oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
2021
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Twilio Inc.
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Delaware | 26-2574840 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer | |||||||
First Floor Non-accelerated filer past or future strategic acquisitions or investments. As of September 30, As of December 31, ASSETS Current assets: Cash and cash equivalents $ 91,906 $ 305,665 Short-term marketable securities 192,031 — Accounts receivable, net 37,258 26,203 Prepaid expenses and other current assets 26,420 21,512 Total current assets 347,615 353,380 Restricted cash 7,450 7,445 Property and equipment, net 47,718 37,552 Intangible assets, net 21,274 10,268 Goodwill 17,407 3,565 Other long-term assets 2,084 484 Total assets $ 443,548 $ 412,694 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,117 $ 4,174 Accrued expenses and other current liabilities 55,283 59,308 Deferred revenue 13,599 10,222 Total current liabilities 75,999 73,704 Long-term liabilities 12,549 9,543 Total liabilities 88,548 83,247 Commitments and contingencies (Note 10) Stockholders’ equity: Class A and Class B common stock 93 87 Additional paid-in capital 584,390 516,090 Accumulated deficit (231,519 ) (186,730 ) Accumulated other comprehensive income 2,036 — Total stockholders’ equity 355,000 329,447 Total liabilities and stockholders’ equity $ 443,548 $ 412,694 Three Months Ended Nine Months Ended 2017 2016 2017 2016 Revenue $ 100,542 $ 71,533 $ 283,784 $ 195,383 Cost of revenue 48,254 31,285 127,873 86,315 Gross profit 52,288 40,248 155,911 109,068 Operating expenses: Research and development 31,674 21,106 87,910 53,339 Sales and marketing 25,778 15,873 73,047 47,451 General and administrative 18,867 14,545 40,810 36,773 Total operating expenses 76,319 51,524 201,767 137,563 Loss from operations (24,031 ) (11,276 ) (45,856 ) (28,495 ) Other income, net 1,000 138 1,969 92 Loss before provision for income taxes (23,031 ) (11,138 ) (43,887 ) (28,403 ) Provision for income taxes (422 ) (116 ) (902 ) (313 ) Net loss attributable to common stockholders $ (23,453 ) $ (11,254 ) (44,789 ) $ (28,716 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.25 ) $ (0.13 ) $ (0.49 ) $ (0.68 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 92,156,768 83,887,901 90,543,087 42,030,989 Three Months Ended Nine Months Ended 2017 2016 2017 2016 Net loss $ (23,453 ) $ (11,254 ) $ (44,789 ) $ (28,716 ) Other comprehensive income: Unrealized loss on marketable securities (44 ) — (238 ) — Foreign currency translation 793 — 2,274 — Total other comprehensive income 749 — 2,036 — Comprehensive loss attributable to common stockholders $ (22,704 ) $ (11,254 ) $ (42,753 ) $ (28,716 ) Nine Months Ended 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (44,789 ) $ (28,716 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 13,406 5,292 Amortization of bond premium 153 — Stock-based compensation 35,973 15,649 Provision for doubtful accounts 407 1,017 Gain on lease termination (295 ) — Write-off of internally developed software 96 188 Changes in operating assets and liabilities: Accounts receivable (9,173 ) (11,275 ) Prepaid expenses and other current assets (4,947 ) (11,561 ) Other long-term assets (1,512 ) (59 ) Accounts payable 1,411 2,317 Accrued expenses and other current liabilities (1,454 ) 18,625 Deferred revenue 3,364 3,346 Long-term liabilities 306 9,596 Net cash provided by (used in) operating activities (7,054 ) 4,419 CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash 1,170 (7,439 ) Purchases of marketable securities (280,569 ) — Maturities of marketable securities 87,325 — Capitalized software development costs (12,281 ) (8,447 ) Purchases of property and equipment (8,613 ) (5,282 ) Purchases of intangible assets (206 ) (646 ) Acquisition, net of cash acquired (22,621 ) — Net cash used in investing activities (235,795 ) (21,814 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from initial public offering, net of underwriting discounts — 160,426 Payments of costs related to public offerings (430 ) (3,936 ) Proceeds from exercises of stock options 22,504 4,751 Proceeds from shares issued in ESPP 7,404 — Tax benefit related to stock-based compensation — 62 Value of equity awards withheld for tax liabilities (476 ) (518 ) Net cash provided by financing activities 29,002 160,785 Effect of exchange rate changes on cash and cash equivalents 88 — NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (213,759 ) 143,390 CASH AND CASH EQUIVALENTS—Beginning of period 305,665 108,835 CASH AND CASH EQUIVALENTS—End of period $ 91,906 $ 252,225 Cash paid for income taxes $ 489 $ 153 NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of property, equipment and intangible assets, accrued but not paid $ 124 $ 2,373 Stock-based compensation capitalized in software development costs $ 2,712 $ 1,068 Vesting of early exercised options $ 315 $ 512 Costs related to the public offerings, accrued but not paid $ — $ 368 the United States. exposure although the balances will exceed insured limits. 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. Amortized Cost Net Fair Value Hierarchy as of September 30, 2017 Aggregate Fair Value Losses Level 1 Level 2 Level 3 Value Financial Assets: Cash and cash equivalents: Money market funds $ 90,144 $ — $ 90,144 $ — $ — $ 90,144 Total included in cash and cash equivalents 90,144 — 90,144 — — 90,144 Marketable securities: U.S. Treasury securities 59,951 (125 ) 59,826 — — 59,826 Corporate debt securities 132,318 (113 ) — 132,205 — 132,205 Total marketable securities 192,269 (238 ) 59,826 132,205 — 192,031 Total financial assets $ 282,413 $ (238 ) $ 149,970 $ 132,205 $ — $ 282,175 Carrying Fair Value Hierarchy as of December 31, 2016 Aggregate Fair Value Level 1 Level 2 Level 3 Value Total Financial Assets: Money market funds (included in cash and cash equivalents) $ 274,135 $ 274,135 $ — $ — $ 274,135 Total financial assets $ 274,135 $ 274,135 $ — $ — $ 274,135 Amortized Aggregate Fair Cost Value Financial Assets: Less than one year $ 121,215 $ 121,130 One to two years 71,054 70,901 Total $ 192,269 $ 192,031 As of As of Capitalized software development costs $ 43,571 $ 28,661 Leasehold improvements 14,208 14,063 Office equipment 9,263 5,729 Furniture and fixtures 1,902 1,576 Software 1,500 968 Total property and equipment 70,444 50,997 Less: accumulated depreciation and amortization (22,726 ) (13,445 ) Total property and equipment, net $ 47,718 $ 37,552 provided. Total Net tangible liabilities $ (3,326 ) Goodwill(1) 12,588 Intangible assets(2) 13,700 Total purchase price $ 22,962 following: Total Estimated Developed technology $ 5,000 4 Customer relationships 6,100 7-8 Supplier relationships 2,600 5 Total intangible assets acquired $ 13,700 integration of both businesses. Goodwill is not deductible for tax purposes.375 BealeSuite 300
Securities registered pursuant to Section 12(b) of the act:Title of each class Trading Symbol(s) Name of each exchange on which registered Class A Common Stock, par value $0.001 per share TWLO The New York Stock Exchange and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No oLarge accelerated filer o☒ Accelerated filer o☐ x☐ Smaller reporting company o☐ (Do not check if a smaller reporting company)Emerging growth company x☐ xoo☐NoxAs of October 31, 2017, 68,822,548 shares of the registrant’s Class A common stock and 24,207,167 shares of registrant’s Class B common stock were outstanding.“potential”“forecasts,” “potential,” or “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 Quarterly Report on Form 10-Q include, but are not limited to, statements about:·· 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 attract and retain enterprises and international organizations as customers for our products;· our ability to form and expand partnerships with independent software vendors and system integrators;········and research and development;·development and additional systems and processes to support our growth;··complyservice the interest on our 3.625% senior notes due 2029 (“2029 Notes”), our 3.875% notes due 2031 (“2031 Notes,” and together with modifiedthe 2029 Notes, the “Notes”), and repay such Notes;new lawsother misuse of our platform;regulations applyingpublic health epidemics, such as COVID-19 on our business, results of operations and financial condition and on our customers, employees, vendors and partners; andbusiness; and· the increased expenses associated with being a public company.the section titled“Summary of Risk Factors and Uncertainties Associated with Our Business” below, in Part II, Item 1A, “Risk Factors”, and elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. 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.
2017
2016As of As of September 30, December 31, 2021 2020 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 1,497,498 $ 933,885 Short-term marketable securities 3,896,754 2,105,906 Accounts receivable, net 345,793 251,167 Prepaid expenses and other current assets 165,760 81,377 Total current assets 5,905,805 3,372,335 Property and equipment, net 237,241 183,239 Operating right-of-use asset 248,582 258,610 Intangible assets, net 1,102,599 966,573 Goodwill 5,263,051 4,595,394 Other long-term assets 219,569 111,282 Total assets $ 12,976,847 $ 9,487,433 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 76,293 $ 60,042 Accrued expenses and other current liabilities 368,683 252,895 Deferred revenue and customer deposits 121,337 87,031 Operating lease liability, current 50,760 48,338 Total current liabilities 617,073 448,306 Operating lease liability, noncurrent 223,033 229,905 Finance lease liability, noncurrent 20,254 17,856 Long-term debt 985,547 302,068 Other long-term liabilities 49,191 36,633 Total liabilities 1,895,098 1,034,768 Commitments and contingencies (Note 13) 0 0 Stockholders’ equity: Preferred stock — — Class A and Class B common stock 178 164 Additional paid-in capital 12,910,271 9,613,246 Accumulated other comprehensive income (405) 9,046 Accumulated deficit (1,828,295) (1,169,791) Total stockholders’ equity 11,081,749 8,452,665 Total liabilities and stockholders’ equity $ 12,976,847 $ 9,487,433
September 30,
September 30,Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands, except share and per share amounts) Revenue $ 740,176 $ 447,969 $ 1,999,095 $ 1,213,686 Cost of revenue 375,561 217,095 1,004,929 580,146 Gross profit 364,615 230,874 994,166 633,540 Operating expenses: Research and development 209,890 136,652 565,970 371,692 Sales and marketing 264,548 140,875 713,196 387,420 General and administrative 122,522 65,617 346,958 182,038 Total operating expenses 596,960 343,144 1,626,124 941,150 Loss from operations (232,345) (112,270) (631,958) (307,610) Other expenses, net (6,613) (3,996) (39,219) (2,099) Loss before benefit (provision) for income taxes (238,958) (116,266) (671,177) (309,709) Benefit (provision) for income taxes 14,849 (648) 12,673 (1,919) Net loss attributable to common stockholders $ (224,109) $ (116,914) $ (658,504) $ (311,628) Net loss per share attributable to common stockholders, basic and diluted $ (1.26) $ (0.79) $ (3.82) $ (2.18) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 177,231,285 147,501,075 172,605,371 142,832,021
September 30,
September 30,Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands) Net loss $ (224,109) $ (116,914) $ (658,504) $ (311,628) Other comprehensive (loss) income: Unrealized (loss) gain on marketable securities (982) (3,021) (6,137) 5,499 Foreign currency translation 31 — (245) — Net change in market value of effective foreign currency forward exchange contracts (161) — (3,069) — Total other comprehensive (loss) income (1,112) (3,021) (9,451) 5,499 Comprehensive loss attributable to common stockholders $ (225,221) $ (119,935) $ (667,955) $ (306,129)
September 30,Common Stock
Class ACommon Stock
Class BAdditional Paid-In Capital Accumulated Other Comprehensive Income (Loss) 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 — — — — — — (206,542) (206,542) Exercises of vested stock options 248,008 — 211,371 — 11,564 — — 11,564 Vesting of restricted stock units 913,966 1 — — (1) — — — Value of equity awards withheld for tax liability (6,989) — — — (2,774) — — (2,774) Conversion of shares of Class B common stock into shares of Class A common stock 419,371 — (419,371) — — — — — Equity component from partial settlement of 2023 convertible
senior notes1,158,381 2 — — 80,047 — — 80,049 Donated common stock 22,102 — — — 9,405 — — 9,405 Issuance of common stock in connection with a follow-on public offering, net of underwriter discounts 4,312,500 4 — — 1,766,396 — — 1,766,400 Costs related to the follow-on public offering — — — — (727) — — (727) Issuance of restricted stock awards 24,697 — — — — — — — Unrealized loss on marketable securities — — — — — (4,176) — (4,176) Foreign currency translation — — — — — (210) — (210) Stock-based compensation — — — — 141,542 — — 141,542 Balance as of March 31, 2021 160,588,258 $ 158 10,343,302 $ 13 $ 11,618,698 $ 4,660 $ (1,376,333) $ 10,247,196 Net loss — — — — — — (227,853) (227,853) Exercises of vested stock options 294,430 — 63,164 — 20,351 — — 20,351 Vesting of restricted stock units 839,472 1 — — (1) — — — Value of equity awards withheld for tax liability (5,498) — — — (1,882) — — (1,882) Conversion of shares of Class B common stock into shares of Class A common stock 188,044 1 (188,044) (1) — — — — Equity component from partial settlement of 2023 convertible
senior notes3,688,584 4 — — 255,590 — — 255,594 Settlement of capped call, net of related costs — — — — 225,233 — — 225,233 Shares issued under ESPP 100,107 — — — 23,699 — — 23,699 Donated common stock 22,102 — — — 6,789 — — 6,789 Costs related to the follow-on public offering — — — — (50) — — (50) Unrealized loss on marketable securities — — — — — (979) — (979) Foreign currency translation — — — — — (66) — (66) Net change in market value of effective foreign currency forward exchange contracts — — — — — (2,908) — (2,908) Stock-based compensation — — — — 148,988 — — 148,988 Balance as of June 30, 2021 165,715,499 $ 164 10,218,422 $ 12 $ 12,297,415 $ 707 $ (1,604,186) $ 10,694,112 Common Stock
Class ACommon Stock
Class BAdditional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount (In thousands, except share amounts) Balance as of June 30, 2021 165,715,499 $ 164 10,218,422 $ 12 $ 12,297,415 $ 707 $ (1,604,186) $ 10,694,112 Net loss — — — — — — (224,109) (224,109) Exercises of vested stock options 222,066 — 83,484 — 15,993 — — 15,993 Vesting of restricted stock units 834,148 1 — — (1) — — — Value of equity awards withheld for tax liability (5,530) — — — (1,896) — — (1,896) Conversion of shares of Class B common stock into shares of Class A common stock 388,725 — (388,725) — — — — — Donated common stock 22,102 — — — 8,389 — — 8,389 Cost adjustments related to the follow-on public offering — — — — 90 — — 90 Shares issued in acquisition 1,116,390 1 — — 419,036 — — 419,037 Value of equity awards assumed in acquisition — — — — 1,511 — — 1,511 Shares issued in acquisition subject to future vesting 59,533 — — — — — — — Unrealized loss on marketable securities — — — — — (982) — (982) Foreign currency translation — — — — — 31 — 31 Net change in market value of effective foreign currency forward exchange contracts — — — — — (161) — (161) Stock-based compensation — — — — 169,734 — — 169,734 Balance as of September 30, 2021 168,352,933 $ 166 9,913,181 $ 12 $ 12,910,271 $ (405) $ (1,828,295) $ 11,081,749 Common Stock
Class ACommon Stock
Class BAdditional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Shares Amount Shares Amount (In thousands, except share amounts) 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 — — — — — — (94,791) (94,791) Exercises of stock options 243,029 — 426,001 — 8,231 — — 8,231 Vesting of restricted stock units 849,763 1 23,107 — — — — 1 Value of equity awards withheld for tax liability (8,726) — (4,692) — (1,674) — — (1,674) Conversion of shares of Class B common stock into shares of Class A 618,103 1 (618,103) (1) — — — — Donated common stock 22,102 — — — 2,701 — — 2,701 Unrealized loss on marketable securities — — — — — (9,375) — (9,375) Stock-based compensation — — — — 72,021 — — 72,021 Balance as of March 31, 2020 128,606,443 $ 126 11,356,940 $ 13 $ 5,034,278 $ (4,289) $ (773,603) $ 4,256,525 Net loss — — — — — — (99,923) (99,923) Exercises of stock options 1,590,891 2 459,010 — 45,230 — — 45,232 Vesting of restricted stock units 807,270 1 4,212 — — — — 1 Value of equity awards withheld for tax liability (6,018) — — — (1,144) — — (1,144) Conversion of shares of Class B common stock into shares of Class A 983,005 1 (983,005) (1) — — — — Shares issued under ESPP 190,642 — — — 16,473 — — 16,473 Donated common stock 22,102 — — — 3,972 — — 3,972 Unrealized gain on marketable securities — — — — — 17,895 — 17,895 Stock-based compensation — — — — 82,559 — — 82,559 Balance as of June 30, 2020 132,194,335 $ 130 10,837,157 $ 12 $ 5,181,368 $ 13,606 $ (873,526) $ 4,321,590 Net loss — — — — — — (116,914) (116,914) Issuance of common stock in connection with a public offering, net of underwriting discounts 5,819,838 6 — — 1,408,744 — — 1,408,750 Costs related to the public offering — — — — (541) — — (541) Exercises of stock options 218,555 — 173,199 — 9,221 — — 9,221 Vesting of restricted stock units 926,032 1 1,688 — — — — 1 Value of equity awards withheld for tax liability (5,870) — — — (1,409) — — (1,409) Conversion of shares of Class B common stock into shares of Class A 282,780 — (282,780) — — — — — Equity component from partial settlement of 2023 convertible senior notes 715,819 1 — — 46,154 — — 46,155 Donated common stock 22,102 — — — 5,757 — — 5,757 Unrealized loss on marketable securities — — — — — (3,021) — (3,021) Stock-based compensation — — — — 92,679 — — 92,679 Balance as of September 30, 2020 140,173,591 $ 138 10,729,264 $ 12 $ 6,741,973 $ 10,585 $ (990,440) $ 5,762,268 Nine Months Ended
September 30,2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) Net loss $ (658,504) $ (311,628) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 189,669 98,070 Non-cash reduction to the right-of-use asset 36,249 27,240 Net amortization of investment premium and discount 24,880 2,909 Amortization of debt discount and issuance costs 5,457 18,432 Stock-based compensation 445,366 237,822 Amortization of deferred commissions 20,798 8,556 Tax benefit related to release of valuation allowance (15,569) (716) Allowance for credit losses 11,371 8,417 Value of donated common stock 24,583 12,430 Loss on extinguishment of debt 28,965 3,155 Other adjustments 8,626 (142) Changes in operating assets and liabilities: Accounts receivable (81,186) (58,340) Prepaid expenses and other current assets (59,929) (8,733) Other long-term assets (66,501) (64,777) Accounts payable (8,665) 86 Accrued expenses and other current liabilities 84,730 59,594 Deferred revenue and customer deposits 27,004 7,799 Operating lease liabilities (36,274) (25,161) Other long-term liabilities (1,019) 2,740 Net cash (used in) provided by operating activities (19,949) 17,753 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired and other related payments (490,880) (2,786) Purchases of marketable securities and other investments (3,225,799) (1,465,158) Proceeds from sales and maturities of marketable securities 1,334,444 892,365 Capitalized software development costs (35,926) (26,114) Purchases of long-lived and intangible assets (33,575) (19,252) Net cash used in investing activities (2,451,736) (620,945) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from a public equity offering 1,766,400 1,408,750 Payments of costs related to public offerings (464) (433) Proceeds from issuance of senior notes 987,500 — Payments of debt issuance costs (2,751) — Proceeds from settlement of capped call, net of settlement costs 228,412 — Principal payments on debt and finance leases (4,852) (6,688) Proceeds from exercises of stock options and shares issued in ESPP 71,607 79,157 Value of equity awards withheld for tax liabilities (6,552) (4,227) Net cash provided by financing activities 3,039,300 1,476,559 Effect of exchange rate changes on cash, cash equivalents and restricted cash (157) — NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 567,458 873,367 Nine Months Ended
September 30,2021 2020 (In thousands) CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 933,885 253,735 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period $ 1,501,343 $ 1,127,102 Cash paid for income taxes, net $ 4,439 $ 1,962 Cash paid for interest $ 19,545 $ 1,290 NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of property, equipment and intangible assets, accrued but not paid $ 6,758 $ 1,261 Purchases of property and equipment through finance leases $ 11,876 $ 15,047 Value of common stock issued and stock awards assumed in acquisition $ 420,548 $ — Value of common stock issued to settle convertible senior notes $ 1,704,969 $ 171,840 Stock-based compensation capitalized in software development costs $ 14,938 $ 10,711 RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONDENSED CONSOLIDATED BALANCE SHEETS Cash and cash equivalents $ 1,497,498 $ 1,127,102 Restricted cash in other current assets 2,733 — Restricted cash in other long-term assets 1,112 — Total cash, cash equivalents and restricted cash $ 1,501,343 $ 1,127,102 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 or APIs.(“API”). The power, flexibility and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore, Bermuda, Spain, Sweden and Australia.ourthe Company’s Annual Report on Form 10-K filed with the SEC on February 21, 201726, 2021 (“Annual Report”).2016,2020, included herein, was derived from the audited financial statements as of that date, but may not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.In the fourth quarter of 2016, the Company adopted the guidance of Accounting Standard Update (“ASU”) No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which simplified several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The Company adopted all provisions on either prospective or modified retrospective basis. The impact from any of the adopted provisions was immaterial to the Company’s financial position, results of operations and cash flows. Hence, prior periods were not adjusted. unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, stockholders’ equity and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 20172021 or any future period. consolidated 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 for doubtful accounts and returns; valuation of the Company’s stock and stock-based awards;customer credit reserves; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software;software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.restricted cash and accounts receivable. The Company maintains cash, cash equivalents restricted cash and marketable securities with financial institutions that management believes are financially sound and have minimal credit risk exposure.onesignificant customer deteriorates substantially, the Company’s results of the large customers deteriorate substantially, operating resultsoperations could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. As of September 30, 2017, one customer organization represented approximately 11% of the Company’s gross accounts receivable. As of December 31, 2016, one customer organization represented approximately 16% of the Company’s gross accounts receivable.InDuring the three and nine months ended September 30, 2017,2021 and 2020, no customerscustomer organization accounted for more than 10% of the Company’s total revenue.total revenue.gross accounts receivable.three months ended September 30, 2016, one customer organization represented 15%second quarter of 2021, the Company’s total revenue,Company started using foreign currency derivative forward contracts and in the nine months ended September 30, 2016, two customer organizations represented 10% and 13%future may also use foreign currency option contacts.total revenue.(e)Significant Accounting Policiesourthe Company’s significant accounting policies as described in ourits Annual Report.(f)Recently Issued Accounting Guidance, Not yet AdoptedIn May 2017,Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting”, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective prospectively for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have any material impact on the Company’s financial position, results of operations or cash flows.In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have any material impact on the Company’s financial position, results of operations or cash flows.In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”, which amends the guidance of FASB Accounting Standards Codification Topic 805, “Business Combinations”, adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. The Company will evaluate the impact of this guidance on its financial statements and related disclosures next time there is a potential business combination.In November 2016, the FASB issued ASU 2016-18, “Restricted Cash”, which requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company will adopt this guidance upon its effective date. The restricted cash balances as of September 30, 2017 and December 31, 2016 were $7.4 million and $8.6 million, respectively.In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers Other Than Inventory”, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have any material impact on the Company’s financial position, results of operations or cash flows.In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements and related disclosures.In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. For public companies, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities the Company has not yet determined the full impact that the adoption of this standard will have on its condensed consolidated financial statements and related disclosures.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This new guidance will replace most existing U.S. GAAP guidance on this topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred, by one year, the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, this guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted beginning January 1, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing,” clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)”. These amendments provide additional clarification and implementation guidance on the previously issued ASUs. These amendments do not change the core principles of the guidance stated in ASU 2014-09, instead they are intended to clarify and improve operability of certain topics included within the revenue standard. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as the effective date and transition requirements for ASU 2014-09. The Company performed its preliminary evaluation and selected a modified retrospective transition method with cumulative effect adjustment as of the standard’s effective date. While the Company has not yet completed the full analysis, based on the evaluation to date, the Company does not expect the adoption of this guidance to have a material impact on its financial position, results of operations or cash flows.3. Fair Value MeasurementsThe Company records certain of its financial assetsmeasured at fair value on a recurring basis. basis:Amortized
Cost or
Carrying
ValueGross
Unrealized
GainsGross
Unrealized
LossesFair Value Hierarchy as of
September 30, 2021Aggregate
Fair ValueLevel 1 Level 2 Level 3 Financial Assets: (In thousands) Cash and cash equivalents: Money market funds $ 1,087,268 $ — $ — $ 1,087,268 $ — $ — $ 1,087,268 Commercial paper 74,209 — — — 74,209 — 74,209 Total included in cash and cash equivalents 1,161,477 — — 1,087,268 74,209 — 1,161,477 Marketable securities: U.S. Treasury securities 349,951 73 (353) 349,671 — — 349,671 Non-U.S. Government securities 242,258 4 (249) 242,013 — — 242,013 Corporate debt securities and commercial paper 3,302,309 4,141 (1,380) 27,000 3,278,070 — 3,305,070 Total marketable securities 3,894,518 4,218 (1,982) 618,684 3,278,070 — 3,896,754 Total financial assets $ 5,055,995 $ 4,218 $ (1,982) $ 1,705,952 $ 3,352,279 $ — $ 5,058,231 Financial Liabilities: Accrued expenses and other current liabilities: Foreign currency derivative liabilities $ — $ — $ (3,069) $ — $ (3,069) $ — $ (3,069) Total financial liabilities $ — $ — $ (3,069) $ — $ (3,069) $ — $ (3,069) Amortized
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 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. Restrictedprimary objective when investing excess cash is short-term and long-term in nature and consistspreservation of cash in a savings account,capital, hence its carrying amount approximates its fair value. Marketablethe Company’s marketable securities primarily consist of U.S. treasury securities andTreasury Securities, high credit quality corporate debt securities. All marketable securities are considered to be available-for-sale and are recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss).Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely thatcommercial paper. As 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 following tables summarize the Company’s financial assets as of September 30, 2017 and December 31, 2016 by type (in thousands):
or Carrying
UnrealizedThere were no marketable securities as of December 31, 2016.The Company classifiesviews its marketable securities as available to support current assets as they areoperations, it has classified all available for current operating needs. The following table summarizes the contractual maturities of marketablesale securities as short-term. As of September 30, 2017 (in thousands):For2021 and December 31, 2020, for fixed income securities that hadwere in unrealized losses as of September 30, 2017,loss positions, the Company has determined that no other-than-temporary impairment existed.(i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of September 30, 2021 and December 31, 2020, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities before maturity.2017, all securities in an unrealized loss position have been in an unrealized loss position for less than one year. 2021, the risk of expected credit losses was not significant.in the three and nine months ended September 30, 2017 was $0.7$16.2 million and $1.8 million, respectively, and is recorded as other income (expense), net, in the accompanying condensed consolidated statements of operations.4. Property and EquipmentProperty and equipment consisted of the following (in thousands):
September 30,
2017
December 31,
2016Depreciation and amortization expense was $3.4 million and $9.3 million for the three and nine months ended September 30, 2017, respectively, and $1.9 million and $4.9 million for the three and nine months ended September 30, 2016, respectively.The Company capitalized $5.5 million and $15.0 million of software development costs in the three and nine months ended September 30, 2017, respectively, and $3.4 million and $9.5$39.5 million in the three and nine months ended September 30, 2016, respectively. Of this amount, the stock-based compensation expense was $1.22021, respectively, and $7.1 million and $2.8$23.7 million in the three and nine months ended September 30, 2017, respectively,2020, respectively. The interest is recorded as other expenses, net, in the accompanying condensed consolidated statements of operations.As of September 30, 2021 As of December 31, 2020 Amortized
CostAggregate
Fair ValueAmortized
CostAggregate
Fair ValueFinancial Assets: (In thousands) Less than one year $ 1,119,954 $ 1,121,537 $ 1,126,091 $ 1,128,927 One to three years 2,774,564 2,775,217 971,413 976,979 Total $ 3,894,518 $ 3,896,754 $ 2,097,504 $ 2,105,906 $0.4December 31, 2020, the Company held strategic investments with a carrying value of $66.3 million and $1.1$9.3 million, respectively, in equity securities of privately held companies and restricted equity securities of a publicly held company. The Company does not have a controlling interest in nor can it exercise significant influence over any of these companies. These securities are recorded as other long-term assets in the accompanying condensed consolidated balance sheets. There were no impairments or other adjustments recorded in the three and nine months ended September 30, 2016, respectively.Amortization2021 or 2020.capitalized software development costs was $2.2its senior notes due 2029 and 2031 (“2029 Notes” and “2031 Notes,” respectively). The Company’s convertible senior notes due 2023 (“Convertible Notes”) were fully redeemed in June 2021 and were no longer outstanding as of the end of the second quarter of 2021. Refer to Note 10 for further details on these financial liabilities.$5.9$513.4 million, inrespectively. The 2029 Notes and 2031 Notes are classified as Level 2 financial instruments within the threefair value hierarchy.nine months endedHedging Activities2017, respectively,2021, the Company had outstanding foreign currency forward contracts designated as cash flow hedges with total buy and $1.4sell notional values of $63.4 million and $3.7$76.7 million, inrespectively. The notional value represents the three and nine months ended September 30, 2016, respectively.5. Recent AcquisitionOn February 6, 2017, the Company completed its acquisition of a messaging provider based in Sweden specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow. The escrow will continue for 18 months after the transaction closing date and may be extended under certain circumstances.Additionally, the Company deposited $2.0 million into a separate escrow accountamount that will be released to certain employees on the first and second anniversariespurchased or sold upon maturity of the closing date, providedforward contract. As of September 30, 2021, these contracts had maturities of less than 6 months and the underlying service conditions are met. This amount is$3.1 million fair value of the associated liability was recorded as prepaid compensationin accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet.Condensed Consolidated Statement of Operations and Statement of Comprehensive Loss Three Months Ended
September 30,Nine Months Ended
September 30,2021 2021 (In thousands) Losses recognized in OCI Net change in market value of effective foreign currency forward exchange contracts $ (161) $ (3,069) Losses recognized in income due to instruments maturing Cost of revenue $ (2,464) $ (2,931) As of As of September 30, December 31, 2021 2020 (In thousands) Capitalized internal-use software development costs $ 185,037 $ 142,489 64,104 43,477 Leasehold improvements 80,897 69,756 Office equipment 56,291 35,346 15,646 12,312 Software 10,491 9,943 Total property and equipment 412,466 313,323 Less: accumulated depreciation and amortization (175,225) (130,084) Total property and equipment, net $ 237,241 $ 183,239 Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands) Depreciation and amortization expense $ 14,546 $ 12,843 $ 43,198 $ 36,674 Capitalized internal-use software development costs $ 17,999 $ 12,172 $ 49,527 $ 36,738 Stock based compensation costs included in capitalized internal-use software development costs $ 5,198 $ 3,696 $ 14,938 $ 10,711 Amortization of capitalized internal-use software development costs $ 4,419 $ 4,380 $ 13,270 $ 13,389 Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands) Operating lease cost $ 16,141 $ 12,127 $ 45,519 $ 35,048 Finance lease cost: Amortization of assets 2,905 2,384 8,389 6,118 Interest on lease liabilities 282 212 805 604 Short-term lease cost 802 1,195 3,340 3,698 Variable lease cost 2,389 2,066 7,322 5,246 Total net lease cost $ 22,519 $ 17,984 $ 65,375 $ 50,714 As of As of September 30, December 31, Leases Classification 2021 2020 Assets: (In thousands) Operating lease assets $ 248,582 $ 258,610 Finance lease assets 29,027 25,771 Total leased assets $ 277,609 $ 284,381 Liabilities: Current Operating Operating lease liability, current $ 50,760 $ 48,338 Finance Finance lease liability, current 10,150 9,062 Noncurrent Operating Operating lease liability, noncurrent 223,033 229,905 Finance Finance lease liability, noncurrent 20,254 17,856 Total lease liabilities $ 304,197 $ 305,161 is amortized$57.1 million as of September 30, 2021 and December 31, 2020, respectively.Nine Months Ended
September 30,2021 2020 Cash paid for amounts included in the measurement of lease liabilities: (In thousands) Operating cash flows from operating leases $ 44,551 $ 34,124 Operating cash flows from finance leases (interest) $ 788 $ 604 Financing cash flows from finance leases $ 8,343 $ 5,721 Weighted average remaining lease term (in years): Operating leases 5.7 5.6 Finance leases 3.1 3.4 Weighted average discount rate: Operating leases 4.5 % 5.3 % Finance leases 3.5 % 4.1 % As of September 30, 2021 Operating
LeasesFinance
LeasesYear Ended December 31, (In thousands) 2021 (remaining three months) $ 14,742 $ 2,920 2022 63,245 10,681 2023 55,476 9,934 2024 50,857 6,693 2025 37,706 1,394 Thereafter 89,223 518 Total lease payments 311,249 32,140 Less: imputed interest (37,456) (1,736) Total lease obligations 273,793 30,404 Less: current obligations (50,760) (10,150) Long-term lease obligations $ 223,033 $ 20,254 expenseits own equity awards, at the conversion ratio provided in the Agreement and Plan of Merger and Reorganization (the “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 rendered.accordingly, the total preliminary purchase price of $838.4 million 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 is accounted for as a post-acquisition compensation expense anddate with the excess recorded as research and development expense in the accompanying condensed consolidated statementgoodwill. These estimates were derived from information currently available. The determination of operations. We expect to continue to obtain information to assist us in determining the fair values and estimated lives of depreciable tangible and identifiable intangible assets requires significant judgment. As of September 30, 2021, the primary areas that are not yet finalized include determination of the netpurchase price, valuation of acquired intangible assets, acquiredcontingencies and income and other taxes.duringwas determined (a) for options, by using the measurement period.The acquired entity’s resultsBlack-Scholes option pricing model with the applicable assumptions as of operations have been includedthe 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 vest as Zipwhip employees continue to provide services in the condensed consolidated financial statementspost-acquisition period. The fair value of these awards will be recorded into the Company fromstock-based compensation expense over the daterespective vesting period of acquisition.Total (In thousands) Fair value of Class A common stock transferred $ 419,037 Cash consideration 417,900 Fair value of the pre-combination service through equity awards 1,511 Total purchase price $ 838,448 Company’s condensedCompany's consolidated balance sheet onas of September 30, 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 23,545 244,500 Other assets 370 Goodwill 600,070 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 $ 838,448 acquisition date, and as subsequently adjusted during the three months ended June 30, 2017 (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 $2.6$18.1 million in this business combination.combination that is included in long-term liabilities in the accompanying consolidated balance sheet.(1)Goodwill generated from this acquisition primarily represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transactionthat is primarily attributable to the future cash flows to be realizedexpected from the acquired technology platform, existing customerincreased scale and supplier relationshipssynergies as well as operational synergies.(2) Identifiable finite-lived intangible assets were compriseda result of the following:
life
(in years)
reduced by $1.7 million to its respective fair value on the acquisition date.
| Total | ||||||||
| (In thousands) | ||||||||
| Balance as of December 31, 2020 | $ | 4,595,394 | ||||||
| Goodwill additions and adjustments | 667,657 | |||||||
| Balance as of September 30, 2021 | $ | 5,263,051 | ||||||
| As of September 30, 2021 | ||||||||||||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||||||||||
| Amortizable intangible assets: | (In thousands) | |||||||||||||||||||
| Developed technology | $ | 794,831 | $ | (194,285) | $ | 600,546 | ||||||||||||||
| Customer relationships | 538,264 | (108,953) | 429,311 | |||||||||||||||||
| Supplier relationships | 51,671 | (6,916) | 44,755 | |||||||||||||||||
| Trade names | 30,669 | (12,327) | 18,342 | |||||||||||||||||
| Order backlog | 10,000 | (9,167) | 833 | |||||||||||||||||
| Patent | 4,071 | (474) | 3,597 | |||||||||||||||||
| Total amortizable intangible assets | 1,429,506 | (332,122) | 1,097,384 | |||||||||||||||||
| Non-amortizable intangible assets: | ||||||||||||||||||||
| Telecommunication licenses | 4,920 | — | 4,920 | |||||||||||||||||
| Trademarks and other | 295 | — | 295 | |||||||||||||||||
| Total | $ | 1,434,721 | $ | (332,122) | $ | 1,102,599 | ||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||||||||||
| 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 name | 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 | ||||||||||||||
| As of September 30, 2021 | ||||||||
| Year Ended December 31, | (In thousands) | |||||||
| 2021 (remaining three months) | $ | 52,554 | ||||||
| 2022 | 204,832 | |||||||
| 2023 | 201,522 | |||||||
| 2024 | 195,948 | |||||||
| 2025 | 192,374 | |||||||
| Thereafter | 250,154 | |||||||
| Total | $ | 1,097,384 | ||||||
| As of | As of | |||||||||||||
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| Accrued payroll and related | $ | 66,094 | $ | 54,683 | ||||||||||
| Accrued bonus and commission | 36,155 | 25,341 | ||||||||||||
| Accrued cost of revenue | 115,996 | 80,620 | ||||||||||||
| Sales and other taxes payable | 63,660 | 48,390 | ||||||||||||
| ESPP contributions | 19,354 | 6,272 | ||||||||||||
| Finance lease liability, current | 10,150 | 9,062 | ||||||||||||
| Accrued other expense | 57,274 | 28,527 | ||||||||||||
| Total accrued expenses and other current liabilities | $ | 368,683 | $ | 252,895 | ||||||||||
| As of | As of | |||||||||||||
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| Deferred tax liability | $ | 20,446 | $ | 13,684 | ||||||||||
| Acquisition holdback | 8,502 | 8,800 | ||||||||||||
| Accrued other expenses | 20,243 | 14,149 | ||||||||||||
| Total other long-term liabilities | $ | 49,191 | $ | 36,633 | ||||||||||
| As of | As of | |||||||||||||
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| 2029 and 2031 Senior Notes | ||||||||||||||
| 2029 Senior Notes | ||||||||||||||
| Principal | $ | 500,000 | $ | — | ||||||||||
| Unamortized discount | (5,872) | — | ||||||||||||
| Unamortized issuance costs | (1,316) | — | ||||||||||||
| Net carrying amount | 492,812 | — | ||||||||||||
| 2031 Senior Notes | ||||||||||||||
| Principal | 500,000 | — | ||||||||||||
| Unamortized discount | (5,962) | — | ||||||||||||
| Unamortized issuance costs | (1,303) | — | ||||||||||||
| Net carrying amount | 492,735 | — | ||||||||||||
| 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 | $ | 985,547 | $ | 302,068 | ||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| 2021 | 2021 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| 2029 Notes | ||||||||||||||||||||
| Contractual interest expense | $ | 4,531 | $ | 10,182 | ||||||||||||||||
| Amortization of debt discount and issuance costs | 246 | 463 | ||||||||||||||||||
| Total interest expense - 2029 Notes | 4,777 | 10,645 | ||||||||||||||||||
| 2031 Notes | ||||||||||||||||||||
| Contractual interest expense | 4,844 | 10,885 | ||||||||||||||||||
| Amortization of debt discount and issuance costs | 188 | 352 | ||||||||||||||||||
| Total interest expense - 2031 Notes | 5,032 | 11,237 | ||||||||||||||||||
| Total interest expense | $ | 9,809 | $ | 21,882 | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | 15,413 | $ | 10,248 | $ | 12,046 | $ | 6,287 | ||||||||||||||||||
| Additions | 4,122 | 1,312 | 13,490 | 8,472 | ||||||||||||||||||||||
| Write-offs | (2,703) | (832) | (8,704) | (4,031) | ||||||||||||||||||||||
| Balance, end of period | $ | 16,832 | $ | 10,728 | $ | 16,832 | $ | 10,728 | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | 16,167 | $ | 11,531 | $ | 16,783 | $ | 6,784 | ||||||||||||||||||
| Additions | 14,211 | 12,164 | 41,596 | 33,714 | ||||||||||||||||||||||
| Deductions against reserve | (12,716) | (12,915) | (40,717) | (29,718) | ||||||||||||||||||||||
| Balance, end of period | $ | 17,662 | $ | 10,780 | $ | 17,662 | $ | 10,780 | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenue by geographic area: | (In thousands) | |||||||||||||||||||||||||
| United States | $ | 497,993 | $ | 328,056 | $ | 1,372,436 | $ | 881,984 | ||||||||||||||||||
| International | 242,183 | 119,913 | 626,659 | 331,702 | ||||||||||||||||||||||
| Total | $ | 740,176 | $ | 447,969 | $ | 1,999,095 | $ | 1,213,686 | ||||||||||||||||||
| Percentage of revenue by geographic area: | ||||||||||||||||||||||||||
| United States | 67 | % | 73 | % | 69 | % | 73 | % | ||||||||||||||||||
| International | 33 | % | 27 | % | 31 | % | 27 | % | ||||||||||||||||||
Pro forma results of operations for this acquisition have not been presented as the financial impact to the Company’s condensed consolidated financial statements is immaterial.
6. Intangible Assets
Goodwill
Goodwill balance as of September 30, 2017 and December 31, 2016 was as follows:
|
| Total |
| |
Balance as of December 31, 2016 |
| $ | 3,565 |
|
Goodwill recorded in connection with the recent acquisition |
| 12,688 |
| |
Measurement period adjustment |
| (100 | ) | |
Effect of exchange rate |
| 1,254 |
| |
Balance as of September 30, 2017 |
| $ | 17,407 |
|
Intangible assets
Intangible assets consisted of the following (in thousands):
|
| As of September 30, 2017 |
| |||||||
|
| Gross |
| Accumulated |
| Net |
| |||
Amortizable intangible assets: |
|
|
|
|
|
|
| |||
Developed technology |
| $ | 14,888 |
| $ | (4,365 | ) | $ | 10,523 |
|
Customer relationships |
| 7,096 |
| (774 | ) | 6,322 |
| |||
Supplier relationships |
| 2,854 |
| (364 | ) | 2,490 |
| |||
Trade name |
| 60 |
| (60 | ) | — |
| |||
Patent |
| 1,737 |
| (93 | ) | 1,644 |
| |||
Total amortizable intangible assets |
| 26,635 |
| (5,656 | ) | 20,979 |
| |||
Non-amortizable intangible assets: |
|
|
|
|
|
|
| |||
Domain names |
| 32 |
| — |
| 32 |
| |||
Trademarks |
| 263 |
| — |
| 263 |
| |||
Total |
| $ | 26,930 |
| $ | (5,656 | ) | $ | 21,274 |
|
|
| As of December 31, 2016 |
| |||||||
|
| Gross |
| Accumulated |
| Net |
| |||
Amortizable intangible assets: |
|
|
|
|
|
|
| |||
Developed technology |
| $ | 9,400 |
| $ | (1,140 | ) | $ | 8,260 |
|
Customer relationships |
| 400 |
| (148 | ) | 252 |
| |||
Trade name |
| 60 |
| (56 | ) | 4 |
| |||
Patent |
| 1,512 |
| (55 | ) | 1,457 |
| |||
Total amortizable intangible assets |
| 11,372 |
| (1,399 | ) | 9,973 |
| |||
Non-amortizable intangible assets: |
|
|
|
|
|
|
| |||
Domain names |
| 32 |
| — |
| 32 |
| |||
Trademarks |
| 263 |
| — |
| 263 |
| |||
Total |
| $ | 11,667 |
| $ | (1,399 | ) | $ | 10,268 |
|
Amortization expense was $1.5 million and $4.2 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2016, respectively.
Total estimated future amortization expense was as follows (in thousands):
|
| As of |
| |
2017 (remaining 3 months) |
| $ | 2,659 |
|
2018 |
| 5,483 |
| |
2019 |
| 5,081 |
| |
2020 |
| 2,651 |
| |
2021 |
| 1,518 |
| |
Thereafter |
| 3,587 |
| |
Total |
| $ | 20,979 |
|
7. Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
| As of |
| As of |
| ||
|
| 2017 |
| 2016 |
| ||
Accrued payroll and related |
| $ | 5,408 |
| $ | 3,133 |
|
Accrued bonus and commission |
| 3,204 |
| 2,251 |
| ||
Accrued cost of revenue |
| 11,553 |
| 8,741 |
| ||
Sales and other taxes payable |
| 19,394 |
| 28,795 |
| ||
ESPP contributions |
| 3,574 |
| 4,364 |
| ||
Deferred rent |
| 668 |
| 1,250 |
| ||
Accrued other expense |
| 11,482 |
| 10,774 |
| ||
Total accrued expenses and other current liabilities |
| $ | 55,283 |
| $ | 59,308 |
|
Long-term liabilities consisted of the following (in thousands):
|
| As of |
| As of |
| ||
|
| 2017 |
| 2016 |
| ||
Deferred rent |
| $ | 9,335 |
| $ | 9,387 |
|
Deferred tax liability |
| 2,780 |
| — |
| ||
Accrued other expense |
| 434 |
| 156 |
| ||
Total other long-term liabilities |
| $ | 12,549 |
| $ | 9,543 |
|
8. Supplemental Balance Sheet Information
A roll-forward of the Company’s reserves is as follows (in thousands):
(a)Allowance for doubtful accounts (in thousands):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 923 |
| $ | 795 |
| $ | 1,076 |
| $ | 486 |
|
Additions |
| 125 |
| 170 |
| 407 |
| 1,017 |
| ||||
Write-offs |
| — |
| (16 | ) | (435 | ) | (554 | ) | ||||
Balance, end of period |
| $ | 1,048 |
| $ | 949 |
| $ | 1,048 |
| $ | 949 |
|
(b) Sales credit reserve (in thousands):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 734 |
| $ | 652 |
| $ | 544 |
| $ | 714 |
|
Additions |
| 104 |
| 169 |
| 1,076 |
| 1,012 |
| ||||
Deductions against reserve |
| (238 | ) | (337 | ) | (1,020 | ) | (1,242 | ) | ||||
Balance, end of period |
| $ | 600 |
| $ | 484 |
| $ | 600 |
| $ | 484 |
|
9. Revenue by Geographic Area
Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (dollars in thousands):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenue by geographic area: |
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 76,713 |
| $ | 60,535 |
| $ | 221,914 |
| $ | 165,528 |
|
International |
| 23,829 |
| 10,998 |
| 61,870 |
| 29,855 |
| ||||
Total |
| $ | 100,542 |
| $ | 71,533 |
| $ | 283,784 |
| $ | 195,383 |
|
Percentage of revenue by geographic area: |
|
|
|
|
|
|
|
|
| ||||
United States |
| 76 | % | 85 | % | 78 | % | 85 | % | ||||
International |
| 24 | % | 15 | % | 22 | % | 15 | % | ||||
10. Commitments and Contingencies
(a)Lease Commitments
The Company entered into various non-cancelable operating lease agreements for its facilities over the next seven years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight-line basis over the term of the lease.
Rent expense was $2.1 million and $6.1 million for the three and nine months ended September 30, 2017, respectively, and $2.1 million and $5.1 million for the three and nine months ended September 30, 2016, respectively.
Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):
Year Ending December 31: |
| As of September 30, |
| |
2017 (remaining three months) |
| $ | 1,958 |
|
2018 |
| 7,326 |
| |
2019 |
| 7,375 |
| |
2020 |
| 7,068 |
| |
2021 |
| 7,033 |
| |
Thereafter |
| 16,052 |
| |
Total minimum lease payments |
| $ | 46,812 |
|
(b)Legal Matters
On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against the Company in the United States District Court, Central District of California (“Telesign I”). Telesign alleges that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (“‘920”), U.S. Patent No. 8,687,038 (“‘038”) and U.S. Patent No. 7,945,034 (“‘034”). The patent infringement allegations in the lawsuit relate to the Company’s Programmable Authentication products, its two-factor authentication use case and an API tool to find information about a phone number. The Company has petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the patents at issue. On July 8, 2016, the U.S. PTO denied the Company’s petition for inter partes review of the ‘920 and ‘038 patents. After the U.S. PTO held its hearing on the ‘034 patent inter partes review, on June 26, 2017, it upheld the patentability of the ‘034 patent, adopting Telesign’s narrow construction of its patent.
On March 28, 2016, Telesign filed a second lawsuit against the Company in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 (“‘792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the U.S. PTO issued an order instituting the inter partes review for the ‘792 patent. A final written decision is expected by March 2018. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the now instituted ‘792 patent inter partes review. On May 16, 2017, the court issued an order to consolidate the Telesign I and Telesign II matters and stay the consolidated case until the completion of the inter partes review of the ‘792 patent. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits.
On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021, United States Patent No. 8,837,465, United States Patent No. 8,755,376, United States Patent No. 8,736,051, United States Patent No. 8,737,962, United States Patent No. 9,270,833, and United States Patent No. 9,226,217. 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. This litigation is currently ongoing.
On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, the Company filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Discovery has already begun, and a hearing on the class certification motion is set for December 2017.
The Company intends to vigorously defend these lawsuits and believes it has meritorious defenses to each matter in which it is a defendant. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate ranges of possible losses.
In addition to the litigation matters discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations.
accrued related to any outstanding indemnification agreements.
Taxes
During the three months ended June 30, 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 nine months ended September 30, 2017, total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.1 million, or $0.14 per share. As of September 30, 2017, the total liability related to these taxes was $19.4 million.
In the event otherany of these jurisdictions challengedisagree with management’s assumptions and analysis, the actualassessment of the Company’s tax exposure could differ materially from themanagement’s current estimates.
11. Stockholders’ Equity
(a)Preferred Stock
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 condensed 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. 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.
(b)
Holders of Class A and Class B common stock are entitled to 1 vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights.
|
| As of |
| As of |
|
|
| 2017 |
| 2016 |
|
Stock options issued and outstanding |
| 11,380,189 |
| 14,649,276 |
|
Nonvested restricted stock units issued and outstanding |
| 4,384,898 |
| 2,034,217 |
|
Class A common stock reserved for Twilio.org |
| 680,397 |
| 680,397 |
|
Stock-based awards available for grant under 2016 Plan |
| 11,601,980 |
| 10,143,743 |
|
Class A common stock reserved for issuance under 2016 ESPP |
| 224,126 |
| 597,038 |
|
Total |
| 28,271,590 |
| 28,104,671 |
|
12.
| As of | As of | |||||||||||||
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Stock options issued and outstanding | 4,510,986 | 5,625,735 | ||||||||||||
| Unvested restricted stock units issued and outstanding | 6,467,518 | 7,523,882 | ||||||||||||
| Class A common stock reserved for Twilio.org | 640,959 | 707,265 | ||||||||||||
| Stock-based awards available for grant under 2016 Plan | 25,591,744 | 18,942,205 | ||||||||||||
| Stock-based awards available for grant under ESPP | 6,481,649 | 4,941,281 | ||||||||||||
| Class A common stock reserved for the Convertible Notes | — | 7,569,731 | ||||||||||||
| Total | 43,692,856 | 45,310,099 | ||||||||||||
2008 Stock Option Plan
The Company granted options under its 2008 Stock Option Plan (the “2008 Plan”), as amended and restated, until June 22, 2016, when the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder.
2016 Stock Option Plan
Under the 2016 Plan, the stock options areequity awards granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. thereunder.
2016 Employee Stock Purchase Plan
The Company’salso offers an Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2017, the shares available for grant under the 2016 Plan were automatically increased by 872,485 shares.
The 2016 ESPP allowsto eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016employees. The ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year, starting in May 2017.
On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.
year. In the three months ended JuneSeptember 30, 2017, 580,7052021 and 2020, no shares of the Company’s Class A common stock were purchased under the 2016 ESPP and 224,126107,815 shares are expected to be purchased in the fourth quarter of 2017.
As of September 30, 2017, total unrecognized compensation cost related to2021.
|
| Number of |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding options as of December 31, 2016 |
| 14,649,276 |
| $ | 6.14 |
| 7.52 |
| $ | 332,716 |
|
Granted |
| 1,443,335 |
| 31.06 |
|
|
|
|
| ||
Exercised |
| (4,615,225 | ) | 4.88 |
|
|
|
|
| ||
Forfeited and cancelled |
| (652,197 | ) | 7.93 |
|
|
|
|
| ||
Outstanding options as of September 30, 2017 |
| 10,825,189 |
| $ | 9.89 |
| 7.37 |
| $ | 218,574 |
|
Options vested and exercisable as of September 30, 2017 |
| 5,166,349 |
| $ | 5.30 |
| 6.54 |
| $ | 126,828 |
|
| Number of options outstanding | Weighted- average exercise price (Per share) | Weighted- average remaining contractual term (In years) | Aggregate intrinsic value (In thousands) | |||||||||||||||||||||||
| Outstanding options as of December 31, 2020 | 5,070,735 | $ | 51.71 | 6.85 | $ | 1,454,222 | ||||||||||||||||||||
| Granted | 249,842 | 368.82 | ||||||||||||||||||||||||
| Assumed in acquisition | 83,539 | 49.26 | ||||||||||||||||||||||||
| Exercised | (1,122,523) | 42.76 | ||||||||||||||||||||||||
| Forfeited and canceled | (325,607) | 120.73 | ||||||||||||||||||||||||
| Outstanding options as of September 30, 2021 | 3,955,986 | $ | 68.53 | 6.21 | $ | 1,002,796 | ||||||||||||||||||||
| Options vested and exercisable as of September 30, 2021 | 2,482,865 | $ | 28.83 | 5.03 | $ | 721,478 | ||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||
Aggregate intrinsic value of stock options exercised (1) | $ | 93,920 | $ | 89,808 | $ | 359,904 | $ | 496,198 | ||||||||||||||||||
| Total estimated grant date fair value of options vested | $ | 27,629 | $ | 12,090 | $ | 105,481 | $ | 53,110 | ||||||||||||||||||
| Weighted-average grant date fair value per share of options granted or assumed in acquisition | $ | 331.57 | $ | — | $ | 234.74 | $ | 64.06 | ||||||||||||||||||
(1)Aggregate intrinsic value represents the difference between the fair value of the Company’s Class A common stock as reported on the New York Stock Exchange and the exercise price of outstanding “in-the-money” options.
| Number of awards outstanding | Weighted- 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 | 2,220,043 | 345.57 | ||||||||||||||||||
| Vested | (2,570,006) | 101.86 | ||||||||||||||||||
| Forfeited and canceled | (706,401) | 170.27 | ||||||||||||||||||
| Unvested RSUs as of September 30, 2021 | 6,467,518 | $ | 212.83 | $ | 2,063,462 | |||||||||||||||
The total estimatedCompany granted 24,697 shares of RSAs with a weighted average grant date fair value of options vested was $3.0 million$359.80 per share and $12.2 million for the three and nine months endedaggregate intrinsic value of $7.8 million.
| Unrecognized Compensation Cost | Weighted-average remaining period | |||||||||||||
| (In thousands) | (In years) | |||||||||||||
| Unvested stock options | $ | 189,118 | 2.1 | |||||||||||
| Unvested restricted stock units and awards | 1,235,756 | 3.0 | ||||||||||||
| Class A shares in escrow subject to future vesting | 67,821 | 2.2 | ||||||||||||
| ESPP | 2,360 | 0.1 | ||||||||||||
| Total | $ | 1,495,055 | ||||||||||||
On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grant value of $5.9 million. The first half of each award vests upon satisfaction of a performance condition and the remainder vests thereafter in equal monthly installments over a 24-month period. The achievement window expires after 4.3 years from the date of grant and the stock options expire seven years after the date of grant. The stock options are amortized over a derived service period of three years, 4.25 years and 4.75 years, respectively. The stock options value and the derived service period were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance options:
|
| Number of |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding options as of December 31, 2016 |
| — |
| $ | — |
| — |
| $ | — |
|
Granted |
| 555,000 |
| 31.72 |
|
|
|
|
| ||
Exercised |
| — |
| — |
|
|
|
|
| ||
Forfeited and cancelled |
| — |
| — |
|
|
|
|
| ||
Outstanding options as of September 30, 2017 |
| 555,000 |
| $ | 31.72 |
| 6.41 |
| $ | — |
|
Options vested and exercisable as of September 30, 2017 |
| — |
| $ | — |
| — |
| $ | — |
|
As of September 30, 2017, total unrecognized compensation cost related to all non-vested stock options was $38.6 million, which will be amortized over a weighted-average period of 2.2 years.
Restricted Stock Units
|
| Number of |
| Weighted- |
| Aggregate |
| ||
Nonvested RSUs as of December 31, 2016 |
| 2,034,217 |
| $ | 32.66 |
| $ | 58,687 |
|
Granted |
| 3,093,326 |
|
|
|
|
| ||
Vested |
| (492,757 | ) |
|
|
|
| ||
Forfeited and cancelled |
| (249,888 | ) |
|
|
|
| ||
Nonvested RSUs as of September 30, 2017 |
| 4,384,898 |
| $ | 30.86 |
| $ | 130,818 |
|
As of September 30, 2017, total unrecognized compensation cost related to nonvested RSUs was $121.1 million, which will be amortized over a weighted-average period of 3.26 years.
Equity Awards Granted to Nonemployees
In September 2016, the Company granted 30,255 restricted stock units to a nonemployee. The award is vested upon the satisfaction of a service condition over two years starting in August 2015. The stock-based compensation expense recorded for this award during the three and nine months ended September 30, 2017 was $0.1 million and $0.3 million, respectively.
As of September 30, 2017, there were no nonemployee awards outstanding.
Early Exercises of Nonvested Options
As of September 30, 2017 and December 31, 2016, the Company recorded a liability of $0.1 million and $0.3 million for 16,033 and 49,580 unvested shares, respectively, that were early exercised by employees and were subject to repurchase at the respective period end. These amounts are reflected in current and non-current liabilities on the Company’s consolidated balance sheets.
Valuation Assumptions
2020. The fair value of employee stock options under our equity incentive plans and purchase rights under the ESPP was estimated on the grant date of grant using the following assumptions in the Black-Scholes option pricing model:
|
| Three Months Ended |
| Nine Months Ended |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Employee Stock Options: |
|
|
|
|
|
|
|
|
|
Fair value of common stock |
| * |
| * |
| $24.77 -$31.96 |
| $10.09-$15.00 |
|
Expected term (in years) |
| * |
| * |
| 6.08 |
| 6.08 |
|
Expected volatility |
| * |
| * |
| 46.1%-47.6% |
| 51.4%-53.0% |
|
Risk-free interest rate |
| * |
| * |
| 1.9%-2.1% |
| 1.3%-1.5% |
|
Dividend rate |
| * |
| * |
| 0% |
| 0% |
|
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Employee Stock Options: | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Fair value of common stock | $342.0 - $375.4 | $— | $316.31 - $409.21 | $108.4 - $191.9 | ||||||||||||||||||||||
| Expected term (in years) | 0.30 - 5.40 | — | 0.30 - 6.08 | 6.08 | ||||||||||||||||||||||
| Expected volatility | 42.9% - 61.5% | —% | 42.9% - 61.5% | 51.9% - 56.0% | ||||||||||||||||||||||
| Risk-free interest rate | 0.1% - 0.9% | —% | 0.1% - 1.1% | 0.4% - 1.4% | ||||||||||||||||||||||
| Dividend rate | —% | —% | —% | —% | ||||||||||||||||||||||
*No stock options were granted in the period.
Employee Stock Purchase Plan: |
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Expected term (in years) |
| 0.5 |
| 0.9 |
| 0.5 |
| 0.9 |
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Expected volatility |
| 33.2 | % | 52 | % | 33.2 | % | 52 | % |
Risk-free interest rate |
| 1.1 | % | 0.6 | % | 1.1 | % | 0.6 | % |
Dividend rate |
| 0 | % | 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:
Asset volatility |
| 40 | % | |
Equity volatility |
| 45 | % | |
Discount rate |
| 14 | % | |
Stock price at grant date |
| $ | 31.72 |
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Three Months Ended Nine Months Ended 2017 2016 2017 2016 Cost of revenue $ 180 $ 84 $ 460 $ 135 Research and development 6,493 3,741 16,687 7,636 Sales and marketing 2,603 1,432 6,961 3,282 General and administrative 4,912 2,391 11,865 4,596 Total $ 14,188 $ 7,648 $ 35,973 $ 15,649 Three Months Ended Nine Months Ended 2017 2016 2017 2016 Net loss attributable to common stockholders $ (23,453 ) $ (11,254 ) $ (44,789 ) $ (28,716 ) Weighted-average shares used to compute basic and diluted net loss per share attributable to common stockholders 92,156,768 83,887,901 90,543,087 42,030,989 Net loss per share attributable to common stockholders, basic and diluted $ (0.25 ) $ (0.13 ) $ (0.49 ) $ (0.68 ) presented: As of September 30, 2017 2016 Issued and outstanding options 11,380,189 16,476,973 Nonvested RSUs issued and outstanding 4,384,898 1,639,378 Common stock reserved for Twilio.org 680,397 780,397 Shares committed under 2016 ESPP 224,126 604,865 Unvested shares subject to repurchase 16,033 74,451 Total 16,685,643 19,576,064 February 26, 2021 (“Annual Report”). confirmations, notifications, and other use cases. See the risk factor titled “The global COVID-19 pandemic may adversely impact our business, results of operations and financial performance” in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition and results of operations. Three Months 2017 2016 Number of Active Customer Accounts (as of period end date) 46,489 34,457 Base Revenue (in thousands) $ 91,965 $ 64,099 Base Revenue Growth Rate 43 % 75 % Dollar-Based Net Expansion Rate 122 % 155 % 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. dollars as we add additional employees and invest in our infrastructure to grow our business. uncertainly in the COVID-19 environment. and credits. Measures: Three Months Ended 2017 2016 (In thousands) Reconciliation: Gross profit $ 52,288 $ 40,248 Non-GAAP adjustments: Stock-based compensation 180 84 Amortization of acquired intangibles 1,250 70 Non-GAAP gross profit $ 53,718 $ 40,402 Non-GAAP gross margin 53 % 56 % Three Months Ended 2017 2016 (In thousands) Reconciliation: Operating expenses $ 76,319 $ 51,524 Non-GAAP adjustments: Stock-based compensation (14,008 ) (7,564 ) Amortization of acquired intangibles (265 ) (66 ) Acquisition related expenses (35 ) (137 ) Payroll taxes related to stock-based compensation (595 ) — Non-GAAP operating expenses $ 61,416 $ 43,757 Three Months Ended 2017 2016 (In thousands) Reconciliation: Loss from operations $ (24,031 ) $ (11,276 ) Non-GAAP adjustments: Stock-based compensation 14,188 7,648 Amortization of acquired intangibles 1,515 136 Acquisition related expenses 35 137 Payroll taxes related to stock-based compensation 595 — Non-GAAP loss from operations $ (7,698 ) $ (3,355 ) Non-GAAP operating margin (8 )% (5 )% Contents Three Months Ended Nine Months Ended 2017 2016 2017 2016 (In thousands) Revenue $ 100,542 $ 71,533 $ 283,784 $ 195,383 Cost of revenue(1) (2) 48,254 31,285 127,873 86,315 Gross profit 52,288 40,248 155,911 109,068 Operating expenses: Research and development(1) (2) 31,674 21,106 87,910 53,339 Sales and marketing(1) (2) 25,778 15,873 73,047 47,451 General and administrative(1) (2) 18,867 14,545 40,810 36,773 Total operating expenses 76,319 51,524 201,767 137,563 Loss from operations (24,031 ) (11,276 ) (45,856 ) (28,495 ) Other income, net 1,000 138 1,969 92 Loss before provision for income taxes (23,031 ) (11,138 ) (43,887 ) (28,403 ) Provision for income taxes (422 ) (116 ) (902 ) (313 ) Net loss attributable to common stockholders $ (23,453 ) $ (11,254 ) $ (44,789 ) $ (28,716 ) Three Months Nine Months 2017 2016 2017 2016 (In thousands) Cost of revenue $ 180 $ 84 $ 460 $ 135 Research and development 6,493 3,741 16,687 7,636 Sales and marketing 2,603 1,432 6,961 3,282 General and administrative 4,912 2,391 11,865 4,596 Total $ 14,188 $ 7,648 $ 35,973 $ 15,649 Three Months Nine Months 2017 2016 2017 2016 (In thousands) Cost of revenue $ 1,250 $ 70 $ 3,429 $ 210 Research and development 25 38 101 114 Sales and marketing 220 — 539 — General and administrative 20 28 64 83 Total $ 1,515 $ 136 $ 4,133 $ 407 Three Months Nine Months 2017 2016 2017 2016 Consolidated Statements of Operations, as a percentage of revenue:** Revenue 100 % 100 % 100 % 100 % Cost of revenue 48 44 45 44 Gross profit 52 56 55 56 Operating expenses: Research and development 32 30 31 27 Sales and marketing 26 22 26 24 General and administrative 19 20 14 19 Total operating expenses 76 72 71 70 Loss from operations (24 ) (16 ) (16 ) (15 ) Other income, net 1 * 1 * Loss before provision for income taxes (23 ) (16 ) (15 ) (15 ) Provision for income taxes * * * * Net loss attributable to common stockholders (23 )% (16 )% (15 )% (15 )% 2020 Three Months Ended September 30, 2017 2016 Change (Dollars in thousands) Base Revenue $ 91,965 $ 64,099 $ 27,866 43 % Variable Revenue 8,577 7,434 1,143 15 % Total revenue $ 100,542 $ 71,533 $ 29,009 41 % 2021. 2020, U.S. revenue and international revenue represented Three Months Ended September 30, 2017 2016 Change (Dollars in thousands) Cost of revenue $ 48,254 $ 31,285 $ 16,969 54 % Gross margin 52 % 56 % Three Months Ended September 30, 2017 2016 Change (Dollars in thousands) Research and development $ 31,674 $ 21,106 $ 10,568 50 % Sales and marketing 25,778 15,873 9,905 62 % General and administrative 18,867 14,545 4,322 30 % Total operating expenses $ 76,319 $ 51,524 $ 24,795 48 % recent acquisitions. certain operational improvements. advertising expenses. In addition, the three months ended September 30, 2021 included sales and marketing expenses and the impact of growth in the headcount from our recent acquisitions. 2020 Nine Months Ended September 30, 2017 2016 Change (Dollars in thousands) Base Revenue $ 260,191 $ 170,303 $ 89,888 53 % Variable Revenue 23,593 25,080 (1,487 ) (6 )% Total revenue $ 283,784 $ 195,383 $ 88,401 45 % 2021. 2020, U.S. revenue and international revenue represented acquisitions. Nine Months Ended September 30, 2017 2016 Change (Dollars in thousands) Cost of revenue $ 127,873 $ 86,315 $ 41,558 48 % Gross margin 55 % 56 % Nine Months Ended September 30, 2017 2016 Change (Dollars in thousands) Research and development $ 87,910 $ 53,339 $ 34,571 65 % Sales and marketing 73,047 47,451 25,596 54 % General and administrative 40,810 36,773 4,037 11 % Total operating expenses $ 201,767 $ 137,563 $ 64,204 47 % recent acquisitions. recent acquisitions. recent acquisitions. business. Further, the nine months ended September 30, 2021 included general and administrative expenses and the impact of growth in the headcount from our recent acquisitions. 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 II, Item 1A, “Risk Factors.” Nine Months 2017 2016 Cash provided by (used in) operating activities $ (7,054 ) $ 4,419 Cash used in investing activities (235,795 ) (21,814 ) Cash provided by financing activities 29,002 160,785 Effect of exchange rate changes on cash and cash equivalents 88 — Net increase (decrease) in cash and cash equivalents $ (213,759 ) $ 143,390 flows: Accounts payable and other current liabilities increased $76.1 million primarily due to increases in transaction volumes. Operating lease liability decreased $36.3 million due to payments made against our operating lease obligations. Other long-term assets increased $66.5 million primarily due to an increase in the sales commissions balances related to the growth of our business. business. long-lived assets. This was offset by $4.9 million in principal payments made on finance leases and $6.6 million related to the value of equity awards withheld to settle tax liabilities. equity awards withheld to settle tax liabilities. 10-K filed with the SEC on February 26, 2021. 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 Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. 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. 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 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. 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. cash flows. have net operating losses in the applicable tax years. Our ability to utilize net operating loss carryforwards depends on the existence of sufficient taxable income of the appropriate character within the carryforward period. Based on all available evidence, other than future taxable income from reversing taxable temporary differences, we have no other sources of taxable income that are objectively verifiable. As such, net operating loss carryforwards generated in tax years beginning before December 31, 2017, could expire unused and net operating losses arising in tax years beginning after December 31, 2017, while able to be carried forward indefinitely, are also not more likely than not to be realized due to lack of taxable income. not be prevented or detected on a timely basis. applicable insider trading policies. meetings; and 31.2 32.1* 101.INS Inline XBRL Instance 101.SCH Inline XBRL Taxonomy Extension Schema 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Nine Months Ended
September 30,Employee Stock Purchase Plan: 2021 2020 Expected term (in years) 0.5 0.5 Expected volatility 58.7% 72.1% Risk-free interest rate 0.04% 0.2% Dividend rate —% —% follows (in thousands):
September 30,
September 30,13.follows:Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands) Cost of revenue $ 3,720 $ 2,237 $ 9,461 $ 6,217 Research and development 69,242 46,294 185,072 119,344 Sales and marketing 53,843 26,573 143,419 69,602 General and administrative 37,238 14,306 107,414 42,659 Total $ 164,043 $ 89,410 $ 445,366 $ 237,822 perPer Share Attributable to Common Stockholderssecurities.Class Asecurities and Class B common stock are the only outstanding equityis described in detail in the Company. The rightsCompany’s Annual Report.the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions.ContentsBasic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.presented (in thousands, except share and per share data):
September 30,
September 30,Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 Net loss attributable to common stockholders (in thousands) $ (224,109) $ (116,914) $ (658,504) $ (311,628) Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 177,231,285 147,501,075 172,605,371 142,832,021 Net loss per share attributable to common stockholders, basic and diluted $ (1.26) $ (0.79) $ (3.82) $ (2.18) As of September 30, 2021 2020 Stock options issued and outstanding 4,510,986 4,946,920 Restricted stock units issued and outstanding 6,467,518 8,026,189 Class A common stock reserved for Twilio.org 640,959 729,367 Class A common stock committed under ESPP 107,815 103,374 — 5,013,815 Class A common stock in escrow 75,612 — Class A common stock in escrow and restricted stock awards subject to future vesting 342,784 — Total 12,145,674 18,819,665 14. Transactions with InvestorsIn 2015, twovendors participatedClass A common stock. Effective with the fourth quarter 2020, the Company expected to settle the principal amount of these notes in the Company’s Series E convertible preferred stock financing and owned approximately 1.9% and 1.0%, respectively,shares of the Company’s outstandingClass A common stock, asand since then used the if-converted method for calculating a potential dilutive effect on diluted net income per share, if applicable. As of September 30, 2017, and 2.0% and 1.0%, respectively,2020, the conversion spread, calculated using the average market price of Class A common stock during the period consistent with the treasury stock method, had a dilutive impact on diluted net income per share of Class A common stock when the average market price of the Company’s outstandingClass A common stock asfor a given period exceeded the conversion price of December 31, 2016. $70.90 per share.amountCompany computes its provision for interim periods by applying an estimated annual effective tax rate to anticipated annual pretax income or loss. The estimated annual effective tax rate is applied to the Company’s year to date income or loss, and is adjusted for discrete items recorded in the period. The Company recorded an income tax benefit of software services the Company purchased from the first vendor was $5.3$14.8 million and $14.7$12.7 million for the three and nine months ended September 30, 2017,2021, respectively, and $3.7an income tax provision of $0.6 million and $10.3 million during the three and nine months ended September 30, 2016, respectively. The net amount due to this vendor as of September 30, 2017 was $1.9 million. The amounts due to or from this vendor as of December 31, 2016 were insignificant.The amount of services the Company purchased from the second vendor was $0.2 million and $0.6 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million and $0.3 million2020, respectively.the three and nine months ended September 30, 2016, respectively. The net amounts due from this vendor as of September 30, 2017 and December 31, 2016 were insignificant.15. Employee Benefit PlanThe Company sponsors a 401(k) defined contribution plan covering all employees. The employer contribution to the plan was $0.3 million and $1.6 millionincome taxes recorded in the three and nine months ended September 30, 2017, respectively,2021 consists primarily of the income tax benefit from the reversal of U.S. valuation allowance related to acquired intangibles from current year business combinations partially offset with income taxes and $0.2 million and $0.9 millionwithholding taxes in foreign jurisdictions in which the Company conducts business. The provision for income taxes recorded in the three and nine months ended September 30, 2016, respectively* * * * * *isare based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. Our fiscal year ends on December 31.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 or 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 empowers 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 a set of APIs that handles For additional detail on the higher-level communication logic needed for nearly every type of customer engagement. These APIs are focused more on what a developer is looking to accomplish, rather than how to do it, thereby allowing our customers to more quickly and easily build better ways to engage with their customers. Our Programmable Communications Cloud software is a set of APIs that enables developers to embed voice, messaging and video capabilities into their applications. The Super Network is our software layer that 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 API’s giving our customers access to more foundational componentsdescription of our platform, like phone numbers.Asbusiness and products please refer to Part II, Item 7, "Management’s Discussion and Analysis of September 30, 2017, our customers’ applications that are embedded with our products could reach users via voice, messagingFinancial Condition and video in nearly every country in the world, and our platform offered customers 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 focused on reaching and serving the needsResults 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 Operations",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.When potential customers do not have the available developer resources to build their own applications, we refer them to our network of Solution Partners, who embed our products in their solutions, such as software for contact centers, sales force automation and marketing automation that they sell to other businesses.We are supplementing our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach. We have supplemented this sales effortAnnual Report on Form 10-K filed with the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration targeted at the needs of enterprise scale customers. Our sales organization works with technical and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leadersSEC on the benefits of developing applications that incorporate 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, sales engineering and customer success personnel.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 up-front 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 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 which 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 throughout 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.ForIn the three months ended September 30, 20172021 and 2016,2020, our revenue was $100.5$740.2 million and $71.5$448.0 million, respectively, and our net loss was $224.1 million and $116.9 million, respectively. In the three months ended September 30, 20172021 and 2016,2020, our 10 largest Active Customer Accounts generated an aggregate of 17%11% and 31%14% of our total revenue, respectively. ForthreeUnited States, for a purchase price of $838.4 million. 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 Zipwhip employees that was embedded in the unvested equity awards which we assumed on the acquisition closing date. Part of the cash consideration 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. This acquisition is described in detail in Note 7 to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q. During the nine months ended September 30, 20172021, we incurred $4.2 million in expenses related to this transaction.2016, among our 10 largest Active Customer Accounts we had fourhas resulted in the imposition of numerous, unprecedented, national and three Variable Customer Accounts in each period representing 8%international measures to try to contain the virus, including travel bans and 10%restrictions, shutdowns, quarantines, shelter-in-place and social distancing orders. To prioritize the health and safety of our revenue, respectively. For the three months ended September 30, 2017employees, customers and 2016, our Base Revenue was $92.0 millioncommunity at large, we have either cancelled or shifted our planned events to virtual-only experiences and $64.1 million, respectively. We incurred a net loss of $23.5 million and $11.3 million for the three months ended September 30, 2017 and 2016, respectively. See the section titled “—Key Business Metrics—Base Revenue” for a discussion of Base Revenue. As we previously disclosed, revenue from Uber, our largest Base Customer Account, decreased on a sequential basismay determine to alter, postpone or cancel additional customer, employee or industry events in the last three quarters. This was duefuture. Since mid-March 2020, we have also taken several precautionary measures to protect our employees and contingent workers and help minimize the spread of the virus, including temporarily closing our worldwide offices, requiring all employees and contingent workers to work from home and suspending almost all business travel worldwide for our employees. We have continued to monitor the progress of vaccination efforts around the world. In the third quarter of 2021, as COVID-19 related restrictions have eased in some geographies, we commenced a combinationphased reopening for certain offices. In these cases, reopening includes limited capacity and social distancing, is voluntary, and is only available to fully-vaccinated employees, unless they have a medical or other protected exception.product usage decreasesCOVID-19 on our results of operations and certain price adjustments that were made by usoverall financial performance remain uncertain. The COVID-19 pandemic and its adverse effects have been prevalent in the locations where we, our customers, our suppliers or our third-party business partners conduct business. There may be additional impacts to the economy and our business as a result of Uber’s high volume growth. Accordingly,COVID-19. We expect that there may be some volatility in customer demand and buying habits as the pandemic continues, and we expect the year-over-year decline in our revenue from Uber to continue to negativelymay experience constrained supply or curtailed customer demand that could materially and adversely impact our revenue growth ratesbusiness, results of operations and financial performance in future periods. Specifically, we may experience impact from delayed sales cycles, including customers and prospective customers delaying contract signing or contract renewals, or reducingDollar-Based Net Expansion Rateproducts and services for upcoming periods.
Ended
September 30,Three Months Ended
September 30,2021 2020 250,000 208,000 $ 740,176 $ 447,969 65 % 52 % 131 % 137 % ____________________ 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 three months ended September 30, 2021 and 2020, 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 three months ended September 30, 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 three months ended September 30, 2017 and 2016, we had six and eight Variable Customer Accounts, which represented 9% and 10%, respectively, of our total revenue.Dollar-Basedtrack 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 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.Our Dollar-Based Net Expansion Rate compares the revenue from Active Customer Accounts, other than Variable Customer Accounts, in a quarter to the same quarter in the prior year. 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.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 ourofferings such as Programmable Voice,Messaging, Programmable MessagingVoice and Programmable Video, products.among others. Some examples of the usage-basedusage‑based fees for which 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 number of authentications for our Programmable AuthenticationVerify product. In the three months ended September 30, 20172021 and 2016,2020, we generated 82%72% and 83%77% of our revenue, respectively, from usage-basedusage‑based fees. We also earn monthly flat fees from certain fee-basedfee‑based products, such as telephone numbersour Email API, Marketing Campaigns, Twilio Flex, our cloud contact center platform, and Twilio Segment, our customer support.Customersdata platform.up-frontupfront 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, whichthat contain minimum revenue commitments, which may contain more favorable pricing. Customers on such contracts typically are invoiced monthly in arrears for products used.accounts receivable and inrevenue, deferred revenue or deferred revenue,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 at any particular timeand customer deposits liability balance is not a meaningful indicator of our future revenue. 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-useinternal use software development costs.costs and 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.operations,operations; our product mix; our ability to manage our network service provider and cloud infrastructure-relatedinfrastructure‑related fees, including Application to Person 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 intangibles; 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.stock-based compensation and compensation expenses related to stock repurchases from employees.stock‑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.internal-useinternal 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.self-serviceself‑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.sales and othercertain taxes, depreciation and amortization 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 transition to, and operation as, a public company.significantcertain amount of sales and other taxes to which we are subject in the United States and internationally based on the manner we sell and deliver our products. Prior to March 2017, we did not collect such taxes from our customers and have therefore recorded such taxes as general and administrative expenses. Effective March 2017, we began collecting these taxes from customers in certain jurisdictions and intend to collect in other jurisdictions in the near term. We expect that these expenses will decline in future years as we continue collecting these taxes from our customers.in jurisdictions with a valuation allowance or a zero tax rate.Measuresnon-GAAPnon‑GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAPnon‑GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-periodperiod‑to‑period comparisons of results of operations, and assists in comparisons with other companies, many of which use similar non-GAAPnon‑GAAP financial information to supplement their GAAP results. Non-GAAPNon‑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-GAAPsimilarly‑titled non‑GAAP measures used by other companies. Whenever we use a non-GAAPnon‑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-GAAPnon‑GAAP financial measures to their most directly comparable GAAP financial measures.Non-GAAPNon-GAAPNon‑GAAP Gross Margin. For the periods presented, we define non-GAAPnon‑GAAP gross profit and non-GAAPnon‑GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude, stock-based compensation and amortizationas applicable, certain expenses as presented in the table below:Three Months Ended
September 30,2021 2020 Reconciliation: (In thousands) Gross profit $ 364,615 $ 230,874 Gross margin 49 % 52 % Non-GAAP adjustments: Stock-based compensation 3,720 2,237 Amortization of acquired intangibles 31,558 12,540 Non-GAAP gross profit $ 399,893 $ 245,651 Non-GAAP gross margin 54 % 55 % acquired intangibles.
September 30,Non-GAAPExpenses.Expenses. For the periods presented, we define non-GAAPnon‑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, acquisition-relatedcertain expenses and payroll taxes related to stock-based compensation.
September 30,Non-GAAP Lossas presented in the table below:Three Months Ended
September 30,2021 2020 Reconciliation: (In thousands) Operating expenses $ 596,960 $ 343,144 Non-GAAP adjustments: Stock-based compensation (160,323) (87,173) Amortization of acquired intangibles (24,203) (7,886) Acquisition-related expenses (1,620) (791) Charitable contributions (8,389) (5,757) Payroll taxes related to stock-based compensation (10,734) (3,179) Non-GAAP operating expenses $ 391,691 $ 238,358 Non-GAAPNon‑GAAP Operating Margin.Margin. For the periods presented, we define non-GAAP lossnon‑GAAP income from operations and non-GAAPnon‑GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude, stock-based compensation, amortizationas applicable, certain expenses as presented in the table below:Three Months Ended
September 30,2021 2020 Reconciliation: (In thousands) Loss from operations $ (232,345) $ (112,270) Operating margin (31) % (25) % Non-GAAP adjustments: Stock-based compensation 164,043 89,410 Amortization of acquired intangibles 55,761 20,426 Acquisition-related expenses 1,620 791 Charitable contributions 8,389 5,757 Payroll taxes related to stock-based compensation 10,734 3,179 Non-GAAP income from operations $ 8,202 $ 7,293 Non-GAAP operating margin 1 % 2 % acquired intangibles, acquisition-related expenses and payroll taxes related to stock-based compensation.
September 30,
September 30,
September 30,Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 Condensed Consolidated Statements of Operations Data: (In thousands) Revenue $ 740,176 $ 447,969 $ 1,999,095 $ 1,213,686 375,561 217,095 1,004,929 580,146 Gross profit 364,615 230,874 994,166 633,540 Operating expenses: 209,890 136,652 565,970 371,692 264,548 140,875 713,196 387,420 122,522 65,617 346,958 182,038 Total operating expenses 596,960 343,144 1,626,124 941,150 Loss from operations (232,345) (112,270) (631,958) (307,610) Other expenses, net (6,613) (3,996) (39,219) (2,099) Loss before benefit (provision) for income taxes (238,958) (116,266) (671,177) (309,709) Benefit (provision) for income taxes 14,849 (648) 12,673 (1,919) Net loss attributable to common stockholders $ (224,109) $ (116,914) $ (658,504) $ (311,628)
(1) Includes stock-based compensation expense as follows:
Ended
September 30,
Ended
September 30,Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands) Cost of revenue $ 3,720 $ 2,237 $ 9,461 $ 6,217 Research and development 69,242 46,294 185,072 119,344 Sales and marketing 53,843 26,573 143,419 69,602 General and administrative 37,238 14,306 107,414 42,659 Total $ 164,043 $ 89,410 $ 445,366 $ 237,822
(2) Includes amortization of acquired intangible assetsintangibles as follows:
Ended
September 30,
Ended
September 30,
Ended
September 30,
Ended
September 30,Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 (In thousands) Cost of revenue $ 31,558 $ 12,540 $ 84,104 $ 37,616 Research and development 462 — 840 — Sales and marketing 23,741 7,876 61,197 23,629 General and administrative — 10 125 68 Total $ 55,761 $ 20,426 $ 146,266 $ 61,313 Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 Condensed Consolidated Statements of Operations, as a percentage of revenue: ** Revenue 100 % 100 % 100 % 100 % Cost of revenue 51 48 50 48 Gross profit 49 52 50 52 Operating expenses: Research and development 28 31 28 31 Sales and marketing 36 31 36 32 General and administrative 17 15 17 15 Total operating expenses 81 77 81 78 Loss from operations (31) (25) (32) (25) Other expenses, net (1) (1) (2) * Loss before benefit (provision) for income taxes (32) (26) (34) (26) Benefit (provision) for income taxes 2 * 1 * Net loss attributable to common stockholders (30 %) (26 %) (33 %) (26 %)
* Less than 0.5% of revenue.20172021 and 2016Three Months Ended
September 30,2021 2020 Change (Dollars in thousands) Total Revenue $ 740,176 $ 447,969 $ 292,207 65 % 2017, Base Revenue2021, total revenue increased by $27.9$292.2 million, or 43%65%, compared to the same period last year, and represented 91% and 90% of total revenue in the three months ended September 30, 2017 and 2016, respectively.year. 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 offsetcustomers, the additional A2P fees imposed by pricing decreases that we have implemented over time for our customers incertain carriers and revenue contribution from the formacquisitions of lower usage prices in an effort to increase the reachTwilio Segment business, ValueFirst business and scale of our platform.Zipwhip business. The changeschange in usage and price werewas reflected in our Dollar-BasedDollar‑Based Net Expansion Rate of 122%131% for the three months ended September 30, 2017.2021. The increase in usage was also attributable to a 35%20% increase in the number of Active Customer Accounts, from 34,457over 208,000 as of September 30, 20162020, to 46,489over 250,000 as of September 30, 2017. As we previously disclosed, revenue from Uber, our largest Base Customer Account, decreased this quarter. This was 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. Accordingly, we expect the year-over-year decline in our revenue from Uber to continue to negatively impact our revenue growth rates and our Dollar-Based Net Expansion Rate for upcoming periods.2017, Variable Revenue increased by $1.12021, U.S. revenue and international revenue represented $498.0 million or 15%67%, compared to the same period last year, and represented 9% and 10%$242.2 million, or 33%, respectively, of total revenue inrevenue. In the three months ended September 30, 2017 and 2016, respectively. This increase was primarily attributable to the fluctuating nature of our Variable Customer Accounts. As these customers increase or decrease their usage of our products, Variable Revenue also varies from period to period.$76.7$328.1 million, or 76%73%, and $23.8$119.9 million, or 24%27%, respectively, of total revenue in the three months ended September 30, 2017, compared to $60.5 million, or 85%, and $11.0 million, or 15%, respectively, of total revenue in the three months ended September 30, 2016. Thisrevenue. The increase in international revenue iswas 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 41%19% increase in the number of international Active Customer Accounts excluding the recent acquisition, driven in part by our focus on expanding our sales to customers outside of the United States; and revenue contribution from our recent acquisition. We opened two offices outsideacquisitions.Three Months Ended
September 30,2021 2020 Change (Dollars in thousands) Cost of revenue $ 375,561 $ 217,095 $ 158,466 73 % Gross margin 49 % 52 % 2017,2021, cost of revenue increased by $17.0$158.5 million, or 54%73%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $14.0$130.6 million increase in network service providers’ fees,costs and a $1.2$19.0 million increase in cloud infrastructure fees to support the growth in usage of our products and a $1.6 million increase in amortization expense related toof intangible assets that we acquired through business combinations. In addition, the three month ended September 30, 2021, included cost of revenue from our internal-use software and acquired intangible assets.Operating Expenses2017, research and development expenses increased by $10.6 million, or 50%,2021, gross margin percentage declined compared to the same period last year. The increaseThis decline was primarily attributable todriven by a re-acceleration in growth of our messaging business, an $8.0 million increase in personnel costs, netamortization expense related to acquired intangible assets, the additional A2P fees imposed by certain carriers, the impact of a $2.1 millionan increasing mix of international product usage and an increase in capitalized software development costs, largely as a resultnetwork service provider fees in certain geographies. These declines were partially offset by the impact of a 44% average increase in our researchthe acquisition of the Twilio Segment business and development headcount due to our continued focus on product development and enhancement. The increase was also due in part to a $0.5 million increase in outsourced engineering services, a $0.5 million increase in cloud infrastructure fees to support the staging and development of our products, a $0.5 million increase in depreciation and amortization expenses and a $0.2 million increase in other professional fees.Three Months Ended
September 30,2021 2020 Change (Dollars in thousands) Research and development $ 209,890 $ 136,652 $ 73,238 54 % Sales and marketing 264,548 140,875 123,673 88 % General and administrative 122,522 65,617 56,905 87 % Total operating expenses $ 596,960 $ 343,144 $ 253,816 74 % 2017, sales2021, research and marketingdevelopment expenses increased by $9.9$73.2 million, or 62%54%, compared to the same period last year. The increase was primarily attributable to a $6.6$61.3 million increase in personnel costs, net of a $5.1 million increase in capitalized software development costs, largely as a result of a 73% 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 $3.3 million increase in our software subscriptions fees supporting development of our products. In addition, the three months ended September 30, 2021 included research and development expenses and the impact of growth in our headcount from our recent acquisitions.45%114% average increase in sales and marketing headcount, as we continued to expand our sales efforts in the United States and internationally, a $0.6 millionabroad. The increase in marketing and advertising costs, a $0.5 million increase in credit card processing feeswas also due to increased volume, a $0.4 million increase in depreciation and amortization, a $0.4 million increase in employee travel, a $0.3$15.9 million increase related to our brand awareness programs and eventsthe amortization of acquired intangible assets and a $0.2$7.0 million increase in professional fees.2017,2021, general and administrative expenses increased by $4.3$56.9 million, or 30%87%, compared to the same period last year. The increase was primarily attributable to a $3.8$46.8 million increase in personnel costs, largely as a result of a 28%126% average increase in general and administrative headcount, to support the growth of our business domestically and internationally. The increase was also due to a $0.5$2.6 million increase in depreciation expensecharitable contributions and a $1.0$0.9 million increase in professional services fees. These increases were partially offset by a $1.3 million decreasefees related to our acquisitions of other businesses. Further, the three months ended September 30, 2021 included general and administrative expenses and the impact of growth in sales and other taxes as we settled the outstanding liabilities in certain jurisdictions and a $0.1 million decrease in business acquisition related costs.headcount from our recent acquisitions.20172021 and 2016Nine Months Ended
September 30,2021 2020 Change (Dollars in thousands) Total Revenue $ 1,999,095 $ 1,213,686 $ 785,409 65 % 2017, Base Revenue2021, total revenue increased by $89.9$785.4 million, or 53%65%, compared to the same period last year, and represented 92% and 87% of total revenue in the nine months ended September 30, 2017 and 2016, respectively.year. 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 offsetcustomers, the additional A2P fees imposed by pricing decreases that we have implemented over time for our customers incertain carriers and revenue contribution from the form of lower usage prices in an effort to increase the reach and scaleacquisition of our platform.Twilio Segment business,ValueFirst business and Zipwhip business. The changeschange in usage and price werewas reflected in our Dollar-BasedDollar‑Based Net Expansion Rate of 131%133% for the nine months ended September 30, 2017.2021. The increase in usage was also attributable to a 35%20% increase in the number of Active Customer Accounts, from 34,457over 208,000 as of September 30, 20162020, to 46,489over 250,000 as of September 30, 2017. As we previously disclosed, revenue from Uber, our largest Base Customer Account, decreased in the period. This was 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. Accordingly, we expect the year-over-year decline in our revenue from Uber to continue to negatively impact our revenue growth rates and our Dollar-Based Net Expansion Rate for upcoming periods.2017, Variable Revenue decreased by $1.52021, U.S. revenue and international revenue represented $1,372.4 million or 6%69%, compared to the same period last year, and represented 8% and 13%$626.7 million, or 31%, respectively, of total revenue inrevenue. In the nine months ended September 30, 2017 and 2016, respectively. This decrease was primarily attributable to the fluctuating nature of our Variable Customer Accounts. As these customers increase or decrease their usage of our products, Variable Revenue also varies from period to period.$221.9$882.0 million, or 78%73%, and $61.9$331.7 million, or 22%27%, respectively, of total revenue in the nine months ended September 30, 2017, compared to $165.5 million, or 85%, and $29.9 million, or 15%, respectively, of total revenue in the nine months ended September 30, 2016. Thisrevenue. The increase in international revenue iswas 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 41%20% increase in the number of international Active Customer Accounts excluding our most recent acquisition, driven in part by our focus on expanding our sales to customers outside of the United States; and revenue contribution from our recent acquisition. We opened two offices outside of the United States between September 30, 2016 and September 30, 2017.Nine Months Ended
September 30,2021 2020 Change (Dollars in thousands) Cost of revenue $ 1,004,929 $ 580,146 $ 424,783 73 % Gross margin 50 % 52 % 2017,2021, cost of revenue increased by $41.6$424.8 million, or 48%73%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $33.1$297.3 million increase in network service providers’ fees,costs and a $3.5$35.4 million increase in cloud infrastructure fees, both to support the growth in usage of our products andproducts. The increase was also due to a $4.3$46.5 million increase in the amortization expense related toof intangible assets that we acquired through business combinations. In addition, the nine month ended September 30, 2021, included cost of revenue from our internal-use software and acquired intangible assets.Operating Expenses2017,2021, gross margin percentage declined compared to the 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 acquired intangible assets, the additional A2P fees imposed by certain carriers, the impact of an increasing mix of international product usage and an increase in network service provider fees in certain geographies. These declines were partially offset by the impact of the acquisition of the Twilio Segment business and certain operational improvements.Nine Months Ended
September 30,2021 2020 Change (Dollars in thousands) Research and development $ 565,970 $ 371,692 $ 194,278 52 % Sales and marketing 713,196 387,420 325,776 84 % General and administrative 346,958 182,038 164,920 91 % Total operating expenses $ 1,626,124 $ 941,150 $ 684,974 73 % $34.6$194.3 million, or 65%52%, compared to the same period last year. The increase was primarily attributable to a $25.6$166.8 million increase in personnel costs, net of a $5.7$12.0 million increase in capitalized software development costs, largely as a result of a 45%62% average increase in our research and development headcount, dueas we continued to our continued focus on enhancing our existing products, introducing new products as well as enhancing product developmentmanagement and enhancement. The increase was also due in part to a $1.9 million increase in cloud infrastructure fees to supportother technical functions. In addition, the stagingnine months ended September 30, 2021 included research and development expenses and the impact of growth in the headcount, from our products, a $1.7 million increase in depreciation and amortization, a $1.4 million increase related to software licenses, a $1.3 million increase in outsourced engineering services and a $0.6 million increase in other professional fees.2017,2021, sales and marketing expenses increased by $25.6$325.8 million, or 54%84%, compared to the same period last year. The increase was primarily attributable to a $17.8$229.9 million increase in personnel costs, largely as a result of a 40%100% 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 $1.5$37.6 million increase related to the amortization of acquired intangible assets and a $22.6 million increase in advertising costs, a $1.4 million increaseexpenses. In addition, the nine months ended September 30, 2021 included sales and marketing expenses and the impact of growth in credit card processing fees due to increased volume, a $0.9 million increase in depreciation and amortization, a $0.7 million increase related to software licenses, a $0.6 million increase in employee travel, a $0.6 million increase in professional fees and a $0.5 million increase related tothe headcount from our SIGNAL conference.2017,2021, general and administrative expenses increased by $4.0$164.9 million, or 11%91%, compared to the same period last year. The increase was primarily attributable to a $11.9$115.7 million increase in personnel costs, largely as a result of a 28%103% average increase in thegeneral and administrative headcount, to support the growth of our business domestically and internationally,internationally. The increase was also due to a $3.6$12.2 million increase in charitable contributions, a $6.2 million increase in professional servicesservice fees primarily related to our operations asacquisitions of other businesses and a public company and our on-going litigation matters, a $2.1$8.3 million increase in facilities and related expenses, a $0.5 million increase related to software licenses and a $0.2 million increase in business acquisition costs. These increases were partially offset by the release of $13.1 million tax liability upon certain obligation settlements and estimate revisions, discussed in detail in Note 10 (d) of the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, and a $1.7 million decrease in state and other taxes as we began collecting those in certain jurisdictions startingprofessional services fees incurred in the second quarterordinary course of 2017.To date, our$155.5$979.0 million, $1.4 billion and $64.4 million, after deducting$1.8 billion, net of underwriting discounts and offering expenses paid by us, from our initial public offeringequity offerings in June 20162019, August 2020 and our follow-on public offering in October 2016,February 2021, respectively; (ii) the net proceeds we received through private sales of equity securities, as well asapproximately $537.0 million, after deducting purchaser discounts and debt issuance costs paid by us, from the issuance of our convertible senior notes due 2023 in May 2018; (iii) the aggregate net proceeds of approximately $985.1 million, after deducting purchaser discounts and debt issuance costs paid or payable by us, from the issuance of our 2029 Notes and 2031 Notes in March 2021; 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. and cash equivalents balances, ourand marketable securities portfolio andbalances, 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 at least the next 12 months. 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 the section titledPart II, Item 1A, “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.flows for the periods indicated (in thousands):
Ended September 30,Nine Months Ended
September 30,2021 2020 (In thousands) Net cash (used in) provided by operating activities $ (19,949) $ 17,753 Net cash used in investing activities (2,451,736) (620,945) Net cash provided by financing activities 3,039,300 1,476,559 Effect of exchange rate changes on cash, cash equivalents and restricted cash (157) — Net increase in cash, cash equivalents and restricted cash $ 567,458 $ 873,367 2017,2021, cash used in operating activities consisted primarily of our net loss of $44.8$658.5 million adjusted for non-cash items, including $36.0$445.4 million of stock-based compensation expense, $13.4$189.7 million of depreciation and amortization expense, $36.2 million of non-cash reduction to our operating right-of-use asset, $24.6 million of donated common stock, $20.8 million amortization of deferred commissions, $15.6 million of tax benefit related to our Zipwhip and $12.0prior acquisitions, a $11.4 million increase in our allowance for credit losses, $5.5 million amortization of debt discount and issuance costs, and $141.8 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other current liabilities remained unchanged and deferred revenue increased $3.4 million due to increases in transaction volumes which were partially offset by the $13.1 million release of tax liability upon certain obligation settlements and estimate revisions, discussed in detail in Note 10 (d) of the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q. Accounts receivable and prepaid expenses increased $14.2$141.1 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.2016,2020, cash provided by operating activities consisted primarily of our net loss of $28.7$311.6 million adjusted for non-cash items, including $15.6$237.8 million of stock-based compensation expense, $5.3$98.1 million of depreciation and amortization expense, $27.2 million of reduction to our operating right-of-use asset, $18.4 million in amortization of debt discount and $11.0issuance costs, a $8.4 million increase in allowance for credit losses, $8.6 million of amortization of our deferred sales commissions and $86.8 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payablereceivable and other liabilitiesprepaid expenses increased $20.9 million and deferred revenue increased $3.3$67.1 million primarily due to increases in transaction volumes and additional accruals of sales and other taxes. Other long-term liabilities increased $9.6 million, primarily due to the $9.5 million increase in the deferred rent related to our new office lease in San Francisco, California. These increases were partially offset by an increase in accounts receivable and prepaid expenses of $22.8 million, which resulted from the growth of our business, the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expensesexpenses. Accounts payable and other current liabilities increased $59.7 million primarily due to increases in transaction volumes. Operating right-of-use liability decreased $25.2 million due to payments made against our operating lease obligations. Long-term assets increased $64.8 million primarily due to an $8.0 million increase in the sales commissions balances related to the tenant improvement allowance undergrowth of our new San Francisco, California office lease.2017,2021, cash used in investing activities was $235.8$2.5 billion primarily consisting of $1.9 billion purchases of marketable securities and other investments, net of maturities and sales, $490.9 million of net cash paid to acquire other businesses, $33.6 million related to purchases of long-lived assets and $35.9 million related to capitalized software development costs.$193.2$572.8 million of purchases of marketable securities net of maturities a $22.6 million payment for a business acquisition, net of cash acquired, an $12.3and sales, $26.1 million related to capitalized software development costs and a $8.6$19.3 million increase inrelated to purchases of capital assets primarily related to the leasehold improvements under our new office lease.2016, cash used in investing activities was $21.8 million, primarily consisting of a $7.4 million increase in restricted cash mainly to secure our new San Francisco, California office lease, $8.4 million of payments for capitalized software development as we continued to build new products and enhance our existing products, and a $5.3 million increase in purchases of capital assets primarily related to the leasehold improvements under our new office lease.Cash Flows from Financing ActivitiesIn the nine months ended September 30, 2017,2021, cash provided by financing activities was $29.0 million,$3.0 billion primarily consisting of $22.5$1.8 billion in net proceeds from our public equity offering, $984.7 million in net proceeds from the issuance of our 2029 Notes and 2031 Notes, as described in Note 10 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, $228.4 million in net proceeds from the settlement of the capped call transactions related to our convertible notes fully redeemed in the second quarter of 2021, and $71.6 million in proceeds from stock options exercisesexercised by our employees and $7.4 million proceeds from shares issued under our employee stock purchase plan.2016,2020, cash provided by financing activities was $160.8 million,$1.5 billion primarily consisting of $160.4$1.4 billion in net proceeds from our public equity offering, and $79.2 million of proceeds raised in our initial public offering, net of underwriting discounts, and $4.8 million of proceeds from stock options exercisesexercised by our employees.employees and shares issued under our employee stock purchase plan. These cash inflows were partially offset by $3.9$6.7 million in principal payments on our convertible notes and financing leases and $4.2 million related to the value of costs paid in connection with our initial public offering.We believe thatassumptionsadoption of our derivatives and estimates associated with revenue recognition, stock-based compensation,hedging policy in the valuationsecond quarter of goodwill and intangible assets, internal-use software development costs, accruals and legal contingencies have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.There have been no material changes to our critical accounting policies and estimates2021, as compared to the critical accounting policies and estimates disclosedfurther described in our Annual Report on Form 10-K.Recently Issued Accounting GuidanceSee Note 2 of the notes2(e) to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for a summary of recently issued and adopted accounting pronouncements.Contractual Obligations and Other CommitmentsOur principal commitments consist of obligations under our operating leases for office space and contractual commitments to our cloud infrastructure and network service providers. Therethere have been no material changes to our principle commitmentscritical accounting policies as described in our most recent Annual Report on Form 10-K.Quantitative and Qualitative Disclosures about Market Riskbusiness. These risks primarily include interest ratebusiness, including sensitivities as follows:and cash equivalents and restricted cash of $91.9 million$1.5 billion and marketable securities of $192.0 million$3.9 billion as of September 30, 2017.2021. Cash, and cash equivalents and restricted cash consist of bank deposits and money market funds. Marketable securities consist primarily of U.S. treasury 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 unaudited condensed consolidated financial statements. Therefore, we are exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars. 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 ColombianColumbian peso, the Singapore dollar,Czech Republic koruna, the Euro, the Hong Kong dollar, the Indian rupee, the Japanese yen, the Mexican Peso, the Polish Zloty, the Serbian dinar, the Singapore dollar and the Swedish Krona. krona. fiscal year. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiaries’ financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our unaudited condensed consolidated statements of operations. We do not currently engage in any hedging activityreduce our potential exposure to market risks that may result from changes in foreign currency fluctuations, althoughexchange rates, we may chooseenter into foreign currency derivative hedging transactions to do somitigate these risks. For further information, refer to Note 2(e) and Note 4 to our condensed consolidated financial statements included elsewhere in the future. this Quarterly Report on Form 10-Q.principal executive officerChief Executive Officer and principal financial officer,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 Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.suchthis evaluation, our principal executive officerChief Executive Officer and principal financial officer havePrincipal Financial Officer concluded that, as of such date,September 30, 2021, our disclosure controls and procedures were effective.Rules 13a-15(d)Rule 13a-15 (d) and 15d-15(d)15d-15 (d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Qquarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.chief executive officerChief Executive Officer and chief financial officer,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.lawsuit against us in the United States District Court, Central Districtdescription of California (“Telesign I”). Telesign alleges that we are infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (“‘920”), U.S. Patent No. 8,687,038 (“‘038”) and U.S. Patent No. 7,945,034 (“‘034”). The patent infringement allegations in the lawsuit relate to our Programmable Authentication products, our two-factor authentication use case and an API tool to find information about a phone number. We have petitioned the U.S. Patent and Trademark Office for inter partes review of the patents at issue. On July 8, 2016, the U.S. PTO denied our petition for inter partes review of the ‘920 and ‘038 patents. After the U.S. PTO held its hearing on the ‘034 patent inter partes review, on June 26, 2017, it upheld the patentability of the ‘034 patent, adopting Telesign’s narrow construction of its patent.On March 28, 2016, Telesign filed a second lawsuit against us in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 (“‘792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the U.S. PTO issued an order instituting the inter partes review for the ‘792 patent. A final written decision is expected by March 2018. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the now instituted ‘792 patent inter partes review. On May 16, 2017, the court issued an order to consolidate the Telesign I and Telesign II matters and stay the consolidated case until the completion of the inter partes review of the’792 patent. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin us from allegedly infringing the patents along with damages for lost profits.On December 1, 2016, we filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021, United States Patent No. 8,837,465, United States Patent No. 8,755,376, United States Patent No. 8,736,051, United States Patent No. 8,737,962, United States Patent No. 9,270,833, and United States Patent No. 9,226,217. 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. This litigation is currently ongoing.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 May 27, 2016, we filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Discovery has already begun and a hearing on the class certification motion is set for December 2017.We intend to vigorously defend these lawsuits and believe we have meritorious defenses to each matter 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 to the litigation discussed above, from time to time, we may be subject tocurrent material 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.the section titledPart I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. 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.is new and unproven,continues to evolve, may decline or experience limited growth and is dependent in part on developers continuing to adopt our platform and use our products.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 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.a history of losses and we are uncertain about our future profitability.We have incurred net losses in each year since our inception, including net losses of $44.8 million, $41.3 million and $35.5 million in the nine months ended September 30, 2017past relied on various transfer safeguards, including the EU-U.S. and the years ended December 31, 2016Swiss-U.S. Privacy Shield frameworks, to legitimize data transfers from the European Economic Area (“EEA”). However, on July 16, 2020, the Court of Justice of the European Union, in a decision known as “Schrems II”, invalidated the EU-U.S. Privacy Shield and 2015, respectively. We had an accumulated deficitraised questions about whether one of $231.5 millionthe primary alternatives to the EU-U.S. Privacy Shield, the European Commission's Standard Contractual Clauses, can lawfully be used for personal information transfers from Europe to the United States or most other countries. At present, there are few viable alternatives to the Standard Contractual Clauses and there is uncertainty as to how personal information can be transferred from the EEA to the U.S. in compliance with the GDPR.expend substantial financialuse our services due to the potential risk posed to such customers as a result of the Court of Justice ruling and subsequent interpretive guidance from the EDPB. We and our customers are at risk of enforcement actions taken by an EU data protection authority until such time that we are able to ensure that all data transfers to us from the EEA are legitimized. Similarly, the Swiss data protection authority determined the Swiss-U.S. Privacy Shield was no longer sufficient for the U.S. to be deemed adequate as a data transfer party and also raised questions about the viability of the Standard Contractual Clauses as a mechanism for transferring personal information out of Switzerland. Israel, which had allowed transfers of Israeli personal information to the U.S. based on the EU-U.S. Privacy Shield, has also declared that it is no longer a valid basis for transfer of personal information from Israel to the U.S.resourcescountries, if we are unable to increase those capabilities fast enough and other valid solutions for personal information transfers to the United States or other countries are not available or are difficult to implement in the interim, we will 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 transferring personal information from Europe. Inability to transfer personal information from Europe or other countries has decreased and may continue to decrease demand for our products and services if affected customers seek alternatives that do not involve such transfers.things:· investmentsthings, give California residents the ability to limit use of certain sensitive personal information, further restrict the use of cross-contextual advertising, establish restrictions on the retention of personal information, expand the types of data breaches subject to the CCPA’s private right of action, provide for increased penalties for CPRA violations concerning California residents under the age of 16, and establish a new California Privacy Protection Agency to implement and enforce the new law. In addition, both Virginia and Colorado passed new privacy legislation in the form of the Virginia Consumer Data Protection Act, effective on January 1, 2023, and the Colorado Privacy Act, effective on July 1, 2023, respectively.engineering team,compliance costs and potential liability may increase.developmentFCC, we also must comply with privacy laws associated with customer proprietary network information (“CPNI”) rules in the U.S. If we fail to maintain compliance with these requirements, we could be subject to regulatory audits, civil and criminal penalties, fines and breach of new products, features and functionality and enhancementscontract claims, as well as reputational damage, which could impact the willingness of customers to our platform;· sales and marketing, including expanding our direct sales organization and marketing programs, especially for enterprises and for organizationsdo business with us.expandingthe EU are also passing more stringent privacy, data protection and data security laws. For example, on July 8, 2019, Brazil enacted the General Data Protection Law (Lei Geral de Proteção de Dados Pessoais) (Law No. 13,709/2018) (“LGPD”), and on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal Information (“APPI”). Both laws broadly regulate the processing of personal information in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties.programs directed at increasingability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs.brand awareness among currentlegal obligations, our contractual obligations relating to privacy, data protection and new developers;·data security have become increasingly stringent due to changes in privacy, data protection and data security and the expansion of our operationsservice offerings. Certain privacy, data protection and infrastructure, both domesticallydata security laws, such as the GDPR and internationally; and· general administration, including legal, accounting and other expenses relatedthe CCPA, require our customers to being a public company.These investments may not result in increased revenue or growth of our business. 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. 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 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 total headcount has grown from 676 employeesimpose specific contractual restrictions on September 30, 2016 to 955 employees on September 30, 2017.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. therefore required to sign business associate agreements (“BAAs”) with customers that subject us to the privacy and security 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 the privacy and security of health information.international headcount grew from 103 employees as of September 30, 2016 to 202 employees as of September 30, 2017, and we established operations in two new countries within that same period. 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, For example, in order to successfully manageFebruary 2016, a putative class action complaint was filed in the Alameda County Superior Court in California and alleged that our rapid growth, our organizational structure has become more complex. In order to manage these increasing complexities, we will need to continue to scaleproducts permitted the interception, recording and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansiondisclosure of communications at certain of our systems and infrastructure will require us to commit substantial financial, operational and management resources before our revenue increases and without any assurancescustomers' request in a manner that our revenue will increase.Finally, continued growth could strain our ability to maintain reliable service levels for our customers. If we fail to achieveviolated the necessary levelCalifornia Invasion 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 quarterPrivacy Act. This litigation has settled, but actions in the pastfuture could lead to similar claims and may continue to vary significantly in the future. These fluctuations are a result of a variety of factors, many of which are outside ofinclude damages and related penalties that could divert management’s attention and resources, and harm our control, may be difficult to predict and may or may not fully reflect the underlying performance of our 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:· our ability to retain and increase revenue from existing 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 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;· change in the mix of products that our customers use;· change in the revenue mix of U.S. and international products;· changes in laws, regulations or regulatory enforcement, in the United States or internationally, that impact our ability 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 authorities in the jurisdictions in which we conduct business;· the impact of new accounting pronouncements;· expenses in connection with mergers, acquisitions 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 experienced increased expenses in the second quarter of 2017 due to our developer conference, SIGNAL, which we plan to host again 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 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 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.materially and adversely affect our business, results of operations and financial condition. For example, Uber, our largest Base Customer Account, has decreased their usage of our products throughout 2017, which will lead to decreased revenues from this customer versus recent historical periods. Customers are charged based on the usage of our products. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our products at any time without penalty or termination charges. Customers may terminate or reduce their use of our products for any number of reasons, including if they are not satisfied with our products, the value proposition of our products or our ability to meet their needs and expectations, or due to the introduction of new competing products by competitors. 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. To protect our system from similar disruptions in the near term, we have significantly increased our server capacity and added additional caching layers to accommodate usage spikes. We also intend to undertake longer term improvements to mitigate against future service disruptions, but there can be no guarantee that these actions or improvements will be effective in preventing or reducing such service disruptions.condition. Reductions in usage from existing customerscondition and the loss of customers couldmay cause our Dollar-Based Net Expansion Rate to decline in the future if customers are not satisfied with our products, the value proposition of our products or our ability to otherwise meet their needs and expectations. If a significant number of customers cease using, or reduce their usage of our products, then we may be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase revenue from customers. Such additional sales and marketing expenditures could adversely affect our business, results of operations and financial condition.cost-effectivecost‑effective manner, then our business, results of operations and financial condition would be adversely affected.assure youguarantee that any such investments will lead to the cost-effective acquisition of additional customers. If we are unable to maintain effective marketing programs, then our ability to attract new customers could be materially and adversely affected, our advertising and marketing expenses could increase substantially, and our results of operations may suffer.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, we expect to incur higher costs and longer sales cycles. In this 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 limited 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 Solution Partner customers and add new Solution 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 Solution Partner customers. Solution 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 our network of Solution Partner customers.As part of our growth strategy, we intend to expand our relationships with existing Solution Partner customers and add new Solution Partner customers. If we fail to expand our relationships with existing Solution Partner customers or establish relationships with new Solution 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, or AWS, which hosts our products and platform. Customers of our products 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 from time to time 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, 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 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. 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 the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015, we derived 22%, 16% and 14% 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 September 30, 2016 and September 30, 2017, our international headcount grew from 103 employees to 202 employees, and we opened two new offices outside of the United States. We expect, in the future, 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 as well as 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:· exposure to political developments in the United Kingdom (U.K.), including the outcome of the U.K. referendum on membership in the European Union (EU), which has created an uncertain political and economic environment, instability for businesses and volatility in global financial markets;· the difficulty of managing and staffing international operations and the increased operations, travel, infrastructure and legal compliance costs associated with numerous international locations;· our ability to effectively price our products in competitive international markets;· new and different sources of competition;· 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 foreign jurisdictions;· difficulties with differing technical and environmental standards, data privacy and telecommunications regulations and certification requirements outside the United States, which could prevent customers from deploying our products or limit their usage;· export controls and economic sanctions administered by the Department of Commerce 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;· tariffs and other non-tariff barriers, such as quotas and local content rules;· 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; 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 that are generally 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 the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015, our 10 largest Active Customer Accounts generated an aggregate of 20%, 30% and 32% of our revenue, respectively. In addition, a significant portion of our revenue comes from two customers, one of which is a Variable Customer Account.In the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015, WhatsApp, a Variable Customer Account, accounted for 5%, 9% and 17% 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 nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015, a second customer, Uber, a Base Customer Account, accounted for 9%, 14% and 9% of our revenue, respectively. Uber uses our Programmable Messaging products and Programmable Voice products. Although Uber has entered into a minimum commitment contract with us, its usage historically has significantly exceeded the minimum revenue commitment in its contract, and it could significantly reduce its usage of our products without notice or penalty. As we previously disclosed, Uber decreased their usage of our products throughout 2017 and may continue to do so in the future.In the event that 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.·on-premise vendors, such as Avaya and Cisco;·on-premises vendors;·· SaaSfor a narrow setand platforms.more easily replace our products more easily with competitive offerings. Our customers also may alsochoose to build some of the functionality our products provide themselves,or establish direct connectivity with network service providers, which may limit or eliminate their demand for our products.competition.competition and, in some cases, may find our products in competition with those of our customers, which could cause them to replace our products with competitive offerings. If one or more of our competitors were to merge or partner with another of our competitors or our suppliers, the change in the competitive landscape could also adversely affect our ability to compete effectively. For example, certain of our competitors have engaged in acquisition activity in 2021 and may continue to do so in the future.In addition, some of our competitors have lower list prices than us, which may be attractive to certain customers even if those products have different or lesser functionality. If we are unable to maintain our current pricing due to the competitive pressures, our margins will be reduced and our business, results of operations and financial condition would be adversely affected. In addition, pricing pressures and increased competition generally could result in reduced revenue, reduced margins, increased losses or the failure of our products to achieve or maintain widespread market acceptance, any of which could harm our business, results of operations and financial condition.operating history,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 makes it difficult to evaluatecould have an adverse impact on our current business and future prospects and increases the risk of your investment.We were founded and launched 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.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.experience with respectsoftware development expertise to determining the optimal prices forbuild our products.We charge our customers based onplatform into their usesoftware applications.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 which may be outside of our control and difficult to predict. This can result in our incurring increased costs which 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.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 infrastructure is outside our control and, therefore, we are not in full control of whether we meet the service level commitments. As a result,could adversely affect our business, results of operations and financial conditioncondition.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 network service providers, could degrade our ability to conduct our business, compromise the integrity of our products and platform, 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 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 services providers, such as AWS or network 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 and those of AWS and our network service providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks) and 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.Defectserrors 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.liability.Our customers usedrive the adoption of our products for important aspectsby international customers.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 experience in selling our products and any other performance problems withoutside of the United States is limited. Furthermore, our products could damage our customers’ businesses and, in turn, hurt our brand and reputation. 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 in order to help correct the problem. In addition, wedeveloper-first business model may not carry insurance sufficient to compensate us for any losses that may result from claims arising from defectsbe successful or disruptions in our products.have the 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. also 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, messages or emails. 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 mayrely 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 and our processes for managing our sales process and supportingdue to a number of potential causes, including technical failures, natural disasters, pandemics such as COVID-19, 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 could be impaired until equivalent services,to use several of our products and from time to time since then, we have experienced some outages which resulted in disruptions to service for some of our customers. In addition, if available,our security, or that of AWS, is compromised, or our products or platform are identified, obtained and implemented, all of which could adversely affectunavailable or our business, results of operations and financial condition.If weusers are unable to develop and maintain successful relationships with independent software vendors and system integrators,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.independent software vendor (ISV) development platforms and system integrators.consulting partners. As part of our growth strategy, we plan to further develop product partnerships with ISV development platforms to embed our products as additional distribution channels and also intend to further develop partnerships and specific solution areas with systems integrators.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 enterprises are not willing to purchase through ISV development platforms,consulting partners, our reputation and ability to grow our business may also be adversely affected.high-qualityhigh 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.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-qualityhigh quality customer support, or a market perception that we do not maintain high-qualityhigh quality customer support, could erode customer trust and adversely affect our reputation, business, results of operations and financial condition.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, on April 30, 2015, Telesign Corporation or Telesign, filed a lawsuit against(“Telesign”) sued us in the United States District Court, Central District of California (Telesign I). Telesign alleges2015 and 2016 alleging that we are infringing threeinfringed four U.S. patents that it holds: U.S. Patent No. 8,462,920 (“‘920”), U.S. Patent No. 8,687,038 (“‘038”) and U.S. Patent No. 7,945,034 (“‘034”).patents. The patent infringement allegations in the lawsuit relatelawsuits related to our Programmable Authentication products, our two-factortwo‑factor authentication use case,Authy, and an API tool to find information about a phone number. Subsequently, on March 28, 2016, Telesign filedOn October 19, 2018, a second lawsuit against us in the United States District Court Centralin the Northern District of California (Telesign II), alleging infringement of U.S. Patent No. 9,300,792 (“‘792”) held by Telesign. The ‘792 patent isentered judgment in the same patent family as the ‘920 and ‘038 patentsour favor on all asserted in Telesign I, and the infringement allegations in Telesign II relate to our Programmable Authentication products and our two-factor authentication use case. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin us from allegedly infringing these patents along with damages for lost profits. See the section titled “Item 3. Legal Proceedings.”claims, which was affirmed on appeal. We intend to vigorously defend these lawsuits and believe we have meritorious defenses to each matter in which we are a defendant. However, litigation is inherently uncertain, and any judgment or injunctive relief enteredourselves 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.such lawsuits. During the course of these lawsuits, there may be announcements of the results of hearings and motions 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.receive claims from third parties, including our competitors, that ouralso introduce or acquire new products or platform and underlying technology infringe or violate a third party’stechnologies, including in areas where we historically have not participated in, which could increase our exposure to 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.claims. 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 products or platform, which could further exhaust our resources. EvenLitigation 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 to our brand, business, results of operations and financial condition. normally 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, reduce demand for our products and adversely affect our business, results of operations and financial condition.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 September 30, 2017, we had 13 registered trademarks in the United States and 61 registered trademarks in foreign jurisdictions. In addition, as of September 30, 2017,December 31, 2020, in the United States, we had been issued 74157 patents, which expire between 2029 and 2036, and we had 40 patent applications pending for examination and two pending provisional applications.2039. As of such date, we also had seven33 issued patents and seven patent applications pending for examination 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, 2020, we had 41 registered trademarks in the United States and 257 registered trademarks in non-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.trademarkpatent applications and patenttrademark 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 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’s own 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.time-consumingtime‑consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.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 may also disrupt our business, divert our resources and 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; and· 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. The replacement of any 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 our senior management or other key employees for any reason could adversely affect our business, results of operations and financial condition.Our management team has limited experience managing a public company.Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage us as a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which 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 amount 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 data or other similar data. 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. New laws, amendments to or re-interpretations of existing laws and regulations, rules of self-regulatory bodies, industry standards and contractual obligations may impact our business and practices, and we may be required to expend significant resources to adapt to these changes, or stop offering our products in certain countries. These developments could adversely affect our business, results of operations and financial condition.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 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 personally identifiable 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. In particular, on April 27, 2016 the European Union adopted the General Data Protection Regulation 2016/679 (GDPR) that will take full effect on May 25, 2018. The GDPR will repeal and replace the EU Data Protection Directive 95/46/EC and it will be directly applicable across EU member states. The GDPR applies to any company established in the EU as well as to those outside the EU if they collect and use personal data through the provision of goods or services to individuals in the EU or monitoring their behavior (for example, through online tracking). The GDPR enhances data protection obligations for businesses and provides direct legal obligations for service providers (data processors) processing personal data on behalf of customers, including with respect to cooperation with European data protection authorities, implementation of security measures and keeping records of personal data processing activities. Noncompliance with the GDPR can trigger steep fines of up to €20 million or 4% of global annual revenues, whichever is higher. Given the breadth and depth of changes in data protection obligations, preparing to meet the GDPR’s requirements before its application on May 25, 2018 requires time, resources and a review of the technology and systems currently in use against the GDPR’s requirements. We are taking steps to prepare for complying with the GDPR requirements, including integrating GDPR-compliant privacy protections into our products and services, commercial agreements and record-keeping practices to help us and our customers meet compliance GDPR obligations. Additional EU laws and regulations (and member states implementations thereof) further govern the protection of consumers and of electronic communications. 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. In addition, we 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 also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data.We have in the past relied on adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.—EU and U.S.—Swiss Safe Harbor Frameworks as agreed to and set forth by the U.S. Department of Commerce, and the European Union and Switzerland. As a result of the October 6, 2015 European Union Court of Justice, or ECJ, decision in Case C-362/14 (Schrems v. Data Protection Commissioner) regarding the adequacy of the U.S.—EU Safe Harbor Framework, the U.S.—EU Safe Harbor Framework is no longer deemed to be a valid method of compliance with restrictions set forth in the EU Data Protection Directive 95/46/EC (and member states’ implementations thereof) regarding the transfer of personal data outside of the European Economic Area. On July 12, 2016, the European Commission adopted the EU-U.S. Privacy Shield Framework to replace the Safe Harbor Framework and on January 12, 2017, the Swiss Government announced the approval of the Swiss-U.S. Privacy Shield Framework to replace the U.S.-Swiss Safe Harbor Framework. We self-certified to the EU-U.S. and Swiss-U.S. Privacy Shield Frameworks which ensure that we are implementing adequate privacy protections for EU personal data transferred to the U.S. The Privacy Shield Framework continues to face criticism from privacy advocates (which believe that it does not ensure adequate protections for personal data transferred to the US) and is subject to pending legal challenges in the General Court of the ECJ. Likewise, another transfer mechanism provided by the EU data protection legislation — the standard contractual clauses approved by the European Commission — is subject to a pending litigation before the Irish High Court (on grounds similar to those that led to the invalidation of the Safe Harbor framework), which recently referred questions on the validity of such clauses to the ECJ. In light of the above and the uncertainties surrounding mechanisms for data transfers, we anticipate engaging in efforts to legitimize data transfers from the European Economic Area. We may be unsuccessful in establishing legitimate means of transferring data from the European Economic Area, we may 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 the ECJ ruling, and we and our customers are at risk of enforcement actions taken by an EU data protection authority until such point in time that we 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.With respect to all of the foregoing, any failure or perceived failure by us, our products or our platform to comply with U.S., EU or other foreign privacy or data security laws, 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 or adverse publicity. For example, on February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California. The complaint alleges 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. The complaint seeks injunctive relief as well as monetary damages. We intend to vigorously defend this lawsuit and believe we have meritorious defenses; however, this litigation, 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.We expect that there will continue to be new proposed laws, 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, regulations and standards may have on our business. 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.Any such new laws, regulations, other legal obligations or industry standards, or any changed interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations. If our privacy or data security measures fail to comply with current or future laws, regulations, policies, legal obligations or industry standards, we may be subject to litigation, regulatory investigations, fines or other liabilities, as well as negative publicity and a potential loss of business.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, the 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. 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 acceptance as a business tool has been adversely affected by “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 aretelecommunications-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 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.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, or TCPA, 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, or 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 efforts to eliminate or modify Section 230 of the Communications Decency Act 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.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.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.over 180 countries.Our international operations are subject to country-specific governmental regulation and related actions that have increasedthe past interfered with, and may in the future interfere with, the effectiveness of our platform and our ability to conduct business.increase our costsbe, listed with one or impact our products and platform or prevent us from offering or providing our products in certain countries. Certainmore denylisting entities due to the messaging practices of our productscustomers and other users. We may be used byat an increased risk of having our IP addresses denylisted due to our scale and volume of email processed, compared to our smaller competitors. While the overall percentage of such email solicitations that our individual customers located in countries where voice and other forms of IP communicationssend may be illegalat or require special licensing or in countriesbelow reasonable standards, the total aggregate number of all emails that we process on a U.S. embargo list. Even wherebehalf of our products are reportedly illegal or become illegal or where users are located in an embargoed country, users in those countriescustomers may trigger increased scrutiny from these denylisting entities. There can be no guarantee that we will be able to continue to usesuccessfully remove ourselves from those lists. Because we fulfill email delivery on behalf of our products in those countries notwithstandingcustomers, denylisting of this type could undermine the illegality or embargo. We may be subject to penalties or governmental action if consumers continue to useeffectiveness of our products in countries where it is illegal to do so,customers’ transactional email, email marketing programs and any such penalties or governmental action may be costly and may harmother email communications, all of which could have a material negative impact on 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 businessfinancial condition and results of operations may be adversely affected.We support local numberoperations.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 customer of our voice products must maintain both our voice product 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 networkwork closely with inbox service providers to transfer these numbers, a process that we do not control, and these networkmaintain our deliverability rates, the implementation of new or more restrictive policies by inbox service providers may refusemake it more difficult to deliver our customers’ emails, particularly if we are not given adequate notice of a change in policy or substantially delaystruggle to update our platform or services to comply with the transferchanged policy in a reasonable amount of these numberstime. In addition, some inbox service providers categorize as “promotional” emails that originate from email service providers and, as a result, direct them to us. Local number portability is considered an important feature by many potential customers, andalternate or “tabbed” section of the recipient’s inbox. If inbox service providers materially limit or halt the delivery of our customers’ emails, or if we fail to reduce any related delays, then we may experience increased difficultydeliver our customers’ emails 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,a manner compatible with inbox service providers’ email handling or DIDs, inauthentication technologies or other policies, or if the United States and foreign countries at a reasonable cost and without restrictions. Our ability to procure, distribute and retain DIDs depends on factors outsideopen rates of our control, such as applicable regulations,customers’ emails are negatively impacted by the practicesactions of networkinbox service providers that provide DIDs, such as offering DIDs with conditional minimum volume call level requirements,to categorize emails, then customers may question the costeffectiveness of these DIDsour platform and the level of overall competitive demand for new DIDs. Due tocancel their limited availability, there are certain popular area code prefixes that we generally cannot obtain. Our inability to acquire or retain DIDs for our operations would make our voice and messaging products less attractive to potential customersaccounts. This, 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 increasingly difficult to source larger quantities of DIDs as we scale and we may need to pay higher costs for DIDs, and DIDs may become subject to more stringent usage conditions. Any of the foregoingturn, could adversely affectharm our business, financial condition and results of 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.Text messages may subject us to potential risks,liability under trade protection, anti-corruption, and other laws and regulations, including liabilities or claims relating to consumer protection laws. For example, the Telephone Consumer Protection Act of 1991 restricts telemarketinglegal liability and the use of automatic SMS text messages without proper consent. This has resulted in civil claims against the 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 are continuously evolving and developing. If we do not comply with these laws or regulations orreputational damage if we become liable under these lawsviolate applicable U.S. economic trade sanctions 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 regulations, 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.Variousviolations.export controlthese types of laws and economic sanctions 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’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.globally-distributedglobally‑distributed systems or, in some cases, prevent the export of our products or provision of our services to some countries altogether.arms-lengtharms‑length pricing standards for our intercompany transactions and our state sales and useindirect tax positions. In determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service or 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 statesjurisdictions regarding potential sales and other indirect taxes for prior state sales taxesperiods that we may owe. We have reserved $19.4$27.9 million and $15.3 million, for domestic jurisdictions and jurisdictions outside of the U.S. respectively,on our September 30, 20172021 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 statesany jurisdiction exceed the accrual in our balance sheet, our results of operations would be harmed.historichistorical and future sales, useindirect and similar taxes, which could adversely affect our results of operations.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. Historically, we have not billed or collected these taxes in certain jurisdictions and, in accordance with generally accepted accounting principles in the United States or (“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. 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 state tax authorities in various jurisdictions and may have additional exposure related to our historichistorical operations. Furthermore, certain jurisdictions in which we do not collect such taxes have in the past and may in the future 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 affect our business, the prices at which we are able to offer our services, our results of operations and financial condition.telecommunications-basedcertain telecommunications‑based taxes from our customers in certain jurisdictions. WeSince then, we have added more jurisdictions where we collect these taxes and we expect to begin collecting suchcontinue expanding the number of jurisdictions in which we will collect these taxes in the future. We are also in discussions with certain jurisdictions regarding our potential sales and other taxes for prior periods that we may owe.in other jurisdictions. We may have some customers that 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.one-timeone‑time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.Co-operationCo‑operation and Development 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. 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.ChangesU.S. taxationcountries in which we do business or require us to change the manner in which 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.subscriptionsservices with stolen credit cards, we could incur substantial third-partythird‑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 subscription.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.able to eliminatesuccessful in eliminating all spam messages from being sent using our platform. In addition, a cybersecurity breach of our customers’ systems could result in exposure of their 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.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 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.transacted with customersalso conducted business in Japan in Japanese Yen and in Europe in Euros and Swedish Kronas, andcurrencies 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. 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 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.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.2016,2020, we had federal, state and stateforeign net operating loss carryforwards or NOLs,(“NOLs”), of $104.0$2.7 billion, $1.8 billion and $27.9 million, respectively. In the years ended December 31, 2020 and 2019, as a result of our Segment and SendGrid acquisitions, respectively, we assumed a $22.3 million and $88.7$56.2 million, respectively, duedeferred tax liability, as described in Note 6 to prior period losses.our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on February 26, 2021. In general, under Section 382 of the Internal Revenue Code of 1986, as amended or the Code,(the “Code”), a corporation that undergoes an “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-changepre‑change NOLs to offset post-changepost‑change taxable income. Our existing NOLs 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. There isa risk that due to regulatory changes, such as suspensionsimposes an 80% limitation on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwisenet operating losses that are generated in tax years beginning after December 31, 2017. Net operating losses generated in tax years beginning prior to December 31, 2017 still have a 20‑year carryforward period and are not subject to 80% limitation. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) enacted on March 27, 2020 permits a full five-year carryback of net operating losses arising in tax years beginning after December 31, 2017 and before January 1, 2021. In addition, at the state level, there may be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit fromperiods during which the use of our NOLs, even ifnet operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. These provisions do not impact us since we attain profitability.the section titledPart I, Item 2, “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. Significant assumptionsAssumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition capitalized internal-use software costs, other non-income taxes,and business combination and valuation of goodwill and purchased intangible assets and stock-based compensation.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.subjectrequired to themaintain internal control over financial reporting requirementsand to report any material weaknesses in such internal control. Section 404 of the Exchange Act, the Sarbanes-OxleySarbanes‑Oxley Act of 2002 or the Sarbanes-Oxley Act, and the rules and regulations of the applicable listing standards of the New York Stock Exchange. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources.The Sarbanes-Oxley Act(the "Sarbanes‑Oxley Act") requires among other things, that we maintain effective disclosure controlsevaluate and proceduresdetermine the effectiveness of our internal control over financial reporting and provide a management report on internal control over financial reporting. Our disclosure controls and other procedures are designed to ensure that information required to be disclosed by usA material weakness is a deficiency, or combination of deficiencies, in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers, and we continue to evaluate how to improve controls. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipatesuch that wethere is a reasonable possibility that a material misstatement of our financial statements will continue to expend, significant resources, including accounting-related costs and significant management oversight.will eventually beare 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, which would likelyand could have a negativematerial 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. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we are required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second Annual Report on Form 10-K.Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting 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.2017,2021, we carried a net $36.7 million$6.4 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.We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act, and take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for so long as we are an “emerging growth company.” We will cease to be an “emerging growth company,” as defined in the JOBS Act, at the end of this fiscal year. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and the trading price of our Class A common stock may be more volatile.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 a 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 network service providers or Internet 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 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 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.October 31, 2017,September 30, 2021, the trading price of our Class A common stock has ranged from $22.80 per share to $70.96$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:··············· new laws or regulations or new interpretations of existing laws or regulations applicable to our business;···issuance. Certain holders of our Class A common stock have rights,issuance, 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.significant stockholders and their respective affiliates who held in the aggregate 56.1% of the voting power of our capital stock as of September 30, 2017.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.2017,2021, our directors, executive officers and holders of more than 5% of our common stock, and their respective affiliates, holdheld in the aggregate 56.1%21.6% 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 22,28, 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.Anti-takeover····three-yearthree‑year terms;·· and·meetings.two-thirdstwo‑thirds of our outstanding common stock not held by such 15% or greater stockholder.credit facility contains restrictionsrevenue 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, 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. Additionally, we generate a portion our revenue from small and medium-sized businesses, which 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.pay dividends.retain existing users and attract new users.Use of Proceeds from Public Offering of Class A Common StockIn June 2016, we closed our initial public offering (“IPO”), in which we sold 11,500,000 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 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-1 (File No. 333-214034), which was declared effective by the SEC on October 20, 2016. We raised $64.4 million 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, 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 follow-on offering were Goldman, Sachs & Co. and J.P. Morgan Securities LLC.EXHIBIT INDEXExhibitNumberDescriptionFiling DateExhibit
NumberIncorporated by Reference 31.1Description Form File No. Exhibit Filing Date 31.1 Filed herewith Filed herewith Furnished herewith Document.Filed herewith Document.Filed herewith Document.Filed herewith Document.Filed herewith Document.Filed herewith Document.Filed herewith 104 Cover Page with Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)
+ Schedules (or similar attachments) have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and other similar attachments upon request by the SEC.Twilio Inc.Twilio Inc. Date: November 13, 2017/s/ JEFFREY LAWSONOctober 28, 2021 Jeffrey Lawson(Principal Executive Officer)October 28, 2021 /s/ KHOZEMA Z. SHIPCHANDLER Date: November 13, 2017/s/ LEE KIRKPATRICKLee KirkpatrickChief Financial Officer(Principal Accounting and Financial Officer)