 

 

 

 

 

 

Additionally, in the three and six months ended June 30, 2018, the Company entered into several non-cancellable vendor agreements with a term from one to two years for total purchase commitments of $3.3 million and $7.8 million, respectively.

 

(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. The court transferred the cases to the United States District Court, Northern District of California.  With respect to each of the patents asserted in the now-consolidated Telesign I and Telesign II cases (“TeleSign I/II”), the consolidated complaint seeks, 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 (“Telesign III”), 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.  Telesign III 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 June 30, 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 believed 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 collecting 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 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 June 30, 2018 and December 31, 2017, the liability recorded for these taxes was $21.9 million and $20.9 million, respectively.

 

On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair permitting a state to require a seller to collect sales tax even if the seller has no physical presence in that state.  This opinion reversed a prior U.S. Supreme Court opinion requiring a physical presence by the seller.  We are evaluating the opinion as it applies to our facts and circumstances.

 

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

 

v3.10.0.1
Stockholders' Equity
6 Months Ended
Jun. 30, 2018
Stockholders' Equity  
Stockholders' Equity

 

12. Stockholders’ Equity

 

(a)Preferred Stock

 

As of June 30, 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 June 30, 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 June 30, 2018, 76,511,357 shares of Class A common stock and 20,828,123 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
June 30,

 

As of
December 31,

 

 

 

2018

 

2017

 

Stock options issued and outstanding

 

9,527,562

 

10,710,427

 

Nonvested restricted stock units issued and outstanding

 

7,705,589

 

5,665,459

 

Class A common stock reserved for Twilio.org

 

635,014

 

635,014

 

Stock-based awards available for grant under 2016 Plan

 

10,877,345

 

10,200,189

 

Stock-based awards available for grant under 2016 ESPP*

 

3,216,460

 

2,478,343

 

Class A common stock reserved for the convertible senior notes

 

10,472,165

 

 

 

 

 

 

 

 

Total

 

42,434,135

 

29,689,432

 

 

 

 

 

 

 

 

* Class A common stock committed for purchase under the 2016 ESPP was 131,581 shares and 235,372 shares as of June 30, 2018 and December 31, 2017, respectively.

 

v3.10.0.1
Stock-Based Compensation
6 Months Ended
Jun. 30, 2018
Stock-Based Compensation  
Stock-Based Compensation

 

13. 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 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 June 30, 2018 and 2017, 201,581 and 580,705 shares of Class A common stock were purchased under the 2016 ESPP, respectively, and 131,581 shares are expected to be purchased in November 2018. As of June 30, 2018, total unrecognized compensation cost related to the 2016 ESPP was $1.4 million, which will be amortized over a weighted-average period of 0.4 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

 

1,140,048

 

33.99

 

 

 

 

 

Exercised

 

(2,150,801

)

6.38

 

 

 

 

 

Forfeited and cancelled

 

(172,112

)

8.54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding options as of June 30, 2018

 

8,972,562

 

$

14.29

 

7.25

 

$

374,398

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable as of June 30, 2018

 

4,825,743

 

$

8.60

 

6.35

 

$

228,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $43.4 million and $74.5 million during the three and six months ended June 30, 2018, respectively, and $22.5 million and $100.7 million during the three and six months ended June 30, 2017, respectively.

 

The total estimated grant date fair value of options vested was $4.8 million and $12.8 million during the three and six months ended June 30, 2018, respectively, and $4.6 million and $8.7 million during the three and six months ended June 30, 2017, respectively.

 

The weighted-average grant-date fair value per share of options granted was $19.1 and $15.7 during the three and six months ended June 30, 2018, respectively, and $11.46 and $13.48 during the three and six months ended June 30, 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 performance condition for the first award was satisfied on March 31, 2018.

 

The stock options are amortized over a derived service period, as adjusted, of 3.1 years, 4.6 years and 5.4 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
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

 

555,000

 

$

31.72

 

6.0

 

$

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited and cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding options as of June 30, 2018

 

555,000

 

$

31.72

 

5.9

 

$

13,487

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable as of June 30, 2018

 

92,500

 

$

31.72

 

5.9

 

$

2,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018, total unrecognized compensation cost related to nonvested stock options was $42.1 million, which will be amortized over a weighted-average period of 2.2 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

 

3,459,051

 

35.5

 

 

 

Vested

 

(1,041,782

)

28.8

 

 

 

Forfeited and cancelled

 

(377,139

)

28.9

 

 

 

 

 

 

 

 

 

 

 

Nonvested RSUs as of June 30, 2018

 

7,705,589

 

$

32.2

 

$

431,652

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018, total unrecognized compensation cost related to nonvested RSUs was $229.7 million, which will be amortized over a weighted-average period of 3.2 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
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Employee Stock Options:

 

 

 

 

 

 

 

 

 

Fair value of common stock

 

$

41.22

 

$

24.77

 

$

33.01- $41.22

 

$

24.77 -$31.96

 

Expected term (in years)

 

6.08

 

6.08

 

6.08

 

6.08

 

Expected volatility

 

44.16

%

46.1

%

44.09%-44.16%

 

46.1%-47.6%

 

Risk-free interest rate

 

2.86

%

1.9

%

2.74%-2.86%

 

1.9%-2.1%

 

Dividend rate

 

0

%

0

%

0

%

0

%

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

0.5

 

0.5

 

0.5

 

0.5

 

Expected volatility

 

39.78

%

33.2