TWILIO INC.
(Exact name of registrant as specified in its charter)
Use these links to rapidly review the documentTABLE OF CONTENTSItem 8. Financial Statements and Supplementary Data
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 | ||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from toCommission File Number:001-37806
Twilio Inc.TWILIO INC.(Exact name of registrant as specified in its charter)
| Delaware | 26-2574840 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
375 Beale101 Spear Street, Suite 300
First FloorSan Francisco, California 94105(Address of principal executive offices) (Zip Code)(415) 390-2337(Registrant'sRegistrant’s telephone number, including area code)
| Title of each class | Trading Symbol(s) | Name of each exchange on which | |||||||||
| Class A Common Stock, par value $0.001 per share | TWLO | ||||||||||
| Long-Term Stock Exchange | |||||||||||
Securities registered pursuant to Section 12(g) of the Act:None
2021. PART II PART IV investments. problem in 2008. numbers and session initiation protocol (“SIP”) Trunking. seamlessly fit texting into their workflows. when developers explore what they can do with Twilio, because one day they may have a business problem that they will use our products to solve. ” Using our software, developers are able to incorporate communications and customer data into applications that span a range of industries and functionalities. Our technology partner customers Segment added the leading customer data platform to Twilio's platform. While every business needs a complete view of their customers, data is typically siloed across many disparate systems. Segment's platform and APIs allow companies to collect, clean and control their customer data, providing a single view of customers across channels for more effective engagement. When combined with Twilio's communication channels, this insight enables businesses to delight their customers with personalized, timely and impactful communications on the right channel at the right time. The Segment platform includes: The higher level APIs SIP Trunking. The inventory management. aggressively in our platform approach, which prioritizes increasing our reach and scale. We intend to pursue the following growth strategies: seamlessly embed two-factor authentication and phone verification into any platform to our product offerings, our acquisition of Segment in November 2020 allowed us to add the market-leading customer data platform to our product offerings and our acquisition of Zipwhip in July 2021 allowed us to expand the toll-free channel, offering developers and businesses another affordable, trusted, high-quality engagement option via messaging-enabled toll-free numbers. good and have not experienced interruptions of operations or work stoppages due to labor disagreements. products and features. We have a strategy to grow within our customers that we refer to as our “in and up” strategy. We get in to new customers through our messaging and email products, often directly via developers, then build on those relationships to grow our footprint with broader adoption and higher value products. Customer Support prices, with greater depth than our products or in geographies where we do not operate. With the introduction of new products and services and new market entrants, we expect competition to intensify in the future. Moreover, as we expand the scope of our platform, we may face additional competition. financial condition. holders. information, including our corporate governance guidelines and code of business conduct and ethics, is also available on our investor relations website under the heading Our business depends on customers increasing their use of our products, and Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ý☒ No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes o☐ No ýxIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ýx No oIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ýx No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer," "smaller” “accelerated filer”, “smaller reporting company"company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ý☒ Accelerated filer o☐ Non-accelerated filer o☐ Smaller reporting company o☐ Emerging growth company o☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ýxThe aggregate market value of stock held by non-affiliates as of June 29, 201830, 2021 (the last business day of the registrant's most recently completed second quarter) was $4.4$51.0 billion based upon $56.02$394.16 per share, the closing price on June 29, 201830, 2021 on the New York Stock Exchange. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.On February 1, 2019,15, 2022, 171,702,846 shares of the registrant had 104,277,870 shares ofregistrant’s Class A common stock and 19,303,2599,820,605 shares of registrant’s Class B common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's definitive Proxy Statement for the 20192022 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2018.Twilio Inc.TWILIO INC.Annual Report on Form 10-KFor the Fiscal Year Ended December 31, 2018
2021TABLE OF CONTENTSPagePART IItem 1.Business4Page Item 1A.PART I Risk Factors17Properties57Selected Financial Data60PART IIIPART III 1Special Note Regarding Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential"“may,” “can,” “will,” “would,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential,” or "continue"“continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:•the impact of the coronavirus disease of 2019 (“COVID-19”) pandemic on the global economy, our customers, employees and business;•our future financial performance, including our revenue, cost of revenue, gross margin and operating expenses, ability to generate positive cash flow and ability to achieve and sustain profitability;•the impact and expected results from changes in our relationship with our larger customers;•the sufficiency of our cash and cash equivalents to meet our liquidity needs;••our ability to continue to build and maintain credibility with the global software developer community;•our ability to attract and retain customers to use our products;•our ability to attract and retain enterprises and international organizations as customers for our products;•our ability to form and expand partnerships with technology partners and consulting partners;••our ability to introduce new products and enhance existing products;•our ability to comply with modified or new industry standards, laws and regulations applying to our business, including the General Data Protection Regulation (“GDPR”), the Schrems II decision invalidating the EU-US Privacy Shield, the California Consumer Privacy Act of 2018 (“CCPA”) and other privacy or cybersecurity regulations that may be implemented in the future, and Signature-based Handling of Asserted Information Using toKENs (“SHAKEN”) and Secure Telephone Identity Revisited (“STIR”) standards (together, “SHAKEN/STIR”) and other robocalling prevention and anti-spam standards and increased costs associated with such compliance;•potential harm caused by compromises in security, data and infrastructure, including cybersecurity protections, investments and resources and costs required to prevent, detect and remediate potential cybersecurity threats, incidents and breaches of ours or our customers’ systems or information;•our ability to optimize our network service provider coverage and connectivity;•our ability to manage changes in network service provider fees that we pay in connection with the delivery of communications on our platform;•our ability to work closely with email inbox service providers to maintain deliverability rates;•our ability to pass on our savings associated with our platform optimization efforts to our customers;•the impact and expected results from changes in our relationships with our larger customers;•our ability to attract and retain enterprises and international organizations as customers for our products;•our ability to form and expand partnerships with technology partners and consulting partners;•our ability to successfully enter into new markets and manage our international expansion;•the attraction and retention of qualified employees and key personnel;•our ability to effectively manage our growth and future expenses and maintain our corporate culture;2•our ability to compete effectively in an intensely competitive market;•the sufficiency of our cash and cash equivalents to meet our liquidity needs;•our anticipated investments in sales and marketing, and research and development;•our ability to maintain, protect and enhance our intellectual property;•our ability to successfully defend litigation brought against us;•our ability to service the interest on our convertible3.625% senior notes due 2029 (“2029 Notes”), our 3.875% notes due 2031 (“2031 Notes,” and together with the 2029 Notes, the “Notes”), and repay such notes, to the extent required;Notes;ability to comply with modified or new laws and regulations applying to our business, including the General Data Protection Regulation ("GDPR"), the California Consumer Privacy Act of 2018customers’ and other privacy regulations that may be implemented inplatform users’ violation of our policies or other misuse of our platform;•our expectations about the future;impact of climate change, natural disasters, public health epidemics and•our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments, including our acquisition of SendGrid, Inc. ("SendGrid").We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Summary of Risk Factors and Uncertainties Associated with Our Business” below, in Part I, Item 1A,"Risk Factors" “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.TableOur business is subject to numerous risks and uncertainties outside of our control. One, or a combination, of these risks and uncertainties could materially affect any of those matters as to which we have made forward-looking statements and cause our actual results or an actual event or occurrence to differ materially from those results or an event or occurrence described in a forward-looking statement. Some of the principal risks associated with our business include the following:•the impact of the global COVID-19 pandemic;•new and unproven markets for our products and platform;•our ability to effectively manage our rapid growth;•fluctuations in our quarterly results and our ability to meet securities analysts’ and investors’ expectations;•our ability to maintain and enhance our brand and increase market awareness of our company and products;•limitations on the use and adoption of our solutions due to privacy laws, data collection and transfer restrictions and related domestic or foreign regulations;3•our ability to maintain and grow our relationships with existing customers and have them increase their usage of our platform;•our ability to attract new customers in a cost-effective manner;•our ability to develop enhancements to our products and introduce new products that achieve market acceptance;•our ability to compete effectively in the markets in which we participate;•our history of losses and uncertainty about our future profitability;•our ability to increase adoption of our products by enterprises;•our ability to expand our relationships with existing technology partner customers and add new technology partner customers;•significant risks associated with expansion of our international operations;•compliance with applicable laws and regulations;•telecommunications-related regulations and future legislative or regulatory actions;•our ability to obtain or retain geographical, mobile, regional, local or toll-free numbers and to effectively process requests to port such numbers in a timely manner due to industry regulations;•our ability to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements or preferences;•our ability to provide monthly uptime service level commitments of a minimum of 99.95% under our agreements with customers;•any breaches of our networks or systems, or those of AWS or our service providers;•defects or errors in our products;•any loss or decline in revenue from our largest customers;•litigation by third parties for alleged infringement of their proprietary rights;•exposure to substantial liability for intellectual property infringement and other losses from indemnity provisions in various agreements;•our ability to successfully utilize or to integrate acquired businesses and technologies successfully or to achieve the expected benefits of such acquisitions, partnerships and investments;•the loss of our senior management and other key employees;•our use of open source software;•our reliance on SaaS technologies from third parties;•potentially adverse tax consequences on our global operations and structure;•fraudulent usage of or activity relating to our products;•unfavorable conditions in our industry or the global economy;•requirement of additional capital to support our business and its availability on acceptable terms, if at all;•exposure to foreign currency exchange rate fluctuations;•our ability to use our net operating losses and certain other tax attributes to offset future taxable income and taxes;•our failure to maintain an effective system of disclosure controls and internal control over financial reporting;•the risks of pandemics, earthquakes, fire, floods and other natural catastrophic events and of interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism;•volatility of the trading price of our Class A common stock;•potential decline in the market price of our Class A common stock due to substantial future sales of shares;•requirement of a significant amount of cash to service our future debt; and•our ability to raise the funds necessary for the repayment of the 2029 Notes and 2031 Notes for cash.4Item 1. BusinessOverviewSoftware developers are reinventing nearly every aspect of business today. Yet as developers, we repeatedly encountered an area where we could not innovate—communications. Because communication is a fundamental human activity and vital to building great businesses, we wanted to incorporate communications into our software applications, but the barriers to innovation were too high. Twilio was started to solve this problem.Twilio spent over a decade building the leading cloud communication platform, but communications is just the beginning. Twilio's vision is to become the leading customer engagement platform, ultimately providing businesses with the holy grail—a single view of the customer journey and the ability to take action, delivering real-time, personalized communications. We believe the future of communicationscustomer engagement will be written in software by the developers of the world—our customers. By empowering them, our mission is to fuel the future of communications.Cloud platforms are a new category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure. These platforms have arisen to enable a fast pace of innovation across a range of categories, such as computing and storage. We are the leader in the Cloud Communications Platformcloud communications platform category. We enable developers to build, scale and operate real-time communicationscustomer engagement within software applications. OurWe offer a customer engagement platform consists of three layers: our Engagement Cloud, Programmable Communications Cloud and Super Network. Our Engagement Cloudwith software is designed to address specific use cases, like account security and contact centers, and is a set of Application Programming Interfaces ("APIs") that handles the higher-level communication logic needed for nearly every type of customer engagement. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. Our Programmable Communications Cloud software isengagement platform also includes a set of APIs that enablesenable developers to embed voice, messaging, video and videoemail capabilities into their applications. The Programmable Communications Cloud isapplications, and are designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. The Super Network is our software layer that allows our customers' software to communicate with connected devices globally. It interconnects with communications networks and inbox service providers around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of API'sAPIs giving our customers access to more foundational components of our platform, like phone numbers.In February 2019 we completed our acquisition ofacquired SendGrid, Inc. (“SendGrid”), the leading email API platform. Email is an important channel for businesses to communicate with their customers and incorporating SendGrid's products into our platform will allowallows us to enable businesses to engage with their customers via email effectively and at scale.In addition, adding this important channelNovember 2020 we acquired Segment.io, Inc. (“Segment”), the market-leading customer data platform. Segment provides businesses a unified customer view to our platform will allowbetter understand their customers and engage more effectively, enabling us to more strategically address our customer'sdrive personalization at scale. The acquisition expands and strengthens use cases across customer service, marketing, sales, product and analytics and accelerates Twilio’s journey to build the world’s leading customer engagement strategy across voice,platform.In July 2021 we acquired Zipwhip, Inc., (“Zipwhip”) a leading provider of toll-free messaging video,in the United States. Zipwhip’s customizable APIs enable organizations to text enable their existing toll-free phone numbers in minutes and now e-mail.We had 64,286over 256,000 Active Customer Accounts as of December 31, 2018,2021, representing organizations big and small, old and young, across nearly every industry, with one thing in common: they are competing by using the power of software to build differentiation through communications.differentiated customer engagement experiences. With our customer engagement platform, our customers are disrupting existing industries and creating new ones. For example, our customers' software applications use our platform to notify a diner when a table is ready, provide enhanced application security through two-factor authentication to safely recognize a customer, connect potential buyers to real estate agents, and power large, omni-channel contact centers. The range of applications that developers build with the Twilio platform has proven to be nearly limitless.5Our goal is for Twilio to be in the toolkit of every software developer in the world.world, from small businesses to major enterprises. Because big ideas often start small, we encourage developers to experiment and iterate on our platform. We loveAs our customers succeed, we share in their success primarily through our usage-based revenue model. Our revenue grows as customers increase their usage of a product, extend their usage of a product to new applications or adopt a new product. We believe the most useful indicator of this increased activity from our existing customer accounts is our Dollar-Based Net Expansion Rate, which for historical periods through December 31, 2019, compares the revenue from a cohort of Active Customer Accounts, other than Variable Customer Accounts, in a quarterperiod to the same quarterperiod in the prior year. As previously announced in our Annual Report on Form 10-K filed with the SEC on March 2, 2020, commencing with the three-month period ended March 31, 2020, we calculate our Dollar-Based Net Expansion Rate by comparing total revenue from a cohort of Active Customer Accounts in a period to the same period in the prior year (the “New DBNE Definition”). When we calculate Dollar‑Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar‑Based Net Expansion Rates for each of the quarters in such period. Under the New DBNE Definition, our Dollar-Based Net Expansion Rate was 140%131% and 128%137% for the years ended December 31, 20182021 and 2017,2020, respectively. See Part II, Item 7, "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Expansion Rate."Our Platform ApproachTwilio's mission is to fuelunlock the futureimagination of communications.builders. Our plan is to be the leading customer engagement platform. We enable builders - the developers of the world - to build, scale and operate real-time communications within software applications. We believeapplications, ultimately empowering every application can be enhanced through the power of communication. Over time, we believedeveloper and company to improve their interactions with their customers. This enables businesses to create novel and creative new consumer experiences that all of our communications that do not occur in person will be integrated into software applications. delight their customers and differentiate their companies from their competitors.Our platform approach enables developers to build this future.whichalso embed our products in the solutions they sell to other businesses,businesses.Part of our core strategy is to provide a broad set of lower-level building blocks that can be used to build practically any digital experience. By doing this, we allow developers' creativity to flourish across the widest set of use cases—some of which have not even been invented yet.What are also ablesome of the common customer problems we are solving?•Contact Center. Twilio gives companies complete control and flexibility to leverage our productsrapidly deploy remote agents, digital channels, self-service and integrations for lower costs and higher productivity.•Alerts and Notifications. From delivery notifications to deliver their applications.Common Use Cases•Anonymous Communications. Enabling userscritical emergency alerts, Twilio provides the building blocks to havedevelop critical communications across messaging channels (short message service (“SMS”), multimedia message service (“MMS”), Short Codes, Toll-Free, WhatsApp, Facebook Messenger, and Google Business Messages), voice and email channels.•User Identity Verification. Customers can use a trusted means ofglobally optimized multi-channel user verification solution to combat fraud, reduce fake user sign-ups and authorize sensitive account actions.•Field services and contactless delivery. Our customers can use Twilio Conversations to ensure privacy with masked communications, where they prefer not to shareprovide granular session control over user permissions, session duration and roles and keep private information like their telephone number. Examples include conversations between driversprivate.•Marketing. Email and ridersSMS campaign support to target, nurture and develop new customer relationships.•Customer Loyalty. Customers can send reminders about reward programs through email or texting after meetingmessaging to drive repeat purchases through a dating website.6•Alerts and Notifications. Alerting a user that an event has occurred, such as when a table is ready, a flight is delayed or a package is shipped.•Contact Center. Improving customer support of powering customer care teams with voice, messaging and video capabilities that integrate with other systems to add context, such as a caller's support ticket history of present location.•Call Tracking. Using phone numbers to provide detailed analytics on phone calls to measure the effectiveness of marketing campaigns or lead generation activities in a manner similar to how web analytics track and measure online activity.•Mobile Marketing. Integrating messaging with marketing automation technology, allowing organizations to deliver targeted and timely contextualized communications to consumers.•User Security. Verifying user identity through two-factor authentication prior to log-in or validating transactions within an application's workflow. This adds an additional layer of security to any application.• PartneringTwilio partners with nonprofit organizations through Twilio.org, our social impact division, to use the power of communications to help solve social challenges, such as an SMS hotline to fight human trafficking, an emergency volunteer dispatch system, and appointment reminders for medical visits in developing nations.nations and more.
Our PlatformTableSegment Customer Data PlatformOur acquisition of Contents•Connections. Collect event data from mobile apps, websites and servers with one API, then pull in contextual data from cloud-based apps like customer relationship management (“CRM”), payment systems and internal databases to build a unified picture of the customer.•Personas. Use identity resolutions to take event data from across devices and channels, merge the data together, and create unified customer profiles to build and enrich audiences, and activate audiences across marketing tools with a single view of the customer.•Privacy. Comply with laws and regulations, such as General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018 (“CCPA”), by using first-party data, collected and privatized with Segment, instead of increasingly regulated third-party data.•Protocols. Standardize data collection to create a single source of truth for customer data that is clean, consistent, and compliant, and adheres to a well thought out tracking plan.Channel APIsOur PlatformEngagement Cloud PartChannel APIs consist of our core strategy is to provide a broad set of lower level building blocks (i.e. thesoftware products in our Programmable Communications Cloud and Super Network) that can be used individually or in combination to build virtually anyrich contextual communications within applications. We offer flexible building blocks that enable our customers to build what they need. Our easy-to-use developer APIs provide a programmatic channel to access our software. Our Channel APIs include:MessagingXTwilio Programmable Messaging is an API to send and receive SMS, MMS and over-the-top (“OTT”) (WhatsApp and Facebook Messenger) messages globally. It uses intelligent sending features to ensure messages reliably reach end users wherever they are. Our customers build use cases, such as appointment reminders, delivery notifications, order confirmations and many two-way and conversational use cases, such as customer care. Programmable Messaging includes:•SMS. Programmatically send and receive SMS messages around the world, supporting localized languages in nearly every market. This includes support for the new 10-digit long code routes in the United States (“U.S.”).•MMS. Exchange picture messages and more over U.S. and Canadian phone numbers from customer applications with built-in image transcoding and media storage.•Toll-Free SMS. Send and receive text messages with the same toll-free number used for voice calls in the U.S. and Canada.•High-Throughput Toll-Free SMS. Starting at 25 messages per second, High-Throughput Toll Free SMS lets you send and receive a higher volume of messages with the same toll-free number used for voice calls in the U.S. and Canada.•OTT channels. Programmatically send, receive and track messages to messaging apps such as WhatsApp and Facebook Messenger.7We charge on a per-message basis for most of our Programmable Messaging products.VoiceTwilio Programmable Voice allows developers to build solutions to make and receive phone calls globally. They can make, manage and route calls to a browser, an app, a phone or anywhere else one can take a call. Developers can also incorporate advanced voice functionality such as text-to-speech, conferencing, recording and transcription. Through advanced call control software, developers can build customized applications that address use cases such as contact centers, call tracking and analytics solutions and anonymized communications. Our voice software works over both the traditional public switched telephone network (“PSTN”) and over Internet Protocol (“VoIP”). Programmable Voice includes:•Twilio Voice. Initiate, receive and manage phone calls globally, end to end through traditional voice technology or between web browsers and landlines or mobile phones.•Call Recording. Securely record, store, transcribe and retrieve voice calls in the cloud.•Global Conference. Integrate audio conferencing that intelligently routes calls through cloud data centers in the closest geographic region to reduce latency.•Voice Insights. Call quality and performance data at the fingertips of our customers. Beyond details of a single call, every account on Twilio has access to the Voice Insights Dashboard, a powerful tool in Twilio Console that provides out-of-the-box visibility to key performance indicators and data to understand changes in call behavior.•Media Streams. Allows for real-time access to the raw audio stream of your phone calls. Through Media Streams our customers can fork the media of a phone call in real-time, effectively creating a copy of the initial audio stream that can be routed to your own application or to a third party to power advanced capabilities of your choosing.•SHAKEN/STIR. Signature-based Handling of Asserted Information Using toKENs (“SHAKEN”) and Secure Telephone Identity Revisited (“STIR”) standards (together, “SHAKEN/STIR”) is a protocol mandated by the Federal Communications Commission (“FCC”) to combat the rise in unwanted robocalls and unlawful caller ID spoofing. When adopted, carriers can present a trust indicator, like “Caller Verified,” to recipients’ phones. SHAKEN/STIR is free to all Twilio customers and allows them to increase answer rates for their calls by giving their calls the highest attestation under the SHAKEN and STIR caller authentication framework.•Programmable Voice SIP Interfaces. Enables voice infrastructure to be augmented with cloud capabilities.•Emergency Calling. Twilio’s Emergency Calling for SIP API enables emergency call routing to Public Safety Answering Points (“PSAPs”) in the U.S., Canada and the United Kingdom (“UK”).•Bring Your Own Carrier Trunking (“BYOC”). Enables connection of customer’s PSTN carrier to Twilio’s programmable platform.EmailThe Twilio SendGrid Email API solves email delivery challenges at scale and ensures our customers’ email program lives up to their product experience. Our Email API provides the flexibility for our customers to build customized solutions, as well as helpful shortcuts to streamline integration and optimize their inbox placement. Businesses use our email products for both marketing messages as well as transactional emails, including shipping notifications, friend requests, password resets and sign-up confirmations. Twilio SendGrid Email API includes:•Integrations. Businesses can integrate our email API with multiple leading development frameworks and client libraries in multiple programming languages.•Internet Protocol (“IP”) Management. Domains and links can be customized, whether sending from shared IP address pools or from a dedicated IP address, to improve reputation management and delivery.8•Deliverability. Our proprietary Mail Transfer Agent (“MTA”) optimizes for inbox placement while offering tools for sender reputation management and expert deliverability professional services. Our real-time email address validation API checks email address legitimacy before sending to improve deliverability.•Sender Authentication. Our custom Sender Policy Framework and DomainKeys Identified Mail record creation is designed to eliminate domain spoofing and phishing.•Mobile support. Our deep linking functionality enables email engagement for mobile apps.•Security. Our two-factor authentication, API key permissions and Event Webhook Security helps enable secure management of our Email API by our customers.VideoProgrammable Video provides developers with the building blocks to add voice and video to web and mobile applications. Developers can address multiple use cases such as video consultations, telemedicine, distance learning, recruiting, social networking and more by using Programmable Video’s global cloud infrastructure to build on WebRTC. They can use our JavaScript, iOS or Android SDKs, quickstarts and open source sample code to launch applications in minutes, then customize them to meet the unique needs of their use case. By doing this, we allow developers' creativityWith Video Insights, developers can monitor the performance of their video applications directly from the Twilio Console.Twilio LiveTwilio Live gives developers the tools to flourish across the widest set ofcreate immersive, interactive audio or video live streaming experiences. Low-latency delivery enables speakers and audience members to engage via chat, polls, and inviting audience members “on stage” to speak. Developers can build interactive shopping experiences, broadcast events such as conferences or concerts, fitness, and more using live streaming APIs, SDKs, and sample code optimized for iOS, Android, and all major browsers.ConversationsThe Twilio Conversations API allows developers to build rich, one-to-one and group interactions for customer support and commerce use cases—some of which haven't even been invented yet. cases. The unified messaging API provides cross-channel support for SMS and MMS, Chat, WhatsApp, Facebook Messenger, and Google Business Messages – all while archiving message history, preserving participant identity, and reducing time to market with software development kits (“SDKs”) and pre-built mobile and web user interfaces.SolutionsAs we observe whatthe customer engagement use cases that are most common and the work flowsworkflows our customers find most challenging, we create the products in our Engagement Cloud toSolutions. We bring these learningsSolutions to a broader audience. While developers can build a broad rangeaudience, including non-technical customers, in the form of applicationshigher level APIs. These solutions are built on top of our platform, certain use cases are more common. Our Engagement CloudChannel APIs build upon our Programmable Communications Cloud to offer more fully implemented functionality for a specific purpose, such as two-factor authentication or a contact center thereby savingor two-factor authentication. This saves developers significant time in building their applications. we have created in this layer of our platform are focused on addressing a massive opportunity to recreate and modernize the field of customer engagement. The means byWe charge on a per-seat or per-use basis for our Solutions, which mostinclude:Contact CenterBusinesses must continually adapt to stay ahead of customers’ changing expectations. Twilio Flex is the industry’s only fully programmable contact center platform that allows companies engageto deploy a broad array of customer engagement channels while providing the tools to easily create, change or extend any part of their custom solution. Twilio Flex enables businesses to rapidly deploy tailored cloud contact centers free from the limitations of software-as-a-service (“SaaS”) applications.9User VerificationOnline fraud has exploded from a minor nuisance to a major factor in how businesses operate today requiring advanced solutions to register, onboard and recognize customers. Twilio Verify is a managed solution that takes care of channel orchestration and management as well as security and business logic. Using our two-factor authentication APIs (“Twilio Verify”), developers can add an extra layer of security to their applications with their customers is archaic and disjointed, made more glaring bysecond-factor passwords sent to a user via SMS, voice, email or push notifications. Twilio Verify provides user authentication codes through a variety of formats based on the pace of development in other areas of communication. Our products in the Engagement Cloud combine the flexibility provided by our platform model along with the learnings we've gained over the past ten years focused on driving success at tens of thousands of customers.Programmable Communications Cloud Our Programmable Communications Cloud provides a range of products that enables developers to embed voice, messaging and video capabilities into their applications. Our easy-to-use developer APIs provide a programmatic channel to access our software. Developers can utilize our intuitive programming language, TwiML, to specify application functions such as <Dial>, <Record> and <Play>, leveraging our software to manage the complexity of executing the specified functions. Our Programmable Communications Cloud consists of software products thatdeveloper’s needs. Codes can be used individuallydelivered through the Authy app on registered mobile phones, desktop or in combination to build rich contextual communications within applications. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. Our Programmable Communications Cloud includes:
or initiating calls.•Programmable Voice. Our Programmable Voice software productssmart devices or via SMS and voice automated phone calls. In addition, authentication can be determined through a push notification on registered smartphones. To allow developers to build solutionsknow exactly who they are sending messages to, make and receive phone calls globally, and to incorporate advanced voice functionality such as text-to-speech, conferencing, recording and transcription. Programmable Voice, through our advanced call control software,Twilio Lookup allows developers to build customized applications that address use cases such as contact centers, call trackingvalidate number format, device type and analytics solutions and anonymized communications.•Programmable Messaging. Our Programmable Messaging software products allow developersprovider prior to build solutions to send and receivesending messages globally, through channels like SMS, MMS, short codes, WhatsApp, Facebook Messenger, and LINE, and incorporate advanced messaging functionality such as emoji, picture messaging and localized languages. Our customers use Programmable Messaging, through software controls, to power use cases, such as appointment reminders, delivery notifications, order confirmations and customer care.•Programmable Video. Our Programmable Video software products enable developers to build next-generation mobile and web applications with embedded video, including for use cases such as customer care, collaboration and physician consultations.
Marketing CampaignsSuper Network Our Programmable Communications CloudMarketing Campaigns is built on top of SendGrid's proven email infrastructure to help digital marketers build and send email campaigns at scale - faster than ever. With drag and drop editing, approachable automation and powerful contacts management, Marketing Campaigns help marketers attract and retain customers more efficiently. Marketing Campaigns include email design and templates, list management, dynamic content and email testing.Super NetworkWhile developers build applications with our software, Twilio manages the connections between the internet and the global software layer, which wetelecommunications network. We call our Super Network. Ourthis the Twilio Super Network interfaces intelligentlyand it is a global network of connections with communications networks globally.numerous carriers globally to provide connectivity in approximately 80 countries.We do not own any physical network infrastructure. We use software to constructbuild a high performance network that continuously optimizes quality and deliverabilityperformance for our customers. Ourcustomers, provides resiliency and redundancy to our platform and helps to minimize disruption from carrier delays or outages. Through handling massive volumes of traffic, we are able to detect issues often before our customers or carrier partners do. We receive real-time feedback on handset deliverability through a number of carriers and destinations and we use this data for our own routing decisions.The Twilio Super Network breaks downoperates a 24/7 global operations center that constantly monitors the geopolitical boundaries and scale limitations of physical network infrastructure and provides our customers that use our Programmable Communications Cloud and Engagement Cloud offering access to over 180 countries.carrier networks, alongside Twilio’s dedicated communications engineers who optimize for changing traffic patterns. The Super Network also contains a set of API'sAPIs giving our customers access to more foundational components of our platform, such aslike phone numbers. We have strategically built out our global infrastructurenumbers, and operate in 27 cloud data centers in nine geographically distinct regions. These data centers serve as interconnection points with network service providers and customers alike, giving us a truly global reach and a redundant means to connect businesses with billions of customers all over the world. Our provider relationships and deployed infrastructure have allowed us to catalogue the many different communications standards that exist today and offer them up to businesses as one consolidated platform with simple, easy-to-use APIs. We are continually adding new network service provider relationships as we scale, and we are not dependent upon any single network service provider to conduct our business. strength of Twilio's Super Network comes fromfeatures include:•Phone Number Provisioning. Acquire local, national, mobile and/or toll-free phone numbers on demand in approximately 80 countries and connect them into the software intelligence we've embedded throughout our communications network. By leveraging our software expertise we eliminate the traditional complexities and uncertainties of telecommunications and deliver a consistent and high quality communications platform for our customers. This allows customerscustomers’ applications.•Elastic SIP Trunking. Connect legacy voice applications to spend less time focusing on mastering the highly specialized and complex telecommunications industry and more time focusing on building best-in-class customer engagement experiences. Our proprietary technology selects which network service providers to use and routes the communications in order to optimize the quality and cost of the communications across our product offerings. Our Super Network analyzes massive volumes of data from our traffic, the applications that power it, and the underlying provider networks in order to optimize our customers' communications for quality and cost. As such, with every new message and call, our Super Network becomesover IP infrastructure with globally available phone numbers and pay-as-you-go pricing. Twilio’s Emergency Calling for SIP Trunking feature enables emergency call routing to PSAPs in the U.S., Canada and the UK.•Interconnect. Connect privately to Twilio to enable enterprise grade security and quality of service for Twilio Voice and Elastic SIP Trunking.We charge on a per-minute or per-phone number basis for most of our Super Network products.IoTThe most challenging aspect of connecting previously unconnected devices lies in making the connection reliable and secure enough to perform and add value for years on end. Twilio’s IoT offerings therefore make connectivity simpler and coding of connected devices more robust, intelligentreliable so that our customers can focus on building differentiated IoT experiences versus building and efficient, enabling us to provide better performancemaintaining the required infrastructure underneath. Our customers use Twilio IoT for use cases, such as asset or fleet tracking, smart building management, consumer wearables (often pulling in other Twilio products such as Voice, Video, and deliverability for our customers. Our Super Network's sophistication becomes increasingly difficult for others to replicate over time as it is continually learning, improvingFlex), predictive maintenance and scaling.10Our Business Model for InnovatorsOur goal is to include Twilio in the toolkit of every developer in the world.world, from small businesses to major enterprises. Because big ideas often start small, developers need the freedom and tools to experiment and iterate on their ideas.In order to empower developers to experiment, our developer-first business model is low friction, eliminating the upfront costs, time and complexity that typically hinder innovation. We call this approachAdditionally, our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouragingmodel encourages experimentation and enablingenables developers to grow as customers as their ideas succeed. Developers can begin building with a free trial. They have access to self-service documentation and free customer support to guide them through the process. Once developers determine that our software meets their needs, they can flexibly increase consumption and pay based on usage. In short, we acquire developers like consumers and enable them to spend like enterprises.Our Growth StrategyWe are the leader in the Cloud Communications Platformcloud communications platform category based on revenue, market share and reputation and intend to continue to set the pace for innovation. We also have the leading market share in the Customer Data Platform category. Our overall strategy is to develop great APIs that developers love. These developers are our champions and bring us “in” to companies of every type, most frequently utilizing our messaging and email tools as an entry point. This “in” motion creates initial relationships with customers of all sizes including major enterprises that allow us to move “up” the software stack and provide those companies with software solutions that address their customer engagement requirements from marketing to sales and support. Today, we offer Twilio Campaigns for marketing, Twilio Flex for customer support and Twilio Verify to onboard and recognize customers. The more strategic nature of these software products also allows us to move up the organization chart, interacting with more senior and strategic purchasers. This “in” and “up” strategy is a motion we work on improving every day. We will also continue to invest•Continue Significant Investment in our Technology Platform. We will continue to invest in building new software capabilities and extending our platform to bring the power of contextual communicationscustomer engagement to a broader range of applications, geographies and customers. We have a substantial research and development team, comprising approximately 47%39% of our headcount as of December 31, 2018.•Grow Our Developer Community and Accelerate Adoption. We will continue to enhance our relationships with developers globally and seek to increase the number of developers on our platform. As of December 31, 2018, we had 64,286 Active Customer Accounts and well over two million registered developer accounts registered on our platform. In addition to adding new developers, we believe there is significant opportunity for revenue growth from developers who already have already registered accounts with us but who have not yet built their software applications with us, or whose applications are in their infancy and will grow with Twilio into an Active Customer Account.•Increase Our International Presence. Our platform serves over 180 countries today, making it as simple to communicate from São Paulo as it is from San Francisco. Customers outside the United StatesU.S. are increasingly adopting our platform, and for the years ended December 31, 20182021 and 2017,2020, revenue from international customer accounts accounted for 25%34% and 23%27% of our total revenue, respectively. We are investing to meet the requirements of a broader range of global developers and enterprises. We plan to grow internationally by continuing to expand our operations outside of the United StatesU.S. and collaborating with international strategic partners.•Further Penetrate the Enterprises. We plan to drive greater awareness and adoption of Twilio from enterprises across industries. We intend to further increase our investment in sales and marketing to meet evolving enterprise needs globally, in addition to extending our enterprise-focused use cases and platform capabilities, like our Twilio Enterprise Plan. Additionally, we believe there is significant opportunity to expand our relationships with existing enterprise customers.•Expand Our Partner Channel. Our Twilio Build partner program is focused on growing our community of technology and consulting partners. Twilio Build's ecosystem of partners offers customers both packaged applications and consulting expertise that make it possible for any customer to innovate with Twilio regardless of region, industry, business model or development resources. To help our partners grow their businesses and innovate for their customers, this program provides go-to-market support, certification and training programs and a partner success team. We have relationships with a number of technology partner customers that embed our products in the solutions that they sell to other businesses. We intend to expand our relationships with existing technology partner customers and to add new technology partner customers. We plan to invest in a range of11initiatives to encourage increased collaboration with, and generation of revenue from, technology partner customers. We have started developingdeveloped relationships with consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications. We intend to continue to invest in and develop the ecosystem for our solutions in partnership with consulting partners to accelerate awareness and adoption of our platform.•Selectively Pursue Acquisitions and Strategic Investments. We may selectively pursue acquisitions and strategic investments in businesses and technologies that strengthen our platform. In FebruaryFrom 2015 through 2021, we acquired Authy, a leading provider of authentication-as-a-service for large-scale applications. With the integration of Authy, we now providemade several acquisitions which have allowed us to expand our platform and service offerings to include features such as a cloud-based API toapplication. In November 2016, we acquired the proprietaryapplication, Web Real-Time-Communication ("WebRTC"(“Web RTC”) media processing technologies, built by the team behind the Kurento Open Source Project. The Kurento Media Server capabilities, including large group communications, transcoding, recording and advanced media processing, has been integrated into Twilio Programmable Video. In February 2017, we acquired Beepsend, AB, a messaging provider based in Sweden specializing in messaging and SMS solutions. In 2018, we acquired Ytica.com, a contact center analytics, tool developer based in Czech Republic; Core Network Dynamics, a software mobile network infrastructure developer based in Germany; and certain assets of VAI Technologies, a language recognition platform.capabilities. In addition, our acquisition of SendGrid in February 2019 we acquired SendGrid, Inc., theallowed us to add a leading e-mail API platform.The Twilio MagicWe believe there's a unique spirit to Twilio, manifested in who we are and how we work together. TheseWe value and invest in a positive culture of optimism, innovation, and accountability. Our values, which we call the Twilio Magic, remind us every day who we are the principles we use to build an impactful, high growth business while staying true to ourselves. Collectively, these principlesat our core and guide how we act and how we make decisions, and how we win.How decisions.We Act Be an Owner.are know their business, embracing the good news and the bad. Owners sweat the details and "pick up the trash." Owners think long term, and spend money wisely. Empower Others.Twilio.orgWe believe that unleashing human potential—both inside and outside our company—iscommunications play a critical role in solving some of the key to our success. Be humble and realize it's not just about us. Invest in each other. No Shenanigans. Always act in an honest, direct and transparent way.How We Make Decisions Wear the Customer's Shoes. Spend the time to deeply understand customers, and solve problems from their perspective. Earn trust through every interaction. Write It Down. Our business is complex, so take the time to express yourself in prose—for your sake, and for the folks with whom you're collaborating. Ruthlessly Prioritize. Prioritization helps break down complex problems, and provides clarity in the face of uncertainty. Decisions are progress, so make decisions with available information and keep learning.How We Win Be Bold. We're driven by a hunger to build a meaningful and impactful company. Embrace crazy ideas and remember, every big idea starts small. Be Inclusive. To achieve our goals, we need a diverse set of voices in the room. Build diverse teams, and seek out unique points of view. Draw the Owl. There's no instruction book, it's ours to write. Figure it out, ship it, and iterate. Invent the future, but don't wing it. Don't Settle. Expect the best from yourself and others, because there's no feeling greater than being proud of our work. Hire the best people for every role.Twilio.org We believe we can create greaterworld’s toughest social good through better communications.challenges. Through Twilio.org, which is a part of our company and not a separate legal entity, we donate and discountsell our products at a reduced rate to nonprofits, who use our products to engage their audience, expand their reachsocial impact organizations and focus on making a meaningful change in the world. Twilio.org's mission is to fuel communications that give hope, power, and freedom with a 10-year goalprovide grant funding to help one billion people every year.scale organizations' mission. In 2015, we reserved 1% of ourTwilio's common stock to fund Twilio.org. We have periodically replenished that initial reserve and as of December 31, 2021, the number of shares of Twilio Class A common stock set aside for Twilio.org operations was 618,857. We started Twilio.org so that more people around the world have the opportunity to thrive. In 2021, over 7,500 social impact at Twilio. Since then, Twilio.org has made several donations consistentorganizations used Twilio products and funding to reach more than 500 million people worldwide. 2021 marked another year of living through the COVID-19 pandemic and Twilio products and funding were used by over 1,200 organizations to provide more than 300 million people with its philanthropicvaccine and COVID-19 related information.Information on our key Environmental, Social and Governance (“ESG”) programs, goals which were treated as charitable contributionsand commitments, and certain metrics can be found in our consolidated statements of operations included elsewhere inannual Impact Report, available on our website at https://investors.twilio.com/governance. Website references throughout this Annual Reportdocument are provided for convenience only, and the content on Form 10-K. the referenced websites is not incorporated by reference into this report. While we believe that our ESG goals align with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there can be no assurance that they will be met.Our Employees and Human Capital ResourcesAs of December 31, 2018, the total remaining shares reserved for Twilio.org was 572,676.Our ProductsEngagement Cloud While developers can build a broad range of applications on our platform, certain use cases are more common. Our Engagement Cloud APIs build upon our Programmable Communications Cloud to offer more fully implemented functionality for a specific purpose, such as two-factor authentication or a contact center, thereby saving developers significant time in building their applications.Flex Flex is a fully programmable cloud contact center platform designed to give businesses complete control of their contact center experience. With Flex, customers can quickly deploy an omnichannel contact center platform and also programmatically customize every element of the experience including the interface, communication channels, agent routing, and reporting to meet the unique needs of the business.Account Security Identity and communications are closely linked, and this is a critical business need for our customers. Using our two-factor authentication APIs, developers can add an extra layer of security to their applications with second-factor passwords sent to a user's phone via SMS, voice or push notifications. Our Account Security products include:•Authy. Provides user authentication codes through a variety of formats based on the developer's needs. Authentication codes can be delivered through the Authy app on registered mobile phones, desktop, or smart devices or via SMS and voice automated phone calls. In addition, authentication can be determined through a push notification on registered smartphones•Lookup. Allows developers to validate number format, device type, and provider prior to sending messages or initiating calls.•Verify. Allows developers to deliver a one-time passcode through SMS or voice to verify that a user is in possession of the device being registered We charge on a per-seat or per-use basis for our Engagement Cloud APIs.Programmable Communications Cloud Our Programmable Communications Cloud consists of software for voice, messaging, video and authentication that empowers developers to build applications that can communicate with connected devices globally. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need.Programmable Voice Our Programmable Voice software products allow developers to build solutions to make and receive phone calls globally, and to incorporate advanced voice functionality such as text-to-speech, conferencing, recording and transcription. Programmable Voice, through our advanced call control software, allows developers to build customized applications that address use cases such as contact centers, call tracking and analytics solutions and anonymized communications. Our voice software works over both the traditional public switch telephone network and over Internet Protocol. Programmable Voice includes:•Twilio Voice. Initiate, receive and manage phone calls globally, end to end through traditional voice technology or between web browsers and landlines or mobile phones. Voice calling can also be integrated natively in Apple iOS and Google Android apps.•Call Recording. Securely record, store, transcribe and retrieve voice calls in the cloud.•Global Conference. Integrate audio conferencing that intelligently routes calls through cloud data centers in the closest of nine geographic regions to reduce latency. Scales from Basic, for a limited number of participants, to Epic, for an unlimited number of participants. We charge on a per-minute basis for most of our Programmable Voice products.Programmable Messaging Our Programmable Messaging software products allow developers to build solutions to send and receive messages globally, and incorporate advanced messaging functionality such as emoji, picture messaging and localized languages. Our customers use Programmable Messaging, through software controls, to power use cases, such as appointment reminders, delivery notifications, order confirmations and customer care. We offer messaging over long-code numbers, short-code numbers, messaging apps such as WhatsApp, Facebook Messenger and LINE, and over IP through our Android, iOS and JavaScript software development kits. Programmable Messaging includes:•Twilio SMS. Programmatically send, receive and track SMS messages around the world, supporting localized languages in nearly every market.•Twilio MMS. Exchange picture messages and more over U.S. and Canadian phone numbers from customer applications with built-in image transcoding and media storage.•Copilot. Intelligent software layer that handles tasks, such as dynamically sending messages from a phone number that best matches the geographic location of the recipient based on a global pool of numbers.•Programmable Chat. Deploy contextual, in-app messaging at global scale.•Channels. Programmatically send, receive and track messages to messaging apps such as WhatsApp, Facebook Messenger and LINE globally.•Toll-Free SMS. Send and receive text messages with the same toll-free number used for voice calls in the United States and Canada. We charge on a per-message basis for most of our Programmable Messaging products.Programmable Video Programmable Video provides developers with the building blocks to add voice and video to web and mobile applications. Developers can address multiple use cases such as remote customer care,multi-party collaboration, video consultations and more by leveraging Programmable Video's global cloud infrastructure and powerful SDKs to build on WebRTC. Programmable Video includes:•Twilio Video. Create rich, multi-party video experiences in web and mobile applications with features such as one-to-one and multi-party video calling, cloud based recordings, screen sharing etc.•Network Traversal. Provide low-latency, cost-effective and reliable Session Traversal Utilities for Network Address Translation (STUN) and Traversal Using Relay for Network Address Translation (TURN) capabilities distributed across five continents. This functionality allows developers to initiate peer-to-peer video sessions across any internet-connected device globally. We charge on a per-connected-endpoint, per-active-endpoint and per-gigabit basis for our Programmable Video products.Super Network Our Programmable Communications Cloud is built on top of our global software layer, which we call our Super Network. Our Super Network interfaces intelligently with communications networks globally. We do not own any physical network infrastructure. We use software to build a high performance network that optimizes performance for our customers. The Super Network also contains a set of API's giving our customers access to more foundational components of our platform, like phone numbers and Session Initiation Protocol ("SIP") Trunking.•Instant Phone Number Provisioning. Acquire local, national, mobile and toll-free phone numbers on demand in over 100 countries and connect them into the customers' applications.•Short Codes. A five to seven digit phone number in the United States, Canada and the United Kingdom used to send and receive a high-volume of messages per second.•Elastic SIP Trunking. Connect legacy voice applications to our Super Network over IP infrastructure with globally-available phone numbers and pay-as-you-go pricing.•Interconnect. Connect privately to Twilio to enable enterprise grade security and quality of service for Twilio Voice and Elastic SIP Trunking. We charge on a per-minute or per-phone-number basis for most of our Super Network products.Our Employees As of December 31, 2018,2021, we had a total of 1,4407,867 employees, including 3512,964 employees located outside of the United States.U.S. None of our U.S. employees are represented by a labor union or covered by awith respect to their employment. Employees in certain of our non-U.S. subsidiaries have the benefits of collective bargaining agreement.arrangements at the national level. We have not experienced any work stoppages, and we consider our relations with our employees to be good.12Diversity, Equity and InclusionWe are driving a diversity, equity and inclusion (“DEI”) strategy based on the principles of antiracism. At Twilio, we use “antiracism” as an umbrella term for actively identifying and eliminating racism/oppression by changing systems, organizational structures, policies, practices, and attitudes, so that power is shared equitably. By educating and empowering Twilions to think and operate through an antiracist lens, we’ll be able to build a more diverse workforce, promote equity for all communities in the workplace and foster safe, inclusive environments.Following our commitment to become an antiracist organization, we began the work to embed and operationalize antiracism across the business, with a strong focus on education. In 2021, over 100 senior Twilio executives participated in an antiracism workshop, with continued learning planned in 2022. We are growing our partnerships with global organizations to help us find, grow, and keep diverse talent in various demographics, regions, and countries. We are coordinating antiracist learning opportunities through employee resource group (“ERG”) specific programming and events. Lastly, we continue to maintain healthy pay parity, ensuring that employees with the same job and location are paid fairly relative to one another, regardless of gender or race.We will continue to grow our DEI resources and global footprint to make sure DEI scales along with the business. Most recently, we expanded the DEI team and launched new ERG chapters globally. This will ensure we are translating antiracism and amplifying DEI efforts across all teams and regions.Compensation and BenefitsTwilio is committed to delivering a comprehensive compensation and benefits program that provides support for all of our employees’ well-being. We provide competitive compensation and benefits to attract and retain talented employees, including offering market-competitive salaries, sales commissions for our sales teams, and equity. We generally offer full-time employees equity at the time of hire and through annual equity grants, as well as provide an employee stock purchase plan, to foster a strong sense of ownership and engage our employees in being committed to our long-term success.We ensure that our compensation is fair for all employees, regardless of classifications, such as race and gender. We routinely run a rigorous statistical analysis to ensure compensation is fair, taking into account factors that should impact pay, like role, level, location and performance.Our full-time employees are eligible to receive, subject to the satisfaction of certain eligibility requirements, our comprehensive benefits package including our medical, dental and vision insurance and life and disability insurance plans. In addition, we provide time off, as well as maintain a tax-qualified 401(k) retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax-advantaged basis. In 2021, we matched 50% of the first 6% of contributions by plan participants, subject to annual contribution limits set forth in the Internal Revenue Code of 1986, as amended.In structuring these benefit plans, we seek to provide an aggregate level of benefits that are comparable to those provided by similar companies.COVID-19 ResponseTo support employee well-being, Twilio established a number of new programs in response to the COVID-19 pandemic and the transition to full-time work from home. We established No Meeting Fridays, created flexible work schedule options, gave employees a home office stipend, a caregiver stipend, free Care.com membership and paid time off through our COVID-19 Support Leave to care for themselves or family members impacted by COVID-19.Research and DevelopmentOur research and development efforts are focused on ensuring that ourbuilding a trusted, smart engagement platform is resilient and available to our customers at any time, and on enhancing our existing products and developing new products.Our research and development organization is predominantly built around small development teams. Our small development teams foster greater agility, which enables us to develop new, innovative products and make rapid changes to our infrastructure that increase resiliency and operational efficiency. Our development teams designed, built and continue to expand our Engagement Cloud, Programmable Communications Cloudcustomer engagement platform, our core platforms stack and Super Network.As of December 31, 2018,2021, we had 6733,103 employees in our research and development organization. We intend to continue to invest in our research and development capabilities to extend our platform and bring the power of contextual communications to a broader range of applications, geographies and customers.Sales and MarketingOur sales and marketing teams work together closely to drive awareness and adoption of our platform, accelerate customer acquisition and generate revenue from customers.Our go-to-market model is primarily focused on initiating customer relationships by reaching and serving the needs of developers. We are a pioneer of developer evangelism and education and have cultivated a large global developer community. We reach developers through community events and conferences, including our annual SIGNAL customer and developer conference, to demonstrate how every developer can create differentiated applications incorporating communications using our products.Once developers are introduced to our platform, we provide them with a low-friction trial experience. By accessing our easy-to-configure APIs, extensive self-service documentation and customer support team, developers can build our products into their applications and then test such applications during an initial free trial period that we provide. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products, for a majority of our products. Our Flex contact center platform is generally offered on a per user, per month basis or on a usage basis per agent hour. Our email API is offered on a monthly subscription basis, while our Marketing Campaigns product is priced based on the number of email contacts stored on our platform and the number of monthly emails sent to those contacts through our email API. Our self-serve pricing matrix is publicly available and it allows for customers to receive automatic tiered discounts as their usage of our products increases. As customers' use of our products grows larger, some enter into negotiated contracts with terms that dictate pricing, and typically include some level of minimum revenue commitments. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, we expand our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account managers or customer success advocates to ensure their satisfaction and expand their usage of our products.We also supplement our self-service model with a sales effortaccount executives and customer success managers aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach.approach to expand usage and ensure satisfaction. To help increase our awareness in the enterprise, we have expanded our marketing efforts through programs like our Twilio Engage roadshow, werewhere we seek to bring business leaders and developers together to discuss the future of customer engagement. We have developed products to support this effort as well, like the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration. Our sales organization targets technical leaders and business leaders who are seeking to leverage software to drive superior customer engagement and competitive differentiation. As we educate these leaders on the benefits of developing applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales, specialty sales and sales engineering personnel.When potential customers do not have the available developer resources to build their own applications, we refer them to either our technology partners who embed our products in the solutions that they sell to other businesses (such as contact centers and sales force and marketing automation), or our professional services team or outside consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications.As of December 31, 2018,2021, we had 5493,661 employees in our sales and marketing organization.We have designed our products and platform to be self-service and to require minimal customer support. To enable seamless self-service,this, we provide all of our users with helper libraries, comprehensive documentation, how-to'show-tos and tutorials. We supplement and enhance these tools with the participation of our engaged developer community. In addition, we provide support options to address the individualized needs of our customers. All developers get free email-based support with APIand system status notifications. Our developers can also engage with the broader Twilio community to resolve certain issues.14We also offer three paid tiers of email and phone support with increasing levels of availability and guaranteed response times. Our highest tier personalized plan, is intended for our largest customers, and includes guaranteed response times that vary based on the priority of the request, a dedicated support engineer, a duty manager coverage and quarterly status review.reviews. Our support model is global, with 24x7 coverage and support offices located throughout the world, with our larger offices located in the United States, the United Kingdom, EstoniaU.S., Ireland, Colombia, India, and Singapore. We currently derive an insignificant amount of revenue from fees charged for customer support.We also offer professional services which provide in-depth, hands-on, fee-based packages of advisory, software architecture, integration and coding services to existing and prospective customers and partners to optimize their use of the Twilio platform. Our goal is to help our customers achieve business results faster. Offerings include services for implementing contact center solutions, email implementation and deliverability, customer data platform design, and configuration and integration of communications capabilities.CompetitionThe market for Cloud Communications Platformcloud communication platforms is rapidly evolving and increasingly competitive. We believe that the principal competitive factors in our market are:•completeness of offering;•credibility with developers;•global reach;•ease of integration and programmability;•product features;•platform scalability, reliability, security and performance;•brand awareness and reputation;•the strength of sales and marketing efforts;•customer support; and,•the cost of deploying and using our products.We believe that we compete favorably on the basis of the factors listed above. We believe that none of our competitors currently competes directly with us across all of our product offerings.Our competitors fall into four primary categories:•legacy on-premise vendors, such as Avaya and Cisco;•regional network service providers that offer limited developer functionality on top of their own physical infrastructure;•smaller software companies that compete with portions of our product line; and,•software-as-a-service "SaaS"Some of our competitors have greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets and larger intellectual property portfolios. As a result, certain of our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower15Intellectual PropertyWe rely on a combination of patent, copyright, trademark and trade secret laws in the United StatesU.S. and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand.As of December 31, 2018,2021, in the United States,U.S., we had been issued 104197 patents, which expire between 2029 and 2037.2040. As of such date, we also had 1336 issued patents in foreign jurisdictions, all of which are related to U.S. patents and patent applications. We have also filed various applications for protection of certain aspects of our intellectual property in the United StatesU.S. and internationally. In addition, as of December 31, 2018,2021, we had 1550 trademarks registered in the United StatesU.S. and 94416 trademarks registered in foreign jurisdictions.We further seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, we intend to continue to expand our international operations, and effective intellectual property, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Further, companies in the communications and technology industries may own large numbers of patents, copyrights and trademarks and may frequently threaten litigation, or file suit against us based on allegations of infringement or other violations of intellectual property rights. We currently are subject to, and expect to face in the future, allegations that we have infringed the intellectual property rights of third parties, including our competitors and non-practicing entities.RegulatoryWe are subject to a number of U.S. federal and state and foreign laws and regulations that involve matters central to our business. These laws and regulations may involve privacy, data protection, intellectual property, competition, telecommunications, broadband, Voice over Internet Protocol (“VoIP”), consumer protection, export taxation or other subjects. Many of the laws and regulations to which we are subject are still evolving and being tested in courts and by regulatory authorities and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industry in which we operate. Because globalU.S., federal, state and foreign laws and regulations have continued to develop and evolve rapidly, it is possible that we or our products or our platform may not be, or may not have been, compliant with each such applicable law or regulation.For example, the General Data Protection Regulation (“GDPR”) and the United Kingdom’s GDPR which took full effect on May 25, 2018, enhanced data protection obligations(“UK GDPR”) impose strict requirements for businessesprocessing the personal information of individuals located, respectively within the European Economic Area (“EEA”) and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities.the United Kingdom (“UK”). Noncompliance with the GDPR and UK GDPR can triggerresult in, for example, bans on data processing and fines equalof up to the greater of € 20 million euros (£17.5 million for the UK GDPR) or 4% of annual global annual revenue. Further, individuals may initiate litigation related to our processing of their personal information. Given the breadth and depth of changes in data protection obligations, meeting the requirements of GDPR has required significant time and resources, including a review of our technology and systems currently in use against the requirements of GDPR. We have taken steps to prepare for complying with GDPR, including integrating GDPR-compliant privacy protections into our products and platform, commercial agreements and record-keeping practices to help us and our customers meet the compliance obligations of GDPR. However, additional EU laws and regulations (and member states' implementations thereof) further govern the protection of consumers and of electronic communications. If our effortsOur actual or perceived failure to comply with GDPRlaws, regulations or other applicable EU lawscontractual commitments regarding privacy, data protection and regulations are not successful, we may be subjectdata security could lead to penaltiescostly legal action, adverse publicity, significant liability and fines that woulddecreased demand for our services, which could adversely impactaffect our business, and results of operations and our ability to conduct business in the EU could be significantly impaired.In addition, laws such as the Telephone Consumer Protection Act of 1991 ("TCPA"(“TCPA”), restrictsrestrict telemarketing and the use of automatic SMS text messages without properexplicit customer consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations, or if we become liable under these laws or regulations due to the failure of our customers fail to comply with these laws by obtaining proper consent,do so, we could face direct liability.Compliance with these laws and regulations has not had, and is not expected to have, a material effect on our capital expenditures, results of operations and competitive position as compared to prior periods, and we do not currently anticipate material capital expenditures for environmental control facilities, of which we currently have none. For additional information16about government regulation applicable to our business, see Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.Corporate InformationTwilio Inc. was incorporated in Delaware in March 2008. Our principal executive offices are located at 375 Beale101 Spear Street, ThirdFirst Floor, San Francisco, California 94105, and our telephone number is (415) 390-2337. Our website address is www.twilio.com. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K.Twilio, the Twilio logo and other trademarks or service marks of Twilio appearing in this Annual Report on Form 10-K are the intellectual property of Twilio. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the intellectual property of their respective holdersInformation about Geographic RevenueInformation about geographic revenue is set forth in Note 1012 of our Notes to our Consolidated Financial Statements included in Part II, Item 8, "Financial“Financial Statements and Supplementary Data"Data” of this Annual Report on Form 10-K.Available Information The followingOur filings are available to be viewed and downloaded free of charge through our investor relations website after we file them with the Securities and Exchange Commission ("SEC"(“SEC”):. Our filings include our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statement for our annual meeting of stockholders. Thesestockholders, Current Reports on Form 8-K and other filings are also available for download free of charge on our investor relations website.with the SEC. Our investor relations website is located at http://investors.twilio.com. The SEC also maintains an Internet website that contains periodic and current reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Further corporate governance"Corporate Governance."“Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.17Item 1A. Risk FactorsA description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including Part II, Item 7, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline.Risks Related to Our Business and Our IndustryThe global COVID-19 pandemic may adversely impact our business, results of operations and financial condition.The rapid spread of COVID-19 globally has in the past disrupted, and may continue to disrupt, our day-to-day operations and the operations of our customers, partners and service providers for an indefinite period of time, including as a result of changing public health recommendations, travel restrictions and limitations, the duration, spread and severity and potential recurrence of the virus and its variants, as well as the efficacy of vaccines and vaccine distribution and the timing and trajectory of the economic recovery, all of which could negatively impact our business and results of operations and financial condition. While the global economy is reopening in various parts of the world, some countries and locations are reinstating lockdowns and other restrictions that make a recovery difficult to predict. This may result in differing levels of demand for our products as the priorities, resources, financial conditions and economic outlook of our customers, partners and service providers change, which could adversely affect or increase the volatility of our financial results. Certain industries were initially more negatively impacted by COVID-19, while others were positively impacted. It has been and, until the COVID-19 pandemic is contained, will continue to be more difficult for us to forecast usage levels and predict revenue trends for the more adversely impacted industries. Any prolonged contractions in industries historically impacted by COVID-19, along with any effects on supply chain or on other industries in which our customers, partners and service providers operate, could adversely impact our business, results of operations and financial condition.Additionally the COVID-19 pandemic has adversely affected global economic and market conditions, including causing labor shortages, supply chain disruptions and inflation, which are likely to continue for an extended period, and which could result in decreased business spending by our customers and prospective customers and business partners and third-party business partners, reduced demand for our solutions, lower renewal rates by our customers, longer or delayed sales cycles, including customers and prospective customers delaying contract signing or contract renewals, or reducing budgets or minimum commitments related to the product and services that we offer, all of which could have an adverse impact on our business operations and financial condition. Specifically, we often enter into annual or multi-year, minimum commitment arrangements with our customers. If customers fail to pay us or reduce their spending with us, we may be adversely affected by an inability to collect amounts due, the cost of enforcing the terms of our contracts, including litigation, or a reduction in revenue. The continuing pandemic could also result in constrained supply or reduced customer demand and willingness to enter into or renew contracts with us, any of which could adversely impact our business, results of operations and overall financial performance in future periods. While we have developed and continue to develop plans to help mitigate the potential negative impact of the pandemic on our business, these efforts may not be effective, and a protracted economic downturn, including due to factors such as labor shortages, supply chain disruptions and inflation, may limit the effectiveness of our mitigation efforts.In addition, as companies continue to support a fully remote workforce, and begin to adapt to hybrid work environments, and as individuals increasingly utilize voice, video and messaging for their communication needs, there will be increased strain and demand for telecommunications infrastructure, including our voice, video and messaging products. Supporting increased demand will require us to make additional investments to increase network capacity, the availability of which may be limited. For example, if the data centers that we rely on for our cloud infrastructure and the network service providers that we interconnect with are unable to keep up with capacity needs or if governmental or regulatory authorities determine to limit our bandwidth, customers may experience delays, interruptions or outages in service. From time to time, including during the COVID-19 pandemic, our data center suppliers and our network service providers have had some outages which resulted in disruptions to service for some of our customers. Such traffic management measures could result in customers experiencing delays, interruptions or outages in services. Any of these events could harm our reputation, erode customer trust, cause customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition.To the extent that the COVID-19 pandemic harms our business, results of operations and financial condition, many of the other risks described in this “Risk Factors” section will be exacerbated.18We have experienced rapid growth and expect our growth to continue, and if we fail to effectively manage our growth, then our business, results of operations and financial condition could be adversely affected.We have experienced substantial growth in our business since inception. For example, our headcount has grown from 4,629 employees on December 31, 2020 to 7,867 employees on December 31, 2021. We have moved to a virtual on-boarding process since the imposition of COVID-19 restrictions on certain business activities. In addition, we are rapidly expanding our international operations. Our international headcount grew from 1,369 employees as of December 31, 2020 to 2,964 employees as of December 31, 2021. We expect to continue to expand our international operations in the future. We have also experienced significant growth in the number of customers, usage and amount of data that our platform and associated infrastructure support. This growth has placed and may continue to place significant demands on our corporate culture, operational infrastructure and management, particularly in light of virtual on-boarding.We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business in the U.S. and non-U.S. regions and mature as a public company, we may find it difficult to maintain our corporate culture while managing this growth. In addition, the COVID-19 pandemic may have long-term effects on the nature of the office environment and remote working. Our employees generally continue to work from home as we continue a phased reopening of offices and, in February 2021, we announced a new Open Work hybrid work approach, under which most employees will have a choice about where and how they work. We face uncertainty as to whether Open Work, and any adjustments we may make to our model, will meet the needs and expectations of our workforce. Any failure to preserve the key aspects of our culture as we manage our anticipated growth and organizational changes could hurt our chance for future success, including our ability to recruit and retain employees, and effectively focus on and pursue our corporate objectives. This, in turn, could adversely affect our business, results of operations and financial condition.In addition, as we have rapidly grown, our organizational structure has become more complex. In order to manage these increasing complexities, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase.Finally, if this growth continues, it could strain our ability to maintain reliable service levels for our customers. If we fail to achieve the necessary level of efficiency in our organization as we grow, then our business, results of operations and financial condition could be adversely affected.Our quarterly results may fluctuate, and if we fail to meet securities analysts’ and investors’ expectations, then the trading price of our Class A common stock and the value of your investment could decline substantially.Our results of operations, including the levels of our revenue, cost of revenue, gross margin and operating expenses, have fluctuated from quarter to quarter in the past and may continue to vary significantly in the future. These fluctuations are a result of a variety of factors, many of which are outside of our control, and may be difficult to predict and may or may not fully reflect the underlying performance of our business. If our quarterly results of operations or forward-looking quarterly and annual financial guidance fall below the expectations of investors or securities analysts, then the trading price of our Class A common stock could decline substantially. Some of the important factors that may cause our results of operations to fluctuate from quarter to quarter include:•the impact of COVID-19 on our customers, partners and service providers, our pace of hiring and the global economy in general;•our ability to retain and increase revenue from existing customers and attract new customers;•fluctuations in the amount of revenue from our Active Customer Accounts;•our ability to attract and retain enterprises and international organizations as customers;•our ability to introduce new products and enhance existing products;•competition and the actions of our competitors, including pricing changes and the introduction of new products, services and geographies;19•changes in laws, industry standards, regulations or regulatory enforcement in the United States or internationally, such as the invalidation of the EU-U.S. Privacy Shield by the Court of Justice of the European Union, the implementation and enforcement of new global privacy laws, such as the General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act of 2018 (“CCPA”) and Brazil's General Data Protection Law (Lei Geral de Proteção de Dados Pessoais) (Law No. 13,709/2018), and the adoption of SHAKEN/STIR and other robocalling prevention and anti-spam standards, all of which increase compliance costs;•changes to the policies or practices of third-party platforms, such as the Apple App Store and the Google Play Store, including with respect to Apple’s Identifier for Advertisers (IDFA), which helps advertisers assess the effectiveness of their advertising efforts, and with respect to transparency regarding data processing;•the number of new employee hires during a particular period;•changes in network service provider fees that we pay in connection with the delivery of communications on our platform;•changes in cloud infrastructure fees that we pay in connection with the operation of our platform;•changes in our pricing as a result of our optimization efforts or otherwise;•reductions in pricing as a result of negotiations with our larger customers;•the rate of expansion and productivity of our sales force, including our enterprise sales force, which has been a focus of our recent expansion efforts;•changes in the size and complexity of our customer relationships;•the length and complexity of the sales cycle for our services, especially for sales to larger enterprises, government and regulated organizations;•change in the mix of products that our customers use during a particular period;•change in the revenue mix of U.S. and international products;•the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business, including investments in our international expansion, additional systems and processes and research and development of new products and services;•significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our products on our platform;•expenses in connection with mergers, acquisitions or other strategic transactions and the follow-on costs of integration;•the timing of customer payments and any difficulty in collecting accounts receivable from customers;•general economic conditions that may adversely affect a prospective customer’s ability or willingness to adopt our products, delay a prospective customer’s adoption decision, reduce the revenue that we generate from the use of our products or affect customer retention;•labor shortages, supply chain disruptions and rising inflation and our ability to control costs, including our operating expenses;•our ability to attract and retain qualified employees and key personnel;•changes in foreign currency exchange rates and our ability to effectively hedge our foreign currency exposure;•extraordinary expenses such as litigation or other dispute-related settlement payments;20•sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business;•the impact of new accounting pronouncements; and•fluctuations in stock-based compensation expense.The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, we believe that quarter-to-quarter comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance. In addition, a significant percentage of our operating expenses is fixed in nature and is based on forecasted revenue trends. Accordingly, in the event of a revenue shortfall, we may not be able to mitigate the negative impact on our income (loss) and margins in the short term. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our Class A common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.Additionally, global pandemics such as COVID-19 as well as certain large scale events, such as major elections and sporting events, can significantly impact usage levels on our platform, which has, and could in the future, cause fluctuations in our results of operations. We expect that significantly increased usage of all communications platforms, including ours, during certain seasonal and one-time events could impact delivery and quality of our products during those events. We also tend to experience increased expenses in connection with the hosting of SIGNAL, which we plan to continue to host annually. Such annual and one-time events may cause fluctuations in our results of operations and may impact both our revenue and operating expenses.If we are not able to maintain and enhance our brand and increase market awareness of our company and products, then our business, results of operations and financial condition may be adversely affected.We believe that maintaining and enhancing the “Twilio” brand identity and increasing market awareness of our company and products, particularly among developers, is critical to achieving widespread acceptance of our platform, to strengthen our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand will depend largely on our continued marketing efforts, our ability to continue to offer high quality products, and our ability to successfully differentiate our products and platform from competing products and services. Our brand promotion and thought leadership activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our products and competing products and services, which may significantly influence the perception of our products in the marketplace. If these reviews are negative or not as strong as reviews of our competitors’ products and services, then our brand may be harmed.From time to time, our customers have complained about our products, such as complaints about our pricing and customer support. If we do not handle customer complaints effectively, then our brand and reputation may suffer, our customers may lose confidence in us and they may reduce or cease their use of our products. In addition, many of our customers post and discuss on social media about Internet-based products and services, including our products and platform. Our success depends, in part, on our ability to generate positive customer feedback and minimize negative feedback on social media channels where existing and potential customers seek and share information. If actions we take or changes we make to our products or platform upset these customers, then their online commentary could negatively affect our brand, reputation and customer trust. Complaints or negative publicity about us, our products or our platform could adversely impact our ability to attract and retain customers, and otherwise harm our business, results of operations and financial condition.The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities increase revenue, this revenue still may not be enough to offset the increased expenses we incur, including, but not limited to, as a result of recent inflationary pressures.21The market for our products and platform is newcontinues to evolve, and unproven, may decline or experience limited growth, and is dependent in part on developers continuing to adopt our platform and use our products.We were founded in 2008, and we have been developing and providing a cloud-basedcloud‑based platform that enables developers and organizations to integrate voice, messaging, video and videoemail communications capabilities into their software applications. This market is relatively new and unprovencontinues to evolve and is subject to a number of risks and uncertainties. We believe that our revenue currently constitutes a significant portion of the total revenue in this market, and therefore, we believe that our future success will depend in large part on the growth, if any, and evolution of this market. The utilization of APIs byIf developers and organizations to build communications functionality into their applications is still relatively new, and developers and organizations may not recognize the need for, or benefits of, our products and platform. Moreover, if they do not recognize the need for and benefits of our products and platform, they may decide to adopt alternative products and services to satisfy some portion of their business needs. In order to grow our business and extend our market position, we intend to focus on educating developers and other potential customers about the benefits of our products and platform, expanding the functionality of our products and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our products and platform address depends upon a number of factors, including the cost, performance and perceived value associated with such products and platform. The market for our products and platform could fail to grow significantly or there could be a reduction in demand for our products as a result of a lack of developer acceptance, technological challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions, including due to labor shortages, supply chain disruptions and inflationary pressures, and other causes. If our market does not experience significant growth or demand for our products decreases, then our business, results of operations and financial condition could be adversely affected.Our actual or perceived failure to comply with increasingly stringent laws, regulations and contractual obligations relating to privacy, data protection and data security could harm our reputation and subject us to significant fines and liability or loss of business.We have a historyand our customers are subject to numerous domestic (for example, CCPA in California) and foreign (for example, the GDPR in the EU) privacy, data protection and data security laws and regulations that restrict the collection, use, disclosure and processing of losses and we are uncertain about our future profitability. We have incurred net losses in each year since our inception,personal information, including net losses of $121.9 million, $63.7 million and $41.3 million in 2018, 2017 and 2016, respectively. We had an accumulated deficit of $371.7 million as of December 31, 2018. We expect to continue to expend substantial financial and other resources on, among other things:•investmentshealth data. These laws and regulations are evolving, are being tested in our engineering team, the development of new products, featurescourts, may result in increasing regulatory and functionality and enhancements to our platform;•sales and marketing, including the continued expansionpublic scrutiny of our direct sales organizationpractices relating to personal information and marketing programs, especiallymay increase our exposure to regulatory enforcement action, sanctions and litigation.The CCPA imposes obligations on businesses to which it applies.These obligations include, but are not limited to, providing specific disclosures in privacy notices and affording California residents certain rights related to their personal information.The CCPA allows for enterprisesstatutory fines for noncompliance. In addition, it is anticipated that the California Privacy Rights Act of 2020 (“CPRA”), effective January 1, 2023, will expand the CCPA.Similar laws have been enacted or been proposed at the state and for organizations outsidefederal levels.For example, Virginia and Colorado have each passed laws similar to but different from the CPRA that take effect in 2023.If we become subject to new privacy, data protection and data security laws, the risk of enforcement action against us could increase because we may become subject to additional obligations, and the number of individuals or entities that can initiate actions against us may increase (including individuals, via a private right of action, and state actors).Outside the United States, an increasing number of laws, regulations, and expanding our programs directed at increasing our brand awareness among currentindustry standards apply to privacy, data protection and new developers;•expansiondata security.our operationsindividuals located, respectively within the European Economic Area (“EEA”) and infrastructure, both domestically and internationally; and•general administration, including legal, accounting and other expensesthe United Kingdom (“UK”). For example, under the GDPR, government regulators may impose temporary or definitive bans on data processing, as well as fines.being a public company.These investmentsour processing of their personal information. As another example, the General Data Protection Law (Lei Geral de Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018) may not resultapply to our operations.increased revenueBrazil and imposes compliance obligations and penalties comparable to those of the GDPR.Further, the interpretation and application of new domestic and foreign laws and regulations in many cases is uncertain, and our legal and regulatory obligations in such jurisdictions are subject to frequent and unexpected changes, including the potential for various regulatory or growth ofother governmental bodies to enact new or additional laws or regulations, to issue rulings that invalidate prior laws or regulations, or to increase penalties significantly.22Similarly, with our business. Weregistration as an interconnected VoIP provider with the Federal Communications Commission (“FCC”), we also expect that our revenue growth rate will decline over time. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and achieve and sustain profitability.must comply with privacy laws associated with customer proprietary network information (“CPNI”) rules in the U.S. If we fail to achieve and sustain profitability, then our business, results of operations and financial condition would be adversely affected.We have experienced rapid growth and expect our growth to continue, and ifmaintain compliance with these requirements, we fail to effectively manage our growth, then our business, results of operations and financial condition could be adversely affected. Wesubject to regulatory audits, civil and criminal penalties, fines and breach of contract claims, as well as reputational damage, which could impact the willingness of customers to do business with us.In addition to our legal obligations, our contractual obligations relating to privacy, data protection and data security have experienced substantial growthbecome increasingly stringent due to changes in laws and regulations and the expansion of our business since inception. For example,offerings. Certain privacy, data protection and data security laws, such as the GDPR and the CCPA, require our headcount has grown from 996 employeescustomers to impose specific contractual restrictions on December 31, 2017 to 1,440 employees on December 31, 2018.their service providers. In addition, we have begun to support customer workloads that involve the processing of protected health information and are rapidly expanding our international operations. required to sign business associate agreements (“BAAs”) with customers that subject us to the requirements under the U.S. Health Insurance Portability and Accountability Act of 1996 and the U.S. Health Information Technology for Economic and Clinical Health Act as well as state laws that govern health information.Our international headcount grew from 215 employees as of December 31, 2017 to 351 employees as of December 31, 2018. We expect to continue to expand our international operations in the future. We have also experienced significant growth in the number of customers, usage and amount of data that our platform and associated infrastructure support. This growth has placed and may continue to place significant demands on our corporate culture, operational infrastructure and management. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and mature as a public company, we may find it difficult to maintain our corporate culture while managing this growth. Anyactual or perceived failure to managecomply with laws, regulations or contractual commitments regarding privacy, data protection and data security could lead to costly legal action, adverse publicity, significant liability, and decreased demand for our anticipated growth and organizational changes in a manner that preserves the key aspects of our culture could hurt our chance for future success, including our ability to recruit and retain personnel, and effectively focus on and pursue our corporate objectives. This, in turn,services, which could adversely affect our business, results of operations and financial condition. In addition,As a cumulative example of these risks, because our primary data processing facilities are currently in order to successfully manage our rapid growth, our organizational structure has become more complex. In order to manage these increasing complexities,the U.S., we will needhave experienced hesitancy, reluctance, or refusal by European or multinational customers to continue to scale and adaptuse our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure will require usservices due to commit substantial financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase. Finally, continued growth could strain our abilitythe potential risk posed to maintain reliable service levels for our customers. If we fail to achieve the necessary level of efficiency in our organization as we grow, then our business, results of operations and financial condition could be adversely affected.Our quarterly results may fluctuate, and if we fail to meet securities analysts' and investors' expectations, then the trading price of our Class A common stock and the value of your investment could decline substantially. Our results of operations, including the levels of our revenue, cost of revenue, gross margin and operating expenses, have fluctuated from quarter to quarter in the past and may continue to vary significantly in the future. These fluctuations are a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance ofour business. If our quarterly results of operations fall below the expectations of investors or securities analysts, then the trading price of our Class A common stock could decline substantially. Some of the important factors that may cause our results of operations to fluctuate from quarter to quarter include:
The inability to import personal information to the United States could significantly and negatively impact our •our ability to retain and increase revenue from existingsuch customers and attract new customers;•fluctuations in the amount of revenue from our Variable Customer Accounts and our larger Base Customer Accounts;•our ability to attract and retain enterprises and international organizations as customers;•our ability to introduce new products and enhance existing products;•competition and the actions of our competitors, including pricing changes and the introduction of new products, services and geographies;•the number of new employees;•changes in network service provider fees that we pay in connection with the delivery of communications on our platform;•changes in cloud infrastructure fees that we pay in connection with the operation of our platform;•changes in our pricing as a result of the Court of Justice July 2020 ruling in the “Schrems II” case, as well as related guidance from the European Data Protection Board. For example, absent appropriate safeguards or other circumstances, the GDPR and laws in Switzerland and the UK generally restrict the transfer of personal information to countries outside of the EEA, such as the United States, that the European Commission does not consider as providing an adequate level of privacy, data protection and data security. If we cannot implement a valid mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal information from Europe or elsewhere.optimization effortsbusiness operations; limit our ability to collaborate with parties that are subject to data privacy and security laws; or otherwise;•reductionsrequire us to increase our personal information processing capabilities in pricing as a resultEurope and/or elsewhere at significant expense. We and our customers are at risk of negotiations with our larger customers;•rate of expansion and productivityEEA for the provision of our sales force, includingservices. While we are actively working to increase our enterprise sales force, which has been a focusdata processing capabilities in Europe and other countries to limit or eliminate the need for data transfers out of our recent expansion efforts;•change in the mix of products that our customers use;•change in the revenue mix of U.S.EEA, if we are unable to increase those capabilities quickly enough, and international products;•changes in laws, regulations or regulatory enforcement, inother valid solutions for personal information transfers to the United States or internationally, that impact our abilityother countries are not available or are difficult to market, sell or deliver our products;•the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business, including investments in our international expansion;•significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our products on our platform;•the timing of customer payments and any difficulty in collecting accounts receivable from customers;•general economic conditions that may adversely affect a prospective customer's ability or willingness to adopt our products, delay a prospective customer's adoption decision, reduce the revenue that we generate from the use of our products or affect customer retention;•changes in foreign currency exchange rates;•extraordinary expenses such as litigation or other dispute-related settlement payments;•sales tax and other tax determinations by authoritiesimplement in the jurisdictions in whichinterim, we conduct business;•the impact of new accounting pronouncements;•expenses in connection with mergers, acquisitionswill likely face continuing reluctance from European and multinational customers to use our services and increased exposure to regulatory actions, substantial fines and injunctions against processing or other strategic transactions; and•fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, we believe that quarter-to-quarter comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance. In addition, a significant percentage of our operating expenses is fixed in nature and is based on forecasted revenue trends. Accordingly, in the event of a revenue shortfall, we may not be able to mitigate the negative impact on our income (loss) and margins in the short term. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our Class A common stock could fall substantially, and we could face costly lawsuits, including securities class action suits. Additionally, certain large scale events, such as major elections and sporting events, can significantly impact usage levels on our platform, which could cause fluctuations in our results of operations. We expect that significantly increased usage of all communications platforms, including ours, during certain seasonal and one-time events could impact delivery and quality of our products during those events. We also tend to experience increased expenses in connection with the hosting of SIGNAL, our developer conference, which we hosted in the fourth quarter of 2018 and plan to host annually. Such annual and one-time events may cause fluctuations in our results of operations and may impact both our revenue and operating expenses.If we are not able to maintain and enhance our brand and increase market awareness of our company and products, then our business, results of operations and financial condition may be adversely affected. We believe that maintaining and enhancing the "Twilio" brand identity and increasing market awareness of our company and products, particularly among developers, is critical to achieving widespread acceptance of our platform, to strengthen our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand will depend largely on our continued marketing efforts, our ability to continue to offer high quality products, our ability to be thought leaders in the cloud communications market and our ability to successfully differentiate our products and platformtransferring personal information from competing products and services. Our brand promotion and thought leadership activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our products and competing products and services, which may significantly influence the perception of our products in the marketplace. If these reviews are negative or not as strong as reviews of our competitors' products and services, then our brand may be harmed. From time to time, our customers have complained about our products, such as complaints about our pricing and customer support. If we do not handle customer complaints effectively, then our brand and reputation may suffer, our customers may lose confidence in us and they may reduce or cease their use of our products. In addition, many of our customers post and discuss on social media about Internet-based products and services, including our products and platform. Our success depends, in part, on our ability to generate positive customer feedback and minimize negative feedback on social media channels where existing and potential customers seek and share information. If actions we take or changes we make to our products or platform upset these customers, then their online commentary could negatively affect our brand and reputation. Complaints or negative publicity about us, our products or our platform could materially and adversely impact our ability to attract and retain customers, our business, results of operations and financial condition. The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities increase revenue, this revenue still may not be enough to offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would adversely affect our business, results of operations and financial condition.anya loss of customers or decline in their use of our products could materially and adversely affect our business, results of operations and financial condition.
market acceptance necessary to generate significant revenue. Furthermore, our ability to increase the usage of our products depends, in part, on the development of new use cases for our products, which is typically driven by our developer community and may be outside of our control. We also have invested, and may continue to invest, in the acquisition of complementary businesses, technologies, services, products and other assets that expand the products that we can offer our customers. We may make these investments without being certain that they will result in products or enhancements that will be accepted by existing or prospective customers. Our ability to generate usage of additional products by our customers may also require increasingly sophisticated and more costly sales efforts and result in a longer sales cycle. In addition, adoption of new products or enhancements may put additional strain on our customer support team, which could require us to make additional expenditures related to further hiring and training. If we are unable to successfully enhance our existing products to meet evolving customer requirements, increase adoption and usage of our products, develop new products, or if our efforts to increase the usage of our products are more expensive than we expect, then our business, results of operations and financial condition would be adversely affected.
If we are unable to increase adoption of our products by enterprises, our business, results of operations and financial condition may be adversely affected.
Historically, we have relied on the adoption of our products by software developers through our self-service model for a significant majority of our revenue, and we currently generate only a small portion of our revenue from enterprise customers. Our ability to increase our customer base, especially among enterprises, and achieve broader market acceptance of our products will depend, in part, on our ability to effectively organize, focus and train our sales and marketing personnel. We have limited experience selling to enterprises and only recently established an enterprise-focused sales force.
Our ability to convince enterprises to adopt our products will depend, in part, on our ability to attract and retain sales personnel with experience selling to enterprises. We believe that there is significant competition for experienced sales professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our ability to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling to enterprises. In addition, even if we are successful in hiring qualified sales personnel, new hires require significant training and experience before they achieve full productivity, particularly for sales efforts targeted at enterprises and new territories. Our recent hires and planned hires may not become as productive as quickly as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Because we do not have a long history of targeting our sales efforts at enterprises, we cannot predict whether, or to what extent, our sales will increase as we organize and train our sales force or how long it will take for sales personnel to become productive.
As we seek to increase the adoption of our products by enterprises, including products like Flex, which is primarily aimed at complex contact center implementations at larger companies, we expect to incur higher costs and longer sales cycles. In the enterprise market segment, the decision to adopt our products may require the approval of multiple technical and business decision makers, including security, compliance, procurement, operations and IT. In addition, while enterprise customers may quickly deploy our products on a limited basis, before they will commit to deploying our products at scale, they often require extensive education about our products and significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development resources. In addition, sales cycles for enterprises are inherently more complex and less predictable than the sales through our self-service model, and some enterprise customers may not use our products enough to generate revenue that justifies the cost to obtain such customers. In addition, these complex and resource intensive sales efforts could place additional strain on our product and engineering resources. Further, enterprises, including some of our customers, may choose to develop their own solutions that do not include our products. They also may demand reductions in pricing as their usage of our products increases, which could have an adverse impact on our gross margin. As a result of our limited
experience selling and marketing to enterprises, our efforts to sell to these potential customers may not be successful. If we are unable to increase the revenue that we derive from enterprises, then our business, results of operations and financial condition may be adversely affected.
If we are unable to expand our relationships with existing technology partner customers and add new technology partner customers, our business, results of operations and financial condition could be adversely affected.
We believe that the continued growth of our business depends in part upon developing and expanding strategic relationships with technology partner customers. Technology partner customers embed our software products in their solutions, such as software applications for contact centers and sales force and marketing automation, and then sell such solutions to other businesses. When potential customers do not have the available developer resources to build their own applications, we refer them to either our technology partners who embed our products in the solutions that they sell to other businesses (such as contact centers and sales force and marketing automation) or our consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications.
As part of our growth strategy, we intend to expand our relationships with existing technology partner customers and add new technology partner customers. If we fail to expand our relationships with existing technology partner customers or establish relationships with new technology partner customers in a timely and cost-effective manner, or at all, then our business, results of operations and financial condition could be adversely affected. Additionally, even if we are successful at building these relationships but there are problems or issues with integrating our products into the solutions of these customers, our reputation and ability to grow our business may be harmed.
We rely upon Amazon Web Services to operate our platform, and any disruption of or interference with our use of Amazon Web Services would adversely affect our business, results of operations and financial condition.
We outsource substantially all of our cloud infrastructure to Amazon Web Services ("AWS"), which hosts our products and platform. Our customers need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced, and expect that in the future we may experience interruptions, delays and outages in service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes, including technical failures, natural disasters, fraud or security attacks. For instance, in September 2015, AWS suffered a significant outage that had a widespread impact on the ability of our customers to use several of our products. In addition, if our security, or that of AWS, is compromised, or our products or platform are unavailable or our users are unable to use our products within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times, as our products become more complex and the usage of our products increases. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers' requirements.
The substantial majority of the services we use from AWS are for cloud-based server capacity and, to a lesser extent, storage and other optimization offerings. AWS enables us to order and reserve server capacity in varying amounts and sizes distributed across multiple regions. We access AWS infrastructure
through standard IP connectivity. AWS provides us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. AWS may terminate the agreement by providing 30 days prior written notice, and it may in some cases terminate the agreement immediately for cause upon notice. Although we expect that we could receive similar services from other third parties, if any of our arrangements with AWS are terminated, we could experience interruptions on our platform and in our ability to make our products available to customers, as well as delays and additional expenses in arranging alternative cloud infrastructure services.
Any of the above circumstances or events may harm our reputation, cause customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition.
To deliver our products, we rely on network service providers for our network service.
We currently interconnect with network service providers around the world to enable the use by our customers of our products over their networks. We expect that we will continue to rely heavily on network service providers for these services going forward. Our reliance on network service providers has reduced our operating flexibility, ability to make timely service changes and control quality of service. In addition, the fees that we are charged by network service providers may change daily or weekly, while we do not typically change our customers' pricing as rapidly.
At times, network service providers have instituted additional fees due to regulatory, competitive or other industry related changes that increase our network costs. For example, starting in 2019, we are expecting one of the major U.S. cellular carriers to introduce a new service offering for A2P, or Application to Person, SMS messages that will add a new fee for A2P SMS messages delivered to its subscribers. While we have historically responded to these types of fee increases through a combination of further negotiating efforts with our network service providers, absorbing the increased costs or changing our prices to customers, there is no guarantee that we will continue to be able to do so in the future without a material negative impact to our business. In the case of this new A2P SMS fee anticipated in 2019, we plan to pass these fees on to our customers who are sending SMS messages to this carrier's subscribers. This is expected to increase our revenue and cost of goods sold, but is not expected to impact the gross profit dollars received for sending these messages. However, mathematically this would still have a negative impact on our gross margins. Additionally, our ability to respond to any new fees may be constrained if all network service providers in a particular market impose equivalent fee structures, if the magnitude of the fees is disproportionately large when compared to the underlying prices paid by our customers, or if the market conditions limit our ability to increase the price we charge our customers.
Furthermore, many of these network service providers do not have long-term committed contracts with us and may terminate their agreements with us without notice or restriction. If a significant portion of our network service providers stop providing us with access to their infrastructure, fail to provide these services to us on a cost-effective basis, cease operations, or otherwise terminate these services, the delay caused by qualifying and switching to other network service providers could be time consuming and costly and could adversely affect our business, results of operations and financial condition. Further, if problems occur with our network service providers, it may cause errors or poor quality communications with our products, and we could encounter difficulty identifying the source of the problem. The occurrence of errors or poor quality communications on our products, whether caused by our platform or a network service provider, may result in the loss of our existing customers or the delay of adoption of our products by potential customers and may adversely affect our business, results of operations and financial condition.
Our future success depends in part on our ability to drive the adoption of our products by international customers.
In 2018, 2017 and 2016, we derived 25%, 23% and 16% of our revenue, respectively, from customer accounts located outside the United States. The future success of our business will depend, in part, on our ability to expand our customer base worldwide. While we have been rapidly expanding our sales efforts internationally, our experience in selling our products outside of the United States is limited. Furthermore, our developer-first business model may not be successful or have the same traction outside the United States. As a result, our investment in marketing our products to these potential customers may not be successful. If we are unable to increase the revenue that we derive from international customers, then our business, results of operations and financial condition may be adversely affected.
We are in the process of expanding our international operations, which exposes us to significant risks.
We are continuing to expand our international operations to increase our revenue from customers outside of the United States as part of our growth strategy. Between December 31, 2017 and December 31, 2018, our international headcount grew from 215 employees to 351 employees. We expect to open additional foreign offices and hire employees to work at these offices in order to reach new customers and gain access to additional technical talent. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks in addition to those we already face in the United States. Because of our limited experience with international operations or with developing and managing sales in international markets, our international expansion efforts may not be successful.
In addition, we will face risks in doing business internationally that could adversely affect our business, including:
Also, due to costs from our international expansion efforts and network service provider fees outside of the United States, which generally are higher than domestic rates, our gross margin for international customers is typically lower than our gross margin for domestic customers. As a result, our gross margin may be impacted and fluctuate as we expand our operations and customer base worldwide.
Our failure to manage any of these risks successfully could harm our international operations, and adversely affect our business, results of operations and financial condition.
We currently generate significant revenue from our largest customers, and the loss or decline in revenue from any of these customers could harm our business, results of operations and financial condition.
In 2018, 2017 and 2016, our 10 largest Active Customer Accounts, which consisted of both Base and Variable Customers, generated an aggregate of 18%, 19% and 30% of our revenue, respectively. A significant portion of our revenue comes from a Variable Customer, WhatsApp.
In 2018, 2017 and 2016, WhatsApp accounted for 7%, 6% and 9% of our revenue, respectively. WhatsApp uses our Programmable Voice products and Programmable Messaging products in its applications to verify new and existing users on its service. Our Variable Customer Accounts, including WhatsApp, do not have long-term contracts with us and may reduce or fully terminate their usage of our products at any time without notice, penalty or termination charges. In addition, the usage of our products by WhatsApp and other Variable Customer Accounts may change significantly between periods.
In the event that any of our large Base or Variable customers do not continue to use our products, use fewer of our products, or use our products in a more limited capacity, or not at all, our business, results of operations and financial condition could be adversely affected.
The market in which we participate is intensely competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed.
We have a adversely affected. are not willing to purchase through consulting partners, our reputation and ability to grow our business may be adversely affected. or platform, which could further exhaust our resources. intellectual property. Any of our patents, copyrights, trademarks or other intellectual property rights could be challenged by others or invalidated through administrative process or litigation. Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our products, and could adversely affect our business, results of operations and financial condition. acceptance as a business tool has been adversely affected by violations. harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products and provision of our services, including with respect to new releases of our products and services, may create delays in the introduction of our products and services in international markets, prevent our customers with international these jurisdictions disagree with management's assumptions and analysis, the assessment of our tax exposure could differ materially from management's current estimates. For example, San Francisco City and County has assessed us for $38.8 million in taxes, including interest and penalties, which exceeded the $11.5 million we had accrued for that assessment. We have paid the full amount, as required by law, and the payment made in excess of the accrued amount is reflected as a deposit on our balance sheet. We believe, however, that this assessment is incorrect and, after failing to reach a settlement, filed a lawsuit on May 27, 2021 contesting the assessment. However, litigation is uncertain and a ruling against us may adversely affect our financial position and results of operation. cash flows. authentication credentials, unauthorized access to their accounts or fraudulent calls on their accounts, any of which could adversely affect our business, results of operations and financial condition. We also incur expenses for some of our network service provider costs outside of the United States in local currencies and for employee compensation and other operating expenses at our If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. In addition, if we acquire additional businesses, we may not be able to successfully integrate the acquired operations and technologies and maintain internal control over financial reporting, if applicable, in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, and could have a material and adverse effect on our business, results of operations and financial condition and could cause a decline in the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange or the Long-Term Stock Exchange. If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline. meetings; and Any provision of our amended and restated certificate of incorporation, second amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our Class A common stock. obligations under our indebtedness, which may not be successful. business. Disclosures Act. assume reinvestment of dividends. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our Class A common stock. Regulation D promulgated thereunder. Consolidated Statement of Operations Data: Revenue Cost of revenue(1)(2) Gross profit Operating expenses: Research and development(1)(2) Sales and marketing(1)(2) General and administrative(1)(2) Charitable contribution Total operating expenses Loss from operations Other income (expenses), net Loss before provision for income taxes Provision for income taxes Net loss Deemed dividend to investors in relation to tender offer Net loss attributable to common stockholders Net loss per share attributable to common stockholders, basic and diluted Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted Key Business Metrics: Number of Active Customer Accounts(3) (as of end date of period) Base Revenue(4) Base Revenue Growth Rate Dollar-Based Net Expansion Rate(5) Cost of revenue Research and development Sales and marketing General and administrative Total Cost of revenue Research and development Sales and marketing General and administrative Total Consolidated Balance Sheet Data: Cash and cash equivalents Marketable securities Working capital Property and equipment, net Total assets Total stockholders' equity Reconciliation: Gross profit Non-GAAP adjustments: Stock-based compensation Amortization of acquired intangibles Non-GAAP gross profit Non-GAAP gross margin Reconciliation: Operating expenses Non-GAAP adjustments: Stock-based compensation Amortization of acquired intangibles Stock repurchase Acquisition-related expenses Release of tax liability upon obligation settlement Charitable contribution Legal settlements/accruals Gain on lease termination Payroll taxes related to stock-based compensation Non-GAAP operating expenses Reconciliation: Loss from operations Non-GAAP adjustments: Stock-based compensation Amortization of acquired intangibles Stock repurchase Acquisition-related expenses Release of tax liability upon obligation settlement Charitable contribution Legal settlements/accruals Gain on lease termination Payroll taxes related to stock-based compensation Non-GAAP loss from operations Non-GAAP operating margin The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A, We have achieved significant growth in recent periods. In the years ended December 31, Number of Active Customer Accounts (as of end date of period) Base Revenue (in thousands) Base Revenue Growth Rate Dollar-Based Net Expansion Rate Number of Active Customer Accounts. We believe that the number of Revenue from acquisitions does not impact the Dollar-Based Net Expansion Rate calculation until the quarter following the one-year anniversary of the applicable acquisition, unless the acquisition closing date is the first day of a quarter. monthly flat fees from certain revenue at any point in time because the number of contracts with our invoiced customers that contain terms requiring any form of prepayment is not significant. SIGNAL customer and developer conferences, credit card processing fees, professional services fees, depreciation, amortization of acquired intangibles and an allocation of our general overhead expenses. uncertainly in the COVID-19 environment. this Annual Report on Form 10-K. Consolidated Statements of Operations Data: Revenue Cost of revenue(1)(2) Gross profit Operating expenses: Research and development(1)(2) Sales and marketing(1)(2) General and administrative(1)(2) Charitable contribution Total operating expenses Loss from operations Other income (expenses), net Loss before provision for income taxes Provision for income taxes Net loss attributable to common stockholders Net loss per share attributable to common stockholders, basic and diluted Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted Cost of revenue Research and development Sales and marketing General and administrative Total Cost of revenue Research and development Sales and marketing General and administrative Total Consolidated Statements of Operations, as a percentage of revenue:** Revenue Cost of revenue Gross profit Operating expenses: Research and development Sales and marketing General and administrative Charitable contribution Total operating expenses Loss from operations Other income (expenses), net Loss before provision for income taxes Provision for income taxes Net loss attributable to common stockholders Base revenue Variable revenue Total revenue 2020 2020, which was also positively impacted by the customer accounts added through the acquisition of our Twilio Segment business. 2020, U.S. revenue and international revenue represented revenue. In 2019, U.S. revenue and international revenue represented Cost of Revenue and Gross Margin Cost of revenue Gross margin 2020 The increase was also due to a $14.2 million increase in the amortization expense of intangible assets that we acquired through business combinations. 2020 Research and development Sales and marketing General and administrative Charitable contribution Total operating expenses recent acquisitions. Consolidated Statements of Operations: Revenue Cost of revenue(1)(2) Gross profit Operating expenses: Research and development(1)(2) Sales and marketing(1)(2) General and administrative(1)(2) Charitable contribution Total operating expenses Loss from operations Other income (expense), net Loss before (provision) benefit for income taxes (Provision) benefit for income taxes Net loss attributable to common stockholders Cost of revenue Research and development Sales and marketing General and administrative Total Cost of revenue Research and development Sales and marketing General and administrative Total Consolidated Statements of Operations, as a percentage of revenue:** Revenue Cost of revenue Gross margin Operating expenses: Research and development Sales and marketing General and administrative Charitable contribution Total operating expenses Loss from operations Other income (expense), net Loss before (provision) benefit for income taxes (Provision) benefit for income taxes Net loss attributable to common stockholders Number of Active Customer Accounts (as of end date of period)(1) Base Revenue (in thousands)(2) Base Revenue Growth Rate Dollar-Based Net Expansion Rate(3) We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for Additionally, cash from operations could also be affected by various risks and uncertainties in connection with the COVID-19 pandemic, including timing and ability to collect payments from our customers and other risks detailed in Part I, Item 1A, “Risk Factors.” Cash provided by (used in) operating activities Cash used in investing activities Cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash Flows from Operating Activities business. business. As of December 31, 2018: Operating leases(1) Capital lease(2) Non-cancellable purchase obligations(3) Total accounting policies. Employee Stock Options Fair value of common stock Expected term (in years) Expected volatility Risk-free interest rate Dividend rate Employee Stock Purchase Plan Expected term (in years) Expected volatility Risk-free interest rate Dividend rate Asset volatility Equity volatility Discount rate Stock price at grant date Recent Accounting Pronouncements Not Yet Adopted while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the ASSETS Current assets: Cash and cash equivalents Short-term marketable securities Accounts receivable, net Prepaid expenses and other current assets Total current assets Restricted cash Property and equipment, net Intangible assets, net Goodwill Other long-term assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses and other current liabilities Deferred revenue and customer deposits Total current liabilities Convertible senior notes, net Other long-term liabilities Total liabilities Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, $0.001 par value, 100,000,000 shares authorized, none issued Common stock, $0.001 par value per share: Authorized shares 1,100,000,000 as of December 31, 2018 and 2017; Issued and outstanding shares 100,080,228 and 93,969,796 as of December 31, 2018 and 2017 Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity See accompanying notes to consolidated financial statements. Revenue Cost of revenue Gross profit Operating expenses: Research and development Sales and marketing General and administrative Charitable contribution Total operating expenses Loss from operations Other (expenses) income, net Loss before provision for income taxes Provision for income taxes Net loss attributable to common stockholders Net loss per share attributable to common stockholders, basic and diluted Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted Net loss Other comprehensive (loss) income: Unrealized gain (loss) on marketable securities Foreign currency translation Total other comprehensive (loss) income Comprehensive loss attributable to common stockholders See accompanying notes to consolidated financial statements. Balance as of December 31, 2015 Net loss Issuance of common stock in connection with Initial Public Offering, net of underwriting discounts Issuance of common stock in connection with Follow-On Public Offering, net of underwriting discounts Costs related to public offerings Conversion of convertible preferred stock to common stock in connection with the initial public offering Exercises of vested stock options Vesting of early exercised stock options Vesting of restricted stock units Value of equity awards withheld for tax liability Exercises of unvested stock options Conversion of shares of Class B common stock into shares of Class A common stock Repurchases of unvested stock options Stock-based compensation Escrow shares returned to the issuer Balance as of December 31, 2016 Net loss Exercises of vested stock options Vesting of early exercised stock options Vesting of restricted stock units Value of equity awards withheld for tax liability Exercises of unvested stock options Conversion of shares of Class B common stock into shares of Class A common stock Shares issued under ESPP Donated common stock Repurchases of unvested stock options Unrealized loss on marketable securities Foreign currency translation Stock-based compensation Balance as of December 31, 2017 Net loss Adjustment to opening retained earnings due to adoption of ASC 606 Exercises of vested stock options Vesting of early exercised stock options Vesting of restricted stock units Value of equity awards withheld for tax liability Exercises of unvested stock options Conversion of shares of Class B common stock into shares of Class A common stock Shares issued under ESPP Issuance of debt conversion option Debt conversion option issuance costs Capped call option issuance costs Donated common stock Unrealized loss on marketable securities Foreign currency translation Stock-based compensation Balance as of December 31, 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization Net amortization of investment premium or discount Amortization of debt issuance costs Accretion of debt discount on convertible senior notes Amortization of deferred commissions Stock-based compensation Value of donated common stock Provision for doubtful accounts Write-off of internally developed software and intangible assets (Gain) loss on lease termination and asset disposals Changes in operating assets and liabilities: Accounts receivable Prepaid expenses and other current assets Other long-term assets Accounts payable Accrued expenses and other current liabilities Deferred revenue and customer deposits Other long-term liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities Maturities of marketable securities Capitalized software development costs Purchases of property and equipment Purchases of intangible assets Acquisition(s), net of cash acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Initial Public Offering, net of underwriting discounts Proceeds from Follow-On Public Offering, net of underwriting discounts Payments of costs related to public offerings Proceeds from issuance of convertible senior notes Payments of debt issuance costs Purchase of capped call Proceeds from exercises of stock options Proceeds from shares issued in ESPP Value of equity awards withheld for tax liabilities Repurchases of common stock Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of year CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of year Cash paid for income taxes NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of property and equipment and intangible assets, accrued but not paid Purchases of property, equipment through capital lease Stock-based compensation capitalized in software development costs Business combination measurement period adjustments Acquisition holdback Costs related to public offerings, accrued but not paid Australia. 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 next 24 months. the end of the previous year. Expense complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional such as the size and operational and economic similarities to the Company's principal business Loss Cash provided by (used in) operating activities Cash used in investing activities Cash, cash equivalents and restricted cash—beginning of period Cash, cash equivalents and restricted cash—end of period (q)Accounts Receivable and Allowance for Doubtful Accounts Company is aware of circumstances that may impair a specific customer's ability to meet their financial obligations, a specific allowance is recorded against amounts due from the customer which reduces the net recognized receivable to the amount the Company reasonably believe will be collected. The Company writes-off accounts receivable against the allowance when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. not significant to the accompanying consolidated balance sheets. establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: Financial Assets: Cash and cash equivalents: Money market funds Reverse repurchase agreements Commercial paper Total included in cash and cash equivalents Marketable securities: U.S. Treasury securities Corporate debt securities and commercial paper Total marketable securities Total financial assets Financial Assets: Cash and cash equivalents: Money market funds Total included in cash and cash equivalents Marketable securities: U.S. Treasury securities Corporate debt securities and commercial paper Total marketable securities Total financial assets commercial paper. 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 December 31, to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of December 31, Financial Assets: Less than one year One to two years Total Capitalized internal-use software development costs Leasehold improvements Office equipment Furniture and fixtures Assets under capital lease(1) Software Total property and equipment Less: accumulated depreciation and amortization Total property and equipment, net Depreciation and amortization expense was Cost of revenue Research and development General and administrative Total Intangible assets(1) Goodwill(2) Total purchase price operations were $61.0 million and $49.3 million for the year ended December 31, 2021 and 2020, respectively. Short-term lease, variable lease and finance lease costs were not significant. provided.. vest as Zipwhip employees continue to provide services in the post-acquisition period. The fair value of these awards will be recorded into the stock-based compensation expense over the respective vesting period of each award. Net tangible assets Intangible assets(1) Goodwill(2) Total purchase price Developed technology Customer relationships Total intangible assets acquired The operations. Due to the integrated nature of the Company's operations, the Company believes that it is not practicable to separately identify earnings of Zipwhip on a stand-alone basis. Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's consolidated financial statements is not significant. future vesting provided. The total amortization period was over 2.41 years from the date of acquisition. Part of the cash consideration was paid to settle the vested equity awards of Segment employees. The Company assumed all unvested and outstanding equity awards of Segment continuing employees as converted into its own equity awards at the conversion ratio provided in the Agreement and Plan of Reorganization (the "Merger Agreement"). the Company's Class A common stock on the acquisition date. Net tangible assets Intangible assets(1) Goodwill(2) Total purchase price Developed technology Customer relationships Total intangible assets acquired developed technology and a multi-period excess earnings method to estimate the fair value of the customer relationships and order backlog. $13.0 million. The Net tangible liabilities Intangible assets(1) Goodwill(2) Total purchase price Developed technology Customer relationships Supplier relationships Total intangible assets acquired Intangible assets(1) Goodwill(2) Total purchase price Balance as of December 31, 2016 Goodwill recorded in connection with 2017 acquisition Measurement period adjustment Effect of exchange rate Balance as of December 31, 2017 Goodwill recorded in connection with 2018 acquisitions Measurement period adjustment Effect of exchange rate Balance as of December 31, 2018 Intangible assets Amortizable intangible assets: Developed technology Customer relationships Supplier relationships Trade name Patent Total amortizable intangible assets Non-amortizable intangible assets: Domain names Trademarks Total Amortizable intangible assets: Developed technology Customer relationships Supplier relationships Trade name Patent Total amortizable intangible assets Non-amortizable intangible assets: Domain names Trademarks Total 2019 2020 2021 2022 2023 Thereafter Total Accrued payroll and related Accrued bonus and commission Accrued cost of revenue Sales and other taxes payable ESPP contributions Deferred rent Nonrefundable deposits VAT liability Accrued other expense Total accrued expenses and other current liabilities Deferred rent Deferred tax liability Acquisition holdback Capital lease obligation Accrued other expense Total other long-term liabilities year ended December 31, 2019. Company’s Class A common stock par value $0.001, which was equivalent to an initial conversion price of approximately $70.90 per share. The conversion rate was subject to adjustment upon the occurrence of certain specified events but would 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 would, 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. Further, the Convertible Notes could 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 Convertible Notes (the “indenture”) or if the Convertible Notes were not freely tradeable as required by the indenture. None of the above mentioned events occurred during the period the notes were outstanding and prior to the redemption. 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 were filed as exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and are incorporated herein by reference. Principal Unamortized discount Unamortized issuance costs Net carrying amount The net carrying amount of the equity component of the Convertible Notes was as Proceeds allocated to the conversion options (debt discount) Issuance costs Net carrying amount Contractual interest expense Amortization of debt issuance costs Amortization of debt discount Total interest expense related to the Notes In connection with the offering of the Convertible Notes in May 2018, the Company entered into Balance, beginning of period Additions Write-offs Balance, end of period Balance, beginning of period Additions Deductions against reserve Balance, end of period Revenue by geographic area: United States International Total Percentage of revenue by geographic area: United States International 2019 2020 2021 2022 2023 Thereafter Total minimum lease payments 2019 2020 2021 2022 2023 Thereafter Total minimum lease payments Additionally, the Company has 2019 2020 2021 2022 2023 Total payments In addition to the litigation any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. accrued related to any outstanding indemnification agreements. In the event For example, San Francisco City and County has assessed the Company for $38.8 million in taxes, including interest and penalties, which exceeded the $11.5 million the Company had accrued for the period covered by this assessment. The Company paid the full amount as required by law. The payment made in excess of the accrued amount is reflected as a deposit in the accompanying consolidated balance sheets. The Company believes, however, that this assessment is incorrect and, after failing to reach a settlement, filed a lawsuit on May 27, 2021 contesting the assessment as described above. However, litigation is uncertain and a ruling against the Company, or a dismissal of our complaint, may adversely affect its financial position and results of operations. The Company had reserved shares of common stock for issuance as follows: Stock options issued and outstanding Nonvested restricted stock units issued and outstanding Class A common stock reserved for Twilio.org Stock-based awards available for grant under 2016 Plan Stock-based awards available for grant under 2016 ESPP Class A common stock reserved for the convertible senior notes Total year. Outstanding options as of December 31, 2017 Granted Exercised Forfeited and cancelled Outstanding options as of December 31, 2018 Options vested and exercisable as of December 31, 2018 Outstanding options as of December 31, 2017 Granted Exercised Forfeited and cancelled Outstanding options as of December 31, 2018 Options vested and exercisable as of December 31, 2018 exercised was $140.2 million. As of December 31, Nonvested RSUs as of December 31, 2017 Granted Vested Forfeited and cancelled Nonvested RSUs as of December 31, 2018 Class A common stock subject to future vesting conditions is $60.1 million, which will be amortized over a term of 2.0 years. Employee Stock Options Fair value of common stock Expected term (in years) Expected volatility Risk-free interest rate Dividend rate Employee Stock Purchase Plan Expected term (in years) Expected volatility Risk-free interest rate Dividend rate Asset volatility Equity volatility Discount rate Stock price at grant date Stock-Based Compensation Expense Cost of revenue Research and development Sales and marketing General and administrative Total Net loss attributable to common stockholders Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted Net loss per share attributable to common stockholders, basic and diluted 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: Stock options issued and outstanding Nonvested restricted stock units issued and outstanding Class A common stock reserved for Twilio.org Class A common stock committed under 2016 ESPP Conversion spread* Unvested shares subject to repurchase Total United States International Loss before provision for income taxes Current: Federal State Foreign Total Deferred: Federal State Foreign Total Provision for income taxes The following table presents a reconciliation of the statutory federal tax rate and the Company's effective tax Tax benefit at federal statutory rate State tax, net of federal benefit Stock-based compensation Credits Foreign rate differential Reserve for uncertain tax positions Change in valuation allowance Change in federal statutory rate Other Effective tax rate Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company's deferred tax assets and Deferred tax assets: Net operating loss carryforwards Accrued and prepaid expenses Stock-based compensation Research and development credits Charitable contributions Capped call Debt issuance cost Other Gross deferred tax assets Valuation allowance Net deferred tax assets Deferred tax liabilities: Capitalized software Prepaid expenses Acquired intangibles Property and equipment Convertible debt Deferred commissions Net deferred tax asset (liability) credits: be subject to an annual limitation, resulting in a potential reduction in the gross deferred tax assets before considering the valuation allowance. Unrecognized tax benefit, beginning of year Gross increases for tax positions of prior years Gross decrease for tax positions of prior years Gross increases for tax positions of current years Unrecognized tax benefit, end of year As of December 31, 2020, such amounts are not significant. accounting principles. 2021. 2021. 2021.limitedhistory of losses and may not achieve or sustain profitability in the future.We have incurred net losses in each year since our inception, including net losses of $949.9 million, $491.0 million and $307.1 million in the years ended December 31, 2021, 2020 and 2019, respectively. We had an accumulated deficit of $2.1 billion as of December 31, 2021. We will need to generate and sustain increased revenue levels, and manage our operating history, which makes it difficultexpenses, in future periods to evaluatebecome profitable and, even if we do, we may not be able to maintain or increase our level of profitability. We expect to continue to expend substantial financial and other resources on, among other things:•investments in our engineering team, improvements in security and data protection, the development of new products, features and functionality and enhancements to our platform;•sales and marketing, including the continued expansion of our direct sales organization and marketing programs, especially for enterprises and for organizations outside of the United States, and expanding our programs directed at increasing our brand awareness among current and new developers;•expansion of our operations and infrastructure, both domestically and internationally; and•general administration, including legal, accounting and other expenses related to being a public company.25Our efforts to grow our business may be costlier than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and Class A common stock may significantly decrease.If we are unable to increase adoption of our products by enterprises, our business, results of operations and financial condition may be adversely affected.Historically, we have relied on the adoption of our products by software developers through our self-service model for a majority of our revenue. Our ability to increase our customer base, especially among enterprises, and achieve broader market acceptance of our products will depend, in part, on our ability to effectively organize, focus and train our sales and marketing employees.Our ability to convince enterprises to adopt our products will depend, in part, on our ability to attract and retain sales employees with experience selling to enterprises. We believe that there is significant competition for experienced sales professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future prospectswill depend, in part, on our ability to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling to enterprises. In addition, even if we are successful in hiring qualified sales employees, new hires require significant training and experience before they achieve full productivity, particularly for sales efforts targeted at enterprises and new territories. Our recent hires and planned hires may not become as productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Because we do not have a long history of targeting our sales efforts at enterprises, we cannot predict whether, or to what extent, our sales will increase as we organize and train our sales force or how long it will take for sales employees to become productive.As we seek to increase the adoption of our products by enterprises, including products like Flex, which is primarily aimed at complex contact center implementations at larger companies, we expect to incur higher costs and longer sales cycles. In the enterprise market segment, the decision to adopt our products may require the approval of multiple technical and business decision makers, including legal, security, compliance, procurement, operations and IT. In addition, while enterprise customers may quickly deploy our products on a limited basis, before they will commit to deploying our products at scale, they often require extensive education about our products and significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development resources. In addition, sales cycles for enterprises are inherently more complex and less predictable than the sales through our self-service model, and some enterprise customers may not use our products enough to generate revenue that justifies the cost to obtain such customers. In addition, these complex and resource intensive sales efforts could place additional strain on our product and engineering resources. Further, enterprises, including some of our customers, may choose to develop their own solutions that do not include our products. They also may demand reductions in pricing as their usage of our products increases, the risk of your investment. We were founded and launchedwhich could have an adverse impact on our first product in 2008.gross margin. As a result of our limited operating history,experience selling and marketing to enterprises, our abilityefforts to forecastsell to these potential customers may not be successful. If we are unable to increase the revenue that we derive from enterprises, then our futurebusiness, results of operations is limited and subject to a number of uncertainties, including our ability to plan for future growth. Our historical revenue growth should notfinancial condition may be considered indicative of our future performance. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as:•market acceptance of our products and platform;•adding new customers, particularly enterprises;•retention of customers;•the successful expansion of our business, particularly in markets outside of the United States;•competition;•our ability to control costs, particularly our operating expenses;•network outages or security breaches and any associated expenses;•foreign currency exchange rate fluctuations;•executing acquisitions and integrating the acquired businesses, technologies, services, products and other assets; and•general economic and political conditions.If we do not address these risks successfully,are unable to expand our relationships with existing technology partner customers and add new technology partner customers, our business, results of operations and financial condition could be adversely affected.We believe that the continued growth of our business depends in part upon developing and expanding strategic relationships with technology partner customers. Technology partner customers embed our software products in their solutions, such as software applications for contact centers and sales force and marketing automation, and then sell such solutions to other businesses. When potential customers do not have the available developer resources to build their own applications, we refer them to either our technology partners who embed our products in the solutions that they sell to other businesses or our consulting partners who provide consulting and development services for organizations that have limited experience with respectsoftware development expertise to determining the optimal prices forbuild our products. We charge our customers based onplatform into their usesoftware applications.As part of our products. We expect thatgrowth strategy, we may needintend to changeexpand our pricing from time to time. In the past we have sometimes reduced our prices either for individualrelationships with existing technology partner customers in connection with long-term agreements or for a particular product. One of the challenges to our pricing is that the fees that we pay to network service providers over whose networks we transmit communications can vary daily or weekly and are affected by volume and other factors that may be outside of our control and difficult to predict. This can result in us incurring increased costs that we may be unable or unwilling to pass through to our customers, which could adversely impact our business, results of operations and financial condition. Further, as competitors introduceadd new products or services that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. As we expand internationally, we also must determine the appropriate price to enable us to compete effectively internationally. Moreover, enterprises, which are a primary focus for our direct sales efforts, may demand substantial price concessions. In addition, if the mix of products sold changes, including for a shift to IP-based products, then we may need to, or choose to, revise our pricing. As a result, in the future we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, results of operations and financial condition.We typically provide monthly uptime service level commitments of up to 99.95% under our agreements withtechnology partner customers. If we fail to meet these contractual commitments,expand our relationships with existing technology partner customers or establish relationships with new technology partner customers in a timely and cost-effective manner, or at all, then our business, results of operations and financial condition could be adversely affected. Our agreements Additionally, even if we are successful at building these relationships but there are problems or issues with integrating our products into the solutions of these customers, typically provide forour reputation and ability to grow our business may be harmed.26To deliver our products, we rely on network service level commitments. If we suffer extended periods of downtimeproviders and internet service providers for our productsnetwork service and connectivity, and disruption or deterioration in the quality of these services or changes in network service provider fees that we pay in connection with the delivery of communications on our platform and we are unable to meet these commitments, then we are contractually obligated to provide a service credit, which is typically 10% of the customer's amounts due for the month in question. In addition, the performance and availability of AWS, which provides our cloud infrastructures is outside of our control and, therefore, we are not in full control of whether we meet our service level commitments. As a result,could adversely affect our business, results of operations and financial conditioncondition.We currently interconnect with network service providers around the world to enable the use by our customers of our products over their networks. Although we are in the process of acquiring authorization in many countries for direct access to phone numbers and for the provision of voice services on the networks of network service providers, we expect that we will continue to rely on network service providers for these services. Where we don't have direct access to phone numbers, our reliance on network service providers has reduced our operating flexibility, ability to make timely service changes and control quality of service. In addition, the fees that we are charged by network service providers may change daily or weekly, while we do not typically change our customers’ pricing as rapidly.At times, network service providers have instituted additional fees due to regulatory, competitive or other industry related changes that increase our network costs. For example, in early 2020, a major U.S. mobile carrier introduced a new Application to Person ("A2P") SMS service offering that adds a new fee for A2P SMS messages delivered to its subscribers, and other U.S. mobile carriers have added or are in the process of adding similar fees. While we have historically responded to these types of fee increases through a combination of further negotiating efforts with our network service providers, absorbing the increased costs or changing our prices to customers, there is no guarantee that we will continue to be able to do so in the future without a material negative impact to our business. In the case of these new carriers A2P SMS fees, after a short phase-in period where we absorbed the fees, we began on May 1, 2021 to pass these fees directly through to our customers who are sending SMS messages to these carriers' subscribers. We expect that this will increase our revenue and cost of revenue, but will not impact the gross profit dollars received for sending these messages. However, mathematically this will have a negative impact on our gross margins. Additionally, our ability to respond to any new fees may be constrained if all network service providers in a particular market impose equivalent fee structures, if the magnitude of the fees is disproportionately large when compared to the underlying prices paid by our customers, or if the market conditions limit our ability to increase the price we charge our customers.Furthermore, many of these network service providers do not have long-term committed contracts with us and may interrupt services or terminate their agreements with us without notice. If a significant portion of our network service providers stop providing us with access to their infrastructure, fail to provide these services to us on a cost-effective basis, cease operations, or otherwise terminate these services, the delay caused by qualifying and switching to other network service providers could be adversely affected if we suffer unscheduled downtime that exceeds the service level commitments we have made to our customers. Any extended service outagestime consuming and costly and could adversely affect our business and reputation.Breaches of our networks or systems, or those of AWS or our service providers, could degrade our ability to conduct our business, compromise the integrity of our products, platform and data, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data. We depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and research and development activities to our marketing and sales efforts and communications with our customers and business partners. Individuals or entities may attempt to penetrate our network security, or that of our platform, and to cause harm to our business operations, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our products and platform. Because the techniques used by such individuals or entities to access, disrupt or sabotage devices, systems and networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques, and we may not become aware in a timely manner of such a security breach, which could exacerbate any damage we experience. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data, including customer data, and to deploy our IT resources in a safe and secure manner that does not expose our network systems to security breaches or the loss of data. Any data security incidents, including internal malfeasance by our employees, unauthorized access or usage, virus or similar breach or disruption of us or our service providers, such as AWS or service providers, could result in loss of confidential information, damage to our reputation, loss of customers, litigation, regulatory investigations, fines, penalties and other liabilities. Accordingly, if our cybersecurity measures or those of AWS or our service providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks), compromise or the mishandling of data by our employees and contractors, then our reputation, business, results of operations and financial conditioncondition. Further, if problems occur with our network service providers, it may cause errors or poor quality communications with our products, and we could encounter difficulty identifying the source of the problem. The occurrence of errors or poor quality communications on our products, whether caused by our platform or a network service provider, may result in the loss of our existing customers or the delay of adoption of our products by potential customers and may adversely affect our business, results of operations and financial condition.Further, we sometimes access network services through intermediaries who have direct access to network service providers. Although we are in the process of securing direct connections with network service providers in many countries, we expect that we will continue to rely on intermediaries for these services. These intermediaries sometimes have offerings that directly compete with our products and may stop providing services to us on a cost-effective basis. If a significant portion of these intermediaries stop providing services or stop providing services on a cost-effective basis, our business could be adversely affected.DefectsWe also interconnect with internet service providers around the world to enable the use of our email products by our customers, and we expect that we will continue to rely on internet service providers for network connectivity going forward. Our reliance on internet service providers reduces our control over quality of service and exposes us to potential service outages and rate fluctuations. If a significant portion of our internet service providers stop providing us with access to their network infrastructure, fail to provide access on a cost-effective basis, cease operations, or errors inotherwise terminate access, the delay caused by qualifying and switching to other internet service providers could be time consuming and costly and could adversely affect our products could diminish demand for our products, harm our business, and results of operations, and subject usfinancial condition.Our future success depends in part on our ability to liability. Our customers usedrive the adoption of our products for important aspectsby international customers.In the years ended December 31, 2021, 2020 and 2019, we derived 34%, 27% and 29% of their businesses, and any errors, defects or disruptionsour revenue, respectively, from customer accounts located outside the United States. The future success of our business will depend, in part, on our ability to expand our customer base worldwide. While we have been rapidly expanding our sales efforts internationally, our experience27in selling our products outside of the United States is, and any other performance problems with our products could damage our customers' businesses and,ability to conduct business in turn, hurt our brand and reputation. We provide regular updates to our products, which havelocal currencies in the past contained, and may in the future contain, undetected errors, failures, vulnerabilities and bugs when first introduced or released. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position, lower customer retention or claims by customers for losses sustained by them. In such an event, wecertain jurisdictions may be required, or is, limited. Furthermore, our developer-first business model may choose, for customer relationsnot be successful or other reasons, to expend additional resources in order to help correcthave the problem. In addition, we maynot carry insurance sufficient to compensate us for any losses that may result from claims arising from defects or disruptions in our products.same traction outside the United States. As a result, our reputation andinvestment in marketing our brand couldproducts to these potential customers may not be harmed, andsuccessful. If we are unable to increase the revenue that we derive from international customers, then our business, results of operations and financial condition may be adversely affected.We are continuing to expand our international operations, which exposes us to significant risks.We are continuing to expand our international operations to increase our revenue from customers outside of the United States as part of our growth strategy. Between December 31, 2020 and December 31, 2021, our international headcount grew from 1,369 employees to 2,964 employees. We expect to open additional international offices and hire employees to work at these offices in order to reach new customers and gain access to additional technical talent. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks in addition to those we already face in the United States. Because of our limited experience with international operations or with developing and managing sales in international markets, our international expansion efforts may not be successful.In addition, we will face risks in doing business internationally that could adversely affect our business, including:•any long–term impact from the United Kingdom’s withdrawal from the European Union, commonly referred to as Brexit, which formally took effect on January 31, 2020.In particular, any such long-term impact from Brexit on our business and operations will depend, in part, on the outcome of the U.K.'s continuing negotiations on a number of matters not definitively addressed in the UK-EU Trade and Cooperation Agreement and may require us to expend significant time and expense to make adjustments to our business and operations;•the difficulty of managing and staffing international operations and the increased operations, travel, infrastructure and legal compliance costs associated with servicing international customers and operating numerous international locations;•our ability to effectively price our products in competitive international markets;•new and different sources of competition or other changes to our current competitive landscape;•understanding and reconciling different technical standards, data privacy and telecommunications regulations, registration and certification requirements outside the United States, which could prevent customers from deploying our products or limit their usage;•our ability to comply with the GDPR and Brazil's General Data Protection Law (Lei Geral de Proteção de Dados Pessoais) (Law No. 13,709/2018), and laws, regulations and industry standards relating to data privacy, data protection, data localization and data security enacted in countries and other regions in which we operate or do business;•potentially greater difficulty collecting accounts receivable and longer payment cycles;•higher or more variable network service provider fees outside of the United States;•the need to adapt and localize our products for specific countries;•the need to offer customer support in various languages;•difficulties in understanding and complying with local laws, regulations and customs in non-U.S. jurisdictions;•compliance with export controls and economic sanctions regulations administered by the Department of Commerce's Bureau of Industry and Security and the Treasury Department’s Office of Foreign Assets Control;•compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act and United Kingdom Bribery Act of 2010;•changes in international trade policies, tariffs and other non-tariff barriers, such as quotas and local content rules;28•more limited protection for intellectual property rights in some countries;•adverse tax consequences;•fluctuations in currency exchange rates, which could increase the price of our products outside of the United States, increase the expenses of our international operations and expose us to foreign currency exchange rate risk;•currency control regulations, which might restrict or prohibit our conversion of other currencies into U.S. dollars;•restrictions on the transfer of funds;•deterioration of political relations between the United States and other countries;•the impact of natural disasters and public health epidemics or pandemics such as COVID-19 on employees, contingent workers, partners, travel and the global economy and the ability to operate freely and effectively in a region that may be fully or partially on lockdown; and•political or social unrest or economic instability in a specific country or region in which we operate, which could have an adverse impact on our operations in that location.Also, due to costs from our international expansion efforts and network service provider fees outside of the United States, which generally are higher than domestic rates, our gross margin for international customers is typically lower than our gross margin for domestic customers. As a result, our gross margin may be impacted and fluctuate as we expand our operations and customer base worldwide.Our failure to manage any of these risks successfully could harm our international operations, and adversely affect our business, results of operations and financial condition.Certain of our products are subject to telecommunications‑related regulations, and future legislative or regulatory actions could adversely affect our business, results of operations and financial condition.As a provider of communications products, we are subject to existing or potential FCC regulations relating to privacy, telecommunications, consumer protection and other requirements. In addition, the extension of telecommunications regulations to our non-interconnected VoIP services could result in additional federal and state regulatory obligations and taxes. We are also in discussions with certain jurisdictions regarding potential sales and other taxes for prior periods that we may owe. In the event any of these jurisdictions disagree with management’s assumptions and analysis, the assessment of our tax exposure could differ materially from management's current estimates, which may increase our costs of doing business and negatively affect the prices our customers pay for our services. If we do not comply with FCC rules and regulations, we could be subject to FCC enforcement actions, fines, loss of licenses and possibly restrictions on our ability to operate or offer certain of our products. Any enforcement action by the FCC, which may be a public process, would hurt our reputation in the industry, could erode customer trust, possibly impair our ability to sell our VoIP products to customers and could adversely affect our business, results of operations and financial condition.Certain of our products are subject to a number of FCC regulations and laws that are administered by the FCC. Among others, we must comply (in whole or in part) with:•the Communications Act of 1934, as amended, which regulates communications services and the provision of such services;•the Telephone Consumer Protection Act, which limits the use of automatic dialing systems for calls and texts, artificial or prerecorded voice messages and fax machines;•the Communications Assistance for Law Enforcement Act, which requires covered entities to assist law enforcement in undertaking electronic surveillance;•requirements to safeguard the privacy of certain customer information;•payment of annual FCC regulatory fees and contributions to FCC-administered funds based on our interstate and international revenues; and29•rules pertaining to access to our services by people with disabilities and contributions to the Telecommunications Relay Services fund.In addition, Congress and the FCC are attempting to mitigate the scourge of robocalls by requiring participation in a technical standard called SHAKEN/STIR, which allows voice carriers to authenticate caller ID, prohibiting malicious spoofing.Similarly, in May 2021, the Biden Administration issued an Executive Order requiring federal agencies to implement additional information technology security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit to the maximum extent consistent with Federal records laws and other applicable laws. The Executive Order will lead to the development of secure software development practices and/or criteria for a consumer software labeling program, the criteria which will reflect a baseline level of secure practices, for software that is developed and sold to the U.S. federal government. Software developers will be required to provide visibility into their software and make security data publicly available. Due to this Executive Order, federal agencies may require us to modify our cybersecurity practices and policies, thereby increasing our compliance costs. If we are unable to meet the requirements of the Executive Order, our ability to work with the U.S. government may be impaired and may result in a loss of revenue.If we do not comply with any current or future rules or regulations that apply to our business, we could be subject to substantial fines and penalties, and we may have to restructure our offerings, exit certain markets or raise the price of our products. In addition, any uncertainty regarding whether particular regulations apply to our business, and how they apply, could increase our costs or limit our ability to grow.As we continue to expand internationally, we have become subject to telecommunications laws and regulations in the foreign countries where we offer our products. Internationally, we currently offer our products in over 180 countries.Our international operations are subject to country-specific governmental regulation and related actions that have increased and will continue to increase our costs or impact our products and platform or prevent us from offering or providing our products in certain countries. Moreover, the regulation of communications platform-as-a-service (“CPaaS”) companies like us is continuing to evolve internationally and many existing regulations may not fully contemplate the CPaaS business model or how they fit into the communications regulatory framework. As a result, interpretation and enforcement of regulations often involve significant uncertainties. In many countries, including those in the European Union, a number of our products or services are subject to licensing and communications regulatory requirements which increases the level of scrutiny and enforcement by regulators. Future legislative, regulatory or judicial actions impacting CPaaS services could also increase the cost and complexity of compliance and expose us to liability. For example, in some countries, some or all of the services we offer are not considered regulated telecommunications services, while in other countries they are subject to telecommunications regulations, including but not limited to payment into universal service funds, licensing fees, provision of emergency services, provision of information to support emergency services and number portability. Specifically, the Australian Communications and Media Authority in 2019 issued a formal finding against several companies, including our Company, for failure to upload data into a centralized database for emergency services and, in the future, regulatory authorities in other jurisdictions in which we operate may also determine that we are a telecommunications company subject to similar regulations. Failure to comply with these regulations could result in our Company being issued remedial directions to undertake independent audits and implement effective systems, processes and practices to ensure compliance, significant fines or being prohibited from providing telecommunications services in a jurisdiction.Moreover, certain of our products may be used by customers located in countries where voice and other forms of IP communications may be illegal or require special licensing or in countries on a U.S. embargo list. Even where our products are reportedly illegal or become illegal or where users are located in an embargoed country, users in those countries may be able to continue to use our products in those countries notwithstanding the illegality or embargo. We may be subject to penalties or governmental action if consumers continue to use our products in countries where it is illegal to do so or if we use a local partner to provide services in a country and the local partner does not comply with applicable governmental regulations. Any such penalties or governmental action may be costly and may harm our business and damage our brand and reputation. We may be required to incur additional expenses to meet applicable international regulatory requirements or be required to raise the prices of services, or restructure or discontinue those services if required by law or if we cannot or will not meet those requirements. Any of the foregoing could adversely affect our business, results of operations and financial condition.30If we are unable to obtain or retain geographical, mobile, regional, local or toll‑free numbers, or to effectively process requests to port such numbers in a timely manner due to industry regulations, our business and results of operations may be adversely affected.Our future success depends in part on our ability to obtain allocations of geographical, mobile, regional, local and toll-free direct inward dialing numbers or phone numbers as well as short codes and alphanumeric sender IDs (collectively “Numbering Resources”) in the United States and foreign countries at a reasonable cost and without overly burdensome restrictions. Our ability to obtain allocations of, assign and retain Numbering Resources depends on factors outside of our control, such as applicable regulations, the practices of authorities that administer national numbering plans or of network service providers from whom we can provision Numbering Resources, such as offering these Numbering Resources with conditional minimum volume call level requirements, the cost of these Numbering Resources and the level of overall competitive demand for new Numbering Resources.In addition, in order to obtain allocations of, assign and retain Numbering Resources in the EU or certain other regions, we are often required to be licensed by local telecommunications regulatory authorities, some of which have been increasingly monitoring and regulating the categories of Numbering Resources that are eligible for provisioning to our customers. We have obtained licenses, and are in the process of obtaining licenses in various countries in which we do business, but in some countries, the regulatory regime around provisioning of Numbering Resources is unclear, subject to change over time, and sometimes may conflict from jurisdiction to jurisdiction. Furthermore, these regulations and governments’ approach to their enforcement, as well as our products and services, are still evolving and we may be unable to maintain compliance with applicable regulations, or enforce compliance by our customers, on a timely basis or without significant cost. Also, compliance with these types of regulation may require changes in products or business practices that result in reduced revenue. Due to our or our customers' assignment and/or use of Numbering Resources in certain countries in a manner that violates applicable rules and regulations, we have been subjected to government inquiries and audits, and may in the future be subject to significant penalties or further governmental action, and in extreme cases, may be precluded from doing business in that particular country. We have also been forced to reclaim Numbering Resources from our customers as a result of certain events of non-compliance. These reclamations result in loss of customers, loss of revenue, reputational harm, erosion of customer trust, and may also result in breach of contract claims, all of which could have an adverse effect on our business, results of operations and financial condition.Due to their limited availability, there are certain popular area code prefixes that we generally cannot obtain. Our inability to acquire or retain Numbering Resources for our operations may make our voice and messaging products less attractive to potential customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other providers of cloud communications, has increased, which increases our dependence on needing sufficiently large quantities of Numbering Resources. It may become increasingly difficult to source larger quantities of Numbering Resources as we scale and we may need to pay higher costs for Numbering Resources, and Numbering Resources may become subject to more stringent regulation or conditions of usage such as the registration and on-going compliance requirements discussed above.Additionally, in some geographies, we support number portability, which allows our customers to transfer their existing phone numbers to us and thereby retain their existing phone numbers when subscribing to our voice and messaging products. Transferring existing numbers is a manual process that can take up to 15 business days or longer to complete. Any delay that we experience in transferring these numbers typically results from the fact that we depend on network service providers to transfer these numbers, a process that we do not control, and these network service providers may refuse or substantially delay the transfer of these numbers to us. Number portability is considered an important feature by many potential customers, and if we fail to reduce any related delays, then we may experience increased difficulty in acquiring new customers.Any of the foregoing factors could adversely affect our business, results of operations and financial condition.31If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements or preferences, our products may become less competitive.The market for communications in general, and cloud communications in particular, is subject to rapid technological change, evolving industry standards, changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we are unable to develop new products that satisfy our customers and provide enhancements and new features for our existing products that keep pace with rapid technological and industry change, including but not limited to SHAKEN/STIR and applicable industry standards, our business, results of operations and financial condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively.Our platform must integrate with a variety of network, hardware, mobile and software platforms and technologies, and we need to continuously modify and enhance our products and platform to adapt to changes and innovation in these technologies. For example, Apple, Google and other cell-phone operating system providers or inbox service providers have developed and, may in the future develop, new applications or functions intended to filter spam and unwanted phone calls, and such applicationsmessages or functionsemails. Third party platforms may also implement changes to their privacy policies or practices that may impact us or our customers. In addition, our network service providers may adopt new filtering technologies in an effort to combat spam or robocalling. Such technologies may inadvertently filter desired messages or calls to or from our customers. If cell-phone operating system providers, network service providers, our customers or their end users adopt new software platforms or infrastructure, we may be required to develop new versions of our products to work with those new platforms or infrastructure. This development effort may require significant resources, which would adversely affect our business, results of operations and financial condition. Any failure of our products and platform to operate effectively with evolving or new platforms and technologies could reduce the demand for our products. If we are unable to respond to these changes in a cost-effective manner, our products may become less marketable and less competitive or obsolete, and our business, results of operations and financial condition could be adversely affected.Our reliance on SaaS technologies from third parties mayWe substantially rely upon Amazon Web Services to operate our platform, and any disruption of or interference with our use of Amazon Web Services would adversely affect our business, results of operations and financial condition.We rely heavily on hosted SaaS technologies from third parties in order to operate critical internal functionsoutsource a substantial majority of our business, including enterprise resource planning, customer supportcloud infrastructure to Amazon Web Services (“AWS”), which hosts our products and customer relations management services. If these services become unavailableplatform. Our customers need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced, and expect that in the future we may experience interruptions, delays and outages in service and availability due to extended outagesa variety of factors, including infrastructure changes, human or interruptions, or because they are no longer available on commercially reasonable terms or prices, our expenses could increase. As a result, our ability to manage our operationssoftware errors, website hosting disruptions and capacity constraints. Capacity constraints could be interrupted anddue to a number of potential causes, including technical failures, natural disasters, pandemics such as COVID-19, fraud or security attacks. In addition, if our processes for managingsecurity, or that of AWS, is compromised, or our sales process and supportingproducts or platform are unavailable or our customers could be impaired until equivalent services, if available,users are identified, obtained and implemented,unable to use our products within a reasonable amount of time or at all, of which could adversely affectthen our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times, as our products become more complex and the usage of our products increases. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers’ requirements, result in negative publicity which could harm our reputation and brand and may adversely affect the usage of our platform.The substantial majority of the services we use from AWS are for cloud-based server capacity and, to a lesser extent, storage and other optimization offerings. AWS enables us to order and reserve server capacity in varying amounts and sizes distributed across multiple regions. We access AWS infrastructure through standard IP connectivity. AWS provides us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. AWS may terminate the agreement for cause upon notice and upon our failure to cure a breach within 30 days from the date of such notification and may, in some cases, suspend the agreement immediately for cause upon notice. Although we expect that we could receive similar services from other third parties, if any of our arrangements with AWS are terminated, we could experience interruptions on our platform and in our ability to make our products available to customers, as well as delays and additional expenses in arranging alternative cloud infrastructure services.32Any of the above circumstances or events may harm our reputation, erode customer trust, cause customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition.We typically provide monthly uptime service level commitments of a minimum of 99.95% under our agreements with customers. If we fail to meet these contractual commitments, then our business, results of operations and financial condition could be adversely affected.Our agreements with customers typically provide for service level commitments. If we suffer extended periods of downtime for our products or platform and we are unable to meet these commitments, then we are contractually obligated to provide a service credit, which is typically 10% of the customer’s amounts due for the month in question. For example, on February 26, 2021, a critical feature enablement service on our platform became overloaded, which resulted in connection issues across multiple products in our cloud communications platform that affected our customers for a limited number of hours. The service disruption had a widespread impact on our customers’ ability to use several of our products. We incurred certain costs associated with offering credits to our affected customers, but the overall impact was not material to our business. We may also ultimately lose or see reduced utilization of our products by one or more customers as a result of the outage. In addition, the performance and availability of AWS or other service providers that provide our cloud infrastructures is outside of our control and, therefore, we are not in full control of whether we meet our service level commitments. As a result, our business, results of operations and financial condition could be adversely affected if we suffer unscheduled downtime that exceeds the service level commitments we have made to our customers. Any extended service outages could adversely affect our business and reputation and erode customer trust.Breaches of our networks or systems, or those of AWS or our service providers, could degrade our ability to conduct our business, compromise the integrity of our products, platform and data, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.We depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and research and development activities to our marketing and sales efforts and communications with our customers and business partners. We may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods and other similar threats.Individuals or entities may attempt to penetrate our network security, or that of our platform, and to cause harm to our business operations, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our products and platform. In particular, cyberattacks and other malicious internet-based activity continue to increase in frequency and in magnitude generally, and cloud-based companies have been targeted in the past. In addition to threats from traditional computer hackers, malicious code, software vulnerabilities, supply chain attacks and vulnerabilities through our third-party partners, employees theft or misuse, password spraying, phishing, credential stuffing and denial-of-service attacks, we also face threats from sophisticated organized crime, nation-state, and nation-state supported actors who engage in attacks (including advanced persistent threat intrusions) that add to the risk to our systems (including those hosted on AWS or other cloud services), internal networks, our customers’ systems and the information that they store and process. Ransomware and cyber extortion attacks, including those perpetrated by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds.Extortion payments may alleviate or reduce the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. The COVID-19 pandemic and our remote workforce also pose increased risks to our IT systems and data. While we devote significant financial and employee resources to implement and maintain security measures, because the techniques used by such individuals or entities to access, disrupt or sabotage devices, systems and networks change frequently and may not be recognized until launched against a target, we may be required to make further investments over time to protect data and infrastructure as cybersecurity threats develop, evolve and grow more complex over time. We may also be unable to anticipate these techniques, and we may not become aware in a timely manner of such a security breach, which could exacerbate any damage we experience. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data, including customer data, and to deploy our IT resources in a safe and secure manner that does not expose our network systems to security breaches or the loss of data. We have been and expect to be subject to cybersecurity threats and incidents, including denial-of-service attacks, employee errors or individual attempts to gain unauthorized access to information systems. Any data security incidents, including internal malfeasance or inadvertent disclosures by our employees or a third party's fraudulent inducement of our employees to disclose33information, unauthorized access or usage, virus or similar breach or disruption of us or our service providers, such as AWS, could result in loss of confidential information, damage to our reputation, erosion of customer trust, loss of customers, litigation, regulatory investigations, fines, penalties and other liabilities. For example, in 2020, SolarWinds Inc., one of our third party software service providers, was subject to a data security incident. We have completed our investigations of this incident and concluded that there was no adverse impact to us.Furthermore, we are required to comply with laws and regulations that require us to maintain the security of personal information and we may have contractual and other legal obligations to notify customers or other relevant stakeholders of security breaches. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may include: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing data (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss and other similar harms. Security incidents and attendant consequences could lead to negative publicity, may cause our customers to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or mitigate the security breach. Accordingly, if our cybersecurity measures or those of AWS or our service providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks), compromise or the mishandling of data by our employees and contractors, then our reputation, customer trust, business, results of operations and financial condition could be adversely affected.While we maintain errors, omissions and cyber liability insurance policies covering certain security and privacy damages, we cannot be certain that our existing insurance coverage will continue to be available on acceptable terms or will be available, and in sufficient amounts, to cover the potentially significant losses that may result from a security incident or breach or that the insurer will not deny coverage as to any future claim.Defects or errors in our products could diminish demand for our products, harm our business and results of operations and subject us to liability.Our customers use our products for important aspects of their businesses, and any errors, defects or disruptions to our products and any other performance problems with our products could damage our customers’ businesses and, in turn, hurt our brand and reputation and erode customer trust. We provide regular updates to our products, which have in the past contained, and may in the future contain, undetected errors, failures, vulnerabilities and bugs when first introduced or released. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position, lower customer retention or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for any losses that may result from claims arising from defects or disruptions in our products. As a result, our reputation and our brand could be harmed, and our business, results of operations and financial condition may be adversely affected.We currently generate significant revenue from our largest customers, and the loss or decline in revenue from any of these customers could harm our business, results of operations and financial condition.In the years ended December 31, 2021, 2020 and 2019, our 10 largest Active Customer Accounts generated an aggregate of 11%, 14% and 13% of our revenue, respectively. In the event that any of our large customers do not continue to use our products, use fewer of our products, or use our products in a more limited capacity, or not at all, our business, results of operations and financial condition could be adversely affected. Additionally, the usage of our products by customers that do not have long-term contracts with us may change between periods. Those with no long-term contract with us may reduce or fully terminate their usage of our products at any time without notice, penalty or termination charges, which may adversely impact our results of operations.34If we are unable to develop and maintain successful relationships with consulting partners, our business, results of operations and financial condition could be adversely affected.We believe that continued growth of our business depends in part upon identifying, developing and maintaining strategic relationships with consulting partners. As part of our growth strategy, we intend to further develop partnerships and specific solution areas with consulting partners. If we fail to establish these relationships in a timely and cost-effectivecost‑effective manner, or at all, then our business, results of operations and financial condition could be adversely affected. Additionally, even if we are successful at developing these relationships but there are problems or issues with the integrations or enterprisesAny failure to offer high quality customer support may adversely affect our relationships with our customers and prospective customers, and adversely affect our business, results of operations and financial condition.Many of our customers depend on our customer support team to assist them in deploying our products effectively to help them to resolve post-deploymentpost‑deployment issues quickly and to provide ongoing support. If we do not devote sufficient resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could prevent prospective customers from adopting our products. We may be unable to respond quickly enough to accommodate short-termshort‑term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could increase costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our business reputation and on positive recommendations from developers. Any failure to maintain high quality customer support, or a market perception that we do not maintain high quality customer support, could erode customer trust and adversely affect our reputation, business, results of operations and financial condition.Failure to set optimal prices for our products could adversely impact our business, results of operations and financial condition.For certain of our products, we primarily charge our customers based on their use of such products ("usage-based pricing"). One of the challenges to our usage-based pricing is that the fees that we pay to network service providers over whose networks we transmit communications can vary daily or weekly and are affected by volume and other factors that may be outside of our control and difficult to predict. This can result in us incurring increased costs that we may be unable or unwilling to pass through to our customers, which could adversely impact our business, results of operations and financial condition.We expect that we may need to change our pricing from time to time. In the past, we have sometimes reduced our prices either for individual customers in connection with long‑term agreements or for a particular product. Further, as competitors introduce new products or services that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. As we expand internationally, we also must determine the appropriate price to enable us to compete effectively internationally. Moreover, enterprises, which are a primary focus for our direct sales efforts, may demand substantial price concessions. In addition, if the mix of products sold changes, including for a shift to IP‑based products, then we may need to, or choose to, revise our pricing. As a result, in the future we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, results of operations and financial condition.We have been sued and may, in the future, be sued by third parties for alleged infringement of their proprietary rights, which could adversely affect our business, results of operations and financial condition.There is considerable patent and other intellectual property development activity in our industry. We may also introduce or acquire new products or technologies, including in areas where we historically have not participated, which could increase our exposure to third party intellectual property claims. Our future success depends, in part, on not infringing the intellectual property rights of others.others and we may be unaware of the intellectual property rights of others that may cover some or all of our technology. Our competitors or other third parties have claimed and may, in the future, claim that weour products or platform and underlying technology are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. For example, Telesign Corporation ("Telesign"(“Telesign”) sued Twilious in 2015 and 2016 alleging that we are infringinginfringed four U.S. patents that it holds: U.S. Patent No. 7,945,034 ("034"), U.S. Patent No. 8,462,920 ("920"), U.S. Patent No. 8,687,038 ("038"), and U.S. Patent No. 9,300,792 ("792").patents. The patent infringement allegations in the lawsuit relatelawsuits related to the Company's two-factorour two‑factor authentication use case,Authy, Authy, and an API tool to find information about a phone number. On October 19, 2018, a United States District Court in the Northern District of California entered judgment in our favor on all asserted claims. Telesign has appealed and the case is now pending before the Court of Appeals for the Federal Circuit. See the section titled "Item 3. Legal Proceedings."claims, which was affirmed on appeal. We intend to vigorously defend ourselves against such lawsuits and believe we have meritorious defenses to matters in which we are a defendant. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In addition, litigation can involve significant management time and attention and be expensive, regardless of outcome.lawsuits. During the course of these lawsuits, there may be announcements of the results of hearings and35motions and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the trading price of our Class A common stock may decline. In the future, we may receive claims from third parties, including our competitors, that our products or platform and underlying technology infringe or violate a third party's intellectual property rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses or modify our productsEvenLitigation is inherently uncertain and even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding intellectual property could be costly and time-consumingtime‑consuming and divert the attention of our management and other employees from our business. Patent infringement, trademark infringement, trade secret misappropriation and other intellectual property claims and proceedings brought against us, whether successful or not, could harm our brand, business, results of operations and financial condition.Indemnity provisions in various agreements potentially expose us to substantial liability for data breach, intellectual property infringement and other losses.Our agreements with customers and other third parties typically include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, loss or exposure of confidential or sensitive data, damages caused by us to property or persons or other liabilities relating to or arising from our products or platform or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although typically we contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, demand for our products and adversely affect our business, results of operations and financial condition.We could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual property could adversely affect our business, results of operations and financial condition.Our success depends, in part, on our ability to protect our brand and the proprietary methods and technologies that we develop under patent and other intellectual property laws ofin the United StatesU.S. and foreignin non-U.S. jurisdictions so that we can prevent others from using our inventions and proprietary information. As of December 31, 2018,2021, in the United States, we had been issued 104197 patents, which expire between 2029 and 2037.2040. As of such date, we also had 1336 issued patents in foreignnon-U.S. jurisdictions, all of which are related to U.S. patents and patent applications. We have also filed various applications for protection of certain aspects of our intellectual property in the United States and internationally. There can be no assurance that additional patents will be issued or that any patents that have been issued or that may be issued in the future will provide significant protection for our intellectual property. As of December 31, 2018,2021, we had 1550 registered trademarks in the United States and 94416 registered trademarks in foreignnon-U.S. jurisdictions. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business, results of operations and financial condition may be adversely affected.There can be no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file patent applications and trademark applications, will be adequate to protect our business. We could be required to spend significant resources to monitor and protect our intellectual property rights. Litigation has in the past, and may be necessary in the future, to enforce our intellectual property rights, determine the validity and scope of our proprietary rights or those of others, or defend against claims of infringement or invalidity. Such litigation could be costly, time-consumingtime‑consuming and distracting to management, result in a diversion of significant resources, the narrowing or invalidation of portions of our intellectual property and have an adverse effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant'scounterclaimant’s ownWe also rely, in part, on confidentiality agreements with our business partners, employees, consultants, advisors, customers and others in our efforts to protect our proprietary technology, processes and methods. These agreements may not effectively prevent disclosure of our confidential information, and it may be possible for unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in these cases, we would not be able to assert any trade secret rights against those parties. Costly and time-consumingtime‑consuming litigation could be necessary to enforce and determine the scope of our36proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.In addition, the laws of some countries do not protect intellectual property and other proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, whether through acquisitions, international product development, regulatory compliance of local data sovereignty, or improving our services (e.g. reducing latency or ensuring redundancy) our exposure to unauthorized copying, transfer and use of our proprietary technology or information may increase.We cannot be certain that our means of protecting our intellectual property and proprietary rights will be adequate or that our competitors will not independently develop similar technology. If we fail to meaningfully protect our intellectual property and proprietary rights, our business, results of operations and financial condition could be adversely affected.We may acquire or invest in companies, which may divert our management’s attention and result in debt or dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions or investments.We actively evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. For example, in November 2020, we acquired Segment for a total purchase price of $3.0 billion, of which approximately $2.5 billion represented the value of our Class A common stock issued at closing. The estimated transaction value of $3.2 billion, as previously announced, included certain shares of Class A common stock and assumed equity awards that are subject to future vesting. Accordingly, at closing, our stockholders incurred substantial dilution. Any future acquisitions or strategic transactions may result in additional dilution or require us to take on debt in order to finance any such transactions. For further risks related to our acquisitions, please see below under “Risks Related to our Acquisitions.” We also may enter into relationships with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies, such as our recent proposed minority investment of $500.0 million to $750.0 million in Syniverse Corporation.Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties or delays in assimilating or integrating the businesses, technologies, products, employees or operations of the acquired companies, particularly if the key employees of the acquired company choose not to work for us, their products or services are not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. In addition, we may discover liabilities or deficiencies associated with the assets or companies we acquire or ineffective or inadequate controls, procedures or policies at an acquired business that were not identified in advance, any of which could result in significant unanticipated costs. Acquisitions also may disrupt our business, divert our resources or require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities.Negotiating these transactions can be time consuming, difficult and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. For one or more of those transactions, we may:•issue additional equity securities that would dilute our existing stockholders;•use cash that we may need in the future to operate our business;•incur large charges or substantial liabilities;•incur debt on terms unfavorable to us or that we are unable to repay;•encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures;•invest in securities that are illiquid or decline in value;•encounter difficulties retaining the acquired company's customers; or37•become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.The occurrence of any of these foregoing could adversely affect our business, results of operations and financial condition.We depend largely on the continued services of our senior management and other key employees, the loss or incapacitation of any of whom could adversely affect our business, results of operations and financial condition.Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, to develop our products and platform, to deliver our products to customers, to attract and retain customers and to identify and pursue opportunities. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience and effort of our co‑founder and Chief Executive Officer, Jeff Lawson. None of our executive officers or other senior management are bound by a written employment agreement and any of them may terminate employment with us at any time with no advance notice. The replacement of any of our senior management would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of any of our senior management or other key employees for any reason could adversely affect our business, results of operations and financial condition.If we are unable to hire, retain and motivate qualified employees, our business will suffer.Our future success depends, in part, on our ability to continue to attract and retain highly skilled employees. We believe that there is, and will continue to be, intense competition for highly skilled management, technical, sales and other employees with experience in our industry. In addition, we have experienced and may continue to experience employee turnover as a result of the ongoing “great resignation” occurring throughout the U.S. economy. New employees require training, take time before they achieve full productivity, and may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. In addition, our new Open Work hybrid approach to work, announced in February 2021, may not meet the expectations of our workforce. Further, labor is subject to external factors that are beyond our control, including our industry’s highly competitive market for skilled workers and leaders, cost inflation, the COVID-19 pandemic and workforce participation rates. We must provide competitive compensation packages and a high quality work environment to hire, retain and motivate employees.If we are unable to retain and motivate our existing employees and attract qualified employees to fill key positions, we may be unable to manage our business effectively, including the development, marketing and sale of our products, which could adversely affect our business, results of operations and financial condition. To the extent we hire employees from competitors, we also may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key employees. If we are unable to retain our employees, our business, results of operations and financial condition could be adversely affected.United States federal legislation and international laws impose certain obligations on the senders of commercial emails, which could minimize the effectiveness of our platform, and establish financial penalties for non-compliance, which could increase the costs of our business.The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, establishes certain requirements for commercial email messages and transactional email messages and specifies penalties for the transmission of email messages that are intended to deceive the recipient as to source or content. Among other things, the CAN-SPAM Act, obligates the sender of commercial emails to provide recipients with the ability to “opt-out” of receiving future commercial emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more restrictive and difficult to comply with than the CAN-SPAM Act. For example, Utah and Michigan prohibit the sending of email messages that advertise products or services that minors are prohibited by law from purchasing or that contain content harmful to minors to email addresses listed on specified child protection registries. Some portions of these state laws may not be preempted by the CAN-SPAM Act. In addition, certain non-U.S. jurisdictions in which we operate have enacted laws regulating the sending of email that are more restrictive than U.S. laws. For example, some foreign laws prohibit sending broad categories of email unless the recipient has provided the sender advance consent (or "opted-in") to receipt of such email. If we were found to be in violation of the CAN-SPAM Act, applicable state laws governing email not preempted by the CAN-SPAM Act or foreign laws regulating the distribution of email, whether as a result of violations by our customers or our own acts or omissions, we could be required to pay large penalties, which would adversely affect our financial condition, significantly harm our business, injure our reputation and erode customer trust. The terms of any injunctions, judgments, consent decrees or settlement agreements entered into in connection with enforcement actions or investigations against our38company in connection with any of the foregoing laws may also require us to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or could increase our operating costs.Our customers’ and other users’ violation of our policies or other misuse of our platform to transmit unauthorized, offensive or illegal messages, spam, phishing scams, and website links to harmful applications or for other fraudulent or illegal activity could damage our reputation, and we may face a risk of litigation and liability for illegal activities on our platform and unauthorized, inaccurate, or fraudulent information distributed via our platform.The actual or perceived improper sending of text messages or voice calls may subject us to potential risks, including liabilities or claims relating to consumer protection laws and regulatory enforcement, including fines. For example, the Telephone Consumer Protection Act of 1991 (“TCPA”) restricts telemarketing and the use of automatic SMS text messages without explicit customer consent. TCPA violations can result in significant financial penalties, as businesses can incur penalties or criminal fines imposed by the FCC or be fined up to $1,500 per violation through private litigation or state attorneys general or other state actor enforcement.Class action suits are the most common method for private enforcement. This has resulted in civil claims against our company and requests for information through third‑party subpoenas. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages or voice calls are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face direct liability.Moreover, despite our ongoing and substantial efforts to limit such use, certain customers may use our platform to transmit unauthorized, offensive or illegal messages, calls, spam, phishing scams, and website links to harmful applications, reproduce and distribute copyrighted material or the trademarks of others without permission, and report inaccurate or fraudulent data or information. These issues also arise with respect to a portion of those users who use our platform on a free trial basis or upon initial use. These actions are in violation of our policies, in particular, our Acceptable Use Policy. However, our efforts to defeat spamming attacks, illegal robocalls and other fraudulent activity will not prevent all such attacks and activity. Such use of our platform could damage our reputation and we could face claims for damages, regulatory enforcement, copyright or trademark infringement, defamation, negligence, or fraud. Furthermore, enacting more stringent controls on our customers’ use of our platform to combat such violations of our Acceptable Use Policy could increase friction for our legitimate customers and decrease their use of our platform.Moreover, our customers’ and other users’ promotion of their products and services through our platform might not comply with federal, state, and foreign laws or of contractual requirements imposed by carriers, such as the CTIA Shortcode Agreement and associated policies. We rely on contractual representations made to us by our customers that their use of our platform will comply with our policies and applicable law, including, without limitation, our email and messaging policies. Although we retain the right to verify that customers and other users are abiding by certain contractual terms, our Acceptable Use Policy and our email and messaging policies and, in certain circumstances, to review their email, messages and distribution lists, our customers and other users are ultimately responsible for compliance with our policies, and we do not systematically audit our customers or other users to confirm compliance with our policies. We cannot predict whether our role in facilitating our customers’ or other users’ activities would expose us to liability under applicable state or federal law, or whether that possibility could become more likely if changes to current laws regulating content moderation, such as Section 230 of the Communications Decency Act are enacted. There are various Congressional, FCC and executive efforts to eliminate or restrict the scope of the protections under Section 230, which limits the liability of internet platforms for third-party content that is transmitted via those platforms and for good-faith moderation of offensive content. In addition, Florida and Texas adopted statutes intended to reduce or eliminate the protections granted under Section 230, although implementation of both statutes has been stayed by federal courts, and similar legislation was introduced in other states in 2021. Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ or other users’ activities, we could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.Our use of open source software could negatively affect our ability to sell our products and subject us to possible litigation.Our products and platform incorporate open source software, and we expect to continue to incorporate open source software in our products and platform in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products and platform. Moreover, although we have implemented policies to regulate the use and incorporation of open source software into our products and platform, we cannot be certain that39we have not incorporated open source software in our products or platform in a manner that is inconsistent with such policies. If we fail to comply with open source licenses, we may be subject to certain requirements, including requirements that we offer our products that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from generating revenue from customers using products that contained the open source software and required to comply with onerous conditions or restrictions on these products. In any of these events, we and our customers could be required to seek licenses from third parties in order to continue offering our products and platform and to re-engineerre‑engineer our products or platform or discontinue offering our products to customers in the event re-engineeringre‑engineering cannot be accomplished on a timely basis. Any of the foregoing could require us to devote additional research and development resources to re-engineerre‑engineer our products or platform, could result in customer dissatisfaction and may adversely affect our business, results of operations and financial condition.We may acquire or invest in companies, which may divert our management's attention and result in debt or dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their products or services are not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions also may disrupt our business, divert our resources or require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities. Negotiating these transactions can be time consuming, difficult and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. For one or more of those transactions, we may:•issue additional equity securities that would dilute our existing stockholders;•use cash that we may need in the future to operate our business;•incur large charges or substantial liabilities;•incur debt on terms unfavorable to us or that we are unable to repay;•encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; or•become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges. The occurrence of any of these foregoing could adversely affect our business, results of operations and financial condition.We depend largely on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition. Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, to develop our products and platform, to deliver our products to customers, to attract and retain customers and to identify and pursue opportunities. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience and effort of our co-founder and Chief Executive Officer, Jeff Lawson. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may terminate employment with us at any time with no advance notice. On November 12, 2018, our Chief Financial Officer, Lee Kirkpatrick, resigned as our Chief Financial Officer and Khozema Shipchandler succeededhim as Chief Financial Officer at that time. Though Mr. Kirkpatrick will remain a consultant for a transition period ending in April 2019, we could experience a delay or disruption in the achievement of our business objectives during the period our new Chief Financial Officer gets up to speed on our business and financial and accounting systems. The replacement of any other of our senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of any of our senior management or other key employees for any reason could adversely affect our business, results of operations and financial condition.If we are unable to hire, retain and motivate qualified personnel, our business will suffer. Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. We believe that there is, and will continue to be, intense competition for highly skilled management, technical, sales and other personnel with experience in our industry in the San Francisco Bay Area, where our headquarters are located, and in other locations where we maintain offices. We must provide competitive compensation packages and a high quality work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing and sale of our products, which could adversely affect our business, results of operations and financial condition. To the extent we hire personnel from competitors, we also may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key personnel. Many of our key personnel are, or will soon be, vested in a substantial number of shares of Class A common stock or stock options. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the trading price of our Class A common stock. If we are unable to retain our employees, our business, results of operations and financial condition could be adversely affected.Our products and platform and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection and information security, and our customers may be subject to regulations related to the handling and transfer of certain types of sensitive and confidential information. Any failure of our products to comply with or enable our customers and channel partners to comply with applicable laws and regulations would harm our business, results of operations and financial condition. We and our customers that use our products may be subject to privacy- and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of personal data, financial data, health or other similar data. The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information of individuals. The U.S. Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. Similarly, many foreign countries and governmental bodies, including the European Union ("EU") member states, have laws and regulations concerning the collection and use of personally identifiable information obtained from individuals located in the EU or by businesses operating within their jurisdiction, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personallyidentifiable information that identifies or may be used to identify an individual, such as names, telephone numbers, email addresses and, in some jurisdictions, IP addresses and other online identifiers. For example, in April 2016 the EU adopted the General Data Protection Regulation ("GDPR"), which took full effect on May 25, 2018. The GDPR enhances data protection obligations for businesses and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of €20 million or 4% of global annual revenues. Given the breadth and depth of changes in data protection obligations, preparing to meet the requirements of GDPR has required significant time and resources, including a review of our technology and systems currently in use against the requirements of GDPR. There are also additional EU laws and regulations (and member states implementations thereof) which govern the protection of consumers and of electronic communications. If our efforts to comply with GDPR or other applicable EU laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and results of operations, and our ability to conduct business in the EU could be significantly impaired. We have in the past relied on the EU-U.S and the Swiss-U.S. Privacy Shield frameworks approved by the European Commission in July 2016 and the Swiss Government in January 2017, respectively, which were designed to allow U.S. corporations to self-certify to the U.S. Department of Commerce and publicly commit to comply with the Privacy Shield requirements to freely import personal data from the EU and Switzerland. However, ongoing legal challenges to these frameworks has resulted in some uncertainty as to their validity. While our Binding Corporate Rules, approved in May 2018, now serve as our primary mechanism to legitimize data transfers from the European Economic Area, we may nonetheless experience hesitancy, reluctance, or refusal by European or multinational customers to continue to use our services due to the potential risk exposure to such customers as a result of a European Union Court of Justice ruling negatively impacting the Privacy Shield frameworks. We and our customers are at risk of enforcement actions taken by an EU data protection authority until such point in time that we are able to ensure that all data transfers to us from the European Economic Area are legitimized. In addition, as the United Kingdom transitions out of the EU, we may encounter additional complexity with respect to data privacy and data transfers from the U.K. Furthermore, outside of the EU, we continue to see increased regulation of data privacy and security, including the adoption of more stringent subject matter specific state laws in the United States. For example, on June 28, 2018, California enacted the California Consumer Privacy Act (CCPA), which takes effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent state privacy legislation in the U.S., which could increase our potential liability and adversely affect our business. As well, we continue to see jurisdictions imposing data localization laws, which require personal information, or certain subcategories of personal information to be stored in the jurisdiction of origin. These regulations may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs The uncertainty and changes in the requirements of multiple jurisdictions may increase the cost of compliance, delay or reduce demand for our services, restrict our ability to offer services in certain locations, impact our customers' ability to deploy our solutions in certain jurisdictions, or subject us to sanctions, by national data protection regulators, all of which could harm our business, financial condition and results of operations. Additionally, although we endeavor to have our products and platform comply with applicable laws and regulations, these and other obligations may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements, contractual commitments or our internal practices We also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data or may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy- or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection. We expect that there will continue to be new proposed laws, rules of self-regulatory bodies, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, rules, regulations and standards may have on our business. Moreover, existing U.S. federal and various state and foreign privacy- and data protection-related laws and regulations are evolving and subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current or enact new laws and regulations regarding privacy- and data protection-related matters. Because global laws, regulations and industry standards concerning privacy and data security have continued to develop and evolve rapidly, it is possible that we or our products or platform may not be, or may not have been, compliant with each such applicable law, regulation and industry standard and compliance with such new laws or to changes to existing laws may impact our business and practices, require us to expend significant resources to adapt to these changes, or to stop offering our products in certain countries. These developments could adversely affect our business, results of operations and financial condition. Any failure or perceived failure by us, our products or our platform to comply with new or existing U.S., EU or other foreign privacy or data security laws, regulations, policies, industry standards or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in governmental investigations, inquiries, enforcement actions and prosecutions, private litigation, fines and penalties, adverse publicity or potential loss of business. For example, on February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California. The complaint alleged that our products permit the interception, recording and disclosure of communications at a customer's request and in violation of the California Invasion of Privacy Act. This litigation, or any other such actions in the future and related penalties could divert management's attention and resources, adversely affect our brand, business, results of operations and financial condition.The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communications and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our products and platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-relatedInternet‑related commerce or communications generally or result in reductions in the demand for Internet-basedInternet‑based products and services such as our products and platform. In particular, a re-adoption of “network neutrality” rules in the United States, which President Biden supported during his campaign, could affect the services used by us and our customers. California’s state network neutrality law went into effect after a federal district court denied a motion for preliminary injunction on March 10, 2021, and that decision was affirmed by the U.S. Court of Appeals for the Ninth Circuit on January 28, 2022. A number of other states have adopted or are adopting or considering legislation or executive actions that would regulate the conduct of broadband providers. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use,ease‑of‑use, accessibility and quality of service. The performance of the Internet and its"viruses", "worms",“viruses,” “worms,” and similar malicious programs. If the use of the Internet is reduced as a result of these or other issues, then demand for our products could decline, which could adversely affect our business, results of operations and financial condition.Certain of our products areThe technology industry is subject to telecommunications-related regulations, and future legislative or regulatory actions could adversely affect our business, results of operations and financial condition. As a provider of communications products, we are subject to existing or potential Federal Communications Commission ("FCC") regulations relating to privacy, Telecommunications Relay Service fund contributions and other requirements. FCC classification of our Internet voice communications products as telecommunications servicesincreasing scrutiny that could result in additional federalgovernment actions that would negatively affect our business.The technology industry is subject to intense media, political and state regulatory obligations.scrutiny, both domestic and foreign, including on issues related to antitrust, privacy, and artificial intelligence, which exposes us to government investigations, legal actions and penalties. For instance, various regulatory agencies, including competition and consumer protection authorities, have active proceedings and investigations concerning multiple technology companies on antitrust and other issues. If we do not comply with FCC rules and regulations,become subject to such investigations, we could be subject to FCC enforcement actions, fines, loss of licenses and possibly restrictions on our ability to operate or offer certain of our products. Any enforcement action by the FCC, which may be a public process, would hurt our reputation in the industry, possibly impair our ability to sell our products to customers and could adversely affect our business, results of operations and financial condition. Our products are subject to a number of FCC regulations and laws that are administered by the FCC. Among others, we must comply (in whole or in part) with:•the Communications Act of 1934, as amended, which regulates communications services and the provision of such services;•the Telephone Consumer Protection Act , which limits the use of automatic dialing systems, artificial or prerecorded voice messages, SMS text messages and fax machines;•the Communications Assistanceliable for Law Enforcement Act ("CALEA"), which requires covered entities to assist law enforcement in undertaking electronic surveillance;•requirements to safeguard the privacy of certain customer information;•payment of annual FCC regulatory fees based on our interstate and international revenues;•rules pertaining to access to our services by people with disabilities and contributions to the Telecommunications Relay Services fund; and•FCC rules regarding the use of customer proprietary network information. If we do not comply with any current or future rules or regulations that apply to our business, we could be subject to substantial fines and penalties, be required to change our products and services or alter our business operations, receive negative publicity, or be subject to civil litigation, all of which could harm our business. Lawmakers also have proposed new laws and regulations, and modifications to existing laws and regulations, that affect the activities of technology companies, such as the recent legislative efforts to eliminate or modify Section 230 of the Communications Decency Act and to regulate platforms that offer apps and other similar actions in some U.S. states. If such laws and regulations are enacted or modified, they could impact us, even if they are not intended to affect our company. In addition, the introduction of new products and services, expansion of our activities in certain jurisdictions, or other actions that we may havetake may subject us to restructure our offerings, exitadditional laws, regulations, and other scrutiny. The increased scrutiny of certain markets or raiseacquisitions in the price of our products. In addition, any uncertainty regarding whether particular regulations apply to our business, and how they apply,technology industry also could increase our costs or limitaffect our ability to grow. Anyenter into strategic transactions or to acquire other businesses.Compliance with new or modified laws and regulations could increase the cost of conducting our business, limit the foregoingopportunities to increase our revenues, or prevent us from offering products or services. While we have adopted policies and procedures designed to ensure compliance with applicable laws and regulations, there can be no assurance that our employees, contractors or agents will not violate such laws and regulations. If we are found to have violated laws and regulations, it could materially adversely affect our business,reputation, financial condition and results of operationsoperations.40We also could be harmed by government investigations, litigation, or changes in laws and financial condition. As we continueregulations directed at our customers, business partners, or suppliers in the technology industry that have the effect of limiting our ability to expand internationally, we have become subjectdo business with those entities. There can be no assurance that our business will not be materially adversely affected, individually or in the aggregate, by the outcomes of such investigations, litigation or changes to telecommunications laws and regulations in the foreign countries where we offer our products. Internationally, we currently offer our productsfuture.The standards imposed by private entities and inbox service providers to regulate the use and delivery of email have in over 180 countries. Our international operations are subject to country-specific governmental regulation and related actions that have increasedthe past interfered with, and may continue to increase our costs or impact our products and platform or prevent us from offering or providing our products in certain countries. Certaininterfere with, the effectiveness of our productsplatform and our ability to conduct business.From time to time, some of our IP addresses have become, and we expect will continue to be, listed with one or more denylisting entities due to the messaging practices of our customers and other users. We may be used by customers located in countries where voiceat an increased risk of having our IP addresses denylisted due to our scale and other formsvolume of IP communications mayemail processed, compared to our smaller competitors. There can be illegal or require special licensing or in countries on a U.S. embargo list. Even where our products are reportedly illegal or become illegal or where users are located in an embargoed country, users in those countries mayno guarantee that we will be able to continue to use our products insuccessfully remove ourselves from those countriesTablelists. Because we fulfill email delivery on behalf of Contentsnotwithstanding the illegality or embargo. We may be subject to penalties or governmental action if consumers continue to use our products in countries where it is illegal to do so, and any such penalties or governmental action may be costly and may harm our business and damage our brand and reputation. We may be required to incur additional expenses to meet applicable international regulatory requirements or be required to discontinue those services if required by law or if we cannot or will not meet those requirements.If we are unable to effectively process local number and toll-free number portability provisioning in a timely manner or to obtain or retain direct inward dialing numbers and local or toll-free numbers, our business and results of operations may be adversely affected. We support local number and toll-free number portability, which allows our customers, to transfer their existing phone numbers to us and thereby retain their existing phone numbers when subscribing to our voice products. Transferring existing numbers is a manual process that can take up to 15 business days or longer to complete. A new customerdenylisting of this type could undermine the effectiveness of our voice products must maintain both our voice productcustomers’ transactional email, email marketing programs and the customer's existing phone service during the number transferring process. Any delay that we experience in transferring these numbers typically results from the fact that we depend on network service providers to transfer these numbers, a process that we do not control, and these network service providers may refuse or substantially delay the transfer of these numbers to us. Local number portability is considered an important feature by many potential customers, and if we fail to reduce any related delays, then we may experience increased difficulty in acquiring new customers. In addition, our future success depends in part on our ability to procure large quantities of local and toll-free direct inward dialing numbers ("DIDs"), in the United States and foreign countries at a reasonable cost and without restrictions. Our ability to procure, distribute and retain DIDs depends on factors outside of our control, such as applicable regulations, the practices of network service providers that provide DIDs, such as offering DIDs with conditional minimum volume call level requirements, the cost of these DIDs and the level of overall competitive demand for new DIDs. In addition, in order to procure, distribute and retain telephone numbers from the European Union or certain other regions, we are often required to register with the local telecommunications regulatory authorities, some of which have been increasingly monitoring and regulating the categories of phone numbers that are eligible for provisioning to our customers. We are in the process of registering in various countries in which we do business, but in some countries, the regulatory regime around provisioning of phone numbers is unclear, subject to change over time, and sometimes may conflict from jurisdiction to jurisdiction. Furthermore, these regulations and governments' approach to their enforcement, as well as our products and services, are still evolving and we may be unable to maintain compliance with applicable regulations, or enforce compliance by our customers, on a timely basis or without significant cost. Also, compliance with these types of regulation may require changes in products or business practices that result in reduced revenue. If we or our customers use phone numbers in these countries in a manner that violates applicable rules and regulations, we may also be subject to significant penalties or governmental action, including government-initiated audits and, in extreme cases, may be precluded from doing business in that particular country. In the event of such non-compliance, we may be forced to reclaim phone numbers from our customers, which could result in loss of customers, breach of contract claims, loss of revenue and reputational harm,email communications, all of which could have a material adverse effectnegative impact on our business, financial condition and results of operationsoperations.Additionally, inbox service providers can block emails from reaching their users or categorize certain emails as “promotional” emails and, financial condition. Dueas a result, direct them to their limited availability, there are certain popular area code prefixes thatan alternate or “tabbed” section of the recipient’s inbox. While we generally cannot obtain. Our inabilitycontinually improve our own technology and work closely with inbox service providers to acquiremaintain our deliverability rates, the implementation of new or retain DIDs for our operations wouldmore restrictive policies by inbox service providers may make our voice and messaging products less attractive to potential customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other providers of cloud communications, has increased, which increases our dependence on needing sufficiently large quantities of DIDs. It may become increasinglyit more difficult to source larger quantitiesdeliver our customers’ emails, particularly if we are not given adequate notice ofDIDs as we scaletime. If the open rates of our customers’ emails are negatively impacted by the actions of inbox service providers to block or categorize emails then customers may question the effectiveness of our platform and we may need to pay higher costs for DIDs, and DIDs may become subject to more stringent regulation or conditions of usage such as the registration and on-going compliance requirements discussed above. Any of the foregoingcancel their accounts. This, in turn, could adversely affectharm our business, financial condition and results of operations.Our global operations and financial condition.We face a risk of litigation resulting from customer misuse of our software to send unauthorized text messages in violation of the Telephone Consumer Protection Act. The actual or perceived improper sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws. For example, the Telephone Consumer Protection Act of 1991 restricts telemarketingliability under export control, economic trade sanctions, anti-corruption, and the use of automatic SMS text messages without proper consent. This has resulted in civil claims against our companyother laws and requests for information through third-party subpoenas. The scoperegulations, and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face direct liability.We may be subject to governmental export controls and economic sanctions regulations thatsuch violations could impair our ability to compete in international markets due to licensing requirements and could subject us to liability if we are not infor compliance with applicable laws.Certain of our products and services may be subject to export control and economic sanctions laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department'sDepartment’s Office of Foreign Assets Controls.Control. Exports of our products and the provision of our services must be made in compliance with these laws and regulations.requirements. Although we take precautions to prevent our products from being provided in violation of such laws, we are aware of previous exports of certain of our products to a small number of persons and organizations that are the subject of U.S. sanctions or located in countries or regions subject to U.S. sanctions. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular deployment may be time-consuming,time‑consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our products or services, or changes in applicable export or economic sanctions regulations may create delays in the introduction and deployment of our products and services in international markets, or, in some cases, prevent the export of our products or provision of our services to certain countries or end users. Any change in trade protection laws, policies, export, or economic sanctions regulations,and other regulatory requirements affecting trade and investments, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our products and services, or in our decreased ability to export our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitationlimitations on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.Further, we incorporate encryption technology into certain of our products. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our customers'customers’ ability to import our products into those countries. Encryption products and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of exports of encryption products, or our failure to obtain required approval for our products, when applicable, could41operations from deploying our products and using our services throughout their globally-distributedglobally‑distributed systems or, in some cases, prevent the export of our products or provision of our services to some countries altogether.We are also subject to U.S. and foreign anti-corruption and anti-bribery laws, including the Foreign Corrupt Practices Act, as amended, the UK Bribery Act 2010, and other anti-corruption laws and regulations in the countries in which we conduct activities.Anti-corruption laws are interpreted broadly and generally prohibit corrupt payments by our employees and third parties acting on our behalf from directly or indirectly authorizing, offering, or providing, improper payments or things of value to recipients in the public or private sector, and also require that we maintain accurate books and records and adequate internal controls. While we have implemented a global compliance program designed to reduce the risk of bribery and corruption-related violations, our employees or third parties acting on our behalf may fail to comply with our policies, resulting in violations of applicable anti-corruption laws and regulations. Such violations could result in significant fines and penalties, criminal liability for us, our individual officers or employees, prohibitions on our ability to conduct business, and potential reputational damageOur reliance on SaaS technologies from third parties may adversely affect our business, results of operations and financial condition.We rely on hosted SaaS technologies from third parties in order to operate critical internal functions of our business, including enterprise resource planning, customer support and customer relations management services. If these services become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms or prices, our expenses could increase. As a result, our ability to manage our operations could be interrupted and our processes for managing our sales process and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business, results of operations and financial condition.We may have additional tax liabilities, which could harm our business, results of operations and financial condition.Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our tax expense may be impacted, for example, if tax laws change or are clarified to our detriment or if tax authorities successfully challenge the tax positions that we take, such as, for example, positions relating to the arms-lengtharms‑length pricing standards for our intercompany transactions and our state sales and useindirect tax positions. In determining the adequacy of our provision for income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service ("IRS"(“IRS”), and other tax authorities. Should the IRS or other tax authorities assess additional taxes as a result of examinations, we may be required to record charges to operations that could adversely affect our results of operations and financial condition. We are currently in discussions with certain states regarding prior state sales taxes that we may owe. We have reserved $22.6 million on our December 31, 2018 balance sheet for these tax payments. The actual exposure could differ materially from our current estimates, and if the actual payments we make to these and other states exceed the accrual in our balance sheet, our results of operations would be harmed.We could be subject to liability for historical and future sales, use and similar taxes, which could adversely affect our results of operations.We conduct operations in many tax jurisdictions throughout the United States.States and internationally. In many of these jurisdictions, non-income-basednon‑income‑based taxes, such as sales, and useVAT, GST, and telecommunications taxes, are assessed on our operations.operations or our sales to customers. We are subject to indirect taxes, and may be subject to certain other taxes, in some of these jurisdictions. We collect certain telecommunications‑based taxes from our customers in certain jurisdictions, and we expect to continue expanding the number of jurisdictions in which we will collect these taxes in the future.Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Following the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., states are now free to levy taxes on sales of goods and services based on an “economic nexus,” regardless of whether the seller has a physical presence in the state. Any additional fees and taxes levied on our services by any state may adversely impact our results of operations.Historically, we have not billed or collected these taxes in certain jurisdictions and, in accordance with generally accepted accounting principles in the United States ("(“U.S. GAAP"GAAP”), we have recorded a provision for our tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. We reserved $25.4 million and $17.7 million for domestic jurisdictions and jurisdictions outside of the U.S., respectively, on our December 31, 2021 balance sheet for these tax payments. These estimates include several key assumptions, including, but not limited to, the taxability of our products, the jurisdictions in which we believe we have nexus or a permanent establishment, and the sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates. We may be subject If the actual payments we make to scrutiny from state tax authoritiesany jurisdiction exceed the accrual in various jurisdictions and may have additional exposure related to our historical operations. Furthermore, certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affectbalance sheet, our business, results of operations and financial condition. Effective March 2017, we began collecting telecommunications-based taxes from our customers in certain jurisdictions. Since then, we have added more jurisdictions where we collect these taxes and we expect to continue expanding the number of jurisdictions in which we will collect these taxes in the future. Somewould be harmed. In addition, some customers may question the incremental tax charges and some may seek to negotiate lower pricing from us, which could adversely affect our business, results of operations and financial condition.We are in discussions with certain jurisdictions regarding potential sales and other indirect taxes for prior periods that we may owe. If any of ContentsOur global operations and structure subject us to potentially adverse tax consequences.We generally conduct our global operations through subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. In particular, our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Also, our tax expense could be affected depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. The relevant revenue and taxing authorities may disagree with positions we have taken generally, or our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-timeone‑time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.Changes in global and U.S. tax legislation may adversely affect our financial condition, results of operations, and cash flows.We are unable to predict what global or U.S. tax reforms may be proposed or enacted in the future or what effects such future changes would have on our business. Any such changes in tax legislation, regulations, policies or practices in the jurisdictions in which we operate could increase the estimated tax liability that we have expensed to date and paid or accrued on our balance sheet; affect our financial position, future results of operations, cash flows, and effective tax rates where we have operations; reduce post-tax returns to our stockholders; and increase the complexity, burden, and cost of tax compliance. We are subject to potential changes in relevant tax, accounting, and other laws, regulations, and interpretations, including changes to tax laws applicable to corporate multinationals. For example, in the United States, Congress and the Biden administration have recently proposed legislation (which has not yet been enacted) to make various tax law changes, including to increase U.S. taxation of international business operations and impose a global minimum tax. While it is too early to predict the outcome of these proposals and they are subject to change, if enacted, they could have a material effect on our income tax liability.Certain government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational companies. In addition, the OrganizationOrganisation for Economic Co-operationCo‑operation and Development (the “OECD”) is conducting a project focused on base erosion and profit shifting in international structures, which seeks to establish certain international standards for taxing the worldwide income of multinational companies. In addition, the OECD is working on a “BEPS 2.0” initiative, which is aimed at (i) shifting taxing rights to the jurisdiction of the consumer and (ii) ensuring all companies pay a global minimum tax. On October 8, 2021, the OECD announced an agreement by members of the Inclusive Framework delineating an implementation plan, and on December 20, 2021, the OECD released model rules for the domestic implementation of a 15% global minimum tax. Further, several countries have proposed or enacted taxes applicable to digital services, which could apply to our business. As a result of these developments, the tax laws of certain countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position.ChangesThe governments of countries in which we operate and other governmental bodies could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations in our tax returns filed in such jurisdictions. New laws could significantly increase our tax obligations in the U.S. taxationcountries in which we do business or require us to change the way we operate our business. As a result of international business activities or the adoption of other tax reform policies could materially impact our business, results of operationslarge and financial condition. Changes to U.S. tax laws that may be enacted in the future could impact the tax treatment of our foreign earnings. Due to the expansionexpanding scale of our international business activities, anymany of these changes into the U.S. taxation of suchour activities maycould increase our worldwide effective tax rate and adversely affectharm our business,financial position, results of operations, and financial condition.43If we experience excessive credit card or fraudulent activity relating to our products, we could incur substantial costs. Most of our customers authorize us to bill their credit card accounts directly for service fees that we charge. If people pay for our services with stolen credit cards, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our customers provide us with credit card billing information online, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent activity. We also incur charges, which we refer to as chargebacks, from the credit card companies from claims that the customer did not authorize the credit card transaction to purchase our services. If the number of unauthorized credit card transactions becomes excessive, we could be assessed substantial fines for excess chargebacks and we could lose the right to accept credit cards for payment.Our products may also be subject to fraudulent usage, including but not limited to revenue share fraud, domestic traffic pumping, subscription fraud, premium text message scams and other fraudulent schemes. Although our customers are required to set passwords or personal identification numbers to protect their accounts, third parties have in the past been, and may in the future be, able to access and use their accounts through fraudulent means. Furthermore, spammers attempt to use our products to send targeted and untargeted spam messages. We cannot be certain that our efforts to defeat spamming attacks will be successful in eliminating all spam messages from being sent using our platform. In addition, a cybersecurity breach of our customers'customers’ systems could result in exposure of theirUnfavorable conditions in our industry or the global economy or reductions in spending on information technology and communications could adversely affect our business, results of operations and financial condition. Our results of operations may vary based on the impact of changes in our industry or the global economy on our customers. Our results of operations depend in part on demand for information technology and cloud communications. In addition, our revenue is dependent on the usage of our products, which in turn is influenced by the scale of business that our customers are conducting. To the extent that weak economic conditions result in a reduced volume of business for, and communications by, our customers and prospective customers, demand for, and use of, our products may decline. Furthermore, weak economic conditions may make it more difficult to collect on outstanding accounts receivable. Additionally, historically, we have generated the substantial majority of our revenue from small and medium-sized businesses, and we expect this to continue for the foreseeable future. Small and medium-sized business may be affected by economic downturns to a greater extent than enterprises, and typically have more limited financial resources, including capital borrowing capacity, than enterprises. If our customers reduce their use of our products, or prospective customers delay adoption or elect not to adopt our products, as a result of a weak economy, this could adversely affect our business, results of operations and financial condition.We may require additional capital to support our business, and this capital might not be available on acceptable terms, if at all.We intend to continue to make investments to support our business and may require additional funds. In particular, we may seek additional funds to develop new products and enhance our platform and existing products, expand our operations, including our sales and marketing organizations and our presence outside of the United States, improve our infrastructure or acquire complementary businesses, technologies, services, products and other assets. In addition, we may use a portion of our cash to satisfy tax withholding and remittance obligations related to outstanding restricted stock units. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A and Class B common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and to respond to business challenges could be significantly impaired, and our business, results of operations and financial condition may be adversely affected.We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect our business, results of operations and financial condition.As our international operations expand, our exposure to the effects of fluctuations in currency exchange rates grows. For example, global political and economic events, such as the COVID-19 pandemic, trade tariff developments and other geopolitical events have caused global economic uncertainty and variability in foreign currency exchange rates. While we have primarily transacted with customers and business partners in U.S. dollars, we have transacted with customersalso conducted business in Japan in Japanese Yen and in Europe in Euros and Swedish Kronas.currencies other than the U.S. dollar. We expect to significantly expand the number of transactions with customers that are denominated in foreign currencies in the future as we continue to expand our business internationally.non-U.S.non‑U.S. locations in the respective local currency for such locations.currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in an increase to the U.S. dollar equivalent of such expenses.In addition, our international subsidiaries maintain net assets that are denominated in currencies other than the functional operating currencies of these entities. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our results of operations due to transactional and translational remeasurements. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors and securities analysts who follow our stock, the trading price of our Class A common stock could be adversely affected.We do not currently maintainrecently implemented a program to hedge transactional exposures in foreign currencies. However,exposure against the Euro, and may do so in the future we maywith respect to other foreign currencies. We also use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.44Our ability to use our net operating losses and certain other tax attributes to offset future taxable income and taxes may be subject to certain limitations.As of December 31, 2018,2021, we had federal, state and foreign net operating loss carryforwards ("NOLs"(“NOLs”), of $452.7$4.2 billion, $2.7 billion and $268.7 million, $347.1 millionrespectively. Utilization of these NOL carryforwards depends on our future taxable income, and $8.1 million, respectively, duethere is risk that a portion of our existing NOLs could expire unused, and that even if we achieve profitability, the use of our unexpired NOLs would be subject to prior period losses. In general, under Sectionlimitations, which could materially and adversely affect our operating results.U.S. federal NOLs generated in taxable years beginning before January 1, 2018, may be carried forward only 20 years to offset future taxable income, if any. Under current law, U.S. federal NOLs generated in taxable years beginning after December 31, 2017, can be carried forward indefinitely, but the deductibility of such U.S. federal NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to federal law.Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"“Code”), and corresponding provisions of state law, a corporation that undergoes an "ownership change"“ownership change” (generally defined as a greater than 50-percentage-point50‑percentage‑point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-yearthree‑year period) is subject to limitations on its ability to utilize its pre‑change NOLs and other pre-change NOLstax attributes to offset post-changepost‑change taxable income.income and taxes. Our existing NOLs and other tax attributes may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in the future, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. On December 22, 2017, In addition, at the U.S. government enacted new 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 changes to the uses and limitations of net operating losses. For example, while the Tax Act allows for federal net operating losses incurred in tax years beginning after December 31, 2017 tostate level, there may be carried forward indefinitely, the Tax Act also imposes an 80% limitation onperiods during which the use of net operating losses that are generated in tax years beginning after December 31, 2017. However, net operating losses generated prior to December 31, 2017 will still have a 20-year carryforward period, but are not subject to the 80% limitation. Furthermore, our ability to utilize our net operating lossesNOL carryforwards is conditioned upon our maintaining profitability in the future and generating U.S. federal taxable income. Since we do not know whethersuspended or when we will generate the U.S. federal taxable income necessary to utilize our remaining net operating losses, these net operating loss carryforwards generated prior to December 31, 2017otherwise limited, which could expire unused.The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in Part II,I, Item 7, "Management's2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations."” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition capitalization of our internal-use software development costs and stock-based compensation.business combinations. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common stock.Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our results of operations.A change in accounting standards or practices may have a significant effect on our results of operations and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.For example, a new accounting guidance, Accounting Standards Codification ("ASC"(“ASC”) 606,"Revenue from Contracts with Customers",842, “Leases” that became effective on January 1, 2018. We adopted ASC 606 on January 1, 2018, and it resulted in an adjustment of $0.7 million to our opening retained earnings as of January 1, 2018. Although this accounting guidance did not have2019, had a material impact on our consolidated financial statements there may be other standards that can become effectiveas described in detail in Note 2 to the future that may have a material impact on our consolidated financial statements such as Accounting Standards Update ("ASU") 2016-12,"Leases", which will become effectiveincluded in our Annual Report on January 1, 2019, and will result in a significant gross up of our assets and liabilities.Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021. Adoption of these types of accounting standards and any difficulties in implementation of changes in accounting principles, including the ability to modify our accounting systems, could cause us to fail to meet our financial reporting obligations, which result in regulatory discipline and harm investorsinvestors' confidence in us.If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-OxleySarbanes‑Oxley Act of 2002 or the Sarbanes-Oxley Act,(the “Sarbanes‑Oxley Act”) requires that45we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. We reported in our Annual Report on Form 10-K as of December 31, 2017, a material weakness related to the tracking of qualifying internal use software development costs eligible for capitalization. During 2018, we completed the remediation measures related to our previously reported materialweakness, and concluded that our internal control over financial reporting was effective as of December 31, 2018. However, completion of remediation does not provide assurance that our remediated controls will continue to operate properly or that our financial statements will be free from error.If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of December 31, 2018,2021, we carried a net $63.3 million$6.3 billion of goodwill and intangible assets related to acquired businesses.assets. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may adversely affect our results of operations.Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or flood, occurring at our headquarters, at one of our other facilities or where a business partner is located could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect our service providers, this could adversely affect the ability of our customers to use our products and platform. In addition, natural disasters and acts of terrorism could cause disruptions in our or our customers' businesses, national economies or the world economy as a whole. We also rely on our network and third-party infrastructure and enterprise applications and internal technology systems for our engineering, sales and marketing, and operations activities. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent in our industry, have occurred on our platform in thepast and may occur on our platform in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, integrity and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to retain existing users and attract new users.
Risks Related to Ownership of Our Class A Common StockThe trading price of our Class A common stock has been volatile and may continue to be volatile, and you could lose all or part of your investment.Prior to our initial public offering in June 2016, there was no public market for shares of our Class A common stock. On June 23, 2016, we sold shares of our Class A common stock to the public at $15.00 per share. From June 23, 2016, the date that our Class A common stock started trading on the New York Stock Exchange, through JanuaryDecember 31, 2019,2021, the trading price of our Class A common stock has ranged from $22.80 per share to $113.3$457.30 per share. The trading price of our Class A common stock may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:•price and volume fluctuations in the overall stock market from time to time;•volatility in the trading prices and trading volumes of technology stocks;•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;•sales of shares of our Class A common stock by us or our stockholders;•failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;•the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;•announcements by us or our competitors of new products or services;•the public'spublic’s reaction to our press releases, other public announcements and filings with the SEC;46•rumors and market speculation involving us or other companies in our industry;•changes in laws, industry standards, regulations or regulatory enforcement in the United States or internationally, GDPR, the California Consumer Privacy Act of 2018 and other privacy or cybersecurity regulations that may be implemented in the future, including the Schrems II decision invalidating the EU-U.S. Privacy Shield, SHAKEN/STIR and other robocalling prevention and anti-spam standards and increased costs associated with such compliance, as well as enhanced Know-Your-Client processes that impact our ability to market, sell or deliver our products;•actual or anticipated changes in our results of operations or fluctuations in our results of operations;•actual or anticipated developments in our business, our competitors'competitors’ businesses or the competitive landscape generally;•litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;•developments or disputes concerning our intellectual property or other proprietary rights;•announced or completed acquisitions of businesses, products, services or technologies by us or our competitors;•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;••general economic conditions, including due to the COVID-19 pandemic, labor shortages, supply chain disruptions, inflation and slow or negative growth of our markets.In addition, in the past, following periods of volatility in the overall market and the market price of a particular company'scompany’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management'smanagement’s attention and resources.Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline.The market price of our Class A common stock could decline as a result of substantial sales of our Class A common stock, particularly sales by our directors, executive officers and significant stockholders, or the perception in the market that holders of a large number of shares intend to sell their shares.Additionally, the shares of Class A common stock subject to outstanding options and restricted stock unit awards under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market upon issuance, subject to applicable insider trading policies. Certain holders of our Class A common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for our stockholders or ourselves.47The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our initial public offering, including our directors, executive officers and their respective affiliates. This limits or precludes yourholders of our Class A common stock from the ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. As of December 31, 2018,2021, our directors, executive officers and their respective affiliates, held in the aggregate 48.8%21.3% of the voting power of our capital stock. Because of the 10-to-one10‑to‑one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively will continue to have concentrated control a majority of the combined voting power of our common stock and therefore may be able to control allcertain matters submitted to our stockholders for approval until the earlier of (i) June 28, 2023, or (ii) the date the holders of two-thirdstwo‑thirds of our Class B common stock elect to convert the Class B common stock to Class A common stock. This concentrated control limits or precludes your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term.The trading market for our Class A common stock is influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who cover us change their recommendation regarding our Class A common stock adversely, or provide more favorable relative recommendations about our competitors, the trading price of our Class A common stock would likely decline. If any analyst who covers us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price of our Class A common stock or trading volume to decline.Anti-takeoverAnti‑takeover provisions contained in our amended and restated certificate of incorporation and second amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.Our amended and restated certificate of incorporation, second amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and second amended and restated bylaws include provisions:•authorizing "blank check"“blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our Class A and Class B common stock;•limiting the liability of, and providing indemnification to, our directors and officers;•limiting the ability of our stockholders to call and bring business before special meetings;•providing for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;•providing that our board of directors is classified into three classes of directors with staggered three-yearthree‑year terms;48•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and•controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings.•providing for advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirdstwo‑thirds of our outstanding common stock not held by such 15% or greater stockholder.Our second amended and restated bylaws provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.Our second amended and restated bylaws provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:•any derivative action or proceeding brought on our behalf;•any action asserting a breach of fiduciary duty owed by our directors, officers, employees or our stockholders;•any action asserting a claim against us arising under the Delaware General Corporation Law; and•any action asserting a claim against us that is governed by the internal-affairs doctrine (the “Delaware Forum Provision”).The Delaware Forum Provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim under the Securities Act, for which the United States District Court for the Northern District of California has sole and exclusive jurisdiction (the “Federal Forum Provision”), as we are based in the State of California. In addition, our second amended and restated bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the Delaware Forum Provision and the Federal Forum Provision; provided, however, that stockholders cannot and will not be deemed to have waived our compliance with the U.S. federal securities laws and the rules and regulations thereunder.The Delaware Forum Provision and the Federal Forum Provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage lawsuits against us and our directors, officers and employees. If a court were to find the Delaware Forum Provision and the Federal Forum Provision in our second amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.49We do not expect to declare any dividends in the foreseeable future.We have never paid dividends and we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our Class A common stock.Risks Related to the Outstanding NotesServicing our IndebtednessOur indebtedness could adversely affect our financial condition.As of December 31, 2021, we had $1.0 billion of indebtedness outstanding (excluding intercompany indebtedness). Our indebtedness could have important consequences, including:•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;•requiring a portion of our cash flows to be dedicated to debt may require a significantservice payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and weother general corporate purposes;•increasing our vulnerability to adverse changes in general economic, industry and competitive conditions;•exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under a future revolving credit facility, may be at variable rates of interest; and•increasing our cost of borrowing.In addition, the indenture governs our 3.625% notes due 2029 (the “2029 Notes”) and our 3.875% notes due 2031 (the “2031 Notes,” and together with the 2029 Notes, the “Notes”) and contains restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, under the indenture governing the Notes, if not cured or waived, could permit the trustee, or permit the holders of the Notes to cause the trustee, to declare all or part of the Notes to be immediately due and payable or to exercise any remedies provided to the trustee and/or result in the acceleration of substantially all of our indebtedness.We may not havebe able to generate sufficient cash flow fromto service all of our businessindebtedness, including the Notes, and may be forced to paytake other actions to satisfy our indebtedness.Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness,debt obligations, including our 0.25% convertible senior notes due 2023 (the "Notes"),the Notes, depends on our future performance,financial condition and results of operations, which isin turn are subject to prevailing economic and competitive conditions and to certain financial, competitivebusiness and other factors beyond our control. Our businessWe may not generatebe able to maintain a level of cash flowflows from operations in the futureoperating activities sufficient to servicepermit us to pay the principal, premium, if any, and interest on our indebtedness, including the Notes.If our cash flows and capital resources are insufficient to fund our debt and make necessary capital expenditures. Ifservice obligations, we are unable to generate such cash flow, wecould face substantial liquidity problems and may be requiredforced to adopt onereduce or more alternatives, such as sellingdelay investments and capital expenditures, or to sell assets, restructuring debtseek additional capital or obtaining additional debt financingrestructure or equity capital on terms that may be onerous or highly dilutive.refinance our indebtedness, including the Notes. Our ability to restructure or refinance any future indebtednessour debt will depend on, among other things, the condition of the capital markets and our financial condition at such time. WeAny refinancing of our debt could be at higher interest rates and may not be ablerequire us to engage in anycomply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture that governs the Notes may restrict us from adopting some of these activitiesalternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to dispose of material assets or engageoperations to meet our debt service and other obligations.50Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.If we cannot make scheduled payments on our indebtedness, we will be in these activities on desirable terms, whichdefault and holders of the Notes and other indebtedness could declare all outstanding principal and interest to be due and payable, the lenders under a future revolving credit facility could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. If we breach the covenants under our debt instruments, we would be in default under such instruments. The holders of such indebtedness could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.The indenture governing the Notes contain cross-default provisions that could result in a default on our debt obligations. In addition, anythe acceleration of all of our future debt agreements may contain restrictiveindebtedness.A breach of the covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenantsunder the indenture governing the Notes could result in an event of default which, if not cured or waived, couldunder the applicable indebtedness. Such a default may allow the creditors to accelerate the related indebtedness and may result in the acceleration of our debt.We may not have the abilityany other indebtedness to raise the funds necessary for cash settlement upon conversion of the Noteswhich a cross-acceleration or to repurchase the Notes for cash upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion of the Notes or to repurchase the Notes. Subject to limited exceptions, holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.cross-default provision applies. In addition, upon conversionan event of default under a revolving credit facility may permit the Notes, unlesslenders thereunder to terminate all commitments to extend further credit under that facility. Furthermore, if we electwere unable to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or pay any cashrepay amounts due upon conversion.and payable under a secured credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In addition,the event our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions of the Notes as required by such indenture would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. Ifnote holders accelerate the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods,our borrowings, we and our guarantors may not have sufficient fundsassets to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.The conditional conversion feature of the Notes, if triggered,that indebtedness. Additionally, we may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results. Under Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. ASC 470-20 requires the value of the conversion option of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders' equity in our consolidated balance sheet and as a discount to the debt component of the Notes, which reduces their initial debt carrying value reflected as a liability on our balance sheets. The carrying value of the debt component of the Notes, net of the discount recorded, will be accreted up to the principal amount of the Notes from the issuance date until maturity, which will result in non-cash charges to interest expense in our consolidated statement of operations. Accordingly, we will report lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current period's accretion of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the trading price of our Class A common stock and the trading price of the Notes. In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of Class A common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected in periods when we report net income.The capped call transactions may affect the value of the Notes and our Class A common stock. In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with the option counterparties. The capped call transactions are expected generally to reduce the potential dilution to our Class A common stock upon any conversion of the Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. In connection with establishing their initial hedges of the capped call transactions, the option counterparties or their respective affiliates entered into various derivative transactions with respect to our Class A common stock and/or purchased shares of our Class A common stock concurrently with or shortly after the pricing of the Notes. In addition, the option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions at any time prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could cause or avoid an increase or a decrease in the market price of our Class A common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the Notes or our Class A common stock. In addition, we do not make any representation that the option counterparties will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.We are subjectable to counterparty risk with respectborrow money from other lenders to the capped call transactions. The option counterparties are financial institutions, and we will be subjectenable us to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal torefinance our exposure at that time under the capped call transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our Class A common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our Class A common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.Risks Related to the Acquisition of SendGridAlthough we expect that the acquisition of SendGrid will result in synergies and other benefits to us, weour AcquisitionsWe may not realize thosepotential benefits from our recent acquisitions, partnerships and investments because of difficulties related to integration, the achievement of synergies, and other challenges.We acquired SendGrid on February 1, 2019. Priorregularly acquire or invest in businesses and technologies that are complementary to the completion of the acquisition, we and SendGrid operated independently, and thereour business through acquisitions, partnerships or investments, including several transactions in fiscal year 2021. There can be no assurances that our businesses can be combined in a manner that allows for the achievement of substantial benefits. TheAny integration process willmay require significant time and resources, and we may not be able to manage the process successfully as our ability to acquire and integrate larger or more complex companies, products, or technology in a successful manner is unproven. If we are not able to successfully integrate SendGrid'sthese acquired businesses with ours or pursue our customer and product strategy successfully, the anticipated benefits of the acquisitionsuch acquisitions may not be realized fully or may take longer than expected to be realized. Further, it is possible that there could be a loss of our and/or SendGrid's key employees and customers, disruption of either company's or both companies' ongoing businesses or unexpected issues, higher than expected costs and an overall post-completionpost‑completion process that takes longer than originally anticipated. Specifically,In addition, the following issues, among others, must be addressed in combining SendGrid's operations with ours in order to realize the anticipated benefits of the acquisition so the combined company performs as the parties hope:•combining the companies'acquired businesses' corporate functions with our corporate functions;SendGrid's businessacquired businesses with our business in a manner that permits us to achieve the synergies anticipated to result from the acquisition,such acquisitions, the failure of which would result in the anticipated benefits of the acquisitionour acquisitions not being realized in the time frame currently anticipated or at all;•maintaining existing agreements with customers, distributors, providers, talent and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers, talent and vendors;•determining whether and how to address possible differences in corporate cultures and management philosophies;•integrating the companies'companies’ administrative and information technology infrastructure;•developing products and technology that allow value to be unlocked in the future;•evaluating and forecasting the financial impact of the acquisition transaction,such acquisitions, partnerships and investments, including accounting charges; and•effecting potential actions that may be required in connection with obtaining regulatory approvals.51In addition, at times the attention of certain members of our management and resources may be focused on integration of the acquired businesses of the two companies and diverted from day-to-dayday‑to‑day business operations, which may disrupt our ongoing business and the business of the combined company.We have incurred, and may continue to incur, significant, non-recurringnonrecurring costs in connection with the acquisition of SendGridour acquisitions, partnerships and investments and integrating our operations with those of the operations of Twilio and SendGrid,acquired businesses, including costs to maintain employee morale and to retain key employees. Management cannot ensure that the elimination of duplicative costs or the realization of other efficiencies will offset the transaction and integration costs in the near term or at all.Purchase price accounting in connection with our acquisition of SendGridacquisitions requires estimates that may be subject to change and could impact our consolidated financial statements and future results of operations and financial position.Pursuant to the acquisition method of accounting, the purchase price we paidpay for SendGrid will beour acquired businesses is allocated to the underlying SendGrid tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill. The acquisition method of accounting is dependent upon certain valuations and other studies that are preliminary. Accordingly, the purchase price allocation as of the acquisition date will be preliminary. We currently anticipate that all the information needed to identify and measure values assigned to the assets acquired and liabilities assumed will be obtained and finalized during the one-year measurement period following the date of completion of the acquisition. Differences between these preliminary estimates and the final acquisition accounting may occur, and these differences could have a material impact on the consolidated financial statements and the combined company'scompany’s future results of operations and financial position.General RisksAny legal proceedings or claims against us could be costly and time-consuming to defend and could harm our reputation regardless of the outcome.We are and may in the future become subject to legal proceedings and claims that arise in the ordinary course of business, such as disputes or employment claims made by our current or former employees. Any litigation, whether meritorious or not, could harm our reputation, will increase our costs and may divert management’s attention, time and resources, which may in turn seriously harm our business. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims, and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs and could seriously harm our business.Unfavorable conditions in our industry or the global economy or reductions in spending on information technology and communications could adversely affect our business, results of operations and financial condition.Our results of operations may vary based on the impact of changes in our industry or the global economy on our customers. Our results of operations depend in part on demand for information technology and cloud communications. In addition, our revenue is dependent on the usage of our products, which in turn is influenced by the scale of business that our customers are conducting. To the extent that weak economic conditions, including due to the COVID-19 pandemic, labor shortages, supply chain disruptions and inflation, geopolitical developments, such as existing and potential trade wars, and other events outside of our control such as the COVID-19 pandemic, result in a reduced volume of business for, and communications by, our customers and prospective customers, demand for, and use of, our products may decline. Furthermore, weak economic conditions may make it more difficult to collect on outstanding accounts receivable and increase our expenses. Additionally, we generate a portion of our revenue from small and medium-sized businesses, which may be affected by economic downturns and other adverse macroeconomic conditions to a greater extent than enterprises, and typically have more limited financial resources, including capital borrowing capacity, than enterprises. If our customers reduce their use of our products, or prospective customers delay adoption or elect not to adopt our products, as a result of a weak economy or rising inflation and increased costs, this could adversely affect our business, results of operations and financial condition.Our business is subject to the risks of pandemics, earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism.Our business operations are subject to interruption by natural disasters, flooding, fire, power shortages, pandemics such as COVID-19, terrorism, political unrest, cyber-attacks, geopolitical instability, war, the effects of climate change and other events beyond our control. For example, our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or flood, occurring at our headquarters, at one of our other facilities or where a business partner is located could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect our service providers, this could adversely affect the ability of our customers to use our products and platform. Natural disasters, pandemics, such as the COVID-19 pandemic, and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole.52We also rely on our network and third-party infrastructure and enterprise applications and internal technology systems for our engineering, sales and marketing, and operations activities. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition.In addition, computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent in our industry, have occurred on our platform in the past and may occur on our platform in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, integrity and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to retain existing users and attract new users. In addition, global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Any such events may result in users being subject to service disruptions or outages, and we may not be able to recover our technical infrastructure in a timely manner to maintain or resume operations, which may adversely affect our financial results.Climate change may have an impact on our business.While we seek to mitigate our business risks associated with climate change (such as drought, wildfires, hurricanes, increased storm severity and sea level rise), we recognize that there are inherent climate-related risks wherever business is conducted. Our primary locations may be vulnerable to the adverse effects of climate change. For example, certain of our offices have experienced, and are projected to continue to experience, climate-related events at an increasing frequency, including drought, heat waves, wildfires and resultant air quality impacts and power shutoffs associated with wildfire prevention. Changing market dynamics, global policy developments and the increasing frequency and impact of extreme weather events on critical infrastructure in the U.S. and elsewhere have the potential to disrupt our business, the business of our third-party suppliers and the business of our customers, and may cause us to experience losses and additional costs to maintain or resume operations. In addition, we may be subject to increased regulations, reporting requirements, standards or expectations regarding the environmental impacts of our business.Item 1B. Unresolved Staff CommentsItem 2. PropertiesWe lease all of our facilities and do not own any real property. Our headquarters is located in San Francisco, California, where we lease approximately 90,000 square feethave sub-leased several floors, consisting of office space under a lease that expires in 2024. The lease payments range from$0.4 million per month in the first 60 months to $0.5 million per month thereafter. The lease included a tenant improvement allowance to cover construction of certain leasehold improvements for up to $8.3 million. All of this amount had been collected from the landlord as of December 31, 2017. We secured our lease obligation with a $7.4 million letter of credit, which we designated as restricted cash on our balance sheet as of December 31, 2016. This letter of credit is periodically reduced, as stipulated in the lease agreement and upon satisfaction of required conditions. As of December 31, 2018, the restricted cash on our balance sheet related to this lease was $3.3 million. In September 2018, we entered into a sub-lease agreement ("Sub-lease") for a total of 259,416 rentable square feet of office space at 101 Spear Street in San Francisco, California.Street. The Sub-leasesub-lease covers several floors for which the terms commencecommenced on December 1, 2018 and April 1, 2020 and will be expiring at various dates between March 2025 and June 2028. TheOur existing lease payments will range from $0.8 million per months to $2.2 million per month. Weobligations are secured our lease obligationby letters of credit with a $14.7cumulative value of $23.7 million letter of credit, which it designated as restricted cash on our balance sheet as of December 31, 2018. We intend for this location to become our headquarters at some time in 2019. In addition to our headquarters, we lease space in Mountain View, Tallinn, Bogota, Madrid, Malmo, Prague and Berlin as additional research and development offices. 2021.We also lease space for additional salesapproximately 600,000 square feet in various locations in North America, South America, Europe and marketing offices in New York, Atlanta, Dublin, London, Munich, Hong Kong, Singapore, Sydney and Melbourne. Our Dublin office isAsia. This includes our international headquarters. Weheadquarters in Dublin, Ireland and regional offices used for business operations, sales, support, and product development.Additional information regarding our lease allcommitments is available in Note 6 of our facilitiesconsolidated financial statements included in Part II, Item 8, “Financial Statements and do not own any real property. Supplementary Data” included elsewhere in this Annual Report on Form 10-K.We intend to procure additional space in the future as we continue toexpand geographically and add employees and expand geographically.employees. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.Item 3. Legal Proceedings On April 30, 2015 and March 28, 2016, Telesign Corporation ("Telesign") filed lawsuits (which were subsequently consolidated) against us in the United States District Court, Central District of California ("Telesign I/II"). Telesign alleges in Telesign I/II that we are infringing four U.S. patents that it holds: U.S. Patent No. 7,945,034 ("034"), U.S. Patent No. 8,462,920 ("920"), U.S. Patent No. 8,687,038 ("038") and U.S. Patent No. 9,300,792 ("792"). The consolidated Telesign I/II actions have been transferredRefer to the United States District Court, Northern District. The patent infringement allegations in the lawsuit relate to our two-factor authentication use case, Authy, and an API tool to find information about a phone number. Telesign seeks, among other things, to enjoin us from allegedly infringing the patents, along with damages for lost profits. On March 8, 2017, in response to a petition by us, the U.S. Patent and Trademark Officer ("PTO") issued an order instituting aninter partes review for the '792 patent. On March 6, 2018, the PTO found all claims challenged by us in theinter partes review unpatentable. On October 19, 2018, the district court granted our motion that all asserted claims of the asserted patents are invalid under 35 U.S.C. § 101 and entered judgment in our favor. On November 8, 2018, Telesign appealed the judgment to the United States Court of Appeals for the Federal Circuit where the case is now pending. Based on, among other things, final judgment being entered by the district court in our favor, we do not believe a loss is reasonably possible or estimable. On December 1, 2016, we 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") forinter partes review of the '021, '465, and '376 patents. On March 9, 2018, the PTO denied Telesign's petition forinter partes review of the '021 patent and granted Telesign's petitions forinter partes review of the '465 and '376 patents. Telesign III is currently stayed pending resolution of theinter partes reviews of the '465 and '376 patents. We are 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 our 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 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 threeNote 13(b) of our customers that were recorded. Following mediation, on January 7, 2019, the parties signed a long-form settlement agreement, providing for a payment of $10 million into a common fund and injunctive relief involving certain updates to Twilio's Acceptable Use Policy and customer documentation. On January 15, 2019, the court entered an order granting preliminary approval of the settlement, and the parties signed an amended settlement agreement to conform to the court's order. A final approval hearing is scheduled for June 11, 2019. Given insurance coverage, we currently estimate our potential liability in the Flowers matter to be $1.7 million and we reserved this amount in our consolidated balance sheet as of December 31, 2018, presentedfinancial statements included elsewhere in this Annual Report on Form 10-K. On September 1, 2015, Twilio was named as10-K for a defendant in a First Amended Complaint in a putative class action captioned Jeremy Bauman v. David Saxe, et al. pending in the United States District Court, Districtdescription of Nevada relating to the alleged sending of unsolicited text messages to the plaintiffs and putative class members. The Company filed a motion to dismiss, which was granted, and on September 20, 2016 the plaintiff filed a Second Amended Complaint with additional allegations that the Company violated the Telephone Consumer Protection Act ("TCPA"), and the Nevada Deceptive Trade Practices Act ("NDTPA"), NRS 41.600(2)(e). On January 10, 2019, the court granted Plaintiffs' motion for class certification under the TCPA and denied plaintiff's request to certify a class under the NDTPA. On February 13, 2019, the court issued an order denying Twilio's motion to dismiss as to Plaintiffs' TCPA claim and granting dismissal as to Plaintiffs' NDTPA claim. The Company intends to vigorously defend itself against and believes it has meritorious defenses to this lawsuit. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate the range of possible loss, if any.SendGrid Stockholder Litigation On December 5, 2018, purported stockholders of SendGrid filed putative class action complaints in the United States District Court for the District of Delaware, Rosenblatt v. SendGrid, Inc., et al., Case No. 1:18-cv-01931-UNA (the "Rosenblatt Complaint"), and in the United States District Court for the District of Colorado, Chen v. SendGrid, Inc., et al., Case No. 1:18-cv-03131-MEH (the "Chen Complaint"), against SendGrid, the individual members of the SendGrid board of directors (the "Individual Defendants"), Twilio and Topaz Merger Subsidiary, Inc.. Thereafter, on December 19, 2018 and January 3, 2019, purported stockholders of SendGrid filed putative class action complaints against SendGrid and the Individual Defendants in the United States District Court for the District of Colorado, respectively, Bushansky v. SendGrid, Inc., et al., 1:18-cv-03260-SKC (the "BushanskyComplaint"), and Conner v. SendGrid, Inc., et al., 1:19-cv-00016-PAB-SKC (the "Conner Complaint"). As of February 11, 2019, all four complaints have been voluntarily dismissed. Among other things, the Rosenblatt Complaint alleges that SendGrid and the Individual Defendants misrepresented and/or omittedour current material information in a registration statement on Form S-4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Rosenblatt Complaint alleges that the Individual Defendants and Twilio acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective registration statement on Form S-4.The Rosenblatt Complaint seeks, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to file a registration statement on Form S-4 that does not contain any untrue statements of material fact and states all material facts, a declaration that the defendants violated Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and an award of plaintiff costs, including reasonable attorneys' and experts' fees. On February 11, 2019, the Rosenblatt Complaint was voluntarily dismissed. Among other things, the Chen Complaint alleges that the defendants misrepresented and/or omitted material information in a registration statement on Form S-4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Chen Complaint alleges that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Form S-4. The Chen Complaint also alleges that the Individual Defendants breached their fiduciary duties to SendGrid stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell SendGrid through an allegedly unfair process and for an unfair price and on unfair terms, and by failing to disclose all material information. The Chen Complaint seeks, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to commence a new sale process, a declaration that the merger agreement was agreed to in breach of the Individual Defendants' fiduciary duties and is therefore unlawful and unenforceable, an order directing the defendants to account to the putative class for damages allegedly sustained, and an award of plaintiff costs, including reasonable attorneys' and experts' fees. On February 4, 2019, the Chen Complaint was voluntarily dismissed. Among other things, the Bushansky and Conner Complaints allege that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a Schedule 14A Definitive Proxy Statement, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Bushansky and Conner Complaints allege that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14A Definitive Proxy Statement. The Bushansky and Conner Complaints seek, among other things, rescission of the merger or rescissory damages, and an award of plaintiff costs, including reasonable attorneys' and experts' fees. On February 4, 2019, the Bushansky Complaint was voluntarily dismissed. On February 11, 2019, the Conner Complaint was voluntarily dismissed. In addition to the litigation discussed above, from time to time, we may be subject to legal actions and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.53Item 4. Mine Safety Disclosures.Not applicable.Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Price of Our Class A Common StockOur Class A common stock is traded on the New York Stock Exchange and, as of August 2021, the Long-Term Stock Exchange under the symbol “TWLO.” As of January 31, 2019,2022, we had 85196 holders of record of our Class A and Class B common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.Dividend PolicyWe have never declared or paid any cash dividends on our capital stock. We intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.Stock Performance GraphThis performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Twilio Inc. under the Securities Act or the Exchange ActWe have presented below the cumulative total return to our stockholders between June 23, 2016 (the date our Class A common stock commenced trading on the NYSE) through December 31, 20182021, in comparison to the S&P 500 Index and S&P 500 Information Technology Index. All values assume a $100 initial investment and data for the S&P 500 Index and S&P 500 Information Technology Index
55Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities(a) Sales of Unregistered SecuritiesIn Mayeach of the years ended December 31, 2021 and 2020, Twilio.org donated 88,408 shares of our unregistered Class A common stock to an independent donor advised fund to further our philanthropic goals. The shares were “restricted securities” for purposes of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), and had an aggregate fair market value on the date of donation of $31.2 million and $19.0 million, respectively.In 2018, we issued $550$550.0 million in aggregate principal amount of 0.25% Convertible Senior Notes due 2023 (the "Notes"“Convertible Notes”). In connection with the offering of the Convertible Notes, we entered into privately-negotiated capped call transactions with certain counterparties (the "capped calls"“capped calls”). The capped calls each havehad an initial strike price of approximately $70.90 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Notes. The capped calls havehad initial cap prices of $105.04 per share, subject to certain adjustments. The capped calls cover,covered, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A Common Stock. SeeRefer to Note 810 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information about the Convertible Notes and capped calls. The CompanyWe offered and sold the Convertible Notes to the initial purchasers in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and for resale by the initial purchasers to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. The CompanyWe relied on these exemptions from registration based in part on representations made by the initial purchasers in the purchase agreement dated May 14, 2018. TheOn May 18, 2021, we issued a notice of redemption for our Convertible Notes and in June 2021, we redeemed all of the remaining outstanding principal amount of the Convertible Notes and settled all related capped call arrangements. These transactions are described in detail in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.In connection with our acquisition of Zipwhip in July 2021, we issued an additional 526 shares of theunregistered Class A common stock issuable upon conversion of the Notes, if any, have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. To the extent that any shares of the Class A common stock are issued upon conversion of the Notes, they will be issued in transactions anticipatedon November 15, 2021, pursuant to bea post-closing adjustment. These issuances were exempt from registration under the Securities Act by virtue of Section 3(a)(9) thereof, because no commission or other remuneration is expected to be paid in connection with conversion4(a)(2) of the Notes, and any resulting issuance of shares of the Class A common stock. In November 2018, Twilio.org donated 62,338 shares of unregistered Class A common stock to an independent DAF to further our philanthropic goals. The shares are "restricted securities" for purposes of Rule 144 under the Securities Act and the fair market valueRule 506 of these shares on the date of the donation was $6.0 million. This amount is recorded as charitable contribution in the consolidated statement of operations included elsewhere in this Annual Report on Form 10-K.(b) Use of ProceedsIn June 2016,February 2021, we closed our initiala follow-on public offering, ("IPO"), in which we sold 11,500,0004,312,500 shares of Class A common stock at a price to the public of $15.00 per share, including shares sold in connection with the exercise of the underwriters' option to purchase additional shares. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-211634), which was declared effective by the SEC on June 22, 2016. We raised $155.5 million in net proceeds after deducting underwriting discounts and commissions of $12.1 million and offering expenses of $4.9 million. No payments were made by us to directors, officers or persons owning 10 percent or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on June 23, 2016 pursuant to Rule 424(b). We invested the funds received in accordance with our board-approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriters of our IPO were Goldman, Sachs & Co. and J.P. Morgan Securities LLC. In October 2016, we closed our follow-on public offering, in which we sold 1,691,222 shares of Class A common stock at a price to the public of $40.00$409.60 per share, including shares sold in connection with the exercise of the underwriters' option to purchase additional shares. The offer and sale of all of the shares in the follow-on offering were registered under the Securities Act pursuant to a registration statement on Form S-1S-3 (File No. 333-214034)333-231794), which was declared effective by the SEC on October 20, 2016.May 29, 2019. We raised $64.4 million$1.8 billion in net proceeds after deducting underwriting discounts and commissions and offering expenses paid and payable by us. No payments were made by us to directors, officers or persons owning 10 percent or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change in the planned use of proceeds from our follow-on offering as described in our final prospectus filed with the SEC on October 21, 2016February 22, 2021, pursuant to Rule 424(b)(5). We invested the funds received in accordance with our board-approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriters of our follow-on offering were Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, Academy Securities, Inc., Cabrera Capital Markets LLC, and Siebert Williams Shank & Co., LLC.In August 2020, we closed a follow-on public offering, in which we sold 5,819,838 shares of Class A common stock at a price to the public of $247.00 per share, including shares sold in connection with the exercise of the underwriters' option to purchase additional shares. The offer and sale of all of the shares in the follow-on offering were registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-231794), which was declared effective by the SEC on May 29, 2019. We raised $1.4 billion in net proceeds after deducting underwriting discounts and commissions and offering expenses paid by us. No payments were made by us to directors, officers or persons owning 10 percent or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change in the planned use of proceeds from our follow-on offering as described in our final prospectus filed with the SEC on August 7, 2020, pursuant to Rule 424(b)(5). We invested the funds received in accordance with our board-approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriters of our follow-on offering were J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Goldman, Sachs & Co. and BofA Securities, Inc.56In June 2019, we closed a follow-on public offering, in which we sold 8,064,515 shares of Class A common stock at a price to the public of $124.00 per share, including shares sold in connection with the exercise of the underwriters' option to purchase additional shares. The offer and sale of all of the shares in the follow-on offering were registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-231794), which was declared effective by the SEC on May 29, 2019. We raised $979.0 million in net proceeds after deducting underwriting discounts and commissions and offering expenses paid by us. No payments were made by us to directors, officers or persons owning 10 percent or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change in the planned use of proceeds from our follow-on offering as described in our final prospectus filed with the SEC on May 31, 2019, pursuant to Rule 424(b). We invested the funds received in accordance with our board-approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriters of our follow-on offering were Goldman, Sachs & Co. and J.P. Morgan Securities LLC.(c) Issuer Purchases of Equity SecuritiesNone.Item 6. Selected Financial and Other Data We have derived the selected consolidated statements of operations data for the years ended December 31, 2018, 2017 and 2016 and the balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data for the years ended December 31, 2015 and 2014 and the consolidated balance sheet data as of December 31, 2016, 2015 and 2014 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial and other data should be read in conjunction with Part II, Item 7, "Management's7. Management’s Discussion and Analysis of Financial Condition and Results of Operations", and our consolidated financial statements and the related notes appearing in Part II, Item 8, "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below.Operations Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands, except share, per share and customer data) $ 650,067 $ 399,020 $ 277,335 $ 166,919 $ 88,846 300,841 182,895 120,520 74,454 41,423 349,226 216,125 156,815 92,465 47,423 171,358 120,739 77,926 42,559 21,824 175,555 100,669 65,267 49,308 33,322 110,427 59,619 51,077 35,991 18,960 7,121 1,172 3,860 — — 464,461 282,199 198,130 127,858 74,106 (115,235 ) (66,074 ) (41,315 ) (35,393 ) (26,683 ) (5,923 ) 3,071 317 11 (62 ) (121,158 ) (63,003 ) (40,998 ) (35,382 ) (26,745 ) (791 ) (705 ) (326 ) (122 ) (13 ) (121,949 ) (63,708 ) (41,324 ) (35,504 ) (26,758 ) — — — (3,392 ) — $ (121,949 ) $ (63,708 ) $ (41,324 ) $ (38,896 ) $ (26,758 ) $ (1.26 ) $ (0.70 ) $ (0.78 ) $ (2.19 ) $ (1.58 ) 97,130,339 91,224,607 53,116,675 17,746,526 16,900,124 64,286 48,979 36,606 25,347 16,631 $ 593,017 $ 365,490 $ 245,548 $ 136,851 $ 75,697 62 % 49 % 79 % 81 % 81 % 140 % 128 % 161 % 155 % 153 % (1)Includes stock-based compensation expense as follows: Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands) $ 1,126 $ 650 $ 291 $ 65 $ 39 42,277 22,808 12,946 4,046 1,577 23,616 9,822 4,972 2,389 1,335 26,254 16,339 6,016 2,377 1,027 $ 93,273 $ 49,619 $ 24,225 $ 8,877 $ 3,978 (2)Includes amortization of acquired intangibles as follows: Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands) $ 5,656 $ 4,644 $ 619 $ 239 $ — 22 139 151 130 — 1,117 753 — — — 375 84 110 95 — $ 7,170 $ 5,620 $ 880 $ 464 $ — (3)See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Number of Active Customer Accounts."(4)See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Base Revenue."(5)See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Expansion Rate." As of December 31, 2018 2017 2016 2015 2014 (In thousands) $ 487,215 $ 115,286 $ 305,665 $ 108,835 $ 32,627 261,128 175,587 — — — 735,138 274,738 279,676 96,032 23,151 63,534 50,541 37,552 14,058 6,751 1,028,710 449,782 412,694 157,516 54,974 $ 438,235 $ 359,846 $ 329,447 $ 116,625 $ 31,194 Non-GAAP Financial Measures We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations, and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results. Non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly-titled non-GAAP measures used by other companies. Whenever we use a non-GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Non-GAAP Gross Profit and Non-GAAP Gross Margin. For the periods presented, we define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude stock-based compensation and amortization of acquired intangibles. Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands) $ 349,226 $ 216,125 $ 156,815 $ 92,465 $ 47,423 1,126 650 291 65 39 5,656 4,644 619 239 — $ 356,008 $ 221,419 $ 157,725 $ 92,769 $ 47,462 55 % 55 % 57 % 56 % 53 % Non-GAAP Operating Expenses. For the periods presented, we define non-GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, stock-based compensation, amortization of acquired intangibles, stock repurchases, acquisition-related expenses, release of tax liability upon obligation settlement, charitable contribution, legal settlements/accruals, gain on lease termination and payroll taxes related to stock-based compensation. Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands) $ 464,461 $ 282,199 $ 198,130 $ 127,858 $ 74,106 (92,147 ) (48,969 ) (23,934 ) (8,812 ) (3,939 ) (1,514 ) (976 ) (261 ) (225 ) — — — — (1,965 ) — (4,481 ) (310 ) (499 ) (1,165 ) — — 13,365 805 — — (7,121 ) (1,172 ) (3,860 ) — — (1,710 ) — — — — — 295 — — — (5,617 ) (2,950 ) (434 ) — — $ 351,871 $ 241,482 $ 169,947 $ 115,691 $ 70,167 Non-GAAP Loss from Operations and Non-GAAP Operating Margin. For the periods presented, we define non-GAAP loss from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude, as applicable, stock-based compensation, amortization of acquired intangibles, stock repurchases, acquisition-related expenses,release of tax liability upon obligation settlement, charitable contribution, legal settlements/accruals, gain on lease termination and payroll taxes related to stock-based compensation. Year Ended December 31, 2018 2017 2016 2015 2014 (In thousands) $ (115,235 ) $ (66,074 ) $ (41,315 ) $ (35,393 ) $ (26,683 ) 93,273 49,619 24,225 8,877 3,978 7,170 5,620 880 464 — — — — 1,965 — 4,481 310 499 1,165 — — (13,365 ) (805 ) — — 7,121 1,172 3,860 — — 1,710 — — — — — (295 ) — — — 5,617 2,950 434 — — $ 4,137 $ (20,063 ) $ (12,222 ) $ (22,922 ) $ (22,705 ) 1 % (5 )% (4 )% (14 )% (26 )% Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"Risk Factors"“Risk Factors” in this Annual Report on Form 10-K. Our fiscal year ends on December 31.OverviewWe are the leader in the Cloud Communications Platformcloud communications platform category. We enable developers to build, scale and operate real-time communicationsreal‑time customer engagement within their software applications via our simple-to-useapplications. We offer a customer engagement platform with software designed to address specific use cases like account security and contact centers, and a set of Application Programming Interfaces ("APIs"(“APIs”). that handles the higher level communication logic needed for nearly every type of customer engagement. The power, flexibility and reliability offered by our software building blocks empowersempower companies of virtually every shape and size to build world-class engagement into their customer experience. Our platform consists of three layers: our Engagement Cloud, Programmable Communications Cloud and Super Network. Our Engagement Cloud software is designed to address specific use cases like account security and contact centers and is a set of APIs that handles the higher level communication logic needed for nearly every type of customer engagement. These APIs are focused For additional detail on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. Our Programmable Communications Cloud software is a set of APIs that enables developers to embed voice, messaging and video capabilities into their applications. The Programmable Communications Cloud is designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. The Super Network is our software layerthat allows our customers' software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of APIs that gives our customers access to more foundational componentsdescription of our platform, like phone numbers. As of December 31, 2018, our customers' applications that are embedded with ourbusiness and products could reach users via voice, messaging and video in nearly every country in the world, and our platform offered customers local telephone numbers in over 100 countries and text-to-speech functionality in 26 languages. We support our global business through 27 cloud data centers in nine regions around the world and have developed contractual relationships with network service providers globally. Our business model is primarily focusedplease refer to Part I, Item 1, “Business”, included elsewhere on reaching and serving the needs of software developers, who we believe are becoming increasingly influential in technology decisions in a wide variety of companies. We call this approach our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed. We established and maintain our leadership position by engaging directly with, and cultivating, our developer community, which has led to the rapid adoption of our platform. We reach developers through community events and conferences, including our SIGNAL developer conferences, to demonstrate how every developer can create differentiated applications incorporating communications using our products. Once developers are introduced to our platform, we provide them with a low friction trial experience. By accessing our easy-to-adopt APIs, extensive self-service documentation and customer support team, developers build our products into their applications and then test such applications through free trials. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account executives or customer success advocates within our sales organization to ensure their satisfaction and expand their usage of our products. We also supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach. To help increase our awareness in the enterprise, we have expanded our marketing efforts through programs like our Twilio Engage roadshow were we seek to bring business leaders and developers together to discuss the future of customer engagement. We have developed products to support this effort as well, like the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration. Our sales organization targets technical leaders and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leadersAnnual Report on the benefits of developing applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel. When potential customers do not have the available developer resources to build their own applications, we refer them to either our technology partners who embed our products in the solutions that they sell to other businesses (such as contact centers and sales force and marketing automation) or our consulting partners who provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications. We generate the substantial majority of our revenue from customers based on their usage of our software products that they have incorporated into their applications. In addition, customers typically purchase one or more telephone numbers from us, for which we charge a monthly flat fee per number. Some customers also choose to purchase various levels of premium customer support for a monthly fee. Customers that register in our self-service model typically pay upfront via credit card and draw down their balance as they purchase or use our products. Most of our customers draw down their balance in the same month they pay up front and, as a result, our deferred revenue and customer deposits liability at any particular time is not a meaningful indicator of future revenue. As our customers' usage grows, some of our customers enter into contracts and are invoiced monthly in arrears. Many of these customer contracts have terms of 12 months and typically include some level of minimum revenue commitment. Most customers with minimum revenue commitment contracts generate a significant amount of revenue in excess of their minimum revenue commitment in any period. Historically, the aggregate minimum commitment revenue from customers with whom we have contracts has constituted a minority of our revenue in any period, and we expect this to continue in the future. Our developer-focused products are delivered to customers and users through our Super Network, which uses software to optimize communications on our platform. We interconnect with communications networks globally to deliver our products, and therefore we have arrangements with network service providers in many regions in the world. Historically, a substantial majority of our cost of revenue has been network service provider fees. We continue to optimize our network service provider coverage and connectivity through continuous improvements in routing and sourcing in order to lower the usage expenses we incur for network service provider fees. As we benefit from our platform optimization efforts, we sometimes pass these savings on to customers in the form of lower usage prices on our products in an effort to drive increased usage and expand the reach and scale of our platform. In the near term, we intend to operate our business to expand the reach and scale of our platform and to grow our revenue, rather than to maximize our gross margins.2018, 20172021, 2020 and 2016,2019, our revenue was $650.1$2.8 billion, $1.8 billion and $1.1 billion, respectively, and our net loss was $949.9 million, $399.0$491.0 million and $277.3$307.1 million, respectively. In the years ended December 31, 2018, 20172021, 2020 and 2016,2019, our 10 largest Active Customer Accounts generated an aggregate of 18%11%, 19%14% and 30%, respectively, of our total revenue. For each of the years ended December 31, 2018, 2017 and 2016, among our 10 largest Active Customer Accounts we had three Variable Customer Accounts, respectively, representing 8%, 8% and 11%13% of our total revenue, respectively.Acquisition of Zipwhip, Inc. in 2021In July 2021, we acquired Zipwhip, Inc. (“Zipwhip”), a leading provider of toll-free messaging in the years ended December 31, 2018, 2017 and 2016, our Base Revenue was $593.0 million, $365.5 million and $245.5 million, respectively, and our net loss was $121.9 million, $63.7 million and $41.3 million, respectively. See the section titled "—Key Business Metrics—Base Revenue"United States, for a discussionpurchase price of Base Revenue.Acquisition$838.8 million. The purchase price was paid in the form of SendGrid In February 2019, we acquired all outstanding shares of capital stock of SendGrid, Inc.("SendGrid"), the leading email API platform, by issuing 23.4 million shares of our Class A common stock with totaland cash and included fair value of $2.6 billion. Pursuantpre-combination services of Zipwhip employees that was embedded in the unvested equity awards which we assumed on the acquisition closing date. Part of the cash was paid to settle the vested stock options of Zipwhip employees that were outstanding on the acquisition closing date. We assumed all unvested and outstanding stock options and restricted stock units of Zipwhip continuing employees as converted into our own respective equity awards at the conversion ratio provided in the Agreement and Plan of Merger and Reorganization,Reorganization. Vesting of Class A shares of our common stock and assumed equity awards that were subject to service conditions is recorded into our stock-based compensation expense as the services are provided. This acquisition is described in detail in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.57Because the acquisition of Zipwhip occurred during the year ended December 31, 2021, the information presented in this section with respect to the year ended December 31, 2021 includes the contribution of Zipwhip starting from July 14, 2021, the date of acquisition. The information with respect to the periods prior to the date of acquisition relates to Twilio on a standalone basis, not including Zipwhip. As a result, comparisons to prior periods may not be indicative of future results or future rates of growth.Acquisition of Segment.io, Inc. in 2020In November 2020, we acquired Segment.io, Inc. (“Segment”), the market-leading customer data platform, for a purchase price of $3.0 billion. The purchase price was paid in the form of shares of our Class A common stock and cash and included fair value of pre-combination services of Segment employees that was embedded in the unvested equity awards which we assumed on the acquisition closing date. Part of the cash was paid to settle the vested equity awards of Segment employees that were outstanding on the acquisition closing date. We assumed all unvested and outstanding equity awards of Segment continuing employees as converted into our own equity awards at the conversion ratio provided in the Agreement and Plan of Reorganization. Vesting of Class A shares of our common stock and assumed equity awards that were subject to service conditions is recorded into our stock-based compensation expense over the period the services are provided. This acquisition is described in detail in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Because the acquisition of Twilio Segment occurred during the year ended December 31, 2020, the information presented in this section with respect to the year ended December 31, 2020 includes the contribution of Twilio Segment starting from November 2, 2020, the date of acquisition. The information with respect to periods prior to the date of acquisition relates to Twilio on a standalone basis, not including Segment. The information with respect to year 2021 includes Segment results for the full year. As a result, comparisons to prior periods or the current full year period may not be indicative of future results or future rates of growth.Investment in Syniverse CorporationIn February 2021, we entered into a Framework Agreement, as amended, each outstanding sharewith Syniverse Corporation (“Syniverse”) and Carlyle Partners V Holdings, L.P., (“Framework Agreement”), pursuant to which Syniverse would issue to us shares of SendGridSyniverse common stock convertedin consideration for an investment by us of up to $750.0 million, subject to certain terms and conditions. The initial agreements and conditions to closing of this transaction are described in detail in Note 13(a) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.On February 9, 2022, Syniverse mutually terminated a proposed Agreement and Plan of Merger with M-3 Brigade Acquisition II Corp. (“MBAC”) because the rate of MBAC shareholder redemptions for the proposed transaction would have exceeded the minimum cash condition for closing, which occurred as a result of recent changes in market conditions (“MBAC Transaction Termination”). Because of the MBAC Transaction Termination, Twilio will not purchase any shares of common stock of, or make any investment in, MBAC.The Framework Agreement, dated as of February 26, 2021, by and between Twilio, Syniverse and Carlyle Partners V Holdings, L.P., remains in full force and effect. The amendment, dated as of August 16, 2021, to the Framework Agreement terminated on February 9, 2022, as a result of the MBAC Transaction Termination. Pursuant to the terms and subject to the closing conditions set forth in the Framework Agreement, the parties thereto are pursuing the alternative transaction, whereby Twilio will make a minority investment of $500.0 million to $750.0 million in Syniverse and the parties (or their applicable subsidiaries) will enter into a 0.485wholesale agreement.Public Equity OfferingsIn February 2021, August 2020 and June 2019, we completed public equity offerings in which we sold 4,312,500 shares, 5,819,838 shares and 8,064,515 shares, respectively, of our Class A common stock at public offering prices of $409.60 per share, $247.00 per share and $124.00 per share, respectively. We received aggregate proceeds of $1.8 billion, $1.4 billion and $979.0 million, respectively, after deducting underwriting discounts and offering expenses paid by us.Issuance of 2029 and 2031 Senior NotesIn March 2021, we issued and sold $1.0 billion aggregate principal amount of senior notes, consisting of $500.0 million principal amount of 3.625% notes due 2029 (the “2029 Notes”) and $500.0 million principal amount of 3.875% notes due 2031 (the “2031 Notes,” and together with the 2029 Notes, the “Notes”). The net proceeds from the offering of these Notes were58approximately $984.7 million, after deducting underwriting discounts and issuance costs paid by us. These Notes are described in detail in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Redemption of Convertible Senior Notes and Capped Call TransactionsDuring 2021 we issued a sharenotice of redemption for our convertible senior notes due 2023 (the “Convertible Notes”) and on June 2, 2021, we redeemed all of the remaining outstanding principal amount of the notes. During 2021 and through the date of the redemption, we converted $343.7 million aggregate principal amount of the Convertible Notes by issuing 4,846,965 shares of our Class A common stock. The extinguishment of these notes resulted in a $29.0 million loss that is included in other (expenses) income, net, in our consolidated statement of operations included elsewhere in this Annual Report on Form 10-K.Concurrently with the principal redemption, we settled the related capped call arrangements that were entered into contemporaneously with the Convertible Notes offering in May 2018. The capped call arrangements were settled for gross cash consideration of $229.8 million that we received and recorded as additional paid-in-capital, net of $1.4 million of transaction costs and a $3.2 million realized gain. These transactions are described in detail in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.COVID-19 UPDATEThe rapid spread of the COVID-19 globally has disrupted, and may continue to disrupt, our day-to-day operations and the operations of our customers, partners and service providers for an indefinite period of time, including as a result of changing public health recommendations, travel restrictions and limitations, the duration, spread and severity and potential recurrence of the virus and its variants, as well as the efficacy of vaccines and vaccine distribution and the timing and trajectory of the economic recovery, all of which could negatively impact our business and results of operations and financial condition. Since mid-March 2020, we have taken precautionary measures to protect our employees and contingent workers and to help minimize the spread of the virus by temporarily closing our worldwide offices and minimizing business travel. We have continued to monitor the progress of vaccination efforts around the world. In the year ended December 31, 2018,second half of 2021, as COVID-19 related restrictions have eased in some geographies, we incurred $3.6 million in expenses related to this acquisition. Unless otherwise noted, the following discussion and analysiscommenced a phased reopening for certain offices.The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. The COVID-19 pandemic and its adverse effects on economic and market conditions, including labor shortages, supply chain disruptions and inflation, have been prevalent in the locations where we, our liquiditycustomers, our suppliers or our third-party business partners conduct business. These adverse conditions may continue for an extended period and capital resources focusesthere may be additional impacts to the economy and our business as a result of COVID-19. This could result in decreased business spending by our customers and prospective customers and business partners and third-party business partners, reduced demand for our solutions, lower renewal rates by our customers, longer or delayed sales cycles, including customers and prospective customers delaying contract signing or contract renewals, or reducing budgets or minimum commitments related to the product and services that we offer, all of which could have an adverse impact on our existingbusiness operations exclusiveand financial condition. See the risk factor titled “The global COVID-19 pandemic may adversely impact our business, results of operations and financial condition” in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K for further discussion of the possible impact of the acquisitionCOVID-19 pandemic on our business, financial condition and results of SendGrid. Any forward-looking statements contained herein do not take into account the impact of this acquisition.operations.Key Business MetricsYear Ended December 31, 2021 2020 2019 Number of Active Customer Accounts (as of end date of period) (1)256,000 221,000 179,000 Total Revenue (in thousands) (1)$ 2,841,839 $ 1,761,776 $ 1,134,468 Total Revenue Growth Rate (1)61 % 55 % 75 % Dollar-Based Net Expansion Rate (2)131 % 137 % 135 % ____________________ (1) Includes the contributions from our Zipwhip business, acquired July 14, 2021; Twilio Segment business, acquired November 2, 2020; Twilio SendGrid business, acquired February 1, 2019; and other smaller acquisitions from the dates of their respective acquisitions except for the Number of Active Customer Accounts, which excludes customer accounts from our Zipwhip business.(2) As previously announced in our Annual Report on Form 10-K filed with the SEC on March 2, 2020, commencing with the three-month period ended March 31, 2020, we calculate our Dollar-Based Net Expansion Rate by comparing total revenue from a cohort of Active Customer Accounts in a period to the same period in the prior year (the “New DBNE Definition”). To facilitate comparison between the periods presented, Dollar-Based Net Expansion Rate as presented in the table above has been calculated as if the New DBNE Definition had been in effect during that period. As a result of the New DBNE Definition, unless specifically identified as being calculated using total revenue, any Dollar-Based Net Expansion Rates disclosed by us in our SEC filings, press releases and presentations prior to the date of our press release for the three months ended March 31, 2020, will not be directly comparable to our Dollar-Based Net Expansion Rates going forward. Unless an acquisition closes on the first day of a quarter, revenue from an acquisition will not impact this calculation until the quarter following the one year anniversary of the acquisition. Year Ended December 31, 2018 2017 2016 64,286 48,979 36,606 $ 593,017 $ 365,490 $ 245,548 62 % 49 % 79 % 140 % 128 % 161 % our Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an Active“Active Customer AccountAccount” at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. We believe that the use of our platform by our customers at or above the $5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below $5 per month. In the years ended December 31, 2021, 2020 and 2019, revenue from Active Customer Accounts represented over 99% of total revenue in each period. A single organization may constitute multiple unique Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account. In the years ended December 31, 2018, 2017 and 2016, revenue from Active Customer Accounts represented over 99% of total revenue in each period. Base Revenue. We monitor Base Revenue as one of the more reliable indicators of future revenue trends. Base Revenue consists of all revenue other than revenue from large Active Customer Accounts that have never entered into 12-month minimum revenue commitment contracts with us, which we refer to as Variable Customer Accounts. While almost all of our customer accounts exhibit some level of variability in the usage of our products, based on our experience, we believe that Variable Customer Accounts are more likely to have significant fluctuations in usage of our products from period to period, and therefore that revenue from Variable Customer Accounts may also fluctuate significantly from period to period. This behavior is best evidenced by the decision of such customers not to enter into contracts with us that contain minimum revenue commitments, even though they may spend significant amounts on the use of our products and they may be foregoing more favorable terms often available to customers that enter into committed contracts with us. This variability adversely affects our ability to rely upon revenue from Variable Customer Accounts when analyzing expected trends in future revenue. For historical periods through March 31, 2016, we defined a Variable Customer Account as an Active Customer Account that (i) had never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) had met or exceeded 1% of our revenue in any quarter in the periods presented through March 31, 2016. To allow for consistent period-to-period comparisons, in the event a customer account qualified as a Variable Customer Account as of March 31, 2016, or a previously Variable Customer Account ceased to be an Active Customer Account as of such date, we included such customer account as a Variable Customer Account in all periods presented. For reporting periods starting with the three months ended June 30, 2016, we define a Variable Customer Account as a customer account that (a) has been categorized as a Variable Customer Account in any prior quarter, as well as (b) any new customer account that (i) is with a customer that has never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) meets or exceeds 1% of our revenue in a quarter. Once a customer account is deemed to be a Variable Customer Account in any period, it remains a Variable Customer Account in subsequent periods unless such customer enters into a minimum revenue commitment contract with us for a term of at least 12 months. In the years ended December 31, 2018, 2017 and 2016, we had six, six and eight Variable Customer Accounts, which represented 9%, 8% and 11%, respectively, of our total revenue. Dollar-BasedDollar‑Based Net Expansion Rate. Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing Active Customer Accounts and to increase their use of the platform. An important way in which we track ourhave historically tracked performance in this area is by measuring the Dollar-Based Net Expansion Rate for our Active Customer Accounts, other than our Variable Customer Accounts. Our Dollar-Based Net Expansion Rate increases when such Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product. Our Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce their usage of a product or when we lower usage prices on a product. As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, for reporting periods starting with the three months ended December 31, 2016, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of our revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric. We believe that measuring our Dollar-Based Net Expansion Rate on revenue generated from our Active Customer Accounts, other than our Variable Customer Accounts, provides a more meaningful indication of the performance of our efforts to increase revenue from existing customers. OurFor historical periods through December 31, 2019, our Dollar-Based Net Expansion Rate compared the revenue from Active Customer Accounts, other than large Active Customer Accounts that have never entered into 12-month minimum revenue commitment contracts with us, in a quarter to the same quarter in the prior year. For reporting periods starting with the three months ended March 31, 2020, our Dollar-Based Net Expansion Rate compares the revenue from all Active Customer Accounts, other than Variable Customer Accounts in a quarter to the same quarter in the prior year. To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts, other than Variable Customer Accounts that were Active Customer Accounts in the same quarter of the prior year. The Dollar-Based Net Expansion Rate is the quotient obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period.60Net Loss CarryforwardsAt December 31, 2018,2021, we had federal, state and foreign net operating loss carryforwards of approximately $452.7 million, $347.1 million$4.2 billion, $2.7 billion and $8.1$268.7 million, respectively, and federal and state tax credits of approximately $26.7$132.9 million and $19.9$84.9 million, respectively. If not utilized, the federal and state loss carryforwards will expire at various dates beginning in 20262029 and 2029,2025, respectively, and the federal tax credits will expire at various dates beginning in 2029. The state tax credits can be carried forward indefinitely. At present, we believe that it is more likely than not that the federal and state net operating loss and credit carryforwards will not be realized. Accordingly, a full valuation allowance has been established for these tax attributes, as well as the rest of the federal and state deferred tax assets.Key Components of Statements of OperationsRevenue. We derive our revenue primarily from usage-basedusage‑based fees earned from customers using the software products within our Engagement Cloud and Programmable Communications Cloud.Channel APIs. These usage-basedusage‑based software products include offerings, such as Programmable Voice,Messaging, Programmable MessagingVoice and Programmable Video.Video, among others. Some examples of the usage-basedusage‑based fees for whichthat we charge include minutes of call duration activity for our Programmable Voice products,the number of text messages sent or received using our Programmable Messaging products, minutes of call duration activity for our Programmable Voice products and the number of authentications for our Account Security products.Verify product. In the years ended December 31, 2018, 20172021, 2020 and 2016,2019, we generated 84%72%, 83%76% and 83%75% of our revenue, respectively, from usage-basedusage‑based fees. We also earnfee-basedfee‑based products, such as telephone numbers, short codesour Email API, Marketing Campaigns, Twilio Flex, our cloud contact center platform, and Twilio Segment, our customer support. Customersdata platform.When customers first begin using our platform, they typically pay upfront via credit card in monthly prepaid amounts and draw down their balances as they purchase or use our products. As customers grow their usage of our products they automatically receive tiered usage discounts. Our larger customers often enter into contracts for at least 12 months, that contain minimum revenue commitments, which may contain more favorable pricing. Customers on such contracts typically are invoiced monthly in arrears for products used.Amounts that have been charged via credit card or invoiced are recorded in accounts receivable and in revenue, deferred revenue or customer deposits, depending on whether the revenue recognition criteria have been met. Given that our credit card prepayment amounts tend to be approximately equal to our credit card consumption amounts in each period, and that we do not have many invoiced customers on pre-payment contract terms, ourOur deferred revenue and customer deposits liability at any particular timebalance is not a meaningful indicator of our future revenue.We define U.S. revenue as revenue from customers with IP addresses or mailing addresses at the time of registration in the United States, and we define international revenue as revenue from customers with IP addresses or mailing addresses at the time of registration outside of the United States.Cost of Revenue and Gross Margin. Cost of revenue consists primarily of fees paid to network service providers. Cost of revenue also includes cloud infrastructure fees, direct costs of personnel, costs, such as salaries and stock-basedstock‑based compensation for our customer support employees, and non-personnelnon‑personnel costs, such as depreciation and amortization expense related to data centers and hosting equipment, amortization of capitalized internal use software development costs and amortization of acquired intangibles. Our arrangements with network service providers require us to pay fees based on the volume of phone calls initiated or text messages sent, as well as the number of telephone numbers acquired by us to service our customers. Our arrangements with our cloud infrastructure provider require us to pay fees based on our server capacity consumption.Our gross margin has been and will continue to be affected by a number of factors, including the timing and extent of our investments in our operations,operations; our product mix; our ability to manage our network service provider and cloud infrastructure-relatedinfrastructure‑related fees, including A2P SMS fees; the mix of U.S. revenue compared to international revenue,revenue; changes in foreign exchange rates; the timing of amortization of capitalized software development costs and acquired intangiblesintangibles; and the extent to which we periodically choose to pass on our cost savings from platform optimization efforts to our customers in the form of lower usage prices.Operating Expenses. The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, sales commissions and bonuses and stock-basedstock‑based compensation. We also incur other non-personnelnon‑personnel costs related to our general overhead expenses. We expect that our operating costs will increase in absolute dollars as we add additional employees and invest in our infrastructure to grow our business.61Research and Development. Research and development expenses consist primarily of personnel costs, outsourced engineering services, cloud infrastructure fees for staging and development, amortization of capitalized internal use software development costs, depreciation and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization.We continue to focus our research and development efforts on adding new features and products, including new use cases, improving our platform and increasing the functionality of our existing products.Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees. Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities and developer evangelism, costs related to ourWe focus our sales and marketing efforts on generating awareness of our company, platform and products, through our developer evangelist team and self-service model, creating sales leads and establishing and promoting our brand, both domestically and internationally. We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self-serviceself‑service model with an enterprise sales approach, expanding our sales channels, driving our go-to-marketgo‑to‑market strategies, building our brand awareness and sponsoring additional marketing events.General and Administrative. General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel and executives.personnel. General and administrative expenses also include costs related to business acquisitions, legal and other professional services fees, sales and othercertain taxes, depreciation and amortization, charitable contributions and an allocation of our general overhead expenses. We expect that we will incur costs associated with supporting the growth of our business and to meet the increased compliance requirements associated with both our international expansionexpansion. We may also incur higher than usual losses related to deterioration of quality of certain financial assets caused by the macroeconomic conditions and our operation as, a public company.Our general and administrative expenses include a certain amount of salesprior non-income-based taxes in certain domestic and other taxes to whichinternational jurisdictions that we are subject to based on the manner we sell and deliver our products. PriorAdditional details are provided in Note 13(d) to March 2017, we did not collect such taxes from our customers and recorded such taxes as general and administrative expenses. Effective March 2017, we began collecting these taxes from customersconsolidated financial statements included elsewhere in certain jurisdictions and added more jurisdictions throughout 2018 where we are now collecting these taxes. We continue expanding the number of jurisdictions where we will be collecting these taxes in the future. We expect that these expenses will decline in future years as we continue collecting these taxes from our customers in more jurisdictions, which would reduce our rate of ongoing accrual.Provision for Income Taxes. Our income tax provision or benefit for interim periods is determined using an estimateconsists primarily of our annual effectiveincome taxes, withholding taxes in foreign jurisdictions in which the Company conducts business and the tax rate, adjusted for discrete items occurring inbenefit related to the quarter.release of valuation allowance from acquisitions. The primary difference between our effective tax rate and the federal statutory rate relates to the full valuation allowance the Company established on the federal, state and certain foreign net operating losses and credits.Non-GAAP Financial Measures:We use the following non‑GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non‑GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period‑to‑period comparisons of results of operations and assists in jurisdictionscomparisons with other companies, many of which use similar non‑GAAP financial information to supplement their GAAP results. Non‑GAAP financial information is presented for supplemental informational purposes only, should not be considered a valuation allowance orsubstitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly‑titled non‑GAAP measures used by other companies. Whenever we use a zero tax rate. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act reduces the U.S. statutory corporate tax rate to 21%, effective January 1, 2018. Consequently, we recordednon‑GAAP financial measure, a decreasereconciliation is provided to the Company's federal deferred tax assetsmost closely applicable financial measure stated in accordance with generally accepted accounting principles. Investors are encouraged to review the related GAAP financial measures and the reconciliation of $28.0 million, which was fully offset by a reductionthese non‑GAAP financial measures to their most directly comparable GAAP financial measures.62Non‑GAAP Gross Profit and Non‑GAAP Gross Margin. For the year ended December 31, 2017. The other provisions of the Tax Act, including the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, did not have a material impact on our financial statementsperiods presented, we define non‑GAAP gross profit and non‑GAAP gross margin as of December 31, 2018. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax CutsGAAP gross profit and Jobs Act (SAB 118), which allowed companiesGAAP gross margin, respectively, adjusted to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Our accounting for the Tax Act is complete and we did not have any signification adjustments to provisional amounts recordedexclude, as of December 31, 2017. The Tax Act creates a new requirement thatapplicable, certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currentlyexpenses as presented in the gross incometable below:Year Ended December 31, 2021 2020 2019 Reconciliation: (In thousands) Gross profit $ 1,390,713 $ 915,661 $ 608,917 Gross margin 49 % 52 % 54 % Non-GAAP adjustments: Stock-based compensation 14,074 8,857 7,123 Amortization of acquired intangibles 114,896 59,501 45,267 Payroll taxes related to stock-based compensation — — 104 Non-GAAP gross profit $ 1,519,683 $ 984,019 $ 661,411 Non-GAAP gross margin 53 % 56 % 58 % Non‑GAAP Operating Expenses. For the periods presented, we define non‑GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, certain expenses as presented in the CFCs' U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factoring such amounts into the measurement of our deferred taxes (the "deferred method"). We selected the period cost method.table below:Year Ended December 31, 2021 2020 2019 Reconciliation: (In thousands) Operating expenses $ 2,306,297 $ 1,408,562 $ 978,702 Non-GAAP adjustments: Stock-based compensation (618,211) (353,054) (257,195) Amortization of acquired intangibles (83,888) (38,993) (27,540) Acquisition-related expenses (7,449) (21,765) (15,713) Charitable contributions (31,169) (18,993) — Payroll taxes related to stock-based compensation (48,417) (27,389) (15,084) Non-GAAP operating expenses $ 1,517,163 $ 948,368 $ 663,170 63Non‑GAAP Income (Loss) from Operations and Non‑GAAP Operating Margin. For the periods presented, we define non‑GAAP income (loss) from operations and non‑GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude, as applicable, certain expenses as presented in the table below:Year Ended December 31, 2021 2020 2019 Reconciliation: (In thousands) Loss from operations $ (915,584) $ (492,901) $ (369,785) Operating margin (32) % (28) % (33) % Non-GAAP adjustments: Stock-based compensation 632,285 361,911 264,318 Amortization of acquired intangibles 198,784 98,494 72,807 Acquisition-related expenses 7,449 21,765 15,713 Charitable contributions 31,169 18,993 — Payroll taxes related to stock-based compensation 48,417 27,389 15,188 Non-GAAP income (loss) from operations $ 2,520 $ 35,651 $ (1,759) Non-GAAP operating margin — % 2 % — % 64Results of OperationsThe following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. We have included Zipwhip in our results of operations prospectively after July 14, 2021, Twilio Segment after November 2, 2020; Twilio SendGrid after February 1, 2019, and all other acquisitions from the respective closing dates of each such acquisition. The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future. Year Ended December 31, 2018 2017 2016 (In thousands, except share and per share data) $ 650,067 $ 399,020 $ 277,335 300,841 182,895 120,520 349,226 216,125 156,815 171,358 120,739 77,926 175,555 100,669 65,267 110,427 59,619 51,077 7,121 1,172 3,860 464,461 282,199 198,130 (115,235 ) (66,074 ) (41,315 ) (5,923 ) 3,071 317 (121,158 ) (63,003 ) (40,998 ) (791 ) (705 ) (326 ) $ (121,949 ) $ (63,708 ) $ (41,324 ) $ (1.26 ) $ (0.70 ) $ (0.78 ) 97,130,339 91,224,607 53,116,675
Our results of operations may be significantly affected by many factors, such as uncertainty regarding the impacts of the COVID-19 pandemic, fluctuations in foreign exchange rates, changes in global economic conditions and customer demand and spending, inflation, labor market constraints, world events and existing and new domestic and foreign laws and regulations, as well as those factors outlined in Part I, Item 1A, “Risk Factors.”Year Ended December 31, 2021 2020 2019 Consolidated Statements of Operations Data: (In thousands, except share and per share amounts) Revenue $ 2,841,839 $ 1,761,776 $ 1,134,468 Cost of revenue (1) (2)1,451,126 846,115 525,551 Gross profit 1,390,713 915,661 608,917 Operating expenses: Research and development (1) (2)789,219 530,548 391,355 Sales and marketing (1) (2)1,044,618 567,407 369,079 General and administrative (1) (2)472,460 310,607 218,268 Total operating expenses 2,306,297 1,408,562 978,702 Loss from operations (915,584) (492,901) (369,785) Other (expenses) income, net (45,345) (11,525) 7,569 Loss before benefit for income taxes (960,929) (504,426) (362,216) Benefit for income taxes 11,029 13,447 55,153 Net loss attributable to common
stockholders$ (949,900) $ (490,979) $ (307,063) Net loss per share attributable to common
stockholders, basic and diluted$ (5.45) $ (3.35) $ (2.36) Weighted-average shares used in computing net
loss per share attributable to common
stockholders, basic and diluted174,180,465 146,708,663 130,083,046 ____________________________________
(1)Includes stock-based compensation expense as follows:Year Ended December 31, 2021 2020 2019 (In thousands) Cost of revenue $ 14,074 $ 8,857 $ 7,123 Research and development 258,672 173,303 126,012 Sales and marketing 213,351 103,450 60,886 General and administrative 146,188 76,301 70,297 Total $ 632,285 $ 361,911 $ 264,318 Year Ended December 31, 2018 2017 2016 (In thousands) $ 1,126 $ 650 $ 291 42,277 22,808 12,946 23,616 9,822 4,972 26,254 16,339 6,016 $ 93,273 $ 49,619 $ 24,225
(2)65 Year Ended December 31, 2018 2017 2016 (In thousands) $ 5,656 $ 4,644 $ 619 22 139 151 1,117 753 — 375 84 110 $ 7,170 $ 5,620 $ 880 Year Ended December 31, 2021 2020 2019 (In thousands) Cost of revenue $ 114,896 $ 59,501 $ 45,267 Research and development 1,260 — — Sales and marketing 82,493 38,915 27,540 General and administrative 135 78 — Total $ 198,784 $ 98,494 $ 72,807 Year Ended
December 31, 2018 2017 2016 100 % 100 % 100 % 46 46 43 54 54 57 26 30 28 27 25 24 17 15 18 1 * 1 71 71 71 (18 ) (17 ) (15 ) (1 ) 1 * (19 ) (16 ) (15 ) * * * (19 )% (16 )% (15 )% Year Ended December 31, 2021 2020 2019 Consolidated Statements of Operations, as a percentage of revenue: ** Revenue 100 % 100 % 100 % Cost of revenue 51 48 46 Gross profit 49 52 54 Operating expenses: Research and development 28 30 34 Sales and marketing 37 32 33 General and administrative 17 18 19 Total operating expenses 81 80 86 Loss from operations (32) (28) (33) Other (expenses) income, net (2) (1) 1 Loss before benefit for income taxes (34) (29) (32) Benefit for income taxes * 1 5 Net loss attributable to common
stockholders(33 %) (28 %) (27) %
***Comparison of the Fiscal Years Ended December 31, 2018, 20172021, 2020 and 2016Revenue2019 Year Ended December 31, 2018 2017 2016 2017 to 2018 Change 2016 to 2017 Change (Dollars in thousands) $ 593,017 $ 365,490 $ 245,548 $ 227,527 62 % $ 119,942 49 % 57,050 33,530 31,787 23,520 70 % 1,743 5 % $ 650,067 $ 399,020 $ 277,335 $ 251,047 63 % $ 121,685 44 % Year Ended December 31, 2021 2020 2019 2020 to 2021
Change2019 to 2020
Change(Dollars in thousands) Total Revenue $ 2,841,839 $ 1,761,776 $ 1,134,468 $ 1,080,063 61 % $ 627,308 55 % 2018 Compared2021 compared to 2017In 2018, Base Revenue2021, total revenue increased by $227.5 million,$1.1 billion, or 62%61%, compared to the same period last year. This increase was primarily attributable to an increase in the usage of our products, particularly our Programmable Messaging products, Programmable Voice products and Email products, the adoption of additional products by our existing customers, the additional A2P fees imposed by certain carriers and revenue contributions from our acquisitions of Twilio Segment, Zipwhip and other businesses. The change in usage from our existing customers was reflected in our Dollar‑Based Net Expansion Rate of 131% for the year ended December 31, 2021. The increase in usage was also attributable to a 16% increase in the number of Active Customer Accounts, from 221,000 as of December 31, 2020, to over 256,000 as of December 31, 2021.66In 2021, U.S. revenue and international revenue represented 91%$1.9 billion or 66%, and 92%$960.0 million, or 34%, respectively, of total revenue. In 2020, U.S. revenue and international revenue represented $1.3 billion, or 73%, and $479.6 million, or 27%, respectively, of total revenue. The increase in 2018international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and 2017, respectively.Programmable Voice products, by our existing international Active Customer Accounts; a 14% increase in the number of international Active Customer Accounts driven in part by our focus on expanding our sales to customers outside of the United States; and revenue contribution from our recent acquisitions.2020 compared to 2019In 2020, total revenue increased by $627.3 million, or 55%, compared to the same period last year. This increase was primarily attributable to an increase in the usage of our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers.customers, and revenue contribution from our acquisition of our Twilio Segment business for the period from November 2, 2020, through December 31, 2020. This increase was partially offset by pricing decreases that we have implemented over time in the form of lower usage prices, in an effort to increase the reach and scale of our platform. The changes in usage and priceprices in the year ended December 31, 20182020 were reflected in our Dollar-BasedDollar‑Based Net Expansion Rate of 140%137%. The increase in usage was also attributable to a 31%23% increase in the number of Active Customer Accounts, from 48,979179,000 as of December 31, 2017,2019, to 64,286over 221,000 as of December 31, 2018.In the year ended December 31, 2018, Variable Revenue increased by $23.5 million, or 70%, compared to the same period last year, and represented 9% and 8% of total revenue in the year ended December 31, 2018 and 2017, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts.$484.8$1.3 billion or 73%, and $479.6 million, or 75%, and $165.3 million, or 25%27%, respectively, of total revenue in 2018, compared to $308.6 million, or 77%, and $90.4 million, or 23%, respectively, of total revenue in 2017. The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts, and a 57% increase in the number of international Active Customer Accounts driven in part by our focus on expanding our sales to customers outside of the United States.2017 Compared to 20162017, Base Revenue increased by $120.0 million, or 49%, compared to 2016, and represented 92% and 89% of total revenue in 2017 and 2016, respectively. This increase was primarily attributable to an increase in the usage of all our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was partially offset by pricing decreases that we have implemented over time in the form of lower usage prices, in an effort to increase the reach and scale of our platform. The changes in usage and price in 2017 were reflected in our Dollar-Based Net Expansion Rate of 128%. The increase in usage was also attributable to a 34% increase in the number of Active Customer Accounts, from 36,606 as of December 31, 2016 to 48,979 as of December 31, 2017. Revenue from Uber, our largest Base Customer, decreased in 2017, due to a combination of product usage decreases and certain price adjustments that were made by us as a result of Uber's high volume growth. In 2017, Variable Revenue increased by $1.7 million, or 5%, compared to 2016, and represented 8% and 11% of total revenue in 2017 and 2016, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts, partially offset by the decrease in number of Variable Customer Accounts from eight to six.$308.6$808.9 million, or 77%71%, and $90.4$325.6 million, or 23%29%, respectively, of total revenue in 2017, compared to $233.9 million, or 84%, and $43.4 million, or 16%, respectively, of total revenue in 2016.revenue. The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts; a 39%23% increase in the number of international Active Customer Accounts excluding the impact from our Beepsend acquisition, driven in part by our focus on expanding our sales to customers outside of the United States; and revenue contribution from the acquisition of our recent acquisition. We opened one new office outside of the United States in 2017. Year Ended December 31, 2017 to 2018
Change 2016 to 2017
Change Year Ended December 31, 2018 2017 2016 2021 2020 2019 2020 to 2021
Change2019 to 2020
Change (Dollars in thousands) (Dollars in thousands) $ 300,841 $ 182,895 $ 120,520 $ 117,946 64 % $ 62,375 52 % Cost of revenue $ 1,451,126 $ 846,115 $ 525,551 $ 605,011 72 % $ 320,564 61 % 54 % 54 % 57 % Gross margin 49 % 52 % 54 % 2018 Compared2021 compared to 2017In 2018,2021, cost of revenue increased by $117.9$605.0 million, or 64%72%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $104.4$465.5 million increase in network service providers'providers’ costs, which included the additional A2P fees imposed by certain carriers, and a $44.2 million increase in cloud infrastructure fees, all to support the growth in usage of our products. The increase was also due to a $55.4 million increase in the amortization expense of intangible assets that we acquired through business combinations. In addition, the year ended December 31, 2021, included cost of revenue from our recent acquisitions.In 2021, the gross margin percentage declined compared to the same period last year. This decline was primarily driven by continued strong growth of our international messaging business, the additional A2P fees imposed by certain carriers and an increase in network service provider fees in certain geographies, which we pass to our customers at cost. The decline was also due to an increase in amortization expense related to our acquired intangible assets, These declines were partially offset by the growth of our other application services products, the impact of the acquisition of our Twilio Segment business and certain operational improvements.672020 compared to 2019In 2020, cost of revenue increased by $320.6 million, or 61%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $246.2 million increase in network service providers’ costs and a $7.6$32.3 million increase in cloud infrastructure fees, both to support the growth in usage of our products.In 2018,2020, gross margin percentage remained stabledeclined compared to 2017. Higher network service provider coststhe same period last year. This decline was primarily driven by a re-acceleration in growth of our messaging business, an increase in amortization expense related to foreign currency fluctuations, certain price adjustments that were made by us in 2017 as a resultacquired intangible assets, the impact of the high volume growth of a large customer, an increasing mix of international product usage and an increase in network service provider fees in certain geographies, which we pass to our customers at cost. These declines were largelypartially offset by the impact of the acquisition of our Twilio Segment business and certain operational improvements and product mix.2017 Compared to 2016 In 2017, cost of revenue increased by $62.4 million, or 52%,improvements.Operating ExpensesYear Ended December 31, 2021 2020 2019 2020 to 2021
Change2019 to 2020
Change(Dollars in thousands) Research and development $ 789,219 $ 530,548 $ 391,355 $ 258,671 49 % $ 139,193 36 % Sales and marketing 1,044,618 567,407 369,079 477,211 84 % 198,328 54 % General and administrative 472,460 310,607 218,268 161,853 52 % 92,339 42 % Total operating expenses $ 2,306,297 $ 1,408,562 $ 978,702 $ 897,735 64 % $ 429,860 44 % 2021 compared to 2016. The increase in cost of revenue was primarily attributable to a $51.3 million increase in network service providers' costs, a $4.8 million increase in cloud infrastructure fees to support the growth in usage of our products and a $5.5 million increase in amortization expense for internal use software.In 2017, gross margin declined primarily as a result of an increasing mix of international product usage and certain price adjustments that were made by us as a result of Uber's high volume growth.Operating Expenses Year Ended December 31, 2017 to 2018
Change 2016 to 2017
Change 2018 2017 2016 (Dollars in thousands) $ 171,358 $ 120,739 $ 77,926 $ 50,619 42 % $ 42,813 55 % 175,555 100,669 65,267 74,886 74 % 35,402 54 % 110,427 59,619 51,077 50,808 85 % 8,542 17 % 7,121 1,172 3,860 5,949 508 % (2,688 ) (70 )% $ 464,461 $ 282,199 $ 198,130 $ 182,262 65 % $ 84,069 42 % 2018 Compared to 2017 In 2018,2021, research and development expenses increased by $50.6$258.7 million, or 42%49%, compared to the same period last year. The increase was primarily attributable to a $37.0$225.0 million increase in personnel costs, net of a $3.3$15.7 million increase in capitalized software development costs, largely as a result of an 32%a 54% average increase in our research and development headcount, as we continued to focus on enhancing our existing products, introducing new products as well as enhancing product management and other technical functions. In addition, the year ended December 31, 2021 included research and development expenses and the impact of growth in headcount from our recent acquisitions.In 2021, sales and marketing expenses increased by $477.2 million, or 84%, compared to the same period last year. The increase was primarily attributable to a $331.5 million increase in personnel costs, largely as a result of a 74% average increase in sales and marketing headcount, as we continued to expand our sales efforts globally. The increase was also due to a $43.6 million increase related to the amortization of acquired intangible assets and a $31.6 million increase in advertising expenses. In addition, the year ended December 31, 2021 included sales and marketing expenses and the impact of growth in headcount from our recent acquisitions.In 2021, general and administrative expenses increased by $161.9 million, or 52%, compared to the same period last year. The increase was primarily attributable to a $142.1 million increase in personnel costs, largely as a result of a 75% average increase in general and administrative headcount, to support the growth of our business globally. The increase was also due to a $12.2 million increase in charitable contributions that we made through Twilio.org, $11.2 million increase in professional service fees incurred in the ordinary course of business, offset by a $14.2 million decrease in professional services related to our acquisitions. In addition, the year ended December 31, 2021 included general and administrative expenses and the impact of growth in headcount from our recent acquisitions.2020 compared to 2019In 2020, research and development expenses increased by $139.2 million, or 36%, compared to the same period last year. The increase was primarily attributable to a $128.3 million increase in personnel costs, net of a $17.8 million increase in capitalized software development costs, largely as a result of a 63% average increase in our research and development headcount, as we continued to focus on enhancing our existing products, introducing new products as well as enhancing product management and other technical functions. The increase was also due to a $2.9$13.3 million increase in our cloud infrastructure fees related to support the staging and development of our products, a $2.1 million increase in professional services fees, a $1.3 million increase in outsourced engineering servicesproducts. In addition, the year ended December 31, 2020 included research and a $1.8 million increase in amortization expense.development expenses and headcount from our recent acquisitions.In 2018,2020, sales and marketing expenses increased by $74.9$198.3 million, or 74%54%, compared to the same period last year. The increase was primarily attributable to a $48.6$137.4 million increase in personnel costs, largely as a result of a 52%88% average increase in sales and marketing headcount, as we continued to expand our sales efforts in the United States and internationally,abroad. The increase was also due to a $5.7$11.4 million increase related to the amortization of acquired intangible assets and a $20.1 million increase in advertising expenses. In addition, the year ended December 31, 2020, included sales and marketing expenses $4.7 million increase related toand headcount from our annual developer conference SIGNAL, a $3.5 million increase in the expenses related to brand awareness programs and $2.3 million increase in credit card fees due to increased transaction volumes.In 2018,2020, general and administrative expenses increased by $50.8$92.3 million, or 85%42%, compared to the same period last year. The increase was partially attributable to the non-recurrence of $13.4 million release of previously accrued tax liability upon certain obligation settlements and estimate revisions. The remaining increase was primarily attributable to a $18.8$25.4 million increase in personnel costs, largely as a result of a 49%66% average increase in general and administrative headcount, to support the growth of our business domestically and internationally andglobally. The increase was also due to a $8.4$19.0 million increase in professional services fees primarily relatedcharitable contributions due to several donations made by Twilio.org, a $10.7 million increase in our operations as a public company and our on-going litigation matters, including legal settlements/accruals,allowance for estimated credit losses partially impacted by the COVID-19 environment and a $4.7$5.8 million increase in professional expenses specifically related to our business acquisitions of other business. Additionally, certain of our taxes increased by $7.9 million primarily in foreign jurisdictions and our professional services fees increased by $6.6 million. In addition, the year ended December 31, 2021 included general and administrative expenses and headcount from our recent acquisitions.Liquidity and Capital ResourcesOur principal sources of liquidity have been (i) the net proceeds of $979.0 million, $1.4 billion and $1.8 billion, net of underwriting discounts and offering expenses paid by us, from our public equity offerings in June 2019, August 2020 and February 2021, respectively; (ii) the aggregate net proceeds of approximately $537.0 million, after deducting purchaser discounts and debt issuance costs paid by us, from the issuance of our Convertible Notes in May 2018; (iii) the aggregate net proceeds of approximately $984.7 million, after deducting purchaser discounts and debt issuance costs paid by us, from the issuance of our 2029 Notes and 2031 Notes in March 2021; (iv) the net proceeds of $228.4 million, after deducting transaction costs paid by us, from settlement of our capped call arrangements in June 2021; and (v) the payments received from customers using our products.Our primary uses of cash include operating costs, such as described inpersonnel-related costs, network service provider costs, cloud infrastructure costs, facility-related spending, as well as acquisitions and investments. Refer to Note 56, Note 10, Note 13(a) and Note 18 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In 2018, charitable contributions expenses increased by $5.9 million, or 508%, compared to the same period last year, due to several donations that Twilio.org made to independent organizations consistent with its philanthropic goals.2017 Compared to 2016 In 2017, research and development expenses increased by $42.8 million, or 55%, compared to 2016. The increase was primarily attributable to a $30.3 million increase in personnel costs, net of a $7.7 million increase in capitalized software development costs, largely as a result of a 37% average increase10-K for detailed discussions of our researchobligations and development headcount, as we continued to focus on enhancing our existing products and introducing new products, as well as enhancing product management and other technical functions. The increase was also due in part to a $3.0 million increase in software subscription expense, a $2.7 million increase in cloud infrastructure fees to support the staging and development of our products, a $1.5 million increase in outsourced engineering services, a $1.4 million increase in amortization expensecommitments related to our internal-use software and the intangible assets acquired through business combinations, a $0.7 million increase related to employee travel and a $0.7 million increase in professional fees. In 2017, sales and marketing expenses increased by $35.4 million, or 54%, compared to 2016. The increase was primarily attributable to a $25.5 million increase in personnel costs, largely as a result of a 42% average increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $1.9 million increase in credit card processing fees due to increased volumes, a $1.4 million increase in advertising expenses, a $1.2 million increase in professional services fees, a $1.2 million increase in employee travel expenses, a $1.1 million increase in software subscription expense, a $1.2 million increase in depreciation and amortization and a $0.4 million increase related to our SIGNAL developer conferences. In 2017, general and administrative expenses increased by $8.5 million, or 17%, compared to 2016. The increase was primarily attributable to a $16.1 million increase in personnel costs, largely as a result of a 33% average increase in general and administrative headcount to support the growth of our business domestically and internationally, a $4.3 million increase in professional services fees primarily related to our operations as a public companyleases, debt, other purchase obligations and our on-going litigation matters, a $2.6 million increaseproposed minority investment in facilities and insurance costs, a $0.5 million increase relatedSyniverse Corporation.We may, from time to software licenses. These increases were partially offset by the releasetime, consider acquisitions of, $13.4 million tax liability upon certain obligationsettlements and estimate revisions, discussedor investments in, detail in Note 11 (d) of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and a $3.4 million decrease in the state and other taxes expense as we began collecting those taxes in certain jurisdictions starting in March 2017,complementary businesses, products, services, capital infrastructure or technologies which allowedmight affect our liquidity requirements, cause us to reduce the ongoing rate of accrual. In 2017, charitable contributions expenses decreased by $2.7 million,secure additional financing or 70%, comparedissue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to the same period last year. During 2017, Twilio.org donated 45,383 shares of Class A common stock with a value of $1.2 million to an independent organizations consistent with its philanthropic goals.Quarterly Results of Operations The following tables set forth our unaudited quarterly statements of operations data for each of the eight quarters ended December 31, 2018, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.us, if at all. Three Months Ended March 31,
2017 June 30,
2017 Sept. 30,
2017 Dec. 31,
2017 March 31,
2018 June 30,
2018 Sept. 30,
2018 Dec. 31,
2018 (Unaudited, in thousands) $ 87,372 $ 95,870 $ 100,542 $ 115,236 $ 129,116 $ 147,754 $ 168,895 $ 204,302 37,286 42,333 48,254 55,022 59,582 67,940 77,031 96,288 50,086 53,537 52,288 60,214 69,534 79,814 91,864 108,014 26,522 29,714 31,674 32,829 37,576 39,811 42,340 51,631 21,116 26,153 25,778 27,622 32,822 37,749 45,949 59,035 17,203 4,740 18,867 18,809 23,393 24,212 28,433 34,389 — — — 1,172 — — 175 6,946 64,841 60,607 76,319 80,432 93,791 101,772 116,897 152,001 (14,755 ) (7,070 ) (24,031 ) (20,218 ) (24,257 ) (21,958 ) (25,033 ) (43,987 ) 498 471 1,000 1,102 665 (1,898 ) (1,939 ) (2,751 ) (14,257 ) (6,599 ) (23,031 ) (19,116 ) (23,592 (23,856 ) (26,972 ) (46,738 ) 30 (510 ) (422 ) 197 (137 ) (150 ) (84 ) (420 ) (14,227 ) $ (7,109 ) $ (23,453 ) $ (18,919 ) $ (23,729 ) $ (24,006 ) $ (27,056 ) $ (47,158 ) (1)Includes stock-based compensation expense as follows Three Months Ended March 31,
2017 June 30,
2017 Sept. 30,
2017 Dec. 31,
2017 March 31,
2018 June 30,
2018 Sept. 30,
2018 Dec. 31,
2018 (Unaudited, in thousands) $ 138 $ 142 $ 180 $ 190 $ 222 $ 266 $ 284 $ 354 4,484 5,710 6,493 6,121 7,872 9,749 10,879 13,777 1,995 2,363 2,603 2,861 3.859 5,049 5,246 9,462 2,768 4,185 4,912 4,474 5,587 5,942 6.332 8,393 $ 9,385 $ 12,400 $ 14,188 $ 13,646 $ 17,540 $ 21,006 $ 22,741 $ 31,986 (2)Includes amortization of acquired intangibles as follows: Three Months Ended March 31,
2017 June 30,
2017 Sept. 30,
2017 Dec. 31,
2017 March 31,
2018 June 30,
2018 Sept. 30,
2018 Dec. 31,
2018 (Unaudited, in thousands) $ 997 $ 1,182 $ 1,250 $ 1,215 $ 1,198 $ 1,125 $ 1,396 $ 1,937 38 38 25 38 22 — — — 117 202 220 214 220 206 390 301 24 20 20 20 20 20 20 315 $ 1,176 $ 1,442 $ 1,515 $ 1,487 $ 1,460 $ 1,351 $ 1,806 $ 2,553 Three Months Ended March 31,
2017 June 30,
2017 Sept. 30,
2017 Dec. 31,
2017 March 31,
2018 June 30,
2018 Sept. 30,
2018 Dec. 31,
2018 (Unaudited) 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 43 44 48 48 46 46 46 47 57 56 52 52 54 54 54 53 30 31 32 28 29 27 25 25 24 27 26 24 25 26 27 29 20 5 19 16 18 16 17 17 — — — 1 — — — 3 74 63 76 70 73 69 69 74 (17 ) (7 ) (24 ) (18 ) (19 ) (15 ) (15 ) (22 ) 1 * 1 1 1 (1 ) (1 ) (1 ) (16 ) (7 ) (23 ) (17 ) (18 ) (16 ) (16 ) (23 ) * (1 ) * * * * * * (16 )% (8 )% (23 )% (17 )% (18 )% (16 )% (16 )% (23 )% *Less than 0.5% of revenue.**Columns may not add up to 100% due to rounding. Three Months Ended March 31,
2017 June 30,
2017 Sept. 30,
2017 Dec. 31,
2017 March 31,
2018 June 30,
2018 Sept. 30,
2018 Dec. 31,
2018 (Unaudited, dollars in thousands) 40,696 43,431 46,489 48,979 53,985 57,350 61,153 64,286 $ 80,643 $ 87,583 $ 91,965 $ 105,299 $ 117,507 $ 135,004 $ 154,348 $ 186,158 62 % 55 % 43 % 40 % 46 % 54 % 68 % 77 % 141 % 131 % 122 % 118 % 132 % 137 % 145 % 147 % (1)See the section titled "—Key Business Metrics—Number of Active Customer Accounts."(2)See the section titled "—Key Business Metrics—Base Revenue."(3)See the section titled "—Key Business Metrics—Dollar-Based Net Expansion Rate."Quarterly Trends in Revenue and Gross Margin Our quarterly revenue increased in each period presented primarily due to an increase in the usage of products as well as the adoption of additional products by our existing customers as evidenced by our Dollar-Based Net Expansion Rates, and an increase in our new customers. In the first half of 2017, an increasing mix of international product usage offset the continued platform optimization and drove a modest decline in gross margin percentage. The trends continued in the second half of 2017, and further gross margin declines were driven by certain price adjustments that were made by us as a result of Uber's high volume growth. In the first three quarters of 2018 the gross margin improved due to continued platform optimization, along with changes in our product and geographic mix. In the fourth quarter of 2018, an increasing mix of international product usage offset the continued platform optimization and drove a modest decline in gross margin percentage.Quarterly Trends in Operating Expenses Our operating expenses have generally increased sequentially as a result of our growth, primarily related to increased personnel costs to support our expanded operations, our continued investment in our products, our operations as a public company and ongoing litigation. Our sales and marketing expenses included $1.5 million, $6.8 million and $3.2 million of expenses related to our SIGNAL developer conference, in the third and fourth quarters of 2018 and the second quarter of 2017, respectively. In the first quarter of 2017, our general and administrative expenses included a significant amount of sales and other taxes to which we are subject. Prior to March 2017, we had not billed nor collected these taxes from our customers, and, accordingly, recorded a provision for these taxes, based on several key assumptions, when our liability was probable and the amount could be reasonably estimated. Starting in March 2017, we began collecting these taxes in certain jurisdictions and have been increasing the number of jurisdictions where these taxes are now being collected by us. In the second quarter of 2017, we revised certain key assumptions driving prior estimates based on settlements reached with various states indicating that certain revisions to these assumptions were appropriate in that period. These revisions resulted in a reversal of $12.2 million of previously accrued liability, which caused a significant decrease in our general and administrative expenses in the second quarter of 2017 and resulted in a reduced rate of ongoing accrual for the third and fourth quarters of 2017 and all of 2018. In the third quarter 2018, our general and administrative expenses increased by $1.5 million due to a preliminary settlement reached in an outstanding class action case, as further described in Note 11(b) of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In the fourth quarters of 2018, our general and administrative expenses further increased by $2.8 million due to the expenses related to our acquisition of SendGrid.Liquidity and Capital Resources To date, our principal sources of liquidity have been (i) the net proceeds of $155.5 million and $64.4 million, net of underwriting discounts and offering expenses, from our initial public offering in June 2016 and our follow-on public offering in October 2016, respectively; (ii) the net proceeds we received through private sales of equity securities; (iii) the net proceeds of approximately $537.0 million, after deducting initial purchaser discounts and debt issuance costs paid by us, from issuance of the Notes, as described in Note 8 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K; and (iv) the payments received from customers using our products. From our inception through March 31, 2016, we completed several rounds of equity financing through the sale of our convertible preferred stock for total net proceeds of $237.1 million.at least the next 12 months.months and beyond. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I, Item 1A, "Risk“Risk Factors."” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.69Cash FlowsThe following table summarizes our cash flows for the periods indicated (in thousands):flows:Year Ended December 31, 2021 2020 2019 (In thousands) Cash (used in) provided by operating activities $ (58,192) $ 32,654 $ 14,048 Cash (used in) investing activities (2,489,996) (845,855) (1,285,792) Cash provided by financing activities 3,096,325 1,493,311 1,020,145 Effect of exchange rate changes on cash, cash equivalents and restricted cash (191) 40 — Net increase (decrease) in cash, cash equivalents and restricted cash $ 547,946 $ 680,150 $ (251,599) Year Ended December 31, 2018 2017 2016 As Adjusted $ 7,983 $ (3,255 ) $ 10,097 (139,419 ) (226,748 ) (34,986 ) 515,819 36,437 229,164 163 74 — $ 384,546 $ (193,492 ) $ 204,275 In 2018,2021, cash provided byused in operating activities consisted primarily of our net loss of $121.9$949.9 million adjusted for non-cash items, including $93.3$632.3 million of stock-based compensation expense, $26.1$17.2 million of tax benefit related to release of valuation allowance in connection with our Zipwhip and prior acquisitions, $258.4 million of depreciation and amortization expense, $14.1$5.8 million amortization of the debt discount and issuance costs related to our Notes, $6.0long-term debt, $48.8 million of charitable donationsnon-cash reduction to our operating right-of-use asset, $31.5 million amortization of deferred commissions and $14.8$185.1 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses increased $196.0 million primarily due to revenue growth, the timing of cash receipts and pre-payments for cloud infrastructure fees and certain operating expenses. Accounts payable and other current liabilities increased $52.1 million and deferred revenue and customer deposits increased $6.0$137.7 million primarily due to increases in transaction volumes. Accounts receivable and prepaid expensesOperating lease liability decreased $49.0 million due to payments made against our operating lease obligations. Other long-term assets increased $67.0$121.2 million which resulted primarily fromdue to an increase in the timing of cash receiptsfrom certainsales commissions balances related to the growth of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses.In 2017,2020, cash used inprovided by operating activities consisted primarily of our net loss of $63.7$491.0 million adjusted for non-cash items, including $49.6$360.9 million of stock-based compensation expense, $18.8$16.5 million of tax benefit related to release of valuation allowance in connection with our acquisitions of other businesses, $149.7 million of depreciation and amortization expense, $1.2$23.8 million amortization of the debt discount and issuance costs related to our long-term debt, $38.4 million of charitable donationsnon-cash reduction to our operating right-of-use asset, $13.3 million amortization of deferred commissions, a $13.2 million increase in our allowance for credit losses, and $10.2$97.4 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other current liabilities increased $2.1 million and deferred revenue increased $3.6 million due to increases in transaction volumes, which were partially offset by the $13.4 million release of tax liability upon certain obligation settlements and estimate revisions, discussed in detail in Note 11 (d) of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Accounts receivable and prepaid expenses increased $13.2$92.9 million which resulted primarily fromdue to the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses. In 2016, cash provided by operating activities consisted primarily of our net loss of $41.3 million adjusted for non-cash items, including $24.2 million of stock-based compensation expense, $8.3 million of depreciation and amortization expense and $16.9 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts Accounts payable and other current liabilities increased $25.9$98.4 million and deferred revenue increased $4.1 million, which were primarily due to increases in transaction volumes and additional accruals of sales and other taxes.volumes. Operating lease liability decreased $33.9 million due to payments made against our operating lease obligations. Other long-term liabilitiesassets increased $9.1$81.9 million primarily due to thean increase in the deferred rent balancesales commissions balances related to our new office lease in San Francisco, California. This was partially offset by an increase in accounts receivable and prepaid expenses of $22.0 million, which primarily resulted from the growth of our business and the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses, and a $5.7 million net increase related to the tenant improvement allowance under our new San Francisco, California office lease, after collecting $2.6 million from the landlord in the fourth quarter of 2016.Cash Flows from Investing ActivitiesIn 2018,2021, cash used in investing activities was $139.4 million,$2.5 billion primarily consisting of $84.2 million$1.9 billion of purchases of marketable securities and other investments, net of maturities $30.6and sales, $491.5 million of net cash paid to acquire other businesses as described in Note 57 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, $44.0 million related to capitalized software development costs and $46.0 million related to purchases of long-lived assets.In 2020, cash used in investing activities was $845.9 million primarily consisting of $453.1 million of purchases of marketable securities and other investments, net of maturities and sales, $333.6 million of net cash paid to acquire other businesses as described in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, $33.3 million related to capitalized software development costs and $25.8 million related to purchases of long-lived assets.70Cash Flows from Financing ActivitiesIn 2021, cash provided by financing activities was $3.1 billion primarily consisting of $1.8 billion in net proceeds from our public equity offering, as described in Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K; $984.7 million in net proceeds from the issuance of our 2029 Notes and 2031 Notes and $228.4 million in net proceeds from the settlement of the capped call transactions related to our Convertible Notes, which were fully redeemed during 2021, as described in Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K; and $136.2 million in proceeds from stock options exercised by our employees and shares issued under our employee stock purchase plan.In 2020, cash provided by financing activities was $1.5 billion primarily consisting of $1.4 billion in net proceeds from our public equity offering, as described in Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and $19.5$104.8 million related to capitalized software development costs. In 2017, cash used in investing activities, as adjusted pursuant to the adoption of the new accounting guidance described in Note 2(p) of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, was $226.7 million, primarily consisting of $177.3 million of purchases of marketable securities, net of maturities, a $22.6 million payment to acquire other businesses, $17.3 million related to capitalized software development costs and $9.2 million purchases of property and equipment primarily related to the leasehold improvements under our new office lease. In 2016, cash used in investing activities, as adjusted pursuant to the adoption of the new accounting guidance described in Note 2(p) of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, was $35.0 million, primarily consisting of $14.2 million of payments related to purchases of property and equipment as we continued to expand our offices and grow our headcount to support the growth of our business, $11.5 million of payments for capitalized software development as we continued to build new products and enhance our existing products and an $8.5 million payment to acquire certain assets of other businesses.Cash Flows from Financing Activities In 2018, cash provided by financing activities was $515.8 million, primarily consisting of $537.1 million net proceeds from our Notes, net of initial purchaser discounts and issuance costs paid in the period, $29.8 million proceeds from stock options exercised by our employees and $10.1 million proceeds from shares issued under our employee stock purchase plan. This was partially offset by a $58.5 million payment for capped call transactions. In 2017, cash provided by financing activities was $36.4 million, primarily consisting of $25.7 million proceeds from stock options exercises by our employees and $11.9 million proceeds from shares issued under our employee stock purchase plan. In 2016, cash provided by financing activities was $229.2 million, primarily consisting of $225.7 million of aggregate proceeds raised in our initial public offering and follow-on public offering, net of underwriting discounts, and $9.1 million of proceeds from stock options exercises by our employees. These cash inflows were partially offset by $4.6 million of costs paid in connection with our public offerings.Off-Balance Sheet ArrangementsWe have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.Contractual Obligations and Other Commitments The following table summarizes our non-cancelable contractual obligations as of December 31, 2018: Less Than
1 Year 1 to 3
Years 3 to 5
Years 5 Years
or More Total (In thousands) $ 24,128 $ 60,425 $ 60,614 $ 81,316 $ 226,483 306 1,085 1,198 1,939 4,528 37,623 3,360 7,000 — 47,983 $ 62,057 $ 64,870 $ 68,812 $ 83,255 $ 278,994 (1)Operating leases represent total future minimum rent payments under non-cancelable operating lease agreements.(2)Capital lease represent total future minimum payments under a non-cancelable capital lease agreements.(3)Non-cancellable purchase obligations represent total future minimum payments under contracts with our cloud infrastructure provider, network service providers and other vendors. Purchase obligations exclude agreements that are cancelable without penalty. Unrecognized tax benefits are not included in the table above because any amounts expected to be settled in cash are not material.We have one business activity and operate in one reportable segment.Critical Accounting Policies and EstimatesOur consolidated financial statements are prepared in accordance with generally accepted accounting principles in U.S. GAAP. Preparationthe United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We baseevaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable. In many instances, we could have reasonably used different accounting estimates and in other instances changes inreasonable under the accounting estimates are reasonably likely to occur from period to period. Actualcircumstances. Our actual results could differ significantly from ourthese estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies, discussed below areassumptions and estimates associated with revenue recognition and business combinations have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical to understanding our historicalaccounting policies and future performance, as these policies relateestimates.See Note 2 to the more significant areas involvingconsolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our judgments and estimates.Revenue RecognitionRevenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter 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.Our revenue is primarily derived from usage-based fees earned from customers accessing our 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.Subscription-based fees are derived from certain term-basednon-usage-based contracts, such as with the sales of short codes, customer support, and customer support. Term-basedfees charged to access the cloud-based platform of our Twilio Segment business, which acquisition is further described in Note 7 to our consolidated financial statements included elsewhere in this Annual Report of Form 10-K. Non-usage-based contracts revenue is recognized on a ratable basis over the contractual term which is generally from one to three years.71Our arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. Credits are accounted for as variable consideration, are estimated based on historical trends and are recorded against revenue. 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.Stock-Based CompensationBusiness CombinationsAccounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed. We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under theuse our best estimates and assumptions to accurately assign fair value recognition provisions of this guidance, stock-based compensation is measuredto the tangible and intangible assets acquired and liabilities assumed at the grantacquisition date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award. Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options and purchase rights under our 2016 Employee Stock Purchase Plan (the "2016 ESPP") granted to our employees and directors. The grant date fair value of restricted stock units is determined using the fair value of our common stock on the date of grant. Prior to our initial public offering, the fair value of our Class A common stock was determined by the estimated fair value at the time of grant. After our initial publicoffering, we use the market closing price of our Class A common stock as reported on the New York Stock Exchange for the fair value. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated Class A common stock fair value as well as assumptions regarding a numberthe useful lives of other variables. These variables include our expected stock price volatility over the expected termthose acquired intangible assets. Examples of critical estimates in valuing certain of the options, stock option exerciseintangible assets and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows:•Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified calculation of expected term, as we do not have sufficient historical data to use any other method to estimate expected term.•Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to ours, such as the size, and operational and economic similarities to our principle business operations. We use this method becausegoodwill we have acquired include but are not limited information onto future expected cash flows from acquired developed technologies; existing customer relationships; uncertain tax positions and tax related valuation allowances assumed; and discount rates. Unanticipated events and circumstances may occur that may affect the volatilityaccuracy or validity of our Class A common stock because of our short trading history.•Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock-based awards.•Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. In February 2017, we granted performance-based stock options that vest upon satisfaction of certain performance conditions. These stock options were valued using the Monte-Carlo simulation model. The following table summarizes thesuch assumptions, used in the Black Scholes option-pricing model to determine the fair value of our stock options, as follows:estimates or actual results. Year Ended December 31, 2018 2017 2016 $33.01 - $76.63 $23.60 - $31.96 $10.09 - $15.00 1 - 6.08 6.08 6.08 38.6% - 44.2% 44.3% - 47.6% 51.4% - 53.0% 2.9% - 3.0% 1.9% - 2.3% 1.3% - 1.5% 0% 0% 0% 0.5 0.5 0.90 39.8% - 47.5% 33.2% - 33.9% 52% 2.1% - 2.5% 1.1% - 1.4% 0.6% 0% 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: 40 % 45 % 14 % $ 31.72 Internal-Use Software Development Costs We capitalize certain costs related to the development of our platform and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within product development expenses in our consolidated statements of operations. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.See Note 2(ab)2(ac) to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements not yet adopted.Item 7A.Quantitative and Qualitative Disclosures about Market RiskWe are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest ratebusiness, including sensitivities as follows:Interest Rate RiskWe had cash, and cash equivalents and restricted cash of $487.2 million$1.5 billion and marketable securities of $261.1 million$3.9 billion as of December 31, 2018.2021. Cash, and cash equivalents and restricted cash consist of bank deposits, and money market funds.funds and commercial paper. Marketable securities consist primarily of U.S. treasury securities, non-U.S. government securities and high credit quality corporate debt securities. The cash and cash equivalents and marketable securities are held for working capital purposes. Such interest-earninginterest‑earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-termshort‑term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.In May 2018, we issued $550.0 million aggregate principal amount of Convertible Notes, which were fully redeemed as of June 2, 2021.In March 2021, we issued $1.0 billion aggregate principal amount of our 2029 Notes and 2031 Notes carrying fixed interest rates of 3.625% and 3.875%, respectively.Currency Exchange RisksThe functional currency of most of our foreign subsidiaries is the U.S. dollar and the Euro. Therefore, we are exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars.dollar. The local currencies of our foreign subsidiaries are the Australian dollar, the Bermuda dollar, the Brazilian real, the British pound, the Euro,Canadian dollar, the Colombian peso, the Singapore dollar,Czech Republic koruna, the Euro, the Hong Kong dollar, the Swedish KronaIndian rupee, the Japanese yen, the Mexican Peso, the Polish Zloty, the Serbian Dinar, the Singapore dollar and the Czech Koruna. Swedish krona.Our subsidiaries remeasure monetary assets and liabilities at period-end exchange rates,year.month in which a transaction occurs. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiaries'subsidiaries’ financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our consolidated statements of operations.72We do not currently engage in anyenter into foreign currency derivative hedging activitytransactions to reducemitigate our potential exposure to market risks that may result from changes in foreign currency fluctuations, although we may chooseexchange rates. For further information, see Note 2(x) and Note 5 to do soour consolidated financial statements included elsewhere in the future. this Annual Report on Form 10-K.A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our consolidated financial statements.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSPagePage 74Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors
Twilio Inc.:Opinions on the Consolidated Financial Statements and Internal Control Over Financial ReportingWe have audited the accompanying consolidated balance sheets of Twilio Inc. and subsidiaries (the Company)"Company") as of December 31, 20182021 and December 31, 2017,2020, the related consolidated statements of operations, comprehensive loss, stockholders'stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2018,2021, and the related notes (collectively, the consolidated"consolidated financial statements)statements"). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and December 31, 2017,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018,2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 20182021, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.The Company acquired Zipwhip, Inc. during fiscal 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Zipwhip, Inc.’s internal control over financial reporting associated with total assets of $51.9 million and total revenues of $55.4 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Zipwhip, Inc.Basis for OpinionsThe Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying ManagementAnnual Report on Internal Control overOver Financial Reporting, appearing under Item 9A(b).Reporting. Our responsibility is to express an opinion on the Company'sCompany’s consolidated financial statements and an opinion on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control Over Financial ReportingA company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Critical Audit MattersThe critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.Evaluation of the sufficiency of audit evidence over revenue recognitionAs discussed in Note 2(e) to the consolidated financial statements, the Company's revenue is derived from usage and non-usage based fees earned from customers accessing the Company's enterprise cloud computing services. As of December 31, 2021, the Company recorded $2.8 billion in revenues, a portion of which related to Programmable Messaging and Programmable Voice APIs. The Company’s revenue recognition process is highly automated and revenue is recorded within the Company’s general ledger through reliance on customized and proprietary information technology (IT) systems.We identified the evaluation of the sufficiency of audit evidence over revenue recognition related to the Company’s Programmable Messaging and Programmable Voice APIs as a critical audit matter. This matter required especially subjective auditor judgment because of the large number of information technology (IT) applications involved in the revenue recognition process. Auditor judgment was required in determining the nature and extent of audit evidence obtained over these information systems that process revenue transactions. Involvement of IT professionals with specialized skills and knowledge was required to assist with the performance and evaluation of certain procedures and determination of IT applications subject to testing.The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over revenue recognition. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s Programmable Messaging and Programmable Voice revenue recognition process. We involved IT professionals with specialized skills and knowledge, who assisted in testing controls related to the Company’s general information technology and application controls related to the systems utilized within the Company’s Programmable Messaging and Programmable Voice revenue recognition process. For a sample of customer agreements, we tested the Company’s identification and treatment of significant contract terms, including comparing the pricing reflected in the Company’s revenue IT system to the contractually agreed upon pricing with the customer. For a sample of revenue transactions, we compared the amounts recognized for consistency with underlying documentation, including contracts with customers. We assessed the recorded revenue by comparing revenue to underlying cash receipts. We evaluated credits issued after year end to assess the revenue recorded within the period. In addition, we evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed, including appropriateness of the nature and extent of such evidence.76Valuation of the acquisition date intangible assets related to a business combinationAs discussed in Note 7 to the consolidated financial statements, on July 14, 2021, the Company acquired Zipwhip, Inc. (Zipwhip) by issuing shares of its Class A common stock worth approximately $419.2 million and paying approximately $418.1 million of cash. As part of the acquisition, the Company acquired $244.5 million of intangible assets, including customer relationships.We identified the assessment of the valuation of the acquisition date customer relationship intangible asset acquired as a critical audit matter. There was a high degree of subjective auditor judgment in assessing the discount rate and forecasted revenue growth rates used to derive the fair value of the customer relationship acquired intangible asset. In addition, this fair value was challenging to test due to the sensitivity of the fair value determination to changes in these assumptions.The following are the primary procedures we performed to address the critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to value acquired intangible assets, including the Company’s controls over the discount rate and forecasted revenue growth rate. We compared prior period forecasted revenue to prior period actual revenue to evaluate the Company’s ability to forecast. We evaluated the Company’s forecasted revenue growth rates used to value the customer relationship intangible asset by (1) comparing the growth forecast assumptions to historical growth rates of peer companies, and (2) comparing forecasted growth rates to historical growth rates. We involved a valuation professional with specialized skills and knowledge, who assisted in testing by:•evaluating the discount rate used by the Company to value the customer relationship intangible asset by assessing the relevant inputs used by the Company in their calculation of their discount rate•recalculating the estimate of the fair value of the customer relationship intangible asset acquired using the Company’s cash flow forecast and discount rate independently corroborated by our valuation specialists and comparing the result to the Company’s fair value estimate./s/ KPMG LLPWe have served as the Company'sCompany’s auditor since 2013.San Francisco,Santa Clara, California
February 28, 201922, 202277TWILIO INC.Consolidated Balance Sheets(In thousands, except share and per share amounts)As of December 31, 2021 2020 (In thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 1,479,452 $ 933,885 Short-term marketable securities 3,878,430 2,105,906 Accounts receivable, net 388,215 251,167 Prepaid expenses and other current assets 186,131 81,377 Total current assets 5,932,228 3,372,335 Property and equipment, net 255,316 183,239 Operating right-of-use assets 234,584 258,610 Intangible assets, net 1,050,012 966,573 Goodwill 5,263,166 4,595,394 Other long-term assets 263,292 111,282 Total assets $ 12,998,598 $ 9,487,433 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 93,333 $ 60,042 Accrued expenses and other current liabilities 417,503 252,895 Deferred revenue and customer deposits 140,389 87,031 Operating lease liability, current 52,325 48,338 Total current liabilities 703,550 448,306 Operating lease liability, noncurrent 211,253 229,905 Finance lease liability, noncurrent 25,132 17,856 Long-term debt 985,907 302,068 Other long-term liabilities 41,290 36,633 Total liabilities 1,967,132 1,034,768 Commitments and contingencies (Note 13) 0 0 Stockholders’ equity: Preferred stock, $0.001 par value, 100,000,000 shares authorized, none issued — — Class A and Class B common stock, $0.001 par value per share Authorized shares 1,100,000,000 as of December 31, 2021 and 2020; Issued and outstanding shares 180,468,099 and 164,047,524 as of December 31, 2021 and 2020180 164 Additional paid-in capital 13,169,118 9,613,246 Accumulated other comprehensive (loss) income (18,141) 9,046 Accumulated deficit (2,119,691) (1,169,791) Total stockholders’ equity 11,031,466 8,452,665 Total liabilities and stockholders’ equity $ 12,998,598 $ 9,487,433 As of December 31, 2018 2017 $ 487,215 $ 115,286 261,128 175,587 97,712 43,113 26,893 19,279 872,948 353,265 18,119 5,502 63,534 50,541 27,558 20,064 38,165 17,851 8,386 2,559 $ 1,028,710 $ 449,782 $ 18,495 $ 11,116 99,758 53,614 19,557 13,797 137,810 78,527 434,496 — 18,169 11,409 590,475 89,936 — — 100 94 808,527 608,165 1,282 2,025 (371,674 ) (250,438 ) 438,235 359,846 $ 1,028,710 $ 449,782 TWILIO INC.Consolidated Statements of Operations(In thousands, except share and per share amounts) Year Ended December 31, 2018 2017 2016 $ 650,067 $ 399,020 $ 277,335 300,841 182,895 120,520 349,226 216,125 156,815 171,358 120,739 77,926 175,555 100,669 65,267 110,427 59,619 51,077 7,121 1,172 3,860 464,461 282,199 198,130 (115,235 ) (66,074 ) (41,315 ) (5,923 ) 3,071 317 (121,158 ) (63,003 ) (40,998 ) (791 ) (705 ) (326 ) $ (121,949 ) $ (63,708 ) $ (41,324 ) $ (1.26 ) $ (0.70 ) $ (0.78 ) 97,130,339 91,224,607 53,116,675 Year Ended December 31, 2021 2020 2019 (In thousands, except share and per share amounts) Revenue $ 2,841,839 $ 1,761,776 $ 1,134,468 Cost of revenue 1,451,126 846,115 525,551 Gross profit 1,390,713 915,661 608,917 Operating expenses: Research and development 789,219 530,548 391,355 Sales and marketing 1,044,618 567,407 369,079 General and administrative 472,460 310,607 218,268 Total operating expenses 2,306,297 1,408,562 978,702 Loss from operations (915,584) (492,901) (369,785) Other (expenses) income, net (45,345) (11,525) 7,569 Loss before benefit for income taxes (960,929) (504,426) (362,216) Benefit for income taxes 11,029 13,447 55,153 Net loss attributable to common stockholders $ (949,900) $ (490,979) $ (307,063) Net loss per share attributable to common stockholders, basic and diluted $ (5.45) $ (3.35) $ (2.36) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 174,180,465 146,708,663 130,083,046 See accompanying notes to consolidated financial statements.79TWILIO INC.Consolidated Statements of Comprehensive Loss(In thousands)Year Ended December 31, 2021 2020 2019 (In thousands) Net loss $ (949,900) $ (490,979) $ (307,063) Other comprehensive (loss) income: Unrealized (loss) gain on marketable securities (27,215) 3,674 3,804 Foreign currency translation (266) 286 — Net change in market value of effective foreign currency forward exchange contracts 294 — — Total other comprehensive (loss) income (27,187) 3,960 3,804 Comprehensive loss attributable to common stockholders $ (977,087) $ (487,019) $ (303,259) Year Ended December 31, 2018 2017 2016 $ (121,949 ) $ (63,708 ) $ (41,324 ) 258 (598 ) — (1,001 ) 2,623 — (743 ) 2,025 — $ (122,692 ) $ (61,683 ) $ (41,324 ) TWILIO, INC.Consolidated Statements of Stockholders'Stockholder's Equity(In thousands, except share amounts)Common Stock
Class ACommon Stock
Class BAdditional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' Equity Shares Amount Shares Amount (In thousands, except share amounts) Balance as of December 31, 2018 80,769,763 $ 80 19,310,465 $ 20 $ 808,527 $ 1,282 $ (371,674) $ 438,235 Net loss — — — — — — (307,063) (307,063) Exercises of stock options 1,466,813 1 2,154,053 2 37,760 — — 37,763 Recapitalization of a subsidiary — — — — 75 — (75) — Vesting of restricted stock units 2,775,788 2 117,331 1 — — — 3 Value of equity awards withheld for tax liability (23,543) — (22,095) — (5,412) — — (5,412) Conversion of shares of Class B common stock into shares of Class A common stock 10,029,127 9 (10,029,127) (9) — — — — Shares of Class A common stock issued under ESPP 244,628 — — — 19,738 — — 19,738 Shares of Class A common stock issued in connection with a follow-on public offering, net of underwriters' discounts and issuance costs 8,064,515 8 — — 979,039 979,047 Shares of Class A common stock issued in acquisition 23,555,081 24 — — 2,658,874 — — 2,658,898 Value of equity awards assumed in acquisition — — — — 182,554 — — 182,554 Unrealized gain on marketable securities — — — — — 3,804 — 3,804 Stock-based compensation — — — — 271,844 — — 271,844 Balance as of December 31, 2019 126,882,172 $ 124 11,530,627 $ 14 $ 4,952,999 $ 5,086 $ (678,812) $ 4,279,411 Net loss — — — — — — (490,979) (490,979) Exercises of stock options 2,263,629 2 1,232,099 1 72,514 — — 72,517 Vesting of restricted stock units 3,525,401 4 29,007 — — — — 4 Value of equity awards withheld for tax liability (34,893) — (4,692) — (8,778) — — (8,778) Conversion of shares of Class B common stock into shares of Class A common stock 2,235,739 2 (2,235,739) (2) — — — — Equity component from partial settlement of convertible senior notes due 2023 2,902,434 3 — — 190,757 — — 190,760 Shares of Class A common stock issued under ESPP 291,800 1 — — 32,242 — — 32,243 Shares of Class A common stock donated to charity 88,408 — — — 18,993 — — 18,993 Issuance of shares of Class A common stock in connection with a follow-on public offering, net of underwriters' discounts and issuance costs 5,819,838 6 — — 1,408,163 — — 1,408,169 Shares of Class A common stock issued in acquisition 9,263,140 9 — — 2,532,347 — — 2,532,356 Value of equity awards assumed in acquisition — — — — 38,972 — — 38,972 Shares of Class A common stock issued in acquisition subject to future vesting 258,554 — — — — — — — Unrealized gain on marketable securities — — — — — 3,674 — 3,674 Foreign currency translation — — — — — 286 — 286 Stock-based compensation — — — — 375,037 — — 375,037 Balance as of December 31, 2020 153,496,222 $ 151 10,551,302 $ 13 $ 9,613,246 $ 9,046 $ (1,169,791) $ 8,452,665 81TWILIO, INC.Consolidated Statements of Stockholder's Equity Convertible
preferred stock Common
Stock—Class A Common
Stock—Class B Accumulated
Other
Comprehensive
Income Additional
paid-in
capital Accumulated
deficit Total
stockholders'
equity Shares Amount Shares Amount Shares Amount 54,508,441 $ 239,911 — $ — 17,324,003 $ 17 $ 22,103 $ — $ (145,406 ) $ 116,625 — — — — — — — — (41,324 ) (41,324 ) — — 11,500,000 12 — — 160,414 — — 160,426 — — 1,691,222 2 — — 65,279 — — 65,281 — — — — — — (5,730 ) — — (5,730 ) (54,508,441 ) (239,911 ) — — 54,508,441 54 239,857 — — — — — — — 2,168,287 2 8,390 — — 8,392 — — — — — — 636 — — 636 — — 19,178 — 68,345 — — — — — — — (1,578 ) — (27,036 ) — (1,037 ) — — (1,037 ) — — — — 126,365 — — — — — — — 36,787,588 37 (36,787,588 ) (37 ) — — — — — — — — (1,625 ) — — — — — — — — — — — 26,178 — — 26,178 — — — — (127,054 ) — — — — — — — 49,996,410 51 37,252,138 36 516,090 — (186,730 ) 329,447 — — — — — — — — (63,708 ) (63,708 ) — — — — 5,186,539 6 25,591 — — 25,597 — — — — — — 378 — — 378 — — 360,116 — 351,255 — — — — — — — — (22,538 ) — (678 ) — — (678 ) — — — — 22,510 — — — — — — — 18,710,499 18 (18,710,499 ) (18 ) — — — — — — 794,142 1 — — 11,917 — — 11,918 — — 45,383 — — — 1,172 — — 1,172 — — — — (16,159 ) — (100 ) — — (100 ) — — — — — — — (598 ) — (598 ) — — — — — — — 2,623 — 2,623 — — — — — — 53,795 — — 53,795 — — 69,906,550 70 24,063,246 24 608,165 2,025 (250,438 ) 359,846 — — — — — — — — (121,949 ) (121,949 ) — — — — — — — — 713 713 — — — — 3,625,991 4 29,732 — — 29,736 — — — — — 36 — — 36 — — 1,970,565 2 172,211 — — — — 2 — — (25,932 ) — (22,044 ) — (2,654 ) — — (2,654 ) — — — — 2,041 — — — — — — — 8,530,980 8 (8,530,980 ) (8 ) — — — — — — 325,262 — — — 10,122 — — 10,122 — — — — — — 119,435 — — 119,435 — — — — — — (2,819 ) — — (2,819 ) — — — — — — (58,465 ) — — (58,465 ) — — 62,338 — — — 5,996 — — 5,996 — — — — — — — 258 — 258 — — — — — — — (1,001 ) — (1,001 ) — — — — — — 98,979 — — 98,979 — $ — 80,769,763 $ 80 19,310,465 $ 20 $ 808,527 $ 1,282 $ (371,674 ) $ 438,235 Common Stock
Class ACommon Stock
Class BAdditional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' Equity Shares Amount Shares Amount (In thousands, except share amounts) Balance as of December 31, 2020 153,496,222 $ 151 10,551,302 $ 13 $ 9,613,246 $ 9,046 $ (1,169,791) $ 8,452,665 Net loss — — — — — — (949,900) (949,900) Exercises of stock options 1,779,320 2 509,499 — 87,693 — — 87,695 Vesting of restricted stock units 3,515,913 4 — — (4) — — — Value of equity awards withheld for tax liability (32,002) — — — (10,388) — — (10,388) Conversion of shares of Class B common stock into shares of Class A common stock 1,218,696 1 (1,218,696) (1) — — — — Equity component from partial settlement and redemption of convertible senior notes due 2023 4,846,965 5 — — 335,637 — — 335,642 Settlement of capped call, net of related costs — — — — 225,233 — — 225,233 Shares of Class A common stock issued under ESPP 198,926 — — — 48,465 — — 48,465 Shares of Class A common stock donated to charity 88,408 — — — 31,169 — — 31,169 Issuance of shares of Class A common stock in connection with a follow-on public offering, net of underwriters' discounts and issuance costs 4,312,500 4 — — 1,765,709 — — 1,765,713 Shares of Class A common stock issued in acquisition 1,116,816 1 — — 419,169 — — 419,170 Value of equity awards assumed in acquisition — — — — 1,511 — — 1,511 Shares of Class A common stock subject to future vesting 84,230 — — — — — — — Unrealized loss on marketable securities — — — — — (27,215) — (27,215) Foreign currency translation — — — — — (266) — (266) Net change in market value of effective foreign currency forward exchange contracts — — — — — 294 — 294 Stock-based compensation — — — — 651,678 — — 651,678 Balance as of December 31, 2021 170,625,994 $ 168 9,842,105 $ 12 $ 13,169,118 $ (18,141) $ (2,119,691) $ 11,031,466 See accompanying notes to consolidated financial statements.TWILIO INC.
INC.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2018 2017 2016 $ (121,949 ) $ (63,708 ) $ (41,324 ) 26,095 18,764 8,315 (1,496 ) 262 — 1,102 — — 12,951 — — 1,349 — — 93,273 49,619 24,225 5,996 1,172 — 3,650 580 1,145 1,874 561 711 (45 ) (295 ) 94 (58,234 ) (15,280 ) (8,254 ) (8,739 ) 2,214 (13,755 ) (5,305 ) (1,984 ) (129 ) 6,980 5,433 1,714 45,120 (3,312 ) 24,182 5,958 3,560 4,076 (597 ) (841 ) 9,097 7,983 (3,255 ) 10,097 (279,687 ) (293,186 ) — 195,497 115,877 — (19,546 ) (17,280 ) (11,527 ) (4,668 ) (9,248 ) (14,174 ) (441 ) (290 ) (785 ) (30,574 ) (22,621 ) (8,500 ) (139,419 ) (226,748 ) (34,986 ) — — 160,426 — — 65,281 — (430 ) (4,606 ) 550,000 — — (12,941 ) — — (58,465 ) — — 29,757 25,727 9,102 10,122 11,918 — (2,654 ) (678 ) (1,037 ) — (100 ) (2 ) 515,819 36,437 229,164 163 74 — 384,546 (193,492 ) 204,275 120,788 314,280 110,005 $ 505,334 $ 120,788 $ 314,280 $ 564 $ 605 $ 225 $ 1,418 $ 235 $ 4,201 $ 2,478 $ — $ — $ 5,706 $ 4,176 $ 1,953 $ 571 $ (149 ) $ — $ 2,290 $ — $ — ��� $ — $ — $ 430 Year Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) Net loss $ (949,900) $ (490,979) $ (307,063) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 258,378 149,660 110,430 Non-cash reduction to the right-of-use asset 48,786 38,395 23,193 Net amortization of investment premium and discount 36,158 6,789 (4,501) Impairment of operating right-of-use assets 8,854 — — Amortization of debt discount and issuance costs 5,827 23,759 23,696 Stock-based compensation 632,285 360,936 264,318 Amortization of deferred commissions 31,541 13,322 4,511 Tax benefit related to release of valuation allowance (17,236) (16,459) (55,745) Value of shares of Class A common stock donated to charity 31,169 18,993 — Loss on extinguishment of debt 28,965 12,863 — Other adjustments 12,094 12,762 3,165 Changes in operating assets and liabilities: Accounts receivable (117,943) (81,303) (51,357) Prepaid expenses and other current assets (78,012) (11,636) (20,316) Other long-term assets (121,225) (81,908) (18,021) Accounts payable 10,191 10,060 17,255 Accrued expenses and other current liabilities 127,554 88,340 46,154 Deferred revenue and customer deposits 45,634 13,824 2,968 Operating lease liabilities (49,046) (33,938) (21,138) Other long-term liabilities (2,266) (826) (3,501) Net cash (used in) provided by operating activities (58,192) 32,654 14,048 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired and other related payments (491,522) (333,591) 122,749 Purchases of marketable securities and other investments (3,523,232) (1,636,590) (2,038,422) Proceeds from sales and maturities of marketable securities 1,614,779 1,183,459 697,171 Capitalized software development costs (43,973) (33,328) (21,922) Purchases of long-lived and intangible assets (46,048) (25,805) (45,368) Net cash used in investing activities (2,489,996) (845,855) (1,285,792) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from public offerings, net of underwriters' discount and issuance costs 1,765,713 1,408,113 979,123 Proceeds from issuance of senior notes due 2029 and 2031 987,500 — — Payment of debt issuance costs (2,777) — — Principal payments on debt and finance leases (8,295) (10,784) (11,046) Proceeds from exercises of stock options and shares of Class A common stock issued under ESPP 136,160 104,760 57,480 Proceeds from settlements of capped call, net of settlement costs 228,412 — — Value of equity awards withheld for tax liabilities (10,388) (8,778) (5,412) Net cash provided by financing activities 3,096,325 1,493,311 1,020,145 Effect of exchange rate changes on cash, cash equivalents and restricted cash (191) 40 — NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 547,946 680,150 (251,599) CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of year 933,885 253,735 505,334 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of year $ 1,481,831 $ 933,885 $ 253,735 Cash paid for income taxes, net $ 6,147 $ 3,092 $ 1,368 Cash paid for interest $ 20,637 $ 2,139 $ 2,290 NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of property and equipment through finance leases $ 22,157 $ 20,108 $ 5,848 Value of common stock issued and equity awards assumed in acquisition $ 420,681 $ 2,571,328 $ 2,841,452 Value of common stock issued to settle convertible senior notes due 2023 $ 1,704,969 $ 892,640 $ — RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS Cash and cash equivalents $ 1,479,452 $ 933,885 $ 253,735 Restricted cash in other current assets 1,536 — — Restricted cash in other long-term assets 843 — — Total cash, cash equivalents and restricted cash $ 1,481,831 $ 933,885 $ 253,735 See accompanying notes to consolidated financial statements.TWILIO INC.Notes to Consolidated Financial Statements1. Organization and Description of BusinessTwilio Inc. (the "Company"“Company”) was incorporated in the state of Delaware on March 13, 2008. The Company is the leader in the Cloud Communications Platform categoryleading cloud communications platform and enables developers to build, scale and operate real-time communicationscustomer engagement within their software applications via simple-to-use Application Programming Interfaces ("API"(“API”). The power, flexibility, and reliability offered by the Company'sCompany’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.The Company'sCompany’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, Australia, Czech Republic, Japanacross North America, South America, Europe, Asia and the Netherlands.2. Summary of Significant Accounting Policies(a)Basis of PresentationThe Company'saccompanying consolidated financial statements have been prepared in conformityaccordance with generally accepted accounting principles generally accepted in the United States of America ("(“U.S. GAAP"GAAP”).(b)Principles of ConsolidationThe consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.(c)Use of EstimatesThe 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 sales credit reserves; recoverability of long-lived and intangible assets; capitalization and useful life of the Company'sCompany’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;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 RiskFinancial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities restricted cash and accounts receivable. The Company maintains cash, restricted cash, cash equivalents restricted cash and marketable securities 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 deterioratecustomer deteriorates substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financialTWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Company'sCompany’s estimates. During the years ended December 31, 20182021, 2020 and 2017, there was2019, no customer organization that accounted for more than 10% of the Company'sCompany’s total revenue. During the year ended December 31, 2016, one customer organization represented approximately 14% of the Company's total revenue.As of December 31, 20182021 and 2017, there was2020, no customer organization that represented more than 10% of the Company'sCompany’s gross accounts receivable.(e) Revenue RecognitionAdoption of Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" 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 a 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.Table of ContentsTWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued) 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.(e)Revenue Recognition PolicyRevenue 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 ServicesThe 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 of one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the years ended December 31, 2018, 20172021, 2020 and 2016,2019, the revenue from usage-based fees represented 84%72%, 83%76% and 83%75% of total revenue, respectively.Subscription-based fees are derived from certain term-basednon-usage-based contracts, such as withthose for the sales of short codes, customer support and customer support. Term-basedfees charged to access the cloud-based platform of Segment io, Inc. (“Segment”), which the Company acquired in 2020 as further described in Note 7. Non-usage-based contracts revenue is recognized on a ratable basis over the contractual term of the arrangement beginning on the date that the servicewhich is made availablegenerally between one to the customer.three years. In the years ended December 31, 20182021, 2020 and 2017,2019, the revenue from term-basednon-usage-based fees represented 16%28%, 24%, and 17%25% of total revenue, respectively. The Company applied the optional exemption of not disclosing the transaction price allocated to the remaining performance obligations for its usage-based contracts and contracts with original duration of one year or less. The majority of the Company's contracts have a duration of one year or less.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"(“SSP”).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.
Remaining Performance ObligationsTableRevenue allocated to remaining performance obligations represents unearned revenue and amounts that were and will be invoiced and recognized as revenue in future periods for non-cancelable multi-year subscription arrangements. The Company applies the optional exemption of ContentsTWILIO INC.Notesnot disclosing the transaction price allocated to Consolidated Financial Statements (Continued)2. Summarythe remaining performance obligations for its usage-based contracts and contracts with original duration of Significant Accounting Policies (Continued) The reserveone year or less. Revenue allocated to remaining performance obligations for sales creditscontracts with durations of more than one year was $154.2 million as of December 31, 2021, of which 62% is included in accounts receivableexpected to be recognized over the next 12 months and 92% is calculated based on historical trends and any specific risks identified in processing transactions. Changes inexpected to be recognized over the reserve are recorded against revenue.(f)Deferred Revenue and Customer DepositsDeferred revenue is recorded when a non-cancellable contractual right to bill exists or when cash payments are received in advance of future usage on non-cancellablenon-cancelable contracts. Customer refundable prepayments are recorded as customer deposits. As of December 31, 2018,2021 and 2020, the Company recorded $10.3$141.5 million and $9.3$87.2 million as its deferred revenue and customer deposits, respectively. Inrespectively, that are included in deferred revenue and customer deposits and other long-term liabilities in the yearaccompanying consolidated balance sheets. During the years ended December 31, 2018,2021, 2020 and 2019, the Company recognized $10.5$70.1 million, $19.5 million and $18.7 million of revenue, respectively, that was included in the deferred revenue and customer deposits balance as of January 1, 2018.85(g)Deferred Sales CommissionsThe 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 of data method to determine the estimated period of benefit of capitalized commissions which is generally determined to be up to five years. Amortization expense related to these capitalized costs related to initial contracts, upsells and renewals, is recognized on a straight line basis over the estimated period of benefit of the capitalized commissions. The Company applies the optional exemption of expensing these costs as incurred with amortization periods of one year or less.Total net capitalized costs as of December 31, 20182021 and 2020, were $9.4$193.4 million and $85.6 million, respectively, and are included in prepaid expenses and other current assets and long-termother long‑term assets in the accompanying consolidated balance sheet.sheets. Amortization of these assets was $1.4$31.5 million, $13.3 million and $4.5 million in the yearyears ended December 31, 2018,2021, 2020 and 2019, respectively, and is included in sales and marketing expense in the accompanying consolidated statementstatements of operations.(f) (h)Cost of RevenueCost of revenue consists primarily of costs of communications services purchased from network service providers. Cost of revenue also includes fees to support the Company's cloud infrastructure, direct costs of personnel, costs, such as salaries and stock-based compensation for the customer care and support services employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs and amortization of acquired intangibles.(g) (i)Research and Development ExpensesResearch and development expenses consist primarily of personnel costs, cloud infrastructure fees for staging and development, outsourced engineering services, amortization of capitalized internal-use software development costs and an allocation of general overhead expenses. The Company capitalizes the portion of its software development costs that meets the criteria for capitalization.(h) (j)Internal-Use Software Development CostsCertain costs of platform and other software applications developed for internal use are capitalized. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantiallyTWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)functionality and expenses costsfunctionality. Costs incurred for maintenance, and minor upgrades and enhancements.enhancements are expensed. Costs related to preliminary project activities and post-implementation operating activities are also expensed as incurred.Capitalized costs of platform and other software applications are included in property and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The amortization of costs related to the platform applications is included in cost of revenue, while the amortization of costs related to other software applications developed for internal use is included in operating expenses.(i) (k)Advertising CostsAdvertising costs are expensed as incurred and were $10.6$78.8 million, $4.9$47.2 million and $3.5$27.0 million in the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively. Advertising costs are included in sales and marketing expenses in the accompanying consolidated statements of operations.(j) (l)Stock-Based CompensationAll stock-based compensation to employees, including the purchase rights issued under the Company's 2016 Employee Stock Purchase Plan (the "ESPP"“ESPP”), is measured on the grant date based on the fair value of the awards on the date of grant. This cost isThese costs are recognized as an expense following straight-line attribution method over the requisite service period. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights86issued under the ESPP. The fair value of the restricted stock units is determined using the fair value of the Company's Class A common stock on the date of grant and recognized as an expense following straight-line attribution method over the requisite service period. Prior to adoption of ASU 2016-09, the stock-based compensation wasForfeitures are recorded net of estimated forfeitures. In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 early-adopted this guidance in the quarter ended December 31, 2018period in which did not have a material impact to its financial statements. 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 inTWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)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. In March 2016, FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based Payment Accounting." This new guidance was intended to simplify several areas of accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company early adopted this guidance in the quarter ended December 31, 2016. The new guidance allows entities to account for forfeitures as they occur. The Company elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. The $0.1 million of cumulative prior years' impact as well as the impact on the first three quarters of 2016 of $75,000 was recognized as an increase to stock-based compensation during the quarter ended December 31, 2016, as the impact on prior periods was insignificant. Adoption of all other changes in the new guidance did not have a significant impact on the Company's consolidated financial statements.Compensation expense for stock options granted to nonemployees is calculated using the Black-Scholes option pricing model and is recognized in expense over the service period.The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards.stock options and the purchase rights issued under ESPP. These assumptions include:• Prior to the Company's IPO, the board of directors considered numerous objective and subjective factors to determine the fair value of the Company's common stock at each meeting at which awards are approved. The factors included, but were not limited to: (i) contemporaneous valuations of the Company's common stock by an unrelated third party; (ii) the prices at which the Company sold shares of its convertible preferred stock to outside investors in arms-length transactions; (iii) the rights, preferences and privileges of the Company's convertible preferred stock relative to those of its common stock; (iv) the Company's results of operations, financial position and capital resources; (v) current business conditions and projections; (vi) the lack of marketability of the Company's common stock; (vii) the hiring of key personnel and the experience of management; (viii) the introduction of new products; (ix) the risk inherent in the development and expansion of the Company's products; (x) the Company's stage of development and material risks related to its business; (xi) the fact that the option grants involve illiquid securities in a private company; and (xii) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, in light of prevailing market conditions;After the IPO, the Company uses the market closing price of its Class A common stock, as reported on the New York Stock Exchange, for the fair value.•stock-based awards arestock option or the purchase right is expected to be outstanding. The Company uses the simplified calculation of expected term, aswhich reflects the Company does not have sufficient historical dataweighted-average time-to-vest and the contractual life of the stock option or the purchase right;•Expected volatility. Prior to use any other method to estimate expected term;•Expected volatility. TheJuly 1, 2021, the expected volatility iswas derived from an average of the historical volatilities of the Class A common stock of the Company and several other entities with characteristics similar to those of the Company,TWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)operations;••If any of the assumptions used in the Black-Scholes model changes, stock-based compensation for future options may differ materially compared to that associated with previous grants.(k) Income TaxesThe Company accounts for income taxes in accordance with authoritative guidance which requires the use of the asset and liability approach. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carry-forwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the consolidated statements of operations.(l) (m)Foreign Currency TranslationThe functional currency of the Company's foreign subsidiaries is generally the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as other income or expense in the year of occurrence. Foreign currency transaction gains and losses were insignificant for all periods presented.87For those entities where the functional currency is a foreign currency, adjustments resulting from translating the financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive (loss) income (loss) in stockholders' equity. Monetary assets and liabilities denominated in a foreign currency are translated into USU.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the weighted average exchange rates during the period. Equity transactions are translated using historical exchange rates. Foreign currency transaction gains and losses are included in other (expenses) income, (expense), net in the consolidated statements of operations.TWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)(m) (n)Comprehensive Income (Loss)Comprehensive income (loss)loss refers to net income (loss)loss and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of stockholders' equity but are excluded from the calculation of net income (loss). For the year ended December 31, 2016, the Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income (loss). Accordingly, for that period, the Company's comprehensive income (loss) is the same as its net income (loss).(n) loss.(o)Net Loss Per Share Attributable to Common StockholdersThe Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. All seriesThe Company has 100,000,000 shares of convertible preferred stock are considered to be participating securities as the holders of the preferred stock are entitled to receive a non-cumulative dividend on a pro ratapari passu basis in the event that a dividend is declaredwas authorized but never issued or paid on common stock. Shares of common stock issued upon early exercise of stock options that are subject to repurchase are also considered to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is declared or paid on common stock. Under the two-class method, in periods when the Company has net income, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period convertible preferred stock non-cumulative dividends, between common stock and the convertible preferred stock. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The Company's basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. For purposes of this calculation, convertible preferred stock, options to purchase common stock, unvested restricted stock units, common stock issued subject to future vesting, any shares of stock committed under the ESPP, any shares of stock held in escrow and any shares of stock reserved for future donations are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive. Since the Company's IPO in 2016, outstanding.Class A and Class B common stock are the only outstanding equity of 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 one1 vote per share and each share of Class B common stock is entitled to 10 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 on a one-for-one1-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible.TWILIO INC.Notesdiluted net loss per share attributable to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)(o) common stockholders as their effect is antidilutive. These securities are presented in Note 16 to these consolidated financial statements.(p)Cash and Cash EquivalentsThe Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of fundscash deposited into money market funds and reverse repurchase agreements.commercial paper. All credit and debit card transactions that process as of the last day of each month and settle within the first few days of the subsequent month are also classified as cash and cash equivalents as of the end of the month in which they were processed.(p) Restricted Cash Restricted cash consists of cash deposited into a savings account with a financial institution as collateral for the Company's obligations under its facility leases of premises located in San Francisco, California. The facility lease for the Company's old office space expired in January 2017 and the facility leases for the Company's current offices expire at various dates between October 2024 and June 2028. 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 consolidated statement of cash flows with the following impact (in thousands): Year Ended
December 31, 2017 Year Ended
December 31, 2016 As Originally
Reported As Adjusted As Originally
Reported As Adjusted $ (3,260 ) $ (3,255 ) $ 10,091 $ 10,097 $ (223,630 ) $ (226,748 ) $ (42,425 ) (34,986 ) 305,665 314,280 108,835 110,005 $ 115,286 $ 120,788 $ 305,665 $ 314,280 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. The restricted cash balances as of December 31, 2018 and December 31, 2017 were $18.1 million and $5.5 million, respectively.Accounts receivable are recorded net of the allowance for doubtful accounts and the reserve for sales credits.accounts. The allowance for doubtful accounts is estimated based on the Company's assessment of its ability to collect on customer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer's ability to pay. In cases where theTWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)TheAs of December 31, 2021 and 2020, the allowance for doubtful accounts was $4.9 million and $1.0 million as of December 31, 2018 and 2017, respectively.(r)Costs Related to the Public OfferingsCosts related to the public offerings, which consist of direct incremental legal, printing and accounting fees are deferred until the offering is completed. Upon completion of the offering, these costs are offset against the offering proceeds within the consolidated statements of stockholders' equity. In the year ended December 31, 2016, the Company recorded in its consolidated statement of stockholders' equity $5.7 million in total offering costs.(s)Property and EquipmentProperty and equipment, both owned and under capital lease,finance leases, is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the related asset. Maintenance and repairs are charged to expenses as incurred.88The useful lives of property and equipment are as follows:Capitalized internal-use software development costs 3 years Data center equipment 2 - 4 years Office equipment 3 years Furniture and fixtures 5 years Software 3 years Assets under capitalfinancing lease5 years or remaining lease term Leasehold improvements 5 years or remaining lease term (t)LeasesThe Company determines if an arrangement is or contains a lease at contract inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying consolidated balance sheets.Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are measured and recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term. As the Company’s leases do not generally provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease agreements may have lease and non-lease components, which the Company accounts for as a single lease component. When estimating the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain such options will be exercised. Operating lease costs are recognized in operating expenses in the accompanying consolidated statements of operations on a straight-line basis over the lease term and variable payments are recognized in the period they are incurred. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of 12 months or less are not recorded on the balance sheet.Within the consolidated statements of cash flows, the Company presents the lease payments made on the operating leases as cash flows from operations and principal payments made on the finance leases as part of financing activities.(u)Intangible AssetsIntangible assets recorded by the Company are costs directly associated with securing legal registration of patents and trademarks, acquiring domain names and the fair value of identifiable intangible assets acquired in business combinations.Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets without determinable economic lives are carried at cost, not amortized and reviewed for impairment at least annually.The useful lives of the intangible assets are as follows:Developed technology 3 - 47 yearsCustomer relationships 2 - 810 yearsSupplier relationships 2 - 5 years Trade names 25 yearsPatentsOrder backlog20 years1 yearTrademarksPatentsIndefinite20 yearsTelecommunication licenses Indefinite Trademarks Indefinite Domain names Indefinite (u) (v)GoodwillGoodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as one1 reporting unit and has selected November 30 as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company's business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. Management mayThe Company has the option to first evaluateperform a qualitative factorsassessment to assessdetermine if it is more likely than not that the fair value of a reporting unit is less than its carrying amountamount. However, the Company may elect to bypass the qualitative assessment and to determine if a two-step impairment test is necessary. Management may choose to proceed directly to the two-step evaluation, bypassing the initial qualitative assessment.quantitative impairment tests. The first step of the impairment test involves comparing the fair value of the reporting unit to its net bookcarrying value, including goodwill. IfA goodwill impairment will be the net bookamount by which a reporting unit’s carrying value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss.value. The impairment loss would be calculated by comparing the implied fair value of the goodwillis limited to its net book value. In calculating the implied fair value of goodwill, the fair value of the entity would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the entity over the amount assigned to other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. goodwill.No goodwill impairment charges have been recorded for any period presented.(v) (w)Derivatives and HedgingThe Company is exposed to a wide variety of risks arising from its business operations and overall economic conditions. These risks include exposure to fluctuations in various foreign currencies against its functional currency and can impact the value of cash receipts and payments. The Company minimizes its exposure to these risks through management of its core business activities, specifically, the amounts, sources and duration of its assets and liabilities, and the use of derivative financial instruments. During 2021, the Company started using foreign currency derivative forward contracts and in the future may also use foreign currency option contacts.Foreign currency derivative forward contracts involve fixing the exchange rate for delivery of a specified amount of foreign currency on a specified date. These agreements are typically cash settled in U.S. dollars for their fair value at or close to their settlement date. Foreign currency option contracts will require the Company to pay a premium for the right to sell a specified amount of foreign currency prior to the maturity date of the option. The Company does not enter into derivative financial instruments trading for speculative purposes.Derivative instruments are carried at fair value and recorded as either an asset or a liability until they mature. Gains and losses resulting from changes in fair value of these instruments are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. For derivative instruments designated as cash flow hedges, gains or losses are initially recorded in other comprehensive income (“OCI”) in the balance sheet, then reclassified into the statement of operations in the period in which the derivative instruments mature. These realized gains and losses are recorded within the same financial statement line item as the hedged transaction.90The Company’s foreign currency derivative contracts are classified within Level 2 of the fair value hierarchy because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.(x)Impairment of Long-Lived AssetsThe Company evaluates its long-lived assets, including property, and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. There waswere no impairmentimpairments during the years ended December 31, 2018, 20172021, 2020 and 2016. The Company wrote off $1.7 million, $0.6 million and $0.7 million of internally developed software in the years ended December 31, 2018, 2017 and 2016, respectively, due to abandonment.2019.TWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)(w) (y)Business CombinationsThe Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statement of operations.(x) (z)Segment InformationThe Company's Chief Executive Officer is the chief operating decision maker, who reviews the Company's financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company has determined that it operates in a single reporting segment.(y) (aa)Fair Value of Financial Instruments The Company applies fair value accounting for all financial instruments on a recurring basis. The Company's financial instruments, which include cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. Restricted cash is long-term in nature and consists of cash in a savings account, hence its carrying amount approximates its fair value. Marketable securities consist of U.S. treasury securities, high credit quality corporate debt securities and reverse repurchase agreements. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value of the convertible senior notes due 2023 (the "Notes") is 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. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the security will be sold before the recovery of its cost basis. Realized gains and losses and declines in value deemed to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net.The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidanceTWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)•Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.•Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.•Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.(z) RecentThe Company applies fair value accounting for all financial instruments on a recurring basis. The Company's financial instruments, which include cash, restricted cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. Marketable securities consist of U.S. treasury securities, non-U.S government securities, high credit quality corporate debt securities and commercial paper. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. Unrealized gains and91losses for available-for-sale securities are recorded in other comprehensive loss. In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.The fair value of the senior notes due 2031 and 2029 (“2029 Notes” and “2031 Notes,” respectively) and the fair value of the convertible senior notes due 2023 (the “Convertible Notes” fully redeemed in 2021) are determined based on their respective closing prices on the last trading day of the reporting period and are classified as Level 2 in the fair value hierarchy.The carrying value of the strategic investments, which consist of restricted equity securities of a publicly held company and equity securities of privately held companies, is determined under the measurement alternative on a non-recurring basis adjusting for observable changes in fair value. The Company does not have a controlling interest nor can it exercise significant influence over any of these entities.The Company regularly reviews changes to the rating of its debt securities by rating agencies and monitors the surrounding economic conditions to assess the risk of expected credit losses. As of December 31, 2021, the risk of expected credit losses was not significant.Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the security will be sold before the recovery of its cost basis. Realized gains and losses and declines in value deemed to be other than temporary are determined based on the specific identification method and are reported in other (expenses) income, net.(ab)Recently Issued Accounting PronouncementsGuidance, Not Yetyet AdoptedIn August 2018,October 2021, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805): Customer's Accounting for Implementation Costs IncurredContract Assets and Contract Liabilities from Contracts with Customers,”which requires that an entity recognize and measure contract assets and contract liabilities acquired in a Cloud Computing Arrangement Thatbusiness combination in accordance with ASC 606, "Revenue from Contracts with Customers". At the acquisition date, an acquirer should account for the related revenue contracts as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contact assets and contract liabilities consistent with how they were recognized and measured in the acquiree's financial statements, assuming the acquirer is a Service Contract". This standard alignsable to assess and rely on how the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standardacquiree applied ASC 606. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2019,2022, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement". The amendments under ASU 2018-13 remove, add and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the new standard will have on its consolidated financial statements. 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 ASC areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition periodexpects to adopt as partASU 2021-08 in the first quarter of the next fiscal year beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a2022 with no material impact on the Company's consolidated financial statements. 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 consolidated financial statements .TWILIO INC.Notes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued) 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. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses", which clarifies that receivables arising from operating leases are not within the scope ofTopic 326, Financial Instruments—Credit Losses. Instead, impairment of receivables arising from operating leases should be accounted for in accordance withTopic 842, Leases. These ASUs are 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. 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 amendment 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 a material 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.TWILIO INC.Notes to Consolidated Financial Statements (Continued)3. Fair Value MeasurementsFinancial AssetsThe following tables provide the financial assets measured at fair value on a recurring basis asbasis:Amortized
Cost or
Carrying
ValueGross
Unrealized
GainsGross
Unrealized
LossesFair Value Hierarchy as of
December 31, 2021Aggregate
Fair ValueLevel 1 Level 2 Level 3 Financial Assets: (In thousands) Cash and cash equivalents: Money market funds $ 786,548 $ — $ — $ 786,548 $ — $ — $ 786,548 Commercial paper 46,076 — — — 46,076 — 46,076 Total included in cash and cash equivalents 832,624 — — 786,548 46,076 — 832,624 Marketable securities: U.S. Treasury securities 375,305 6 (2,561) 372,750 — — 372,750 Non-U.S. government securities 221,641 — (1,355) 220,286 — — 220,286 Corporate debt securities and commercial paper 3,300,326 960 (15,892) 31,000 3,254,394 — 3,285,394 Total marketable securities 3,897,272 966 (19,808) 624,036 3,254,394 — 3,878,430 Total financial assets $ 4,729,896 $ 966 $ (19,808) $ 1,410,584 $ 3,300,470 $ — $ 4,711,054 92Amortized
Cost or
Carrying
ValueGross
Unrealized
GainsGross
Unrealized
LossesFair Value Hierarchy as of
December 31, 2020Aggregate
Fair ValueLevel 1 Level 2 Level 3 Financial Assets: (In thousands) Cash and cash equivalents: Money market funds $ 656,749 $ — $ — $ 656,749 $ — $ — $ 656,749 Commercial paper 2,000 — — — 2,000 — 2,000 Total included in cash and cash equivalents 658,749 — — 656,749 2,000 — 658,749 Marketable securities: U.S. Treasury securities 223,247 389 (1) 223,635 — — 223,635 Corporate debt securities and commercial paper 1,874,257 8,149 (135) 50,000 1,832,271 — 1,882,271 Total marketable securities 2,097,504 8,538 (136) 273,635 1,832,271 — 2,105,906 Total financial assets $ 2,756,253 $ 8,538 $ (136) $ 930,384 $ 1,834,271 $ — $ 2,764,655 The Company's primary objective when investing excess cash is preservation of capital, hence the Company's marketable securities primarily consist of U.S. Treasury Securities, non-U.S government securities, high credit quality corporate debt securities and 2017 (in thousands): Gross
Unrealized
Losses
Less Than
12 Months Gross
Unrealized
Losses
More Than
12 Months Fair Value Hierarchy as of
December 31, 2018 Amortized
Cost or
Carrying
Value Gross
Unrealized
Gains Aggregate
Fair Value Level 1 Level 2 Level 3 $ 420,234 $ — $ — $ — $ 420,234 $ — $ — $ 420,234 35,000 — — — — 35,000 — 35,000 9,983 — — — — 9,983 — 9,983 465,217 — — — 420,234 44,983 — 465,217 59,785 — (7 ) (9 ) 59,769 — — 59,769 201,683 23 (123 ) (224 ) — 201,359 — 201,359 261,468 23 (130 ) (233 ) 59,769 201,359 — 261,128 $ 726,685 $ 23 $ (130 ) $ (233 ) $ 480,003 $ 246,342 $ — $ 726,345 Gross
Unrealized
Losses
Less Than
12 Months Gross
Unrealized
Losses
More Than
12 Months Fair Value Hierarchy as of
December 31, 2017 Amortized
Cost or
Carrying
Value Gross
Unrealized
Gains Aggregate
Fair Value Level 1 Level 2 Level 3 $ 95,432 $ — $ — $ — $ 95,432 $ — $ — $ 95,432 95,432 — — — 95,432 — — 95,432 59,962 — (216 ) — 59,746 — — 59,746 116,223 — (382 ) — — 115,841 — 115,841 176,185 — (598 ) — 59,746 115,841 — 175,587 $ 271,617 $ — $ (598 ) $ — $ 155,178 $ 115,841 $ — $ 271,019 As of December 31, 2018, the fair value of the 0.25% convertible senior notes due 2023 (the "Notes"), as further described in Note 8 below, was approximately $743.4 million.2018,2021 and 2020, 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 requiredTWILIO INC.Notes to Consolidated Financial Statements (Continued)3. Fair Value Measurements (Continued)2018,2021 and 2020, 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 years ended December 31, 2018 and 2017. before maturity.Interest earned on marketable securities was $3.0$55.7 million, $32.4 million and $2.6$20.8 million in the years ended December 31, 20182021, 2020 and 2017,2019, respectively. The interest is recorded as other (expenses) income, (expense), net, in the accompanying consolidated statements of operations.The following table summarizes the contractual maturities of marketable securities as of December 31, 2018 and 2017 (in thousands):securities:As of December 31, 2021 As of December 31, 2020 Amortized
CostAggregate
Fair ValueAmortized
CostAggregate
Fair ValueFinancial Assets: (In thousands) Less than one year $ 1,084,751 $ 1,085,006 $ 1,126,091 $ 1,128,927 One to three years 2,812,521 2,793,424 971,413 976,979 Total $ 3,897,272 $ 3,878,430 $ 2,097,504 $ 2,105,906 As of December 31, 2018 As of December 31, 2017 Amortized
Cost Aggregate
Fair Value Amortized
Cost Aggregate
Fair Value $ 261,468 $ 261,128 $ 108,584 $ 108,360 — — 67,601 67,227 $ 261,468 $ 261,128 $ 176,185 $ 175,587 The Company enters into reverse securities repurchase agreements, primarily for short-term investments with maturities of 90 days or less. As of December 31, 2018,2021 and 2020, the Company was party to reverse repurchase agreements totaling $35.0held strategic investments with a carrying value of $68.3 million which were reported in cash and equivalents$9.3 million, respectively. These securities are recorded as other long-term assets in the accompanying consolidated balance sheet. Undersheets. There were no impairments or other adjustments recorded in the years ended December 31, 2021 and 2020 related to these reverse securities repurchase agreements,securities.Financial LiabilitiesThe Company’s financial liabilities that are measured at fair value on a recurring basis consist of foreign currency derivative liabilities and are classified as Level 2 financial instruments in the Company typically lends available cashfair value hierarchy. As of December 31, 2021, the aggregate fair value of these instruments and the associated gross unrealized losses were not significant.The Company’s financial liabilities that are not measured at fair value on a specified raterecurring basis consist of interestits 2029 Notes and holds U.S. government securities2031 Notes, respectively. The Company’s Convertible Notes were fully redeemed in June 2021 and were no longer outstanding as collateral duringof December 31, 2021. Refer to Note 10 for further details on these financial liabilities.As of December 31, 2021 the termfair values of the agreement. Collateral2029 Notes and 2031 Notes were $510.2 million and $512.8 million, respectively. As of December 31, 2020, the fair value is in excess of the amounts loaned under these agreements.Convertible Notes was $1.7 billion.934. Property and EquipmentProperty and equipment consisted of the following (in thousands):following:As of December 31, 2021 2020 (In thousands) Capitalized internal-use software development costs $ 198,589 $ 142,489 Data center equipment (1)77,946 43,477 Leasehold improvements 85,297 69,756 Office equipment 58,636 35,346 Furniture and fixtures 15,360 12,312 Software 10,506 9,943 Total property and equipment 446,334 313,323 Less: accumulated depreciation and amortization (1)(191,018) (130,084) Total property and equipment, net $ 255,316 $ 183,239 (1) Data center equipment contains $63.0 million and $40.8 million in assets held under finance leases as of December 31, 2021 and 2020, respectively. Accumulated depreciation and amortization contains $26.8 million and $15.0 million in accumulated amortizations for assets held under finance leases as of December 31, 2021 and 2020, respectively. As of December 31, 2018 2017 $ 72,647 $ 49,177 15,293 14,246 13,563 9,652 2,440 1,976 2,478 — 1,849 1,675 108,270 76,726 (44,736 ) (26,185 ) $ 63,534 $ 50,541 (1)Assets under capital lease relate to a sub-lease agreement that commenced in the fourth quarter of 2018, as further described in Note 11(a), and consist primarily of furniture that will be acquired at a bargain purchase option at the end of the lease term.$18.9$59.6 million, $13.1$51.1 million and $7.4$37.5 million for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.The Company capitalized $25.3$63.1 million, $21.5$47.1 million and $13.5$29.7 million in internal-useinternal‑use software development costs in the years ended December 31, 2018, 20172021, 2020 and 2016, respectively,2019, respectively.5. Derivatives and HedgingAs of December 31, 2021, the Company had outstanding foreign currency forward contracts designated as cash flow hedges with total sell and buy notional values of $276.2 million and $243.1 million, respectively. The notional value represents the amount that will be purchased or sold upon maturity of the forward contract. As of December 31, 2021, these contracts had maturities of less than 12 months.Gains and losses associated with these foreign currency forward contracts were as follows:Consolidated Statement of Operations and Statement of Comprehensive Loss Year Ended December 31, 2021 (In thousands) Gains recognized in OCI Net change in market value of effective foreign currency forward exchange contracts $ 294 Losses recognized in income due to instruments maturing Cost of revenue $ 7,545 The Company is subject to master netting agreements with certain counterparties of the foreign exchange contracts, under which it is permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is the Company’s policy to present the derivatives at gross in its consolidated balance sheet. The Company’s foreign currency forward contracts are not subject to any credit contingent features or collateral requirements. The Company manages its exposure to counterparty risk by entering into contracts with a diversified group of major financial institutions and by actively monitoring its outstanding positions. As of December 31, 2021, the Company did not have any offsetting arrangements.946. Right-of-Use Assets and Lease LiabilitiesThe Company has entered into various operating lease agreements for office space and data centers and finance lease agreements for data center and office equipment and furniture.As of December 31, 2021, the Company had 31 leased properties with remaining lease terms of 0.1 years to 7.8 years, some of which $5.7 million, $4.2 million and $2.0 million, respectively, was stock-based compensation expense. Amortization of capitalized software developmentinclude options to extend the leases for up to 5.0 years.Operating lease costs was $13.0 million, $8.4 million and $5.5 million in the years ended December 31, 2018, 2017 and 2016, respectively. The amortization expense was allocated as follows (in thousands): Year Ended December 31, 2018 2017 2016 $ 6,898 $ 4,788 $ 3,304 5,437 3,619 2,182 689 — — $ 13,024 $ 8,407 $ 5,486 5. Business CombinationsFiscal 2018 AcquisitionsVAI Technologies, LLC In November 2018, the Company acquired certain assets from VAI Technologies, LLC, a Delaware corporation and a developer of a natural language processing platform. The purchase price consisted of $1.2 million in cash, of which $0.3 was withheld by the Company for a period from 18 months to 4 years and can be extended under certain circumstances.TWILIO INC.Notes to Consolidated Financial Statements (Continued)5. Business Combinations (Continued) The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable intangibles assets acquired based on their respective fair values on the acquisition date. The excess of the purchase price over the fair values of the identifiable assets acquired was recorded as goodwill. The estimated fair value of the intangible assets acquired was determined by the Company. The following table presents the final purchase price allocation recorded in the Company's consolidated balance sheet (in thousands): Total $ 517 683 $ 1,200 (1)The intangible assets consist of developed technology with the estimated useful life of 4 years on the date of acquisition.(2)The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology and the future development initiatives of the acquired workforce. The Company intends to file elections that make the goodwill deductible for U.S. tax purposes. The Company incurred cost related to this acquisition of $0.1 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statementstatements of operations.Ytica.com a.s.Supplemental cash flow and other information related to operating leases was as follows:Year Ended December 31, 2021 2020 Operating cash flows paid for amounts included in operating lease liabilities (in thousands) $ 60,085 $ 46,895 Weighted average remaining lease term (in years) 5.5 6.0 Weighted average discount rate 4.5 % 4.8 % Maturities of operating lease liabilities were as follows:As of December 31, 2021 Year Ended December 31, (In thousands) 2022 $ 63,086 2023 57,173 2024 50,742 2025 37,621 2026 34,827 Thereafter 54,760 Total lease payments 298,209 Less: imputed interest (34,631) Total operating lease obligations 263,578 Less: current obligations (52,325) Long-term operating lease obligations $ 211,253 7. Business CombinationsZipwhip, Inc.In September 2018,July 2021, the Company acquired all outstanding shares of Ytica.com a.s. ("Ytica"Zipwhip, Inc. (“Zipwhip”), a developer andleading provider of a contact center reporting and analytics basedtoll-free messaging in the Czech Republic,United States, for a total purchase price, as adjusted, of $21.8$838.8 million. The purchase price included $418.1 million paid inof cash, $419.2 million fair value of which $3.21.1 million was held in escrow with a term of 18 months. Additionally, the Company granted 47,574 restricted stock unitsshares of the Company's Class A common stock to a former shareholder of Ytica that had aand $1.5 million fair value of $3.6 million and isthe pre-combination services of Zipwhip employees reflected in the unvested equity awards assumed by the Company at closing. Additionally, at closing, the Company issued 59,533 shares of its Class A common stock which are subject to vesting over a period of three3 years. The Company is recordingVesting of these shares will be recorded in the stock-based compensation expense as the sharesservices are vesting.Part of the cash consideration paid at closing was to settle the vested equity awards of Zipwhip employees. The Company assumed all unvested and outstanding equity awards of Zipwhip continuing employees, as converted into its own equity awards, at the conversion ratio provided in the Agreement and Plan of Merger and Reorganization (the “Zipwhip Merger Agreement”). This transaction also included a $19.1 million of additional cash consideration for certain employees, which will vest as these employees provide services in the post-acquisition period. This amount will be recorded in the operating expenses over a period of 3 years as the services are provided.The acquisition was accounted for as a business combination and the total purchase price of $838.8 million was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date andwith 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.as goodwill. These estimates were derived from information currently available. The determination of the fair values and estimated lives of depreciable tangible and identifiable intangible assets requires significant judgment. As of December 31, 2021, the areas that are not yet finalized include contingencies and income and other taxes.The fair value of the 1.2 million aggregate number of shares of the Company's Class A common stock issued at closing was determined based on the closing market price of the Company's Class A common stock on the acquisition date. The fair value of the $30.7 million unvested equity awards assumed on the acquisition closing date was determined (a) for options, by using the Black-Scholes option pricing model with the applicable assumptions as of the acquisition date; (b) for restricted stock units, by using the closing market price of the Company's Class A common stock on the acquisition date. These awards will continue to Consolidated Financial Statements (Continued)5. Business Combinations (Continued)The purchase price components, as adjusted, are summarized in the following table:Total (In thousands) Fair value of Class A common stock transferred $ 419,197 Cash consideration 418,073 Fair value of the pre-combination service through equity awards 1,511 Total purchase price $ 838,781 The following table presents the preliminary purchase price allocation, as adjusted, recorded in the Company's consolidated balance sheet as of December 31, 2018 (in thousands):2021:Total (In thousands) Cash and cash equivalents $ 21,610 Accounts receivable and other current assets 11,481 Property and equipment, net 2,950 Operating right-of-use asset 23,545 Intangible assets (1)244,500 Other assets 370 Goodwill 600,403 Accounts payable and other liabilities (20,239) Deferred revenue (4,526) Operating lease liability, noncurrent (23,169) Deferred tax liability (18,144) Total purchase price $ 838,781 Total $ (1,538 ) 9,920 13,375 $ 21,757
following:(1) finite-lived intangible assets wereare comprised of the following (in thousands):Total Estimated
life(In thousands) (In years) Developed technology $ 56,800 7 Customer relationships 147,700 10 Supplier relationships 39,600 5 Trade names 400 5 Total intangible assets acquired $ 244,500 Total Estimated
life
(in years) $ 9,090 4 830 2 $ 9,920 (2)The goodwillGoodwill generated from this acquisition primarily represents the value that is primarily attributable to the future cash flows to be realizedexpected from the acquired technology platformincreased scale and synergies as well as operational synergies. The Company intends to file elections that makea result of the goodwillintegration of both businesses. Goodwill is not deductible for U.S. tax purposes. The Company acquired a net deferred tax liability96The estimated fair value of the intangible assets acquired was determined by the Company. The Company andengaged a third‑party expert to assist with the Company considered or relied in part upon a valuation report of a third-party expert.analysis. The Company used an income approacha relief-from-royalty method to estimate the fair values of the identifiable intangibledeveloped technology and trade names, a multi-period excess earnings method to estimate the fair values of customer relationships and a with-and-without method to estimate the fair value of the supplier relationships.Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date as the Company believes that these amounts approximate their current fair values, except for operating right-of-use assets.Company incurred costs relatedvalue of the acquired operating right-of-use assets was reduced to thisits respective fair value on the acquisition date.The acquired entity's results of $0.6operations were included in the Company's consolidated financial statements from the date of acquisition, July 14, 2021. For the year ended December 31, 2021, Zipwhip contributed net operating revenue of $55.4 million, that were expensed as incurred and recorded in general and administrative expenseswhich is reflected in the accompanying consolidated statement of operation.immaterial.Core Network Dynamics GmbHCosts incurred related to the acquisition were not significant.Other Fiscal 2021 AcquisitionsDuring 2021, the Company completed other business combinations for an aggregate purchase price of $105.0 million, of which $13.4 million was allocated to developed technology, $23.6 million was allocated to other intangible assets and $63.2 million was allocated to goodwill.Fiscal 2020 AcquisitionsSegment.io, Inc.In August 2018,November 2020, the Company acquired all outstanding shares of Core Network Dynamics GmbH ("CND"), a developer and providerSegment, the market-leading customer data platform, by issuing 9.5 million shares of a complete software mobile network infrastructure based in Germany, for a total purchase price of $11.1 million, paid in cash, of which $2.0 million was withheld by the Company for a term of 18 months and is recorded in other long-term liabilities in the accompanying consolidated balance sheet. Additionally, the Company granted 35,950 restricted stock units of the Company'sits Class A common stock towith a former shareholder of CND that had afair value of $2.2$2.6 billion and $415.9 million and isin cash, as adjusted. Of the total shares of Class A common stock issued at closing, 258,554 shares with the fair value of $70.7 million were subject toTWILIO INC.Notes to Consolidated Financial Statements (Continued)5. Business Combinations (Continued)over a period of three years. The Company is recording aand are recorded in the stock-based compensation expense as the sharesservices are vesting.The acquisition added additional products and services to the Company's offerings for its customers. With these additional products, the Company can now offer a customer engagement platform. The acquisition has also added new customers, new employees, technology and intellectual property assets.The acquisition was accounted for as a business combination and the total purchase price of $3.0 billion, as adjusted, was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date andwith the excess was recorded as goodwill.The acquired entity's resultspurchase price, as adjusted, reflected the $2.5 billion fair value of operations have been included9.3 million shares of the Company's Class A common stock transferred as consideration for accredited outstanding shares of Segment, the $415.9 million cash consideration for unaccredited shares and vested equity awards and the $39.0 million fair value of the pre-combination services of Segment employees reflected in the consolidated financial statementsunvested equity awards assumed by the Company on the acquisition date. As of December 31, 2021, 150,824 shares of Class A common stock issued at closing with future vesting was held in escrow.The fair value of the Company from9.5 million shares of the Company's Class A common stock issued at closing was determined based on its closing price on the acquisition date. The fair value of the assumed unvested equity awards was determined (a) for options, by using a Black-Scholes option pricing model with the applicable assumptions as of the acquisition date, and (b) for restricted stock units, by using the closing market price of acquisition.The fair value of unvested employee equity awards assumed on the acquisition date was $245.3 million. These awards continue to vest as the Segment employees provide services in the post-acquisition period. The fair value of these awards is97recorded in the stock-based compensation expense over the respective vesting period of each award.The purchase price components, as adjusted, are summarized in the following table:Total (In thousands) Fair value of Class A common stock transferred $ 2,532,329 Cash consideration 415,899 Fair value of the pre-combination service through equity awards 38,972 Total purchase price $ 2,987,200 The following table presents the preliminary purchase price allocation, recorded in the Company's consolidated balance sheet as of December 31, 2018 (in thousands):adjusted:Total (In thousands) Cash and cash equivalents $ 93,170 Accounts receivable and other current assets 90,635 Property and equipment, net 5,081 Operating right-of-use asset 53,630 Intangible assets (1)595,000 Other assets 4,869 Goodwill 2,299,016 Accounts payable and other liabilities (24,263) Deferred revenue (50,005) Operating lease liability (58,206) Deferred tax liability (21,728) Total purchase price $ 2,987,200 Total $ (313 ) 4,500 6,869 $ 11,056
following:(1) finite-lived intangible assets wereare comprised of the following (in thousands):Total Estimated
life(In thousands) (In years) Developed technology $ 390,000 7 Customer relationships 190,000 6 Order backlog 10,000 1 Trade names 5,000 5 Total intangible assets acquired $ 595,000 Total Estimated
life
(in years) $ 3,910 4 590 0.5 $ 4,500 (2)The goodwillGoodwill generated from this acquisition primarily represents the value that is primarily attributable to the future cash flows to be realizedexpected from the operatingincreased scale and synergies betweenas a result of the acquired technology platform and the Company's Programmable Wireless products. The Company intends to file elections that make the goodwillintegration of both businesses. Goodwill is not deductible for U.S. tax purposes. The Company acquired a net deferred tax liability of $1.2 million in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet.The estimated fair value of the intangible assets acquired was determined by the Company. The Company andengaged a third‑party expert to assist with the Company considered or relied in part upon a valuation report of a third-party expert.analysis. The Company used a replacement cost approachrelief from royalty method to estimate the fair values of the identifiable intangible assets.98Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their current fair values, except for operating right-of-use assets, which were reduced to their respective fair values as of the acquisition date.The acquired entity's results of operations were included in the Company's consolidated financial statements from the date of acquisition, November 2, 2020. For the year ended December 31, 2021, Segment contributed net operating revenue of $200.9 million, which is reflected in the accompanying consolidated statement of operations. Due to the integrated nature of the Company's operations, the Company believes that it is not practicable to separately identify earnings of Segment on a stand-alone basis.During the year ended December 31, 2020, the Company incurred costs related to this acquisition of $0.8$20.8 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operation. Prooperations.The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Segment as if it was consummated on January 1, 2019 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense, one-time tax benefit and direct and incremental transaction costs reflected in the historical financial statements. Specifically, the following adjustments were made:•For the year ended December 31, 2020, the Company's and Segment's direct and incremental transaction costs of $79.3 million are excluded from the pro forma condensed combined net loss.•For the year ended December 31, 2019, the Company's direct and incremental transaction costs of $20.8 are included in the pro forma condensed combined net loss.•In the year ended December 31, 2020, the pro forma condensed combined net loss includes a reversal of the valuation allowance release of $13.8 million.•In the year ended December 31, 2019, the pro forma condensed combined net loss includes a one-time tax benefit of $38.1 that would have resulted from the acquisition, and an ongoing tax benefit of $7.5 million.This unaudited data is presented for informational purposes only and is not intended to represent or be indicative of the results of operations for thisthat would have been reported had the acquisition areoccurred on January 1, 2019. It should not presentedbe taken as representative of future results of operations of the combined company.The following table presents the unaudited pro forma condensed combined financial impact to the Company's consolidated financial statements is immaterial.information:Year Ended December 31, 2020 2019 (Unaudited, in thousands) Revenue $ 1,874,720 $ 1,217,502 Net loss attributable to common stockholders $ (655,355) $ (576,962) TWILIO INC.Notes to Consolidated Financial Statements (Continued)5. Business Combinations (Continued)Other Fiscal 20172020 AcquisitionsBeepsend, AB In February 2017,During 2020, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions,other business combinations for a totalan aggregate purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow with a term of 18 months and was fully released at the escrow expiration date. Additionally, the Company deposited $2.0 million into a separate escrow account that was subject to certain service conditions and was released to certain employees on the first and second anniversaries of the closing date as the conditions were met. This amount was recorded as prepaid compensation in the accompanying consolidated balance sheet and was amortized into expense as the services were rendered. acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the preliminary net tangible and intangible assets and liabilities based on their preliminary fair values on the acquisition date. The prepaid compensation subject to service conditions was accounted for as a post-acquisition compensation expense and recorded as research and development expense in the accompanying consolidated statements of operations. The acquired entity's results of operations were 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 consolidated balance sheet (in thousands): Total $ (3,575 ) 13,700 12,837 $ 22,962 (1)Identifiable finite-lived intangible assets were comprised of the following: Total Estimated
life
(in years) $ 5,000 4 6,100 7 - 8 2,600 5 $ 13,700 (2)Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangibleintangibles assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from theTWILIO INC.Notes to Consolidated Financial Statements (Continued)5. Business Combinations (Continued)acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes. The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in the long-term liabilities in the accompanying consolidated balance sheet. 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. Specifically, the developed technology asset class was valued using the-relief-from royalty method, while the customer relationships asset class was valued using a multi-period excess earnings method and the supplier relationships asset class was valued using an incremental cash flow method. 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 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.Kurento Open Source Project In November 2016, the Company acquired certain assets from Tikal Technologies S.L., a Spanish corporation, behind the Kurento Open Source Project. The acquired assets consisted of (a) proprietary WebRTC media processing technologies, (b) certain licenses, patents and trademarks and (c) certain employee relationships behind the WebRTC technology. The purchase price consisted of $8.5 million in cash, of which $1.5 million was placed into escrow to indemnify the Company against breaches of general representations, warranties, claims and tax compliance matters. The escrow is effective for 24 months and 10 days from the acquisition date and may be extended under certain circumstances. The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable intangibles assets acquiredassumed based on their respective fair values onat the acquisition date. The excesstime of the purchase price over the fair values of the identifiable assets acquired was recorded as goodwill.acquisition. The Company considereddoes not consider these acquisitions to be material, individually or relied in part upon a valuation report of a third-party expert. The following table presents the final purchase price allocation recorded in the Company'saggregate, to its consolidated balance sheet (in thousands):financial statements. Total $ 8,100 400 $ 8,500 99(1)The intangible assets consist of developed technology with the estimated useful life of 3 years on the date of acquisition.TWILIO INC.Notes to Consolidated Financial Statements (Continued)5. Business Combinations (Continued)(2)The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology and the future development initiatives of the acquired workforce. The goodwill is deductible for tax purposes. The Company incurred cost related to this acquisition of $0.1 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operations.6.8. Goodwill and Intangible AssetsGoodwillGoodwill balance as of December 31, 20182021 and 20172020, was as follows (in thousands):follows:Total (In thousands) Balance as of December 31, 2019 $ 2,296,784 Goodwill additions related to 2020 acquisitions 2,303,780 Measurement period adjustments (5,170) Balance as of December 31, 2020 $ 4,595,394 Goodwill additions related to 2021 acquisitions 663,599 Measurement period adjustments 4,173 Balance as of December 31, 2021 $ 5,263,166 Total $ 3,565 12,688 149 1,449 $ 17,851 20,356 571 (613 ) $ 38,165 Intangible assets consisted of the following (in thousands):following:As of
December 31, 2021Gross Accumulated
AmortizationNet Amortizable intangible assets: (In thousands) Developed technology $ 794,831 $ (222,765) $ 572,066 Customer relationships 538,264 (128,035) 410,229 Supplier relationships 51,671 (9,491) 42,180 Trade names 30,669 (13,874) 16,795 Order backlog 10,000 (10,000) — Patent 4,035 (508) 3,527 Total amortizable intangible assets 1,429,470 (384,673) 1,044,797 Non-amortizable intangible assets: Telecommunication licenses 4,920 — 4,920 Trademarks and other 295 — 295 Total $ 1,434,685 $ (384,673) $ 1,050,012 100 As of December 31, 2018 Gross Accumulated
Amortization Net $ 28,209 $ (10,497 ) $ 17,712 8,153 (2,411 ) 5,742 2,696 (973 ) 1,723 60 (60 ) — 2,264 (178 ) 2,086 41,382 (14,119 ) 27,263 32 — 32 263 — 263 $ 41,677 $ (14,119 ) $ 27,558 TWILIO INC.Notes to Consolidated Financial Statements (Continued)6. Goodwill and Intangible Assets (Continued) As of December 31, 2017 Gross Accumulated
Amortization Net $ 14,941 $ (5,476 ) $ 9,465 7,159 (1,006 ) 6,153 2,881 (500 ) 2,381 60 (60 ) — 1,878 (108 ) 1,770 26,919 (7,150 ) 19,769 32 — 32 263 — 263 $ 27,214 $ (7,150 ) $ 20,064 As of
December 31, 2020Gross Accumulated
AmortizationNet Amortizable intangible assets: (In thousands) Developed technology $ 724,599 $ (113,282) $ 611,317 Customer relationships 379,344 (59,574) 319,770 Supplier relationships 4,356 (3,044) 1,312 Trade names 25,560 (7,921) 17,639 Order backlog 10,000 (1,667) 8,333 Patent 3,360 (373) 2,987 Total amortizable intangible assets 1,147,219 (185,861) 961,358 Non-amortizable intangible assets: Telecommunication licenses 4,920 — 4,920 Trademarks and other 295 — 295 Total $ 1,152,434 $ (185,861) $ 966,573 Amortization expense was $7.2$198.8 million, $5.7$98.6 million and $0.9$72.9 million for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.Total estimated future amortization expense wasis as follows (in thousands):follows:As of
December 31,
2021Year Ended December 31, (In thousands) 2022 $ 204,837 2023 201,527 2024 195,953 2025 192,379 2026 119,045 Thereafter 131,056 Total $ 1,044,797 As of
December 31,
2018 $ 9,724 6,337 4,922 3,198 892 2,190 $ 27,263 TWILIO INC.Notes to Consolidated Financial Statements (Continued)7.9. Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following (in thousands):following:As of December 31, 2021 2020 (In thousands) Accrued payroll and related $ 78,780 $ 54,683 Accrued bonus and commission 64,665 25,341 Accrued cost of revenue 118,004 80,620 Sales and other taxes payable 61,975 48,390 ESPP contributions 10,284 6,272 Finance lease liability, current 12,370 9,062 Accrued other expense 71,425 28,527 Total accrued expenses and other current liabilities $ 417,503 $ 252,895 101 As of
December 31, 2018 2017 $ 9,886 $ 4,898 8,564 4,777 29,901 10,876 23,631 20,877 2,672 1,338 1,418 1,048 3,415 162 2,217 2,515 18,054 7,123 $ 99,758 $ 53,614 Other long-term liabilities10. Notes PayableLong-term debt consisted of the following (in thousands):following:As of December 31, 2021 2020 (In thousands) 2029 and 2031 Senior Notes 2029 Senior Notes Principal $ 500,000 $ — Unamortized discount (5,701) — Unamortized issuance costs (1,286) — Net carrying amount 493,013 — 2031 Senior Notes Principal 500,000 — Unamortized discount (5,832) — Unamortized issuance costs (1,274) — Net carrying amount 492,894 — Convertible Senior Notes and Capped Call Transactions Convertible Senior Notes Principal — 343,702 Unamortized discount — (38,406) Unamortized issuance costs — (3,228) Net carrying amount — 302,068 Total long-term debt $ 985,907 $ 302,068 2029 and 2031 Senior NotesIn March 2021, the Company issued $1.0 billion aggregate principal amount of senior notes, consisting of $500.0 million principal amount of 3.625% notes due 2029 (the “2029 Notes”) and $500.0 million principal amount of 3.875% notes due 2031 (the “2031 Notes,” and together with the 2029 Notes, the “Notes”). Initially, none of the Company’s subsidiaries guaranteed the Notes. However, under certain circumstances in the future the Notes can be guaranteed by each of the Company’s material domestic subsidiaries. The 2029 Notes and 2031 Notes will mature on March 15, 2029 and March 15, 2031, respectively. Interest payments are payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2021.The aggregate net proceeds from offering of the Notes were approximately $984.7 million after deducting underwriting discounts and issuance costs paid by the Company. The issuance costs of $2.8 million are amortized into interest expense using the effective interest method over the term of the Notes.102 As of
December 31, 2018 2017 $ 7,569 $ 8,480 5,181 2,452 2,290 — 2,170 — 959 477 $ 18,169 $ 11,409 8. (1)at any time prior to March 15, 2024 with the net cash proceeds received by the Company from an equity offering at a redemption price equal to 103.625% of the principal amount, provided the aggregate principal amount of all such redemptions does not exceed 40% of the original aggregate principal amount of the 2029 Notes. Such redemption shall occur within 180 days after the closing of an equity offering and at least 50% of the then-outstanding aggregate principal amount of the 2029 Notes shall remain outstanding, unless all 2029 Notes are redeemed concurrently;(2)at any time prior to March 15, 2024 at 100% of the principal amount, plus a “make-whole” premium;(3)at any time on or after March 15, 2024 at a prepayment price equal to 101.813% of the principal amount;(4)at any time on or after March 15, 2025 at a prepayment price equal to 100.906% of the principal amount; and(5)at any time on or after March 15, 2026 at a prepayment price equal to 100.000% of the principal amount;in each case, the redemption will include the accrued and unpaid interest, as applicable.The Company may voluntarily redeem the 2031 Notes, in whole or in part, under the following circumstances:(1)at any time prior to March 15, 2024 with the net cash proceeds received by the Company from an equity offering at a redemption price equal to 103.875% of the principal amount, provided the aggregate principal amount of all such redemptions does not to exceed 40% of the original aggregate principal amount of the 2031 Notes. Such redemption shall occur within 180 days after the closing of an equity offering and at least 50% of the then-outstanding aggregate principal amount of the 2031 Notes shall remain outstanding, unless all 2031 Notes are redeemed concurrently;(2)at any time prior to March 15, 2026 at 100% of the principal amount, plus a “make-whole” premium;(3)at any time on or after March 15, 2026 at a prepayment price equal to 101.938% of the principal amount;(4)at any time on or after March 15, 2027 at a prepayment price equal to 101.292% of the principal amount;(5)at any time on or after March 15, 2028 at a prepayment price equal to 100.646% of the principal amount; and(6)at any time on or after March 15, 2029 at a prepayment price equal to 100.000% of the principal amount;in each case, the redemption will include accrued and unpaid interest, as applicable.The Notes are 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 that the Company may incur in the future and equal in right of payment with the Company’s existing and future liabilities that are not subordinated.In certain circumstances involving a change of control event, the Company will be required to make an offer to repurchase all, or, at the holder’s option, any part, of each holder’s notes of that series at 101% of the aggregate principal amount, plus accrued and unpaid interest, as applicable.The indenture governing the Notes (the “Indenture”) contains covenants limiting the Company’s ability and the ability of its subsidiaries to: (i) create liens on certain assets to secure debt; (ii) grant a subsidiary guarantee of certain debt without also providing a guarantee of the Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of its assets to another person. These covenants are subject to a number of limitations and exceptions. Certain of these covenants will not apply during any period in which the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services.103The interest expense recognized during the year ended December 31, 2021 was not significant.As of December 31, 2021, the Company was in compliance with all of its financial covenants under the Indenture.Convertible Senior Notes and Capped Call TransactionsIn May 2018, the Company issued $550.0 million aggregate principal amount of 0.25% convertible senior notes due 2023 (“Convertible Notes”) in a private placement, including $75.0 million aggregate principal amount of such Convertible Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the "Notes").purchasers. The interest on the Notes is payable semi-annually in arrears on June 1total net proceeds from this offering, after deducting initial purchaser discounts 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 thedebt issuance of Notes (the "indenture") or if the Notes are not freely tradeable as requiredcosts paid by the indenture.Company, were approximately $537.0 million. The Convertible Notes will mature onhad the original maturity date of June 1, 2023, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds fromOn May 18, 2021, the debt offering, after deducting initial purchaser discountsCompany issued a notice of redemption for its Convertible Notes and debt issuance costs, paid or payable by us, were approximately $537.0 million. Each $1,000in June 2021, redeemed all of the remaining outstanding principal amount of the Convertible Notes. During 2021 and through the date of the redemption, the Company converted $343.7 million aggregate principal amount of the Convertible Notes is initially convertible into 14.1040by issuing 4,846,965 shares of its Class A common stock. Of the Company's$1.7 billion total value of these transactions, $1.4 billion and $335.7 million were allocated to the equity and liability components, respectively, utilizing the effective interest rate to determine the fair value of the liability component. The selected interest rate reflected the Company’s incremental borrowing rate, adjusted for the Company’s credit standing on nonconvertible debt with similar maturity. The extinguishment of these Convertible Notes resulted in a $29.0 million loss that is included in other (expenses) income, net, in the accompanying consolidated statement of operations. No sinking fund was provided for these Convertible Notes.In the year ended December 31, 2020, the Company converted $206.3 million aggregate principal amount of the Convertible Notes by issuing 2,902,434 shares of its Class A common stock parand $2.0 million of cash. Of the $894.6 million total value $0.001, which is equivalentof these transactions, $701.9 million and $192.7 million were allocated to an initial conversion pricethe equity and liability components, respectively. The extinguishment of approximately $70.90 per share. The conversion rate is subject to adjustment upon the occurrence ofTWILIO INC.Notes to Consolidated Financial Statements (Continued)8. Convertible Senior Notesthese notes resulted in a $12.9 million loss and Capped Call Transactions (Continued)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 definedwas included in other (expenses) income, net, in the indenture,accompanying consolidated statements of operations. There were no conversions in 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 their redemption, the close of business on the business day immediately preceding March 1, 2023, theConvertible Notes may bewere 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 five5 business days period after any five5 consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Convertible 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'sCompany’s notice that it is redeeming any or all of the Convertible 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, holdersEach $1,000 principal amount of the Convertible Notes may, at their option, convert all or a portion of their Notes regardlesswas initially convertible into 14.104 shares of the foregoing conditions.104Upon conversion, the Company willhad an ability to 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,common stock, at the Company'sCompany’s election. It isThroughout the Company's current intent to settleperiod the principal amountConvertible Notes were outstanding the conditional redemption feature was triggered several times and the Company settled the notes presented for conversion primarily in shares of the Notes with cash. During the year ended December 31, 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; effectivelyTWILIO INC.Notes to Consolidated Financial Statements (Continued)8. Convertible Senior Notes and Capped Call Transactions (Continued)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.In accounting for the issuance of the Convertible Notes, the Company separated the Convertible 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 iswas not remeasured as long as it continuescontinued 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, iswas amortized to interest expense at an annual effective interest rate of 5.7% over the contractual terms of the Convertible Notes.In accounting for the transaction costs related to the Convertible Notes, the Company allocated the total amount incurred to the liability and equity components of the Convertible 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 arewere amortized to interest expense using the effective interest method over the contractual terms of the Convertible Notes and were written off upon the redemption of the Convertible Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders'stockholders’ equity. The net carrying amount of the liability component of the Notes was as follows (in thousands): As of
December 31,
2018 $ 550,000 (106,484 ) (9,020 ) $ 434,496 follows (in thousands):follows:As of December 31, 2021 2020 (In thousands) Proceeds allocated to the conversion options (debt discount) $ — $ 74,636 Issuance costs (2,819) (2,819) Net carrying amount $ (2,819) $ 71,817 As of
December 31,
2018 $ 119,435 (2,819 ) $ 116,616 TWILIO INC.Notes to Consolidated Financial Statements (Continued)8. Convertible Senior Notes and Capped Call Transactions (Continued) The following table sets forth the interest expense recognized related to the Notes (in thousands): Year Ended
December 31,
2018 $ 852 1,102 12,951 $ 14,905 privately-negotiatedprivately negotiated capped call transactions with certain counterparties (the "capped calls"“capped calls”). The capped calls each havehad an initial strike price of approximately $70.90 per share, subject to certain adjustments, which correspondscorresponded to the initial conversion price of the Notes. The capped calls havehad initial cap prices of $105.04 per share, subject to certain adjustments. The capped calls cover,covered, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A Common Stock.common stock. The capped calls arewere generally intended to reduce or offset the potential dilution to the Class A Common Stockcommon 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 onConcurrently with the earlierredemption 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 affectingConvertible Notes, the Company including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, thesettled its 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.call arrangement. The capped call transactions arearrangement was settled in June 2021 for gross cash consideration of $229.8 million received by the Company and recorded in stockholders' equityadditional paid-in-capital, net of $1.4 million in transaction costs and are not accounted for as derivatives.a $3.2 million realized gain. The net costgain was primarily driven by the change in the fair value of $58.5 million incurred to purchase the capped call transactionsCompany’s Class A common stock on the transaction settlement date. The gain was recorded as a reduction to additional paid-in capitalin other (expenses) income, net, in the accompanying consolidated balance sheet.9.statement of operations.10511. Supplemental Balance Sheet InformationA roll-forwardroll‑forward of the Company's reserves for the years ended December 31, 2018, 2017 and 2016Company’s customer credit reserve is as follows (in thousands):(a) Allowance for doubtful accounts:Year Ended December 31, 2021 2020 2019 (In thousands) Balance, beginning of period $ 16,783 $ 6,784 $ 3,015 Additions 55,937 50,817 18,143 Deductions against reserve (54,143) (40,818) (14,374) Balance, end of period $ 18,577 $ 16,783 $ 6,784 Year Ended December 31, 2018 2017 2016 $ 1,033 $ 1,076 $ 486 4,085 580 1,145 (173 ) (623 ) (555 ) $ 4,945 $ 1,033 $ 1,076 TWILIO INC.Notes to Consolidated Financial Statements (Continued)9. Supplemental Balance Sheet Information (Continued)(b) Sales credit reserve: Year Ended December 31, 2018 2017 2016 $ 1,761 $ 544 $ 714 5,560 2,531 1,348 (4,306 ) (1,314 ) (1,518 ) $ 3,015 $ 1,761 $ 544 10.12. Revenue by Geographic AreaRevenue by geographic area is based on the IP address or the mailing address at the time of registration. The following table sets forth revenue by geographic area (in thousands):area:Year Ended December 31, 2021 2020 2019 Revenue by geographic area: (In thousands) United States $ 1,881,873 $ 1,282,213 $ 808,857 International 959,966 479,563 325,611 Total $ 2,841,839 $ 1,761,776 $ 1,134,468 Year Ended December 31, 2018 2017 2016 $ 484,809 $ 308,612 $ 233,922 165,258 90,408 43,413 $ 650,067 $ 399,020 $ 277,335 75 % 77 % 84 % 25 % 23 % 16 % Percentage of revenue by geographic area: United States 66 % 73 % 71 % International 34 % 27 % 29 % Long-lived assets outside of the United States were not significant.11.13. Commitments and Contingencies(a)Lease and Other CommitmentsThe Company entered into various non-cancelable operating lease agreements for its facilities that expire overfacilities. See Note 6 to these consolidated financial statements for additional detail on the next ten years. CertainCompany's 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. In September 2018, the Company entered into a sub-lease agreement ("Sub-lease") for a total of 259,416 rentable square feet of office space at 101 Spear Street in San Francisco, California. The Sub-lease covers several floors for which the terms commence on December 1, 2018 and April 1, 2020, and will be expiring at various dates between March 2025 and June 2028. The Company secured its lease obligation with a $14.7 million letter of credit, which it designated as restricted cash on its balance sheet as of December 31, 2018. The Company intends for this location to become its headquarters at some time in 2019. The total lease payments range from $0.8 million per month to $2.2 million per month. The Sub-lease contains a bargain purchase option for the Company to acquire the existing furniture in the leased space for $1 at the end of the lease term. This option was treated as a capital lease under ASC 840—"Leases" and as of December 31, 2018, $2.5 million was recorded as assets under capital lease within the property, plant and equipment balance in the accompanyingTable of ContentsTWILIO INC.Notes to Consolidated Financial Statements (Continued)11. Commitments and Contingencies (Continued)consolidated balance sheet. The corresponding capital lease obligation was recorded as current and long-term liabilities. In January 2016, the Company entered into a lease agreement ("Lease"), as subsequently amended, for approximately 90,000 square feet of new office space at 375 Beale Street in San Francisco, California, that houses its principal executive office. The term of the Lease is approximately 96 months following the commencement in October 2016, and the lease payments range from $0.4 million per month in the first 60 months to $0.5 million per month thereafter. The Lease included a tenant improvement allowance to cover construction of certain leasehold improvements for up to $8.3 million. All applicable amounts were collected from the landlord as of December 31, 2017. Based on the terms of the landlord incentive and involvement of the Company in the construction process, the leasehold improvements were determined to be property of the Company. The Company initially secured its lease obligation with a $7.4 million letter of credit, which was designated as restricted cash on its balance sheet as of December 31, 2016. This amount is periodically reduced as stipulated in the lease agreement. Rent expense was $10.3 million, $8.1 million and $7.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):Year Ending December 31: As of
December 31,
2018 $ 24,128 29,527 30,898 30,492 30,122 81,316 $ 226,483 Future minimum lease payments under the capital lease were as follows (in thousands):Year Ending December 31: As of
December 31,
2018 $ 306 512 573 590 608 1,939 $ 4,528 TWILIO INC.Notes to Consolidated Financial Statements (Continued)11. Commitments and Contingencies (Continued) noncancellable contractual commitments with its cloud infrastructure provider, network service providers and other vendors that are non-cancellablenoncancellable and expire within one to four years. Future minimum payments under these noncancellable purchase commitments were as follows (in thousands).follows. Unrecognized tax benefits are not included in these amounts because any amounts expected to be settled in cash are not material:As of
December 31, 2021Year Ending December 31, (In thousands) 2022 $ 213,106 2023 222,852 2024 35,066 2025 561 Total payments $ 471,585 Year Ending December 31: As of
December 31,
2018 $ 37,623 2,337 1,023 2,000 5,000 $ 47,983 (b) Legal Matters On April 30, 2015 and March 28, 2016, Telesign Corporation ("Telesign") filed lawsuits (which were subsequently consolidated) againstIn February 2021, the Company in the United States District Court, Central District of California ("Telesign I/II"entered into a Framework Agreement, as subsequently amended, with Syniverse Corporation (“Syniverse”). Telesign alleges in Telesign I/II that and Carlyle Partners V Holdings, L.P. (“Carlyle”) (the “Framework Agreement”), pursuant to which Syniverse would issue to the Company is infringing four U.S. patents that it holds: U.S. Patent No. 7,945,034 ("034"), U.S. Patent No. 8,462,920 ("920"), U.S. Patent No. 8,687,038 ("038") and U.S. Patent No. 9,300,792 ("792"). The consolidated Telesign I/II actions have been transferred to the United States District Court, Northern District. The patent infringement allegationsshares of Syniverse common stock in the lawsuit relate to the Company's two-factor authentication use case, Authy, andconsideration for an API tool to find information about a phone number. Telesign seeks, among other things, to enjoin us from allegedly infringing the patents, along with damages for lost profits. On March 8, 2017, in response to a petitioninvestment by the Company of up to $750.0 million. In August 2021, Syniverse entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Blue Steel Merger Sub Inc. (the “Merger Sub”) and M-3 Brigade Acquisition II Corp. (“MBAC”), which would result in Syniverse being a wholly owned subsidiary of MBAC (the “Merger”). Concurrently, the U.S. PatentCompany and Trademark Officer ("PTO"MBAC entered into the Twilio Subscription Agreement (the “Subscription Agreement”), pursuant to which the Company agreed, subject to the terms and conditions set forth therein, to subscribe for and purchase, and MBAC agreed to issue and sell to the Company, immediately prior to the closing of the Merger, shares of Class A common stock and, if applicable, shares of Class C common stock for an aggregate amount up to $750.0 million, depending on redemptions by MBAC’s shareholders. In connection with the closing of the investment, the Company and Syniverse (or their respective subsidiaries) would enter into a wholesale agreement.See Note 18 for details on developments on this transaction which occurred in the period subsequent to December 31, 2021.(b)Legal MattersThe City and County of San Francisco (“San Francisco”) issued an order instituting an inter partes reviewhas assessed the Company for additional Telephone Users Tax (“TUT”) and Access Line Tax (“ALT”) on certain of the Company’s services for the '792 patent. years 2009 through 2018. The assessments totaled $38.8 million, including interest and penalties. The Company paid the assessments under protest in the third quarter of 2020.On March 6, 2018, the PTO found all claims challenged byMay 27, 2021, the Company filed a lawsuit against San Francisco in San Francisco Superior Court challenging the inter partes review unpatentable. On October 19, 2018,assessments. The Company raised numerous defenses to the district court granted the Company's motionassessments including that all asserted claimsits services are not telecommunications services, application of the asserted patents are invalid under 35 U.S.C. § 101taxes to Twilio’s services violates the Internet Tax Freedom Act and entered judgment in the Company's favor. On November 8, 2018, Telesign appealed the judgment to the United States Court of Appeals for the Federal Circuit where the case is now pending. Based on, among other things, final judgment being entered by the district court in the Company's favor, the CompanySan Francisco does not believe a loss is reasonably possible or estimable. On December 1, 2016, the Compamy filed a patent infringement lawsuit against Telesign in the United States District Court, Northern Districthave jurisdiction to impose tax on services provided outside 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 dismissTWILIO INC.Notes to Consolidated Financial Statements (Continued)11. Commitments and Contingencies (Continued)as to the '021, '465 and '376 patents. On August 23, 2017, Telesign petitioned the 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.San Francisco. 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 violationrefunds of the California Invasiontaxes paid, waivers of Privacy Act. The complaint seeks injunctiveinterest and penalties, cost of suit and reasonable attorneys’ fees, and other legal and equitable relief as well as monetary damages. 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. Following mediation, on January 7, 2019, the parties signed a long-form settlement agreement, providing for a payment of $10 million into a common fund and injunctive relief involving certain updates to Twilio's Acceptable Use Policy and customer documentation. On January 15, 2019, the court entered an order granting preliminary approval of the settlement, and the parties signed an amended settlement agreement to conform to the court's order. A final approval hearing is scheduled for June 11, 2019. Given insurance coverage, the Company currently estimates its potential liability in the Flowers matter to be $1.7 million and reserved this amount in its consolidated balance sheet as of December 31, 2018, presented elsewhere in this Annual Report on Form 10-K. On September 1, 2015, Twilio was named as a defendant in a First Amended Complaint in a putative class action captioned Jeremy Bauman v. David Saxe, et al. pending in the United States District Court, District of Nevada relating to the alleged sending of unsolicited text messages to the plaintiffs and putative class members. deems appropriate.The Company filed a motion to dismiss, which was granted, and on September 20, 2016 the plaintiff filed a Second Amended Complaint with additional allegations that the Company violated the Telephone Consumer Protection Act ("TCPA"), and the Nevada Deceptive Trade Practices Act ("NDTPA"), NRS 41.600(2)(e). On January 10, 2019, the court granted Plaintiffs' motion for class certification under the TCPA and denied plaintiff's request to certify a class under the NDTPA. On February 13, 2019, the court issued an order denying the Company's motion to dismiss as to Plaintiffs' TCPA claim and granting dismissal as to Plaintiffs' NDTPA claim. The Company intends to vigorously defend itself against and believes it has meritorious defensesstrong arguments against the assessments, but litigation is uncertain and there is no assurance that it will prevail in court. Should the Company lose on one or more of its arguments, it could incur additional losses associated with taxes, interest, and penalties that together, in aggregate, could be material. The Company regularly assesses the likelihood of adverse outcomes resulting from tax disputes such as this and examines all open years to this lawsuit. It is too earlydetermine the necessity and adequacy of any tax reserves. The Company’s tax reserves are further discussed in Note 13(d) of these matters to reasonably predict the probability of the outcomes or to estimate the range of possible loss, if any.SendGrid Stockholder Litigation On December 5, 2018, purported stockholders of SendGrid filed putative class action complaints in the United States District Court for the District of Delaware, Rosenblatt v. SendGrid, Inc., et al., Case No. 1:18-cv-01931-UNA (the "Rosenblatt Complaint"), and in the United States District Court for the District of Colorado, Chen v. SendGrid, Inc., et al., Case No. 1:18-cv-03131-MEH (the "Chen Complaint"), against SendGrid, the individual members of the SendGrid board of directors (the "Individual Defendants"), Twilio and Topaz Merger Subsidiary, Inc. Thereafter, on December 19, 2018Table of ContentsTWILIO INC.Notes to Consolidated Financial Statements (Continued)11. Commitments and Contingencies (Continued)and January 3, 2019, purported stockholders of SendGrid filed putative class action complaints against SendGrid and the Individual Defendants in the United States District Court for the District of Colorado, respectively, Bushansky v. SendGrid, Inc., et al., 1:18-cv-03260-SKC (the "Bushansky Complaint"), and Conner v. SendGrid, Inc., et al., 1:19-cv-00016-PAB-SKC (the "Conner Complaint"). As of February 11, 2019, all four complaints have been voluntarily dismissed. Among other things, the Rosenblatt Complaint alleges that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a registration statement on Form S-4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Rosenblatt Complaint alleges that the Individual Defendants and Twilio acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective registration statement on Form S-4. The Rosenblatt Complaint seeks, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to file a registration statement on Form S-4 that does not contain any untrue statements of material fact and states all material facts, a declaration that the defendants violated Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and an award of plaintiff costs, including reasonable attorneys' and experts' fees. On February 11, 2019, the Rosenblatt Complaint was voluntarily dismissed. Among other things, the Chen Complaint alleges that the defendants misrepresented and/or omitted material information in a registration statement on Form S-4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Chen Complaint alleges that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Form S-4. The Chen Complaint also alleges that the Individual Defendants breached their fiduciary duties to SendGrid stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell SendGrid through an allegedly unfair process and for an unfair price and on unfair terms, and by failing to disclose all material information. The Chen Complaint seeks, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to commence a new sale process, a declaration that the merger agreement was agreed to in breach of the Individual Defendants' fiduciary duties and is therefore unlawful and unenforceable, an order directing the defendants to account to the putative class for damages allegedly sustained, and an award of plaintiff costs, including reasonable attorneys' and experts' fees. On February 4, 2019, the Chen Complaint was voluntarily dismissed. Among other things, the Bushansky and Conner Complaints allege that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a Schedule 14A Definitive Proxy Statement, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Bushansky and Conner Complaints allege that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14A Definitive Proxy Statement. The Bushansky and Conner Complaints seek, among other things, rescission of the merger or rescissory damages, and an award of plaintiff costs, including reasonable attorneys' and experts' fees. On February 4, 2019, the Bushansky Complaint was voluntarily dismissed. On February 11, 2019, the Conner Complaint was voluntarily dismissed.TWILIO INC.Notes to Consolidated Financial Statements (Continued)11. Commitments and Contingencies (Continued) matters discussed above, from time to time, the Company is a partymay be subject to legal actionactions and subject to claims that arise in the ordinary course of business. The Company has received, and may in the future continue to receive, claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasiblefrom third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to predict or determine the ultimate outcome of these matters,defend the Company, believes that these legal proceedings will not have a material adverse effect on its financial positionpartners and its customers by determining the scope, enforceability and validity of third‑party proprietary rights, or to establish our proprietary rights. The 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 consolidated statements of operations.(c)Indemnification AgreementsThe 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 Eventsevents 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 and in connection with our financing and business combinations transactions, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners, customers 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'sCompany’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'sCompany’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 December 31, 20182021 and 2017, no2020, 0 amounts were accrued.(d)Other TaxesThe Company conducts operations in many tax jurisdictions throughoutwithin and outside the United States. In many of these jurisdictions, non-income-based taxes, such as sales, use, telecommunications, and use and telecommunicationsother local taxes are assessed on the Company'sCompany’s operations. Prior to March 2017,In the last several years the Company had not billed nor collected thesehas expanded to collect taxes fromin most jurisdictions where it operates. The Company continues to carry reserves for certain of its customers and,prior non-income-based tax exposures in accordance with U.S. GAAP, recorded a provision for its tax exposure in thesecertain jurisdictions when it wasis both probable that a liability had beenwas incurred and the amount of the exposure could be reasonably estimated. These reserves are based on estimates includedwhich include several key assumptions including, but not limited to, the taxability of the Company'sCompany’s services, the jurisdictions in which its management believes it hashad 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, from January 2018, the Company is not recording an additional provision for its exposure for new activities in that jurisdiction. The Company expects to continue to expand the number of jurisdictions whereTWILIO INC.Notes to Consolidated Financial Statements (Continued)11. Commitments and Contingencies (Continued)these taxes will be collected in the future. Simultaneously, the Company was and continues to beremain in discussions with certain statesjurisdictions regarding its prior state sales and other taxes if any, that the Companyit 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 December 31, 2018 and 2017, the liability recorded for these taxes was $22.6 million and $20.9 million, respectively.otherany of these jurisdictions challenge management'sdisagree with management’s assumptions and analysis, the actualassessment of the Company’s tax exposure could differ materially from themanagement’s current estimates.12. Stockholders' Equity(a) Preferred StockAs of December 31, 20182021, the liabilities recorded for these taxes were $25.4 million for domestic jurisdictions and 2017,$17.7 million for jurisdictions outside of the United States. As of December 31, 2020, these liabilities were $25.6 million and $9.6 million, respectively.10814. Stockholders' EquityPreferred StockAs of December 31, 2021 and 2020, 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 In June 2016, the Company completed an initial public offering ("IPO") in which the Company sold 11,500,000 shares of its newly authorized Class A common stock, which included 1,500,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $15.00 per share. The Company received net proceeds of $155.5 million, after deducting underwriting discounts and offering expenses paid by the Company, from the sale of its shares in the IPO. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as shares of Class B common stock and all shares of convertible preferred stock then outstanding were converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock. In October 2016, the Company completed a follow-on public offering ("FPO") in which the Company sold 1,691,222 shares of its Class A common stock, which included 1,050,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $40.00 per share. In addition, another 6,358,778 shares of the Company's Class A common stock were sold by the selling stockholders of the Company, which included 906,364 shares sold pursuant to the exercise of employee stock options by certain selling stockholders. The Company received aggregate proceeds of $64.4 million, after deducting underwriting discounts and offering expenses paid and payable by the Company. The Company did not receive any of the net proceeds from the sales of shares by the selling stockholders.As of December 31, 20182021 and 2017,2020, 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 December 31, 2018, 80,769,7632021, 170,625,994 shares of Class A common stock and 19,310,4659,842,105 shares of Class B common stock were issued and outstanding. As of December 31, 2017, 69,906,5502020, 153,496,222 shares of Class A common stock and 24,063,24610,551,302 shares of Class B common stock were issued and outstanding. Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share,TWILIO INC.Notes to Consolidated Financial Statements (Continued)12. Stockholders' Equity (Continued)respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. The outstanding Class B common stock as of the year ended December 31, 2017 included 180,000 shares related to the Authy acquisition which was released from escrow during 2018.As of December 31, 2021 2020 Stock options issued and outstanding 3,351,313 5,625,735 Unvested restricted stock units issued and outstanding 6,475,700 7,523,882 Class A common stock reserved for Twilio.org 618,857 707,265 Stock-based awards available for grant under 2016 Plan 24,650,104 18,942,205 Stock-based awards available for grant under ESPP 6,382,830 4,941,281 Class A common stock reserved for the Convertible Notes — 7,569,731 Total 41,478,804 45,310,099 As of
December 31,
2018 As of
December 31,
2017 7,978,369 10,710,427 8,262,902 5,665,459 572,676 635,014 9,313,354 10,200,189 3,092,779 2,478,343 10,472,165 — 39,692,245 29,689,432 (c) Twilio.orgIn September 2015, the Company's board of directors approved the establishment of Twilio.orgFebruary 2021, August 2020 and committed 1% of the Company's outstanding capital stock to fund Twilio.org's activities. Through Twilio.org, which is a part ofJune 2019, the Company completed public equity offerings in which it sold 4,312,500 shares, 5,819,838 shares and not8,064,515 shares, respectively, of its Class A common stock at a separate legal entity,public offering price of $409.60, $247.00 and $124.00 per share, respectively. The Company received total proceeds of $1.8 billion, $1.4 billion and $979.0 million, respectively, net of underwriting discounts and offering expenses paid by the Company donates and discounts its products to nonprofits, who use the Company's products to engage their audience, expand their reach and focus on making a meaningful change in the world. In the years ended December 31, 2018 and 2017, Twilio.org donated $7.1 million and $1.2 million to the qualified recipients consistent with its philanthropic mission. As of December 31, 2018, the Company had 572,676 shares reserved for Twilio.org activities.13.Company.15. Stock-Based Compensation2008 Stock Option PlanThe Company maintained a stock plan, the 2008 Stock Option Plan, as amended and restated (the "2008 Plan"“2008 Plan”), which allowed the Company to grant incentive ("ISO"(“ISO”), non-statutory ("NSO"non‑statutory (“NSO”) stock options and restricted stock units ("RSU"(“RSU”) to its employees, directors and consultants to participate in the Company'sCompany’s future performance through stock-basedstock‑based awards at the discretion of the board of directors. Under the 2008 Plan, options to purchase the Company'sCompany’s common stock could not be granted at a price less than fair value in the case of ISOs and NSOs. Fair value was determined by the board of directors, in good faith, with input from valuation consultants. On June 22, 2016, the plan was terminated in connection with the Company'sCompany’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. The Company'sCompany’s right of first refusal for outstanding equity awards granted under the 2008 Plan terminated upon completion of the IPO. OptionsAll remaining outstanding stock options granted include provisions for early exercisability.under the 2008 Plan are vested and exercisable.2016 Stock Option PlanThe Company'sCompany’s 2016 Stock Option and Incentive Plan (the "2016 Plan"“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'sCompany’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'sCompany’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'sCompany’s compensation committee. On January 1, 20182021 and 2017,2020, the shares available for grant under the 2016 Plan were automatically increased by 4,698,4908,202,376 shares and 4,362,4276,920,640 shares, respectively.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.Segment 2013 Stock Incentive PlanIn connection with its acquisition of Segment, the Company assumed and replaced all stock options and restricted stock units of continuing employees issued under Segment’s 2013 Stock Incentive Plan (“Segment Plan”) that were unvested and outstanding on the acquisition date. The assumed equity awards will continue to be outstanding and will be governed by the provisions of the Segment Plan.SendGrid 2009, 2012 and 2017 Stock Incentive PlansIn connection with its acquisition of SendGrid, the Company assumed all stock options and restricted stock units issued under SendGrid’s 2009, 2012 and 2017 Stock Incentive Plans that were outstanding on the date of acquisition. The assumed equity awards will continue to be outstanding and will be governed by the provisions of their respective plans. Additionally, the Company assumed shares of SendGrid common stock that were reserved and available for issuance under SendGrid's 2017 Equity Incentive Plan, on an as converted basis. These shares can be utilized for future equity grants under the Company’s 2016 Plan, to the extent permitted by New York Stock Exchange rules.Zipwhip 2008 Stock Plan and 2018 Equity Incentive PlanIn connection with its acquisition of Zipwhip, the Company assumed and replaced all stock options and restricted stock units of continuing employees issued under Zipwhip Amended and Restated 2008 Stock Plan and 2018 Equity Incentive Plan (“Zipwhip Plans”) that were unvested and outstanding on the acquisition date. The assumed equity awards will continue to be outstanding and will be governed by the provisions of the Zipwhip Plans.Under bothall 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-hirestock options and restricted stock units is generally a four-year termfour years 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,grant. For existing employees and, effective February 2021, for new-hires the Company began grantingstock options and restricted stock units to existing employees that vest in equal monthly and quarterly installments, respectively, over a four yearthe service period.2016 Employee Stock Purchase PlanThe Company'sCompany’s Employee Stock Purchase Plan ("(“2016 ESPP"ESPP”), as amended, initially became effective on June 21, 2016. A total of 2,400,000 shares of the Company'sCompany’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 Company's Class A common stock, 1% of the number of shares of the Company'sCompany’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'sCompany’s compensation committee. On January 1, 20182021 and 2017,2020, the shares available for grant under the 2016 PlanESPP were automatically increased by 939,6981,640,475 shares and 872,4851,384,128 shares, respectively.The 2016 ESPP allows eligible employees to purchase shares of the Company'sCompany’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, theThe 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'sCompany’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company'sCompany’s Class A common stock on the offering date or (ii) the fair market value of the Company'sCompany’s Class A common stock on the purchase date. In the years ended December 31, 2018 and 2017, 325,262 shares and 794,142 shares110As of December 31, 2018,2021, total unrecognized compensation cost related to the 2016 ESPP was $2.2 million, which will be amortized over a weighted-average period of 0.4 years.not significant.TWILIO INC.Notes to Consolidated Financial Statements (Continued)13. Stock-Based Compensation (Continued) Stock optionsStock-options and restricted stock units activity under the Company's 2008 Plan and 2016 Plan as well as respective Stock Incentive Plans of SendGrid and Segment 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) 10,155,427 $ 10.31 7.12 $ 145,763 1,330,118 39.77 (3,628,032 ) 8.20 (434,144 ) 19.70 7,423,369 $ 16.07 6.80 $ 543,640 4,529,504 $ 9.38 5.96 $ 362,017 Number of
options
outstandingWeighted-
average
exercise
price
(Per share)Weighted-
average
remaining
contractual
term
(In years)Aggregate
intrinsic
value
(In thousands)Outstanding options as of December 31, 2020 5,070,735 $ 51.71 6.85 $ 1,454,222 Granted 350,208 343.94 Assumed in acquisition 83,539 49.26 Exercised (1,733,819) 40.44 Forfeited and canceled (419,350) 131.01 Outstanding options as of December 31, 2021 3,351,313 $ 78.10 6.09 $ 646,760 Options vested and exercisable as of December 31, 2021 2,152,819 $ 37.21 4.92 $ 490,502 Year Ended December 31, 2021 2020 2019 (In thousands, except per share amounts) Aggregate intrinsic value of stock options exercised (1)$ 508,539 $ 603,597 $ 394,998 Total estimated grant date fair value of options vested $ 138,851 $ 107,854 $ 81,292 Weighted-average grant date fair value per share of options granted $ 216.29 $ 170.70 $ 58.13 ____________________________________
(1)Aggregate intrinsic value represents the difference between the Company's estimated fair value of its common stock and the exercise price of outstanding "in-the-money" options. Prior to the IPO, the fair value of the Company's common stock was estimated by the Company's board of directors. After the IPO, the fair value of the Company's common stock is the Company'sCompany’s Class A common stock price as reported on the New York Stock Exchange. The aggregate intrinsic valueExchange and the exercise price of stock options exercised was $178.5 million, $132.0 million and $54.4 million during the years endedoutstanding “in-the-money” options.As of December 31, 2018, 2017 and 2016, respectively. The total estimated grant date fair value of options vested was $21.8 million, $15.8 million and $15.3 million during the years ended December 31, 2018, 2017 and 2016, respectively. The weighted-average grant-date fair value of options granted was $18.40, $13.33 and $5.52 during the years ended December 31, 2018, 2017 and 2016, respectively. On February 28, 2017,2020, the Company granted a total ofhad outstanding 555,000 shares of performance-based stock options in three distinct awards towith a weighted average exercise price of $31.72 and an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grantaggregate intrinsic value of $5.9$170.3 million. The first halfAll performance conditions had been met. During the year ended December 31, 2021, all 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 thethese stock options expire seven years after the datewere exercised. The aggregate intrinsic value of grant. Thethese stock options are amortized over a derived service period, as adjusted, of 3.1 years, 3.9 years and 4.6 years, respectively. The stock options valueTWILIO INC.Notes to Consolidated Financial Statements (Continued)13. Stock-Based Compensation (Continued)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) 555,000 $ 31.72 6.0 $ — — — — — — — 555,000 $ 31.72 6.0 $ — 185,000 $ 31.72 5.16 $ 10,652 2018,2021, no performance-based stock options remain outstanding.As of December 31, 2021, total unrecognized compensation cost related to nonvestedall unvested stock options was $35.4$151.5 million, which will be amortized on a ratable basis over a weighted-average period of 2.022.2 years.Restricted Stock Units Number of
options
outstanding Weighted-
average
grant date
fair value
(per share) Aggregate
intrinsic
value
(in thousands) 5,665,459 $ 29.29 $ 133,648 5,556,817 49.70 (2,142,776 ) 29.50 (816,598 ) 31.96 8,262,902 $ 42.70 $ 729,373 Number of
awards
outstandingWeighted-
average
grant date
fair value
(Per share)Aggregate
intrinsic
value
(In thousands)Unvested RSUs as of December 31, 2020 7,523,882 $ 131.76 $ 2,542,858 Granted 3,465,980 328.38 Vested (3,493,652) 114.70 Forfeited and canceled (1,020,510) $ 188.76 Unvested RSUs as of December 31, 2021 6,475,700 $ 237.22 $ 1,705,311 Prior to the completion of the Company's IPO, the Company granted RSUs ("Pre-IPO RSUs") under its 2008 Plan to its employees that vested upon the satisfaction of both a time-based service condition and a liquidity condition. The time-based service condition for the majority of these awards will be satisfied over a period of four years. The liquidity condition was satisfied upon occurrence of the Company's IPO in June 2016. RSUs granted on or after the completion of the Company's IPO ("Post-IPO RSUs") are granted under the 2016 Plan and are subject to a time-based vesting condition only. The compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable service period. The Post-IPO RSUs are generally earned over a service period of four years.As of December 31, 2018,2021, the Company had outstanding 24,697 restricted stock awards (“RSAs”) that were held in escrow with future vesting conditions. The aggregate intrinsic value of these awards was not significant.As of December 31, 2021, total unrecognized compensation cost related to nonvestedunvested RSUs and RSAs was $325.3 million,$1.4 billion, which will be amortized over a weighted-average period of 3.033.1 years.As of December 31, 2021, the unrecognized compensation cost related to Consolidated Financial Statements (Continued)13. Stock-Based Compensation (Continued)Valuation AssumptionsThe fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black-Scholes option pricing model:Year Ended December 31, Employee Stock Options: 2021 2020 2019 Fair value of common stock $268.55 - $409.21 $108.37 - $301.72 $103.70 - $130.70 Expected term (in years) 0.30 - 6.39 0.52 - 6.08 0.33 - 6.08 Expected volatility 42.9% - 61.5% 51.9% - 65.1% 49.0% - 66.5% Risk-free interest rate 0.1% - 1.4% 0.1% - 1.4% 1.6% - 2.5% Dividend rate —% —% —% Year Ended December 31, 2018 2017 2016 $33.01 - $76.63 $23.60 - $31.96 $10.09 - $15.00 1 - 6.08 6.08 6.08 38.6% - 44.2% 44.3% - 47.6% 51.4% - 53.0% 2.9% - 3.0% 1.9% - 2.3% 1.3% - 1.5% 0% 0% 0% 0.5 0.5 0.90 39.8% - 47.5% 33.2% - 33.9% 52% 2.1% - 2.5% 1.1% - 1.4% 0.6% 0% 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:Year Ended December 31, Employee Stock Purchase Plan: 2021 2020 2019 Expected term (in years) 0.50 0.50 0.49 - 0.50 Expected volatility 46.4% - 58.7% 54.4% - 72.1% 43.1% - 50.3% Risk-free interest rate —% - 0.1% 0.1% - 0.2% 1.6% - 2.4% Dividend rate —% —% —% 40 % 45 % 14 % $ 31.72 The Company recorded the total stock-based compensation expense as follows (in thousands):follows:Year Ended December 31, 2021 2020 2019 (In thousands) Cost of revenue $ 14,074 $ 8,857 $ 7,123 Research and development 258,672 173,303 126,012 Sales and marketing 213,351 103,450 60,886 General and administrative 146,188 76,301 70,297 Total $ 632,285 $ 361,911 $ 264,318 Year Ended December 31, 2018 2017 2016 $ 1,126 $ 650 $ 291 42,277 22,808 12,946 23,616 9,822 4,972 26,254 16,339 6,016 $ 93,273 $ 49,619 $ 24,225 TWILIO INC.Notes to Consolidated Financial Statements (Continued)14.16. Net Loss Per Share Attributable to Common StockholdersThe 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 per share data):presented:Year Ended December 31, 2021 2020 2019 Net loss attributable to common stockholders (in thousands) $ (949,900) $ (490,979) $ (307,063) Weighted-average shares used to compute net loss per share attributable to
common stockholders, basic and diluted174,180,465 146,708,663 130,083,046 Net loss per share attributable to common stockholders, basic and diluted $ (5.45) $ (3.35) $ (2.36) 112 Year Ended December 31, 2018 2017 2016 $ (121,949 ) $ (63,708 ) $ (41,324 ) 97,130,339 91,224,607 53,116,675 $ (1.26 ) $ (0.70 ) $ (0.78 ) As of December 31, 2021 2020 2019 Stock options issued and outstanding 3,351,313 5,625,735 7,705,848 Restricted stock units issued and outstanding 6,475,700 7,523,882 8,490,517 Class A common stock reserved for Twilio.org 618,857 707,265 795,673 Class A common stock committed under ESPP 147,947 103,703 207,792 Convertible Notes(1)— 4,847,578 3,150,647 Class A common stock in escrow 75,506 75,612 — Class A common stock in escrow and restricted stock awards subject to future vesting 235,054 268,030 — Total 10,904,377 19,151,805 20,350,477 Year Ended December 31, 2018 2017 2016 7,978,369 10,710,427 14,649,276 8,262,902 5,665,459 2,034,217 572,676 635,014 680,397 113,312 235,372 597,038 233 — — 1,250 5,214 49,580 16,829,742 17,251,486 18,010,508 *Since(1) The Convertible Notes were fully redeemed in 2021 and were no longer outstanding as of December 31, 2021. As of December 31, 2020, the Company expectsexpected to settle the principal amount of the notes in shares of its outstanding convertible seniorClass A common stock, and as such used the if-converted method to calculate any potential dilutive effect of the debt settlement on diluted net income per share, if applicable. Prior to the fourth quarter 2020, the Company expected to settle the principal amount of these notes in cash and any excess in shares of the Company's Class A common stock,stock. Hence, as of December 31, 2019, the Company usesused the treasury stock method for calculatingto calculate any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will havehas a dilutive impact on diluted net income per share of Class A common stock when the average market price of the Company's Class A common stock for a given period exceeds the conversion price of $70.90 per share for the Convertible Notes. The conversion spread iswas calculated using the average market price of Class A common stock during the period, consistent with the treasury stock method.TWILIO INC.Notes to Consolidated Financial Statements (Continued)15.17. Income TaxesThe following table presents domestic and foreign components of loss before income taxes for the periods presented (in thousands):presented:Year Ended December 31, 2021 2020 2019 (In thousands) United States $ (737,360) $ (403,148) $ (328,902) International (223,569) (101,278) (33,314) Loss before provision for income taxes $ (960,929) $ (504,426) $ (362,216) Year Ended December 31, 2018 2017 2016 $ (96,448 ) $ (46,737 ) $ (14,002 ) (24,710 ) (16,266 ) (26,996 ) $ (121,158 ) $ (63,003 ) $ (40,998 ) ProvisionBenefit for income taxes consists of the following (in thousands):Year Ended December 31, 2021 2020 2019 Current: (In thousands) Federal $ 122 $ — $ — State 420 272 198 Foreign 8,274 5,215 2,684 Total 8,816 5,487 2,882 Deferred: Federal (13,772) (12,719) (49,393) State (4,083) (3,563) (7,474) Foreign (1,990) (2,652) (1,168) Total (19,845) (18,934) (58,035) Income tax benefit $ (11,029) $ (13,447) $ (55,153) 113 Year Ended December 31, 2018 2017 2016 $ — $ 99 $ — 139 78 83 881 823 214 1,020 1,000 297 29 28 2 19 10 — (277 ) (333 ) 27 (229 ) (295 ) 29 $ 791 $ 705 $ 326 rate for the years ended December 31, 2018, 2017 and 2016:rate:Year Ended December 31, 2021 2020 2019 Tax benefit at federal statutory rate 21 % 21 % 21 % State tax, net of federal benefit 8 12 8 Stock-based compensation 16 24 14 Credits 4 3 4 Foreign rate differential (1) (4) (2) Permanent book vs. tax differences — (1) — Change in valuation allowance (46) (51) (29) Other — — (1) Effective tax rate 2 % 4 % 15 % Year Ended
December 31, 2018 2017 2016 21 % 34 % 34 % 15 10 11 31 47 23 8 8 2 (4 ) (8 ) (23 ) — — (12 ) (68 ) (46 ) (34 ) — (45 ) — (3 ) (1 ) (2 ) 0 % (1 )% (1 )% TWILIO INC.Notes to Consolidated Financial Statements (Continued)15. Income Taxes (Continued)liabilities (in thousands):As of December 31, 2021 2020 Deferred tax assets: (In thousands) Net operating loss carryforwards $ 1,054,585 $ 656,755 Accrued and prepaid expenses 24,831 15,408 Stock-based compensation 44,261 32,900 Research and development credits 148,282 92,899 Charitable contributions 15,219 8,229 Capped call — 4,475 Debt issuance cost — 230 Depreciable property 3,675 — Intangibles 135,500 135,500 Lease liability 71,651 68,566 Other 14,567 — Gross deferred tax assets 1,512,571 1,014,962 Valuation allowance (1,136,827) (677,782) Net deferred tax assets 375,744 337,180 Deferred tax liabilities: Capitalized software (28,825) (19,174) Prepaid expenses (1,649) (450) Acquired intangibles (251,034) (231,379) Property and equipment — (85) Convertible debt — (9,495) Right-of-use asset (64,277) (66,243) Deferred commissions (47,897) (21,162) Other — (2,876) Net deferred tax liability $ (17,938) $ (13,684) 114 As of December 31, 2018 2017 2016 $ 116,190 $ 56,138 $ 31,090 11,594 9,140 16,698 11,147 7,131 5,368 32,206 16,212 7,807 3,100 1,233 1,458 13,175 — — 638 — — 194 472 — 188,244 90,326 62,421 (147,354 ) (78,900 ) (49,601 ) 40,890 11,426 12,820 (10,686 ) (7,664 ) (7,086 ) (838 ) (1,015 ) (452 ) (2,997 ) (2,101 ) (152 ) (1,990 ) (2,380 ) (4,931 ) (27,164 ) — — (2,396 ) (718 ) (201 ) $ (5,181 ) $ (2,452 ) $ (2 ) As of December 31, 2018, the Company had approximately $452.7 million in federal net operating lossThe following table summarizes our tax carryforwards, carryovers, and $26.7 million in federal tax credits. If not utilized, the federal net operating loss and tax credit carryforwards will expire at various dates beginning in 2029. As of December 31, 2018, the Company had approximately $347.1 million in state net operating loss carryforwards and $19.9 million in state tax credits. If not utilized, the state net operating loss carryforwards will expire at various dates beginning in 2026 The California state tax credits can be carried forward indefinitely. As of December 31, 2018, the Company had foreign net operating loss carryovers of $8.1 million. The foreign net operating loss carryovers can be carried forward indefinitely.As of
December 31, 2021Expiration Date
(If not utilized)(In thousands) Federal net operating loss carryforwards $ 320,167 Various dates beginning in 2029 Federal tax credits $ 132,920 Various dates beginning in 2029 Federal net operating loss carryforwards $ 3,906,263 Indefinite State net operating loss carryforwards $ 2,737,083 Various dates beginning in 2025 State tax credits $ 84,858 Indefinite Foreign net operating loss carryforwards $ 268,653 Indefinite A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code of 1986, as amended, and similar state tax provisions that are applicable if the Company experiences an "ownership“ownership change."” An ownership change may occur, for example, as a result of issuance of new equity. Should these limitations apply, the carryforwards wouldTWILIO INC.Notes to Consolidated Financial Statements (Continued)15. Income Taxes (Continued)The Company's accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company's deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. Additionally, in December 2020, the Company completed an intra-entity asset transfer of certain intellectual property rights to an Irish subsidiary where its international business is headquartered. The transfer resulted in a step-up in the tax basis of the transferred intellectual property rights and a correlated $135.5 million increase in foreign deferred tax assets.At present, the Company does not believe that it is more likely than not that the federal, state and foreign net deferred tax assets will be realized, and accordingly, a full valuation allowance has been established. The valuation allowance increased by approximately $68.5$459.0 million and $29.3$421.9 million during the years ended December 31, 20182021 and 2017,2020, respectively.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):follows:Year Ended December 31, 2021 2020 2019 (In thousands) Unrecognized tax benefit, beginning of year $ 191,183 $ 49,042 $ 15,635 Gross increases for tax positions of prior years 3,496 4,259 12,939 Gross decrease for tax positions of prior years (10,693) (931) (395) Gross increases for tax positions of current year 39,394 138,813 20,863 Unrecognized tax benefit, end of year $ 223,380 $ 191,183 $ 49,042 Year Ended December 31, 2018 2017 2016 $ 9,445 $ 12,275 $ 1,679 1,233 493 1,996 (4 ) (6,331 ) — 4,961 3,008 8,600 $ 15,635 $ 9,445 $ 12,275 2018,2021, the Company had approximately $15.6$223.4 million of unrecognized tax benefits. If the $15.6$223.4 million is recognized, $0.9$6.6 million would affect the effective tax rate. The remaining amount would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance.The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2018, the Company has accumulated $0.1 million in both interest2021 and penalties related to uncertain tax positions.The Company does not anticipate any significant changes within 12 months of December 31, 2018,2021, in its uncertain tax positions that would be material to the consolidated financial statements taken as a whole because nearly all of the unrecognized tax benefit has been offset by a deferred tax asset, which has been reduced by a valuation allowance.115The Company files U.S. federal income tax returns as well as income tax returns in many U.S. states and foreign jurisdictions. As of December 31, 2018,2021, the tax years 2008 through the current period remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized. The Company is not currently subject tofully reserved for all open U.S. federal, state and local, or non-U.S. income tax examinations by any tax authorities.On December 22, 2017,June 7, 2019, a three-judge panel from the U.S. government enacted comprehensive tax legislation commonly referred to asCourt of Appeals for the Tax Cuts and Jobs Act (Tax Act). The Tax Act reducesNinth Circuit overturned the U.S. statutory corporateTax Court's decision in Altera Corp. v. Commissioner and upheld the portion of the Treasury regulations under Section 482 of the Internal Revenue Code that requires related parties in a cost-sharing arrangement to share expenses related to share-based compensation. As a result of this decision, the Company's gross unrecognized tax benefits increased to reflect the impact of including share-based compensation in cost-sharing arrangements. On July 22, 2019, Altera filed a petition for a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019. On February 10, 2020, Altera filed a petition to appeal the decision to the Supreme Court and on June 22, 2020 the Supreme Court denied the petition. There is no impact on the Company’s effective tax rate for years ended December 31, 2021 and 2020 due to 21%, effective January 1, 2018. Consequently, wea full valuation allowance against its deferred tax assets. We will continue to monitor future developments and their potential effects on our consolidated financial statements.In connection with the Zipwhip acquisition, the Company recorded a decreasenet deferred tax liability which provides an additional source of taxable income to support the Company'sTWILIO INC.Notes to Consolidated Financial Statements (Continued)15. Income Taxes (Continued)federalthe pre-existing deferred tax assets of $28.0 million, which was fully offset by a reduction in the Company's valuation allowance forand, accordingly, during the year ended December 31, 2017.2021, the Company released a total of $15.9 million of its U.S. valuation allowance. The other provisionsCompany continues to maintain a valuation allowance for its U.S. Federal and State net deferred tax assets.In connection with the Segment acquisition, the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the Tax Act, including the one-time transitionpre-existing deferred tax on the mandatory deemed repatriation of cumulative foreign earnings, did not have a material impact on the Company's financial statements as of December 31, 2018. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cutsassets and, Jobs Act (SAB 118), which allowed companies to record provisional amounts .during a measurement period not to extend beyond one year of the enactment date. The Company's accounting for the Tax Act is complete and we did not have any signification adjustments to provisional amounts recorded as of December 31, 2017. The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs' U.S. shareholder. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factoring such amounts into the measurement of its deferred taxes (the "deferred method"). The Company selected the period cost method.16. Subsequent Events On February 1, 2019, the Company acquired all outstanding shares of capital stock of SendGrid, the leading email API platform, by issuing 23.4 million shares of its Class A common stock for a total value of $2.6 billion. Pursuant to the Agreement and Plan of Merger and Reorganization, as amended, each outstanding share of SendGrid common stock was converted into 0.485 of a share of the Company's Class A common stock. Pursuant to the acquisition method of accounting, the purchase price that was paid for SendGrid will be allocated to the underlying SendGrid tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill. The acquisition method of accounting is dependent upon certain valuations and other studies that have not yet been completed. Duringaccordingly, during the year ended December 31, 2018,2020, the Company incurred $3.6released a total of $13.8 million of its U.S. valuation allowance. The Company continues to maintain a valuation allowance for its U.S. Federal and State net deferred tax assets.In connection with the SendGrid acquisition, the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets and, accordingly, during the year ended December 31, 2019, the Company released a total of $55.0 million of its U.S. valuation allowance. The Company continues to maintain a valuation allowance for its U.S. Federal and State net deferred tax assets.The provision for income taxes recorded in the years ended December 31, 2021 and 2020, consists primarily of income taxes, withholding taxes in foreign jurisdictions in which the Company conducts business and the tax benefit related to the release of valuation allowance from acquisitions. 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.18. Subsequent EventsAs described in Note 13(a), the Company was a party to a certain Framework Agreement, as amended, and a Subscription Agreement pursuant to which the Company intended to purchase up to $750.0 million in expensescommon stock of MBAC, subject to certain terms and conditions.In February 2022, Syniverse, MBAC and the Merger Sub mutually terminated the Merger Agreement and the related proposed Merger. The parties agreed to this transaction.***********
Notwithstanding the above, the Framework Agreement between the Company, Syniverse and Carlyle remains in full force and effect. Pursuant to the terms and subject to the closing conditions set forth in the Framework Agreement, the parties are pursuing the alternative transaction, whereby the Company will make a minority investment of $500.0 million to $750.0 million in Syniverse and the parties (or their applicable subsidiaries) will enter into a wholesale agreement.The transaction is expected to close in 2022.116Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and Procedures(a) Evaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chiefour Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K.Based on this evaluation, our Chief Executive Officer and Chiefour Principal Financial Officer concluded that, as of December 31, 2018,2021, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chiefour Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.(b) Management's Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Chief Executive Officer and our ChiefPrincipal Financial Officer, to provide reasonable assurance regarding the reliability of financingfinancial reporting and the preparation of financial statements for external purposes in accordance with accounting principlesU.S generally accepted in the United States of America.Under the supervision and with the participation of our Chief Executive Officer and our ChiefPrincipal Financial Officer and oversight of the board of directors, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018,2021, based on the criteria set forth inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018.On July 14, 2021 the Company acquired Zipwhip, Inc. (“Zipwhip”). Management excluded Zipwhip from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Zipwhip's total assets excluded from this assessment was $51.9 million, representing 0.4% of the Company’s consolidated total assets as of December 31, 2021, and Zipwhip's total revenue of $55.4 million represented 2% of the Company’s consolidated revenue for the year ended December 31, 2021.The effectiveness of our internal control over financial reporting as of December 31, 20182021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8, "Financial“Financial Statements and Supplementary Data"Data”, of this Annual Report on Form 10-K.Remediation of Material Weakness Disclosed in Fiscal Year 2017 Annual Report on Form 10-K As previously disclosed in Item 9A of Part II of our Annual Report on Form 10-K and for the year ended December 31, 2017, our management determined that our internal control over financial reporting was not effective as of December 31, 2017 due to a material weakness in controls related to the accounting for capitalized software whereas we did not obtain or generate sufficient relevant quality information to support the design and functioning of control activities over the accounting for capitalized software development costs. Specifically, our process level control over internal use software development costs did not effectively track and categorize software development costs incurred during the application development stage to quantify amounts that should be capitalized as a long-lived asset, rather than expensed as research and development expenses. Additionally, the review control of theTable of Contentscapitalized software development costs was not operating at a sufficient level of precision to identify potential material misstatements. To remediate the material weakness in our internal control over financial reporting described in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2017, we:•Designed and implemented an enhanced internal process and process level controls to effectively capture, track and categorize relevant data related to capitalizable software development costs incurred during the application development stage;•Enhanced management review controls over capitalized software development costs with increased precision to identify potential material misstatements; and•Documented guidelines and provided trainings to personnel that are accountable for internal control over the capitalizable software development costs. Management has determined that the remediation actions discussed above were effectively designed and demonstrated to be operating effectively for a sufficient period of time to enable us to conclude that the material weakness regarding internal control activities have been remediated as of December 31, 2018.(c) Changes in Internal Control Other thanOn July 14, 2021, the action described under"RemediationCompany acquired Zipwhip. As a result of Material Weakness Disclosed in Fiscal Year 2017 Annual Report on Form 10-K"this acquisition, the Company is reviewing the internal controls of Zipwhip and is making appropriate changes as deemed necessary. Except for the additionalchanges in internal control implementedcontrols related to remediate the material weakness described above,Zipwhip, there were no other changes in our internal control over financial reporting in connection with the evaluation required by RulesRule 13a-15 (d) and 15d-15 (d) of the Exchange Act that occurred during the quarter ended December 31, 20182021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.(d) Inherent Limitations on Effectiveness of ControlsOur management, including our Chief Executive Officer and Chiefour Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effectivecost‑effective control system, misstatements due to error or fraud may occur and not be detected.Item 9B. Other InformationNot applicable.PartItem 9C. Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsNot applicable.Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item is incorporated by reference to our Proxy Statement relating to our 20192022 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.Codes of Business Conduct and EthicsOur board of directors has adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees, which is available on our website at (investors.twilio.com) under "Governance Documents"“Governance Documents”. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to, or waiver from, a provision of our Code of Business Conduct and Ethics and by posting such information on the website address and location specified above.Item 11. Executive CompensationThe information required by this item is incorporated by reference to our Proxy Statement relating to our 20192022 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item is incorporated by reference to our Proxy Statement relating to our 20192022 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.118Item 13. Certain Relationships and Related Transactions and Director IndependenceThe information required by this item is incorporated by reference to our Proxy Statement relating to our 20192022 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.Item 14. Principal Accountant Fees and ServicesThe information required by this item is incorporated by reference to our Proxy Statement relating to our 20192022 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.2021.PartItem 15. Exhibits and Financial Statement Schedules(a)The following documents are filed as part of this report:1.See Index to Financial Statements at Item 8 herein.2.Schedules not listed above have been omitted because they are not required, not applicable, or the required information is otherwise included.3.The exhibits listed below are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference, in each case as indicated below.Exhibit
NumberIncorporated by Reference Description Form File No. Exhibit Filing Date 2.1 10-Q 001-37806 2.1 July 30, 2021 2.2 S-3 333-249889 2.1 November 5, 2020 2.3 8-K 001-37806 2.1 August 17, 2021 3.1 S-1A 333-211634 3.1 June 13, 2016 3.2 10-Q 001-37806 3.1 August 4, 2020 4.1 S-1 333-211634 4.1 May 26, 2016 4.2 S-1 333-211634 4.2 May 26, 2016 4.3 8-K 001-37806 4.1 May 18, 2018 4.4 8-K 001-37806 4.2 May 18, 2018 4.5 8-K 001-37806 4.1 March 9, 2021 1194.6 8-K 001-37806 4.2 March 9, 2021 4.7 8-K 001-37806 4.3 March 9, 2021 4.8 8-K 001-37806 4.4 March 9, 2021 4.9 10-K 001-37806 4.5 February 26, 2021 10.1* 10-K 001-37806 10.1 February 26, 2021 10.2*10-K 001-37806 10.2 February 26, 2021 10.3* 10-K 001-37806 10.3 February 26, 2021 10.4* 10-Q 001-37806 10.2 October 31, 2019 10.5* 10-K 001-37806 10.5 February 26, 2021 10.6* 10-K 001-37806 10.6 February 26, 2021 10.7* 10-K 001-37806 10.7 February 26, 2021 10.8* 10-Q 001-37806 10.1 October 31, 2019 10.9* S-8 333-211634 99.1 August 2, 2021 10.10* S-8 333-211634 99.2 August 2, 2021 10.11 S-1 333-211634 10.6 May 26, 2016 10.12 10-Q 001-37806 10.1 November 8, 2018 10.13 10-Q 001-37806 10.2 November 8, 2018 10.14* 8-K 001-37806 10.1 October 25, 2018 10.15* Filed herewith 10.16* Filed herewith 10.17* Filed herewith 10.18* 10-Q 001-37806 10.1 May 10, 2018 10.19* 10-Q 001-37806 10.2 May 10, 2018 10.20 8-K 001-37806 10.1 May 18, 2018 10.21+† 10-Q 001-37806 10.1 May 6, 2021 21.1 Filed herewith 23.1 Filed herewith 31.1 Filed herewith 31.2 Filed herewith 32.1** Furnished herewith 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document Filed herewith 101.SCH Inline XBRL Taxonomy Extension Schema Document. Filed herewith 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith 101.LAB XBRL Taxonomy Extension Label Linkbase Document. Filed herewith 120Incorporated by ReferenceExhibitNumberDescriptionFormFile No.ExhibitFiling Date31.1Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed herewith
101.PRE31.2Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed herewith32.1**Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Furnished herewith101.INSXBRL Instance Document.Filed herewith101.SCHXBRL Taxonomy Extension Schema Document.Filed herewith101.CALXBRL Taxonomy Extension Calculation Linkbase Document.Filed herewith101.DEFXBRL Taxonomy Extension Definition Linkbase Document.Filed herewith101.LABXBRL Taxonomy Extension Label Linkbase Document.Filed herewith101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Filed herewith104 Cover Page with Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). supplementallysupplemental copies of any of the omitted schedules and other similar attachments upon request by the Securities and Exchange Commission.† Certain portions of this exhibit have been omitted because they are not material and they are the type of information that the registrant treats as private or confidential.***Item 16. Form 10-K SummaryNone.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.Twilio Inc.Date: Twilio Inc. February 28, 201922, 2022/s/ JEFFREYJEFF LAWSONJeffreyJeff Lawson
Director and Chief Executive Officer (Principal Executive Officer)Date: February 28, 201922, 2022
/s/ KHOZEMA Z. SHIPCHANDLERKhozema Z. Shipchandler
Chief FinancialOperating Officer (Principal Accounting and Financial Officer)Date: February 28, 201922, 2022
/s/ RICHARD L. DALZELLRichard DalzellDirectorDate: Richard L. Dalzell
DirectorFebruary 28, 201922, 2022
/s/ BYRON B. DEETERByron DeeterDirectorDate: Byron B. Deeter
DirectorFebruary 28, 201922, 2022
/s/ ELENA A. DONIOElena DonioDirectorDate: Elena A. Donio
DirectorFebruary 28, 201922, 2022
/s/ DONNA L. DUBINSKYDonna L. Dubinsky
DirectorDate: February 28, 201922, 2022
/s/ JEFF EPSTEINJeff Epstein
DirectorFebruary 22, 2022 /s/ JEFFREY R. IMMELT Jeffrey R. Immelt
DirectorFebruary 22, 2022 /s/ DEVAL L. PATRICK Deval L. Patrick
DirectorFebruary 22, 2022 /s/ ERIKA ROTTENBERG Erika RottenbergDirectorDate: February 28, 2019/s/ JEFF EPSTEINJeff Epstein
Erika Rottenberg
Director122