Usetheselinkstorapidlyreviewthedocument
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INDEXTOCONSOLIDATEDFINANCIALSTATEMENTS
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AsfiledwiththeSecuritiesandExchangeCommissiononMay26,2016
RegistrationNo.333-
UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
FORMS-1
REGISTRATIONSTATEMENT
UNDER
THESECURITIESACTOF1933
TwilioInc.
(ExactnameofRegistrantasspecifiedinitscharter)
Delaware
(Stateorotherjurisdictionof
incorporationororganization)
7372
(PrimaryStandardIndustrial
ClassificationCodeNumber)
26-2574840
(I.R.S.Employer
IdentificationNumber)
645HarrisonStreet,ThirdFloor
SanFrancisco,California94107
(415)390-2337
(Address,includingzipcode,andtelephonenumber,including
areacode,ofRegistrant'sprincipalexecutiveoffices)
JeffLawson
ChiefExecutiveOfficer
TwilioInc.
645HarrisonStreet,ThirdFloor
SanFrancisco,California94107
(415)390-2337
(Name,address,includingzipcode,andtelephonenumber,including
areacode,ofagentforservice)
Copiesto:
AnthonyJ.McCusker,Esq.
RezwanD.Pavri,Esq.
GoodwinProcterLLP
135CommonwealthDrive
MenloPark,California94025
(650)752-3100
KarynSmith,Esq.
TwilioInc.
645HarrisonStreet,ThirdFloorSanFrancisco,California94107
(415)390-2337
ChristopherL.Kaufman,Esq.
TadJ.Freese,Esq.
Latham&WatkinsLLP
140ScottDrive
MenloPark,CA94025
(650)328-4600
Approximatedateofcommencementofproposedsaletothepublic:
Assoonaspracticableafterthisregistrationstatementbecomeseffective.
IfanyofthesecuritiesbeingregisteredonthisFormaretobeofferedonadelayedorcontinuousbasispursuanttoRule415undertheSecuritiesAct,checkthefollowingbox:
o
IfthisFormisfiledtoregisteradditionalsecuritiesforanofferingpursuanttoRule462(b)undertheSecuritiesAct,pleasecheckthefollowingboxandlisttheSecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering.
o
IfthisFormisapost-effectiveamendmentfiledpursuanttoRule462(c)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering.
o
IfthisFormisapost-effectiveamendmentfiledpursuanttoRule462(d)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering.
o
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof"largeacceleratedfiler","acceleratedfiler"and"smallerreportingcompany"inRule12b-2oftheExchangeAct.(Checkone):
CALCULATIONOFREGISTRATIONFEE
TitleofEachClassofSecurities
tobeRegistered
ProposedMaximum
AggregateOffering
Price
Amountof
RegistrationFee
ClassAcommonstock,$0.001parvaluepershare $100,000,000 $10,070
EstimatedsolelyforthepurposeofcomputingtheamountoftheregistrationfeepursuanttoRule457(o)undertheSecuritiesActof1933,asamended.
IncludestheadditionalsharesthattheunderwritershavetheoptiontopurchasefromtheRegistrant,ifany.
TheRegistrantherebyamendsthisregistrationstatementonsuchdateordatesasmaybenecessarytodelayitseffectivedateuntiltheRegistrantshallfileafurtheramendmentwhichspecifically
Largeacceleratedfiler
o Acceleratedfiler
o Non-acceleratedfiler
ý
(Donotcheckifasmaller
reportingcompany)
Smallerreportingcompany
o
(1)(2) (2)
(1)
(2)
statesthatthisregistrationstatementshallthereafterbecomeeffectiveinaccordancewithSection8(a)oftheSecuritiesActof1933oruntiltheregistrationstatementshallbecomeeffectiveonsuchdateastheSecuritiesandExchangeCommission,actingpursuanttosaidSection8(a),maydetermine.
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Theinformationinthispreliminaryprospectusisnotcompleteandmaybechanged.ThesesecuritiesmaynotbesolduntiltheregistrationstatementfiledwiththeSecuritiesandExchangeCommissioniseffective.Thispreliminaryprospectusisnotanoffertosellnordoesitseekanoffertobuythesesecuritiesinanyjurisdictionwheretheofferorsaleisnotpermitted.
SubjectToCompletion.Dated
.
Shares
TwilioInc.ClassACommonStock
ThisisaninitialpublicofferingofsharesofClassAcommonstockofTwilioInc.
Priortothisoffering,therehasbeennopublicmarketforthecommonstock.Itiscurrentlyestimatedthattheinitialpublicofferingpricepersharewillbebetween$
and$
.WeintendtolisttheClassAcommonstockontheNewYorkStockExchangeunderthesymbol"TWLO".
Wehavetwoclassesofcommonstock,ClassAcommonstockandClassBcommonstock.TherightsoftheholdersofClassAcommonstockandClassBcommonstockareidentical,exceptvotingandconversionrights.EachshareofClassAcommonstockisentitledtoonevote.EachshareofClassBcommonstockisentitledto10votesandisconvertibleatanytimeintooneshareofClassAcommonstock.TheholdersofouroutstandingClassBcommonstockwillholdapproximately
%ofthevotingpowerofouroutstandingcapitalstockfollowingthisoffering,withourdirectorsandexecutiveofficersandtheiraffiliatesholdingapproximately
%.
Wearean"emerginggrowthcompany"asdefinedunderthefederalsecuritieslawsand,assuch,wehaveelectedtocomplywithreducedreportingrequirementsforthisprospectusandmayelecttodosoinfuturefilings.
See "Risk Factors" beginning on page 16 to read about factors you should consider before buying shares of the Class A common stock.
NeithertheSecuritiesandExchangeCommissionnoranyotherregulatorybodyhasapprovedordisapprovedofthesesecuritiesorpassedupontheaccuracyoradequacyofthisprospectus.Anyrepresentationtothecontraryisacriminaloffense.
Totheextentthattheunderwriterssellmorethan
sharesofClassAcommonstock,theunderwritershavetheoptiontopurchaseuptoanadditional
sharesfromTwilioattheinitialpublicofferingpricelesstheunderwritingdiscount.
TheunderwritersexpecttodeliverthesharesagainstpaymentinNewYork,NewYorkon
.
Prospectusdated
.
PerShare Total
Initialpublicofferingprice $
$
Underwritingdiscount(1) $
$
Proceeds,beforeexpenses,toTwilio $
$
Seethesectiontitled"Underwriting"foradditionalinformationregardingcompensationpayabletotheunderwriters.(1)
Goldman,Sachs&Co. J.P.Morgan
Allen&CompanyLLC PacificCrestSecurities
adivisionofKeyBancCapitalMarkets
JMPSecurities WilliamBlair CanaccordGenuity
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Prospectus
Throughandincluding
(the25thdayafterthedateofthisprospectus),alldealerseffectingtransactionsinthesesecurities,whetherornotparticipatinginthisoffering,mayberequiredtodeliveraprospectus.Thisisinadditiontoadealer'sobligationtodeliveraprospectuswhenactingasanunderwriterandwithrespecttoanunsoldallotmentorsubscription.
Wehavenotauthorizedanyonetoprovideanyinformationortomakeanyrepresentationsotherthanthosecontainedinthisprospectusorinanyfreewritingprospectuseswehaveprepared.Weandtheunderwriterstakenoresponsibilityfor,andcanprovidenoassuranceastothereliabilityof,anyotherinformationthatothersmaygiveyou.Weareofferingtosell,andseekingofferstobuy,sharesofClassAcommonstockonlyinjurisdictionswhereoffersandsalesarepermitted.Theinformationcontainedinthisprospectusisaccurateonlyasofthedateofthisprospectus,regardlessofthetimeofdeliveryofthisprospectusorofanysaleoftheClassAcommonstock.
ForinvestorsoutsidetheUnitedStates:Neitherwenoranyoftheunderwritershavedoneanythingthatwouldpermitthisofferingorpossessionordistributionofthisprospectusinanyjurisdictionwhereactionforthatpurposeisrequired,otherthanintheUnitedStates.PersonsoutsideoftheUnitedStateswhocomeintopossessionofthisprospectusmustinformthemselvesabout,andobserveanyrestrictionsrelatingto,theofferingofthesharesofClassAcommonstockandthedistributionofthisprospectusoutsideoftheUnitedStates.
i
PagePROSPECTUSSUMMARY 1RISKFACTORS 16SPECIALNOTEREGARDINGFORWARD-LOOKINGSTATEMENTS 51INDUSTRYANDMARKETDATA 53USEOFPROCEEDS 54DIVIDENDPOLICY 55CAPITALIZATION 56DILUTION 59SELECTEDCONSOLIDATEDFINANCIALANDOTHERDATA 62MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS 65LETTERFROMJEFFLAWSON,CO-FOUNDER,CHIEFEXECUTIVEOFFICERANDCHAIRMAN 95BUSINESS 98MANAGEMENT 118EXECUTIVECOMPENSATION 126CERTAINRELATIONSHIPSANDRELATEDPARTYTRANSACTIONS 137PRINCIPALSTOCKHOLDERS 142DESCRIPTIONOFCAPITALSTOCK 145SHARESELIGIBLEFORFUTURESALE 151MATERIALU.S.FEDERALINCOMETAXCONSEQUENCESTONON-U.S.HOLDERSOFOURCLASSACOMMONSTOCK 154UNDERWRITING 159LEGALMATTERS 164EXPERTS 164WHEREYOUCANFINDADDITIONALINFORMATION 164INDEXTOCONSOLIDATEDFINANCIALSTATEMENTS F-1
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PROSPECTUSSUMMARY
This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you shouldconsider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled "Risk Factors" and "Management's Discussionand Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus, before makingan investment decision. Unless the context otherwise requires, the terms "Twilio," "the company," "we," "us" and "our" in this prospectus refer to Twilio Inc. and its consolidatedsubsidiaries.
TWILIOINC.
Overview
Softwaredevelopersarereinventingnearlyeveryaspectofbusinesstoday.Yetasdevelopers,werepeatedlyencounteredanareawherewecouldnotinnovate—communications.Becausecommunicationisafundamentalhumanactivityandvitaltobuildinggreatbusinesses,wewantedtoincorporatecommunicationsintooursoftwareapplications,butthebarrierstoinnovationweretoohigh.Twiliowasstartedtosolvethisproblem.
Webelievethefutureofcommunicationswillbewritteninsoftware,bythedevelopersoftheworld—ourcustomers.Byempoweringthem,ourmissionistofuelthefutureofcommunications.
Cloudplatformsareanewcategoryofsoftwarethatenabledeveloperstobuildandmanageapplicationswithoutthecomplexityofcreatingandmaintainingtheunderlyinginfrastructure.Theseplatformshavearisentoenableafastpaceofinnovationacrossarangeofcategories,suchascomputingandstorage.WearetheleaderintheCloudCommunicationsPlatformcategory.Weenabledeveloperstobuild,scaleandoperatereal-timecommunicationswithinsoftwareapplications.
Ourdeveloper-firstplatformapproachconsistsofthreethings:ourProgrammableCommunicationsCloud,SuperNetworkandBusinessModelforInnovators.OurProgrammableCommunicationsCloudsoftwareenablesdeveloperstoembedvoice,messaging,videoandauthenticationcapabilitiesintotheirapplicationsviaoursimple-to-useApplicationProgrammingInterfaces,orAPIs.Wedonotaimtoprovidecompletebusinesssolutions,ratherourProgrammableCommunicationsCloudoffersflexiblebuildingblocksthatenableourcustomerstobuildwhattheyneed.TheSuperNetworkisoursoftwarelayerthatallowsourcustomers'softwaretocommunicatewithconnecteddevicesglobally.Itinterconnectswithcommunicationsnetworksaroundtheworldandcontinuallyanalyzesdatatooptimizethequalityandcostofcommunicationsthatflowthroughourplatform.OurBusinessModelforInnovatorsempowersdevelopersbyreducingfrictionandupfrontcosts,encouragingexperimentationandenablingdeveloperstogrowascustomersastheirideassucceed.
Wehadover28,000ActiveCustomerAccountsasofMarch31,2016,representingorganizationsbigandsmall,oldandyoung,acrossnearlyeveryindustry,withonethingincommon:theyarecompetingbyusingthepowerofsoftwaretobuilddifferentiationthroughcommunications.Withourplatform,ourcustomersaredisruptingexistingindustriesandcreatingnewones.Forexample,ourcustomershavereinventedhiredtransportationbyconnectingridersanddrivers,withcommunicationsasacriticalpartofeachtransaction.Ourcustomers'softwareapplicationsuseourplatformtonotifyadinerwhenatableisready,atravelerwhenaflightisdelayedorashopperwhenapackagehasshipped.TherangeofapplicationsthatdevelopersbuildwiththeTwilioplatformhasproventobenearlylimitless.
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OurgoalisforTwiliotobeinthetoolkitofeverysoftwaredeveloperintheworld.AsofMarch31,2016,over900,000developeraccountshadbeenregisteredonourplatform.Becausebigideasoftenstartsmall,weencouragedeveloperstoexperimentanditerateonourplatform.WelovewhendevelopersexplorewhattheycandowithTwilio,becauseonedaytheymayhaveabusinessproblemthattheywilluseourproductstosolve.
Asourcustomerssucceed,weshareintheirsuccessthroughourusage-basedrevenuemodel.Ourrevenuegrowsascustomersincreasetheirusageofaproduct,extendtheirusageofaproducttonewapplicationsoradoptanewproduct.WebelievethemostusefulindicatoroftheincreasedactivityfromourexistingcustomersisourDollar-BasedNetExpansionRate,whichwas155%fortheyearendedDecember31,2015.Seethesectiontitled"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—KeyBusinessMetrics—Dollar-BasedNetExpansionRate."
Wehaveachievedsignificantgrowthinrecentperiods.FortheyearsendedDecember31,2013,2014and2015andthethreemonthsendedMarch31,2016,ourrevenuewas$49.9million,$88.8million,$166.9millionand$59.3million,respectively.Weincurredanetlossof$26.9million,$26.8million,$35.5millionand$6.5millionfortheyearsendedDecember31,2013,2014and2015andthethreemonthsendedMarch31,2016,respectively.
IndustryBackground
Trends in Our Favor
Rise of Software Developers
Today,softwareisusedtodisruptindustriesandtransformproductsandservices,therebyredefininghoworganizationsengagewiththeircustomers.Thisshifthassignificantlyincreasedthevalueandinfluenceofsoftwaredevelopersacrossorganizationsofallsizesandindustries.
Differentiation Must Increasingly Be Built, Not Bought
Inorderfororganizationstodeliverdifferentiatedcustomerexperiencesthatbuildorextendcompetitiveadvantage,theyareincreasinglyaddingthesoftwaredevelopmentcompetenciesnecessarytobuildapplicationsthatdelighttheircustomers.Infact,Gartnerpredictsthatby2020,75%ofapplicationpurchasessupportingdigitalbusinesswillbe"build,notbuy."
Cloud Platforms As Building Blocks for Modern Applications
Cloudplatforms,anewcategoryofsoftwarethatenablesdeveloperstobuildandmanageapplicationswithoutthecomplexityofcreatingandmaintainingtheunderlyinginfrastructure,havearisentoenablethefastpaceofinnovationrequiredbymodernapplications.Theseplatformstypicallyprovideglobal,scalableandcost-effectivesolutions.Cloudplatformsareemergingacrossarangeofcategories,includinganalytics,communications,computing,mapping,paymentsandstorage.Thesecloudplatformsareenablingeveryorganization,fromsmallstartupstoFortune500enterprises,toexperiment,prototypeanddeploynext-generationapplications.
Agility of Software Accelerates Pace of Innovation
Thewayorganizationsbuild,deployandscalemodernapplicationshasfundamentallychanged.Organizationsmustcontinuouslybringnewapplicationsandfeaturestomarkettodifferentiatethemselvesfromtheircompetitorsandtobuildandextendtheircompetitiveadvantage.Heightenedconsumerexpectationsforreal-time,personalizedinteractionfurthernecessitaterapidinnovation.Inordertosatisfytheseneeds,developersmustbeempoweredtofreelyexperiment,quicklyprototypeandrapidlydeploynewapplicationsthataremassivelyscalable.Legacy
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infrastructuredoesnotsupportthisnewparadigmfordevelopersbecauseittypicallyhasbeenslow,complexandcostlytoimplement,andinflexibletooperateanditerate.
Contextual Communications Are Transforming Applications
Communicationisfundamentaltohumanactivityandvitaltobuildinggreatbusinesses.Whilesoftwarehastransformedbusiness,communicationstechnologyhaslargelyfailedtoevolve.Infact,thephoneappontoday'ssmartphonesismerelyatouchscreenrepresentationofthepush-buttonphoneinventedinthe1960s.
Today,thereisdemandforcommunicationstobeembeddedintoapplicationswherecommunicationscanbedeeplyintegratedwiththecontextofusers'lives,suchaspersonalandbusinessidentities,relationships,locationsanddailyschedules.Thistypeofcontextualcommunicationsenablesdeveloperstobuildthepowerfulapplicationsthataredifferentiatingorganizations.Whetheranapplicationisdesignedtobookahotel,hailarideoraidadelayedtraveler,enablinguserstoseamlesslycommunicateincontextiscriticaltoadelightfulexperience.Contextualcommunicationsaretransformingapplicationsandreplacingsiloedcommunicationsapplications,suchasthephoneapp.
Limitations of Legacy Products
Legacyproductswerenotdesignedwiththesoftwaremindsetandarethereforeunabletoaddresstheforegoingtrends.Theseproductstendtobemonolithic,costly,complicated,geopoliticallyboundedandimpracticaltoscale,allofwhichhinderinnovation.Asaresult,manyinnovativeideashaveneverevenbeenattemptedwithlegacyproducts,letalonerealized.Overtime,manyattemptshavebeenmadetoevolvethecommunicationsindustrywithsoftware.However,webelievethatnolegacyproducthastrulyempoweredtheglobaldevelopercommunitytotransformtheirapplicationswithcommunications.
OurPlatformApproach
Twilio'smissionistofuelthefutureofcommunications.Weenabledeveloperstobuild,scaleandoperatereal-timecommunicationswithinsoftwareapplications.
OurProgrammableCommunicationsCloud,SuperNetworkandBusinessModelforInnovatorsworktogethertocreatevalueforourcustomersandacompetitiveadvantageforourcompany.
Our Programmable Communications Cloud.
OurProgrammableCommunicationsCloudconsistsofsoftwareproductsthatcanbeusedindividuallyorincombinationtobuildrichcontextualcommunicationswithinapplications.OurProgrammableCommunicationsCloudincludes:
• ProgrammableVoice.
OurProgrammableVoicesoftwareproductsallowdeveloperstobuildsolutionstomakeandreceivephonecallsglobally,andincorporateadvancedvoicefunctionalitysuchastext-to-speech,conferencing,recordingandtranscription.ProgrammableVoice,throughouradvancedcallcontrolsoftware,allowsdeveloperstobuildcustomizedapplicationsthataddressusecasessuchascontactcenters,calltrackingandanalyticssolutionsandanonymizedcommunications.
• ProgrammableMessaging.
OurProgrammableMessagingsoftwareproductsallowdeveloperstobuildsolutionstosendandreceivetextmessagesglobally,andincorporateadvancedmessagingfunctionalitysuchasemoji,picturemessagingandlocalizedlanguages.OurcustomersuseProgrammableMessaging,throughsoftwarecontrols,topowerusecasessuchasappointmentreminders,deliverynotifications,orderconfirmationsandcustomercare.
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• ProgrammableVideo.
OurrecentlyintroducedProgrammableVideosoftwareproductsenabledeveloperstobuildnext-generationmobileandwebapplicationswithembeddedvideo,includingforusecasessuchascustomercare,collaborationandphysicianconsultations.
• UseCaseAPIs.
Whiledeveloperscanbuildabroadrangeofapplicationsonourplatform,certainusecasesaremorecommon.OurUseCaseAPIsbuildupontheaboveproductstooffermorefullyimplementedfunctionalityforaspecificpurpose,suchastwo-factorauthentication,therebysavingdeveloperssignificanttimeinbuildingtheirapplications.
• Add-on Marketplace.
LaunchedinMay2016,ourAdd-onMarketplaceallowsthirdpartiestointegratetheircapabilitiesdirectlyintoourCloudCommunicationsPlatform,whichallowsustofurtherleverageourcommunitytoprovidenewanddifferentiatedfunctionalityforourcustomers.
Our Super Network.
OurProgrammableCommunicationsCloudisbuiltontopofourglobalsoftwarelayer,whichwecallourSuperNetwork.OurSuperNetworkinterfacesintelligentlywithcommunicationsnetworksglobally.Wedonotownanyphysicalnetworkinfrastructure.Weusesoftwaretobuildahighperformancenetworkthatoptimizesperformanceforourcustomers.OurSuperNetworkbreaksdownthegeopoliticalboundariesandscalelimitationsofthephysicalnetworkinfrastructure.
Ourplatformhasglobalreach,consistingof22clouddatacentersinsevenregions.Weinterconnectthoseclouddatacenterswithnetworkserviceprovidersaroundtheworld,givingusredundantmeanstoreachusersglobally.Wearecontinuallyaddingnewnetworkserviceproviderrelationshipsaswescale.
OurSuperNetworkanalyzesmassivevolumesofdatafromendusers,theirapplicationsandthecommunicationsnetworkstooptimizeourcustomers'communicationsforqualityandcost.Witheverynewmessageandcall,ourSuperNetworkbecomesmorerobust,intelligentandefficient,enablingustoprovidebetterperformanceatlowerpricestoourcustomers.OurSuperNetwork'ssophisticationbecomesincreasinglydifficultforotherstoreplicateovertime.
Our Business Model for Innovators.
Bigideasoftenstartsmall,andthereforedevelopersneedthefreedomandtoolstoexperimentanditerateontheirideas.Inordertoempowerdeveloperstoexperiment,ourdeveloper-firstbusinessmodelislowfriction,eliminatingtheupfrontcosts,timeandcomplexitythathinderinnovation.Developerscanbeginbuildingwithafreetrial.Oncedevelopersdeterminethatoursoftwaremeetstheirneeds,theycanflexiblyincreaseconsumptionandpaybasedonusage.Inshort,weacquiredeveloperslikeconsumersandenablethemtospendlikeenterprises.
StrengthsofOurPlatformApproach
Ourplatformwasbuiltbydevelopersfordevelopers,andourapproachhasthefollowingstrengths:
• DeveloperMindShare.
Wearerecognizedastheleadingplatformforcloudcommunications,andwebelievewesetthestandardfordeveloperstobuild,scaleandoperatereal-timecommunicationswithinsoftwareapplications.
• Composable.
Weareaplatformcompanyfocusedonprovidingsoftwaredeveloperswiththenecessarybuildingblockstocomposecommunicationssolutionsthatcanbeintegratedintotheirapplications.Webelievethisenablesdeveloperstobuilddifferentiatedapplicationsforanearlylimitlessrangeofusecases.
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• Comprehensive.
OurProgrammableCommunicationsCloudoffersabreadthoffunctionality,includingvoice,messagingandvideo,allwithglobalreachandacrossdevices.
• EasytoGetStarted.
Developerscanbeginbuildingwithafreetrial,allowingthemtoexperimentanditerateonourplatform.Thisapproacheliminatestheupfrontcostsandcomplexitythattypicallyhinderinnovation.
• EasytoBuild.
WedesignedourAPIssodeveloperscouldquicklylearn,accessandbuilduponourProgrammableCommunicationsCloud.
• EasytoScale.
Ourplatformallowsourcustomerstoscaleelasticallywithouthavingtorearchitecttheirapplicationsormanagecommunicationsinfrastructure.
• Multi-TenantArchitecture.
Ourmulti-tenantarchitectureenablesallofourcustomerstooperateonourplatformwhilesecurelypartitioningtheirapplicationusageanddata.Inaddition,ourSolutionPartnercustomers,whichembedourproductsinthesolutionstheyselltootherbusinesses,relyonourmulti-tenantplatformtoindependentlymanagetheirowncustomers'activity.
• Reliable.
Ourplatformconsistsoffault-tolerantandglobally-distributedsystemsthathaveenabledourcustomerstooperatetheirapplicationswithoutsignificantfailuresordowntime.
• Global.
Customerscanwriteanapplicationonceandconfigureittooperateinnearlyeverycountryintheworldwithoutanychangetothecode.
OurOpportunity
Gartnerestimatedthatin2015,$3.5trillionwouldbespentoninformationtechnologyglobally,and42%ofallITspendingwouldbeoncommunications.The$1.5trillionspentoncommunicationsservicesrepresentsalmostfivetimestheamountspentonenterprisesoftwareandninetimestheamountspentondatacenters.Webelievethelimitationsofexistinghardware-andnetwork-centriccommunicationsproductshistoricallyhaveanchoredthecommunicationstechnologymarketinhighcostandlowfunctionality.Overtime,webelievethatameaningfulportionofthe$1.5trillionspentoncommunicationsserviceswillmigratefromexistinghardware-andnetwork-centriccommunicationsproductstocontextualcommunicationssolutionsthatareintegratedintosoftwareapplications.
OurProgrammableCommunicationsCloudincludesasuiteofsoftwareproducts,includingProgrammableVoice,ProgrammableMessaging,ProgrammableVideoandProgrammableAuthentication.Asaresult,ourplatformcurrentlyaddressessignificantportionsofseverallargemarketsthat,inaggregate,havebeenestimatedbyIDCtobe$45.6billionin2017.
Specifically,IDCestimatesthat,in2017:
• TheWorldwideApplication-to-PersonSMSmarketwillbe$29.4billion.OurProgrammableMessagingproductsaddressportionsofthismarket.
• CertainsegmentsoftheWorldwideUnifiedCommunicationsandCollaborationmarketwillbe$14.1billion.OurProgrammableVoiceandProgrammableVideoproductsaddressportionsofthesemarketsegments.
• TheAdvancedAuthenticationsegmentoftheWorldwideIdentityandAccessManagementmarketwillbe$2.1billion.OurProgrammableAuthenticationproductsaddressportionsofthismarketsegment.
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OurGrowthStrategy
WearetheleaderintheCloudCommunicationsPlatformcategorybasedonrevenue,marketshareandreputation,andintendtocontinuetosetthepaceforinnovation.Weintendtopursuethefollowinggrowthstrategies:
• ContinueSignificantInvestmentinourTechnologyPlatform.
Wewillcontinuetoinvestinbuildingnewsoftwarecapabilitiesandextendingourplatformtobringthepowerofcontextualcommunicationstoabroaderrangeofapplications,geographiesandcustomers.
• GrowOurDeveloperCommunityandAccelerateAdoption.
AsofMarch31,2016,over900,000developeraccountshadbeenregisteredonourplatform,andwehadover90,000payingcustomeraccounts,ofwhichover28,000wereActiveCustomerAccounts.WecategorizeacustomeraccountasanActiveCustomerAccountinaquarterinwhichitgeneratesatleast$5ofrevenueduringthelastmonthofthequarter.Wewillcontinuetoenhanceourrelationshipswithdevelopersgloballyandseektoincreasethenumberofdevelopersonourplatform.Inadditiontoaddingnewdevelopers,webelievethereissignificantopportunityforrevenuegrowthfromexistingpayingcustomeraccountsthatweseektogrowintoActiveCustomerAccounts.
• IncreaseOurInternationalPresence.
Ourplatformoperatesinover180countriestoday,makingitassimpletocommunicatefromSãoPauloasitisfromSanFrancisco.WeplantogrowinternationallybyexpandingouroperationsoutsideoftheUnitedStatesandcollaboratingwithinternationalstrategicpartners.
• ExpandFocusonEnterprises.
WeplantodrivegreaterawarenessandadoptionofTwiliofromenterprisesacrossindustries.Weintendtoincreaseourinvestmentinsalesandmarketingtomeetevolvingenterpriseneedsglobally,inadditiontoextendingourenterprise-focusedplatformcapabilitiesandusecases.
• FurtherEnableSolutionPartnerCustomers.
WehaverelationshipswithanumberofSolutionPartnercustomersthatembedourproductsinthesolutionsthattheyselltootherbusinesses.WeintendtoexpandourrelationshipswithexistingSolutionPartnercustomersandtoaddnewSolutionPartnercustomers.
• ExpandISVDevelopmentPlatformandSIPartnerships.
Weintendtocontinuetoinvestanddeveloptheecosystemforoursolutionsinpartnershipwithindependentsoftwarevendor(ISV)developmentplatformsandsystemintegrators,orSIs,toaccelerateawarenessandadoptionofourplatform.
• SelectivelyPursueAcquisitionsandStrategicInvestments.
Wemayselectivelypursueacquisitionsandstrategicinvestmentsinbusinessesandtechnologiesthatstrengthenourplatform.
OurValuesandLeadershipPrinciples
Ourcorevaluesareatthecenterofeverythingthatwedo.Asacompanybuiltbydevelopersfordevelopers,thesevaluesguideustoworkinawaythatexemplifiesmanyattributesofthedeveloperethos.Ourvaluesprovideaguideforthewayourteamswork,communicate,setgoalsandmakedecisions.
Webelieveleadershipisabehavior,notaposition.Inadditiontoourvalues,wehavearticulatedtheleadershiptraitsweallstrivetoachieve.OurleadershipprinciplesapplytoeveryTwilion,notjustmanagersorexecutives,andprovideapersonalgrowthpathforemployeesintheirjourneystobecomebetterleaders.
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ThecombinationofcorevaluesandleadershipprincipleshascreatedablueprintforhowTwilionsworldwideinteractwithcustomersandwitheachother,andforhowtheyrespondtonewchallengesandopportunities.
RiskFactors
Ourbusinessissubjecttonumerousrisksanduncertainties,includingthosehighlightedinthesectiontitled"RiskFactors"immediatelyfollowingthisprospectussummary.Someoftheserisksare:
• Themarketforourproductsandplatformisnewandunproven,maydeclineorexperiencelimitedgrowth,andisdependentinpartondeveloperscontinuingtoadoptourplatformanduseourproducts.
• Wehaveahistoryoflossesandweareuncertainaboutourfutureprofitability.
• Wehaveexperiencedrapidgrowthandexpectourgrowthtocontinue,andifwefailtoeffectivelymanageourgrowth,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.
• Ourquarterlyresultsmayfluctuate,andifwefailtomeetsecuritiesanalysts'andinvestors'expectations,thenthetradingpriceofourClassAcommonstockandthevalueofyourinvestmentcoulddeclinesubstantially.
• Ifwearenotabletomaintainandenhanceourbrandandincreasemarketawarenessofourcompanyandproducts,thenourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.
• Ourbusinessdependsoncustomersincreasingtheiruseofourproductsandanylossofcustomersordeclineintheiruseofourproductscouldmateriallyandadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
• Ifweareunabletoattractnewcustomersinacost-effectivemanner,thenourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.
• Ifwedonotdevelopenhancementstoourproductsandintroducenewproductsthatachievemarketacceptance,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.
• Ifweareunabletoincreaseadoptionofourproductsbyenterprises,ourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.
• Ourfuturesuccessdependsinpartonourabilitytodrivetheadoptionofourproductsbyinternationalcustomers.
• Themarketinwhichweparticipateisintenselycompetitive,andifwedonotcompeteeffectively,ourbusiness,resultsofoperationsandfinancialconditioncouldbeharmed.
• Thedualclassstructureofourcommonstockwillhavetheeffectofconcentratingvotingcontrolwithcertainstockholders,includingourdirectors,executiveofficersandsignificantstockholderswhowillholdintheaggregate
%ofthevotingpowerofourcapitalstockfollowingthecompletionofthisoffering,whichwilllimitorprecludeyourabilitytoinfluencecorporatematters,includingtheelectionofdirectors,amendmentsofourorganizationaldocumentsandanymerger,consolidation,saleofallorsubstantiallyallofourassetsorothermajorcorporatetransactionrequiringstockholderapproval.
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ChannelsforDisclosureofInformation
Investors,themediaandothersshouldnotethat,followingthecompletionofthisoffering,weintendtoannouncematerialinformationtothepublicthroughfilingswiththeSecuritiesandExchangeCommission,ortheSEC,theinvestorrelationspageonourwebsite,pressreleasesandpublicconferencecallsandwebcasts.
CorporateInformation
TwilioInc.wasincorporatedinDelawareinMarch2008.Ourprincipalexecutiveofficesarelocatedat645HarrisonStreet,ThirdFloor,SanFrancisco,California94107,andourtelephonenumberis(415)390-2337.Ourwebsiteaddressiswww.twilio.com.Informationcontainedon,orthatcanbeaccessedthrough,ourwebsitedoesnotconstitutepartofthisprospectusandinclusionsofourwebsiteaddressinthisprospectusareinactivetextualreferencesonly.
"Twilio"and"TwiML,"andourotherregisteredorcommonlawtradenames,trademarks,orservicemarksappearinginthisprospectusareourproperty.Othertrademarksandtradenamesreferredtointhisprospectusarethepropertyoftheirrespectiveowners.
ImplicationsofBeinganEmergingGrowthCompany
Wearean"emerginggrowthcompany,"asdefinedintheJumpstartOurBusinessStartupsActof2012.Wewillremainanemerginggrowthcompanyuntiltheearlierof(1)December31,2021(thelastdayofthefiscalyearfollowingthefifthanniversaryofourinitialpublicoffering),(2)thelastdayofthefiscalyearinwhichwehavetotalannualgrossrevenueofatleast$1.0billion,(3)thelastdayofthefiscalyearinwhichwearedeemedtobea"largeacceleratedfiler",asdefinedintheSecuritiesExchangeActof1934,ortheExchangeAct,and(4)thedateonwhichwehaveissuedmorethan$1.0billioninnon-convertibledebtduringthepriorthree-yearperiod.WerefertotheJumpstartOurBusinessStartupsActof2012hereinasthe"JOBSAct,"andanyreferencehereinto"emerginggrowthcompany"hasthemeaningascribedtoitintheJOBSAct.
Anemerginggrowthcompanymaytakeadvantageofreducedreportingrequirementsthatareotherwiseapplicabletopubliccompanies.Theseprovisionsinclude,butarenotlimitedto:
• beingpermittedtopresentonlytwoyearsofauditedfinancialstatementsandonlytwoyearsofrelated"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"inthisprospectus;
• notbeingrequiredtocomplywiththeauditorattestationrequirementsofSection404oftheSarbanes-OxleyActof2002,asamended;
• reduceddisclosureobligationsregardingexecutivecompensationinourperiodicreports,proxystatementsandregistrationstatements,includinginthisprospectus;and
• exemptionsfromtherequirementsofholdinganonbindingadvisoryvoteonexecutivecompensationandstockholderapprovalofanygoldenparachutepaymentsnotpreviouslyapproved.
WehaveelectedtotakeadvantageofcertainofthereduceddisclosureobligationsinthisprospectusandmayelecttotakeadvantageofotherreducedreportingrequirementsinourfuturefilingswithSEC.Asaresult,theinformationthatweprovidetoourstockholdersmaybedifferentthanyoumightreceivefromotherpublicreportingcompaniesinwhichyouholdequityinterests.
TheJOBSActalsoprovidesthatanemerginggrowthcompanycantakeadvantageofanextendedtransitionperiodforcomplyingwithneworrevisedaccountingstandards.Wehaveirrevocablyelectednottoavailourselvesofthisexemptionand,therefore,wewillbesubjecttothesameneworrevisedaccountingstandardsasotherpubliccompaniesthatarenotemerginggrowthcompanies.
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THEOFFERING
ClassAcommonstockofferedbyus
shares
ClassAcommonstocktobeoutstandingafterthisoffering
shares
ClassBcommonstocktobeoutstandingafterthisoffering
shares
TotalClassAandClassBcommonstocktobeoutstandingafterthisoffering
shares
OptiontopurchaseadditionalsharesofClassAcommonstockfromus
shares
Useofproceeds
WeestimatethatthenetproceedsfromthesaleofsharesofourClassAcommonstockinthisofferingwillbeapproximately$
(orapproximately$
iftheunderwriters'optiontopurchaseadditionalsharesofourClassAcommonstockfromusisexercisedinfull),basedupontheassumedinitialpublicofferingpriceof$
pershare,whichisthemidpointoftheestimatedofferingpricerangesetforthonthecoverpageofthisprospectus,andafterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpensespayablebyus.
Theprincipalpurposesofthisofferingaretoincreaseourcapitalizationandfinancialflexibility,createapublicmarketforourClassAcommonstockandenableaccesstothepublicequitymarketsforusandourstockholders.Wecurrentlyintendtousethenetproceedsfromthisofferingforworkingcapitalorothergeneralcorporatepurposes,includingfundingourgrowthstrategiesdiscussedinthisprospectus.Theseusesandgrowthstrategiesincludeinvestmentstogrowourengineering,salesandmarketingandcustomersupportteams,toenhanceourtechnologyplatform,togrowourdevelopercommunityandaccelerateadoption,toincreaseourinternationalpresence,tofurtherenableourSolutionPartnercustomers,toexpandourfocusonenterprises,andtoexpandISVdevelopmentplatformandSIpartnerships;however,wedonotcurrentlyhaveanydefinitiveorpreliminaryplanswithrespecttotheuseofproceedsforsuchpurposes.Wemayalsouseaportionofthenetproceedstoacquirebusinesses,products,servicesortechnologies.However,wedonothaveagreementsorcommitmentsforanyacquisitionsatthistime.Seethesectiontitled"UseofProceeds."
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VotingRights SharesofClassAcommonstockareentitledtoonevotepershare.SharesofClassBcommonstockareentitledto10votespershare.
HoldersofourClassAcommonstockandClassBcommonstockwillgenerallyvotetogetherasasingleclass,unlessotherwiserequiredbylaworouramendedandrestatedcertificateofincorporation.EachshareofourClassBcommonstockwillbeconvertibleintooneshareofourClassAcommonstockatanytimeandwillconvertautomaticallyuponcertaintransfersandupontheearlierofsevenyearsfromthedateofthisprospectusorthedatetheholdersoftwo-thirdsofourClassBcommonstockelecttoconverttheClassBcommonstocktoClassAcommonstock.
Uponcompletionofthisoffering,theholdersofouroutstandingClassBcommonstockwillhold
%ofthevotingpowerofouroutstandingcapitalstock,withourdirectorsandexecutiveofficersandtheiraffiliatesholding
%intheaggregate.Theseholderswillhavetheabilitytocontroltheoutcomeofmatterssubmittedtoourstockholdersforapproval,includingtheelectionofourdirectorsandtheapprovalofanychangeincontroltransaction.Seethesectionstitled"PrincipalStockholders"and"DescriptionofCapitalStock"foradditionalinformation.
NewYorkStockExchangetradingsymbol
"TWLO"
ThenumberofsharesofourClassAandClassBcommonstockthatwillbeoutstandingafterthisofferingisbasedonnosharesofourClassAcommonstockand72,200,793sharesofourClassBcommonstock(includingconvertiblepreferredstockonanas-convertedbasis)outstandingasofMarch31,2016,andexcludes:
• 16,704,752sharesofourClassBcommonstockissuableupontheexerciseofoptionstopurchasesharesofourClassBcommonstockoutstandingasofMarch31,2016,withaweighted-averageexercisepriceof$5.57pershare;
• 573,800restrictedstockunitsforsharesofourClassBcommonstockthatarereleasableuponsatisfactionofserviceandliquidityconditionsoutstandingasofMarch31,2016;
• 671,550sharesofourClassBcommonstockissuableupontheexerciseofoptionstopurchasesharesofourcommonstockthatweregrantedafterMarch31,2016,withanexercisepriceof$10.30pershare;
• 130,375restrictedstockunitsforsharesofourClassBcommonstockthatarereleasableuponsatisfactionofserviceandliquidityconditionsthatweregrantedafterMarch31,2016;
• 780,397sharesofourClassAcommonstockreservedforissuancetofundandsupporttheoperationsofTwilio.org,asadjustedonMay13,2016,ofwhichnonearecurrentlyissuedandoutstanding;and
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• 13,900,000sharesofourClassAcommonstockreservedforfutureissuanceunderourequitycompensationplans,whichwillbecomeeffectivepriortothecompletionofthisoffering,consistingof:
• 11,500,000sharesofourClassAcommonstockreservedforfutureissuanceunderour2016StockOptionandIncentivePlan,orour2016Plan;and
• 2,400,000sharesofourClassAcommonstockreservedforfutureissuanceunderour2016EmployeeStockPurchasePlan,orourESPP.
Our2016PlanandESPPeachprovideforannualautomaticincreasesinthenumberofsharesreservedthereunderandour2016PlanalsoprovidesforincreasestothenumberofsharesofClassAcommonstockthatmaybegrantedthereunderbasedonsharesunderlyinganyawardsunderour2008StockOptionPlan,orour2008Plan,thatexpire,areforfeitedorareotherwiseterminated,asmorefullydescribedinthesectiontitled"ExecutiveCompensation—EmployeeBenefitandStockPlans."
Exceptasotherwiseindicated,allinformationinthisprospectusassumes:
• theamendmenttoourcurrentcertificateofincorporationtoredesignateouroutstandingcommonstockasClassBcommonstockandcreateanewclassofClassAcommonstocktobeofferedandsoldinthisoffering;
• theautomaticconversionofalloutstandingsharesofourconvertiblepreferredstockintoanaggregateof54,508,441sharesofourClassBcommonstock,theconversionofwhichwilloccurimmediatelypriortothecompletionofthisoffering;
• thefilingandeffectivenessofouramendedandrestatedcertificateofincorporationinDelawareandtheeffectivenessofouramendedandrestatedbylaws,eachofwhichwilloccurimmediatelypriortothecompletionofthisoffering;and
• noexercisebytheunderwritersoftheiroptiontopurchaseuptoanadditional
sharesofourClassAcommonstockfromus.
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SUMMARYCONSOLIDATEDFINANCIALANDOTHERDATA
Thefollowingtablessummarizeourconsolidatedfinancialandotherdata.WehavederivedthesummaryconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2013,2014and2015fromourauditedconsolidatedfinancialstatementsincludedelsewhereinthisprospectus.WehavederivedthesummaryconsolidatedstatementsofoperationsdataforthethreemonthsendedMarch31,2015and2016andoursummaryconsolidatedbalancesheetdataasofMarch31,2016fromourunauditedinterimconsolidatedfinancialstatementsincludedelsewhereinthisprospectus.Theunauditedinterimconsolidatedfinancialstatementshavebeenpreparedonthesamebasisastheauditedconsolidatedfinancialstatementsandreflect,intheopinionofmanagement,alladjustmentsofanormal,recurringnaturethatarenecessaryforafairstatementoftheunauditedinterimconsolidatedfinancialstatements.Ourhistoricalresultsarenotnecessarilyindicativeoftheresultsthatmaybeexpectedinthefuture,andtheresultsforthethreemonthsendedMarch31,2016arenotnecessarilyindicativeoftheresultstobeexpectedforthefullyearoranyotherperiod.Thefollowingsummaryconsolidatedfinancialandotherdatashouldbereadinconjunctionwiththesectiontitled"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andourconsolidatedfinancialstatementsandtherelatednotesincludedelsewhereinthisprospectus.
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YearEnded
December31,
ThreeMonthsEnded
March31,
2013 2014 2015 2015 2016
(Unaudited)
(Inthousands,exceptshareandpersharedata)
ConsolidatedStatementsofOperations:
Revenue $ 49,920 $ 88,846 $ 166,919 $ 33,365 $ 59,340
Costofrevenue(1)(2) 25,868 41,423 74,454 15,545 26,827
Grossprofit 24,052 47,423 92,465 17,820 32,513
Operatingexpenses:
Researchanddevelopment(1)(2) 13,959 21,824 42,559 8,480 14,864
Salesandmarketing(1) 21,931 33,322 49,308 9,869 13,422
Generalandadministrative(1)(2)
15,012 18,960 35,991 8,265 10,593
Totaloperatingexpenses 50,902 74,106 127,858 26,614 38,879
Lossfromoperations (26,850) (26,683) (35,393) (8,794) (6,366)Otherincome(expenses),net (4) (62) 11 53 (18)Lossbefore(provision)benefitforincometaxes (26,854) (26,745) (35,382) (8,741) (6,384)(Provision)benefitforincometaxes — (13) (122) 81 (84)Netloss (26,854) (26,758) (35,504) (8,660) (6,468)Deemeddividendtoinvestorsinrelationtotenderoffer — — (3,392) — —
Netlossattributabletocommonstockholders $ (26,854) $ (26,758) $ (38,896) $ (8,660) $ (6,468)Netlosspershareattributabletocommonstockholders,basicanddiluted $ (1.59) $ (1.58) $ (2.19) $ (0.49) $ (0.37)
Weighted-averagesharesusedincomputingnetlosspershareattributabletocommonstockholders,basicanddiluted 16,916,035 16,900,124 17,746,526 17,749,487 17,483,198
Proformanetlosspershareattributabletocommonstockholders,basicanddiluted(unaudited) $ (0.45) $ (0.45) $ (0.54) $ (0.14) $ (0.09)
Weighted-averagesharesusedincomputingproformanetlosspershareattributabletocommonstockholders,basicanddiluted(unaudited) 59,398,525 59,382,614 72,254,967 61,129,595 71,991,639
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Includesstock-basedcompensationexpenseasfollows:(1)
YearEnded
December31,
ThreeMonths
Ended
March31,
2013 2014 2015 2015 2016
(Unaudited)
(Inthousands)
Costofrevenue $ 27 $ 39 $ 65 $ 14 $ 23
Researchanddevelopment 810 1,577 4,046 663 1,516
Salesandmarketing 753 1,335 2,389 420 734
Generalandadministrative 567 1,027 2,377 548 752
Total $ 2,157 $ 3,978 $ 8,877 $ 1,645 $ 3,025
Includesamortizationofacquiredintangiblesasfollows:(2)
YearEnded
December31,
Three
Months
Ended
March31,
2013 2014 2015 2015 2016
(Unaudited)
(Inthousands)
Costofrevenue $ — $ — $ 239 $ 28 $ 70
Researchanddevelopment — — 130 17 38
Generalandadministrative — — 95 11 27
Total $ — $ — $ 464 $ 56 $ 135
AsofMarch31,2016
Actual ProForma(1)
ProForma
asAdjusted
(2)(3)
(Unaudited,inthousands)
ConsolidatedBalanceSheetData:
Cashandcashequivalents $ 103,320 $ 103,320
Workingcapital 83,489 83,489
Propertyandequipment,net 16,847 16,847
Totalassets 167,254 167,254
Totalstockholders'equity 114,351 114,351
Theproformacolumninthebalancesheetdatatableabovereflects(a)theredesignationofouroutstandingcommonstockasClassBcommonstock,(b)theautomaticconversionofalloutstandingsharesofourconvertiblepreferredstockintoanaggregateof54,508,441sharesofourClassBcommonstock,whichconversionwilloccurimmediatelypriortothecompletionofthisoffering,and(c)thefilingandeffectivenessofouramendedandrestatedcertificateofincorporationinDelaware.
Theproformaasadjustedcolumninthebalancesheetdatatableabovegiveseffectto(a)theproformaadjustmentssetforthaboveand(b)thesaleandissuancebyusof
sharesofourClassAcommonstockinthisoffering,basedupontheassumedinitialpublicofferingpriceof$
pershare,whichisthemidpointoftheestimatedofferingpricerangesetforthonthecoverpageofthisprospectus,andafterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpensespayablebyus.
Each$1.00increaseordecreaseintheassumedinitialpublicofferingpriceof$
pershare,whichisthemidpointoftheestimatedofferingpricerangesetforthonthecoverpageofthisprospectus,wouldincreaseordecrease,asapplicable,theamountofourcashandcashequivalents,workingcapital,totalassetsandtotalstockholders'equityby$
,assumingthatthenumberofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,afterdeductingunderwritingdiscountsandcommissionspayablebyus.Anincreaseordecreaseof1.0millionsharesinthenumberofsharesofferedbyuswouldincreaseordecrease,asapplicable,theamountofourcashandcashequivalents,workingcapital,totalassetsandtotalstockholders'equityby$
,assuminganinitialpublicofferingpriceof$
pershare,whichisthemidpointoftheestimatedofferingpricerangesetforthonthecoverpageofthisprospectus,afterdeductingunderwritingdiscountsandcommissionspayablebyus.
(1)
(2)
(3)
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KeyBusinessMetrics
Number of Active Customer Accounts.
WebelievethatthenumberofourActiveCustomerAccountsisanimportantindicatorofthegrowthofourbusiness,themarketacceptanceofourplatformandfuturerevenuetrends.WedefineanActiveCustomerAccountattheendofanyperiodasanindividualaccount,asidentifiedbyauniqueaccountidentifier,forwhichwehaverecognizedatleast$5ofrevenueinthelastmonthoftheperiod.WebelievethatuseofourplatformbyActiveCustomerAccountsatorabovethe$5permonththresholdisastrongerindicatorofpotentialfutureengagementthantrialusageofourplatformorusageatlevelsbelow$5permonth.AsinglecustomermayconstitutemultipleuniqueActiveCustomerAccountsifithasmultipleaccountidentifiers,eachofwhichistreatedasaseparateActiveCustomerAccount.
IntheyearsendedDecember31,2013,2014and2015andthethreemonthsendedMarch31,2016,revenuefromActiveCustomerAccountsrepresentedapproximately99%oftotalrevenueineachperiod.
Base Revenue.
WemonitorBaseRevenueasoneofthemorereliableindicatorsoffuturerevenuetrends.BaseRevenueconsistsofallrevenueotherthanrevenuefromActiveCustomerAccountswithlargecustomersthathaveneverenteredinto12-monthminimumrevenuecommitmentcontractswithus,whichwerefertoasVariableCustomerAccounts.Whilealmostallofourcustomeraccountsexhibitsomelevelofvariabilityintheusageofourproducts,basedonourexperience,webelieveVariableCustomerAccountsaremorelikelytoexhibitsignificantfluctuationsinusageofourproductsfromperiodtoperiod,andthereforethatrevenuefromVariableCustomerAccountsmayalsofluctuatesignificantlyfromperiodtoperiod.Thisbehaviorisbestevidencedbythedecisionofsuchcustomersnottoenterintocontractswithusthatcontainminimumrevenuecommitments,eventhoughtheymayspendsignificantamountsontheuseofourproductsandtheymaybeforegoingmorefavorabletermsoftenavailabletocustomersthatenterintocommittedcontractswithus.ThisvariabilityadverselyaffectsourabilitytorelyuponrevenuefromVariableCustomerAccountswhenanalyzingexpectedtrendsinfuturerevenue.
Forhistoricalperiods,wedefineaVariableCustomerAccountasanActiveCustomerAccountthat(i)iswithacustomerthathadneversignedaminimumrevenuecommitmentcontractwithusforatermofatleast12monthsand(ii)hasmetorexceeded1%ofourrevenueinanyquarterintheperiodspresented.Toallowforconsistentperiod-to-periodcomparisons,intheeventacustomeraccountqualifiedasaVariableCustomerAccountasofMarch31,2016,orapreviouslyVariableCustomerAccountceasedtobeanActiveCustomerAccountasofsuchdate,weincludedsuchcustomeraccountasaVariableCustomerAccountinallperiodspresented.Forfuturereportingperiods,wewilldefineaVariableCustomerAccountasacustomeraccountthat(a)hasbeencategorizedasaVariableCustomerAccountinanypriorquarter,aswellas(b)anynewcustomeraccountthat(i)iswithacustomerthathasneversignedaminimumrevenuecommitmentcontractwithusforatermofatleast12monthsand(ii)meetsorexceeds1%ofourrevenueinaquarter.OnceacustomeraccountisdeemedtobeaVariableCustomerAccountinanyperiod,it
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YearEnded
December31,
ThreeMonths
Ended
March31,
2013 2014 2015 2015 2016
NumberofActiveCustomerAccounts(as of end date of period ) 11,048 16,631 25,347 19,340 28,648
BaseRevenue(in thousands ) $ 41,751 $ 75,697 $ 136,851 $ 25,931 $ 49,834
Base Revenue Growth Rate 111% 81% 81% 70% 92%Dollar-BasedNetExpansionRate 170% 153% 155% 145% 170%
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remainsaVariableCustomerAccountinsubsequentperiodsunlesssuchcustomerentersintoaminimumrevenuecommitmentcontractwithusforatermofatleast12months.
InthethreemonthsendedMarch31,2016,wehadnineVariableCustomerAccounts,whichrepresented16%ofourtotalrevenue.
Dollar-Based Net Expansion Rate.
Ourabilitytodrivegrowthandgenerateincrementalrevenuedepends,inpart,onourabilitytomaintainandgrowourrelationshipswithcustomersthathaveActiveCustomerAccountsandtoincreasetheiruseoftheplatform.AnimportantwayinwhichwetrackourperformanceinthisareaisbymeasuringtheDollar-BasedNetExpansionRateforourActiveCustomerAccounts,otherthanourVariableCustomerAccounts.OurDollar-BasedNetExpansionRateincreaseswhensuchActiveCustomerAccountsincreaseusageofaproduct,extendusageofaproducttonewapplicationsoradoptanewproduct.OurDollar-BasedNetExpansionRatedecreaseswhensuchActiveCustomerAccountsceaseorreduceusageofaproductorwhenwelowerusagepricesonaproduct.WebelievemeasuringourDollar-BasedNetExpansionRateonrevenuegeneratedfromourActiveCustomerAccounts,otherthanourVariableCustomerAccounts,providesamoremeaningfulindicationoftheperformanceofoureffortstoincreaserevenuefromexistingcustomeraccounts.
OurDollar-BasedNetExpansionRatecomparestherevenuefromActiveCustomerAccounts,otherthanVariableCustomerAccounts,inaquartertothesamequarterintheprioryear.TocalculatetheDollar-BasedNetExpansionRate,wefirstidentifythecohortofActiveCustomerAccounts,otherthanVariableCustomerAccounts,thatwereActiveCustomerAccountsinthesamequarteroftheprioryear.TheDollar-BasedNetExpansionRateisthequotientobtainedbydividingtherevenuegeneratedfromthatcohortinaquarter,bytherevenuegeneratedfromthatsamecohortinthecorrespondingquarterintheprioryear.WhenwecalculateDollar-BasedNetExpansionRateforperiodslongerthanonequarter,weusetheaverageoftheapplicablequarterlyDollar-BasedNetExpansionRatesforeachofthequartersinsuchperiod.
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RISKFACTORS
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the otherinformation in this prospectus, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financialstatements and related notes, before making a decision to invest in our Class A common stock. The risks and uncertainties described below may not be the only ones we face. If any of therisks 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 commonstock could decline, and you could lose part or all of your investment.
RisksRelatedtoOurBusinessandOurIndustry
The market for our products and platform is new and unproven, may decline or experience limited growth and is dependent in part on developers continuing to adopt ourplatform and use our products.
Wewerefoundedin2008,andhavebeendevelopingandprovidingacloud-basedplatformthatenablesdevelopersandorganizationstointegratevoice,messagingandvideocommunicationscapabilitiesintotheirsoftwareapplications.Thismarketisrelativelynewandunprovenandissubjecttoanumberofrisksanduncertainties.Webelievethatourrevenuecurrentlyconstitutesasignificantportionofthetotalrevenueinthismarket,andtherefore,webelievethatourfuturesuccesswilldependinlargepartonthegrowth,ifany,ofthismarket.TheutilizationofAPIsbydevelopersandorganizationstobuildcommunicationsfunctionalityintotheirapplicationsisstillrelativelynew,anddevelopersandorganizationsmaynotrecognizetheneedfor,orbenefitsof,ourproductsandplatform.Moreover,iftheydonotrecognizetheneedforandbenefitsofourproductsandplatform,theymaydecidetoadoptalternativeproductsandservicestosatisfysomeportionoftheirbusinessneeds.Inordertogrowourbusinessandextendourmarketposition,weintendtofocusoneducatingdevelopersandotherpotentialcustomersaboutthebenefitsofourproductsandplatform,expandingthefunctionalityofourproductsandbringingnewtechnologiestomarkettoincreasemarketacceptanceanduseofourplatform.Ourabilitytoexpandthemarketthatourproductsandplatformaddressdependsuponanumberoffactors,includingthecost,performanceandperceivedvalueassociatedwithsuchproductsandplatform.Themarketforourproductsandplatformcouldfailtogrowsignificantlyortherecouldbeareductionindemandforourproductsasaresultofalackofdeveloperacceptance,technologicalchallenges,competingproductsandservices,decreasesinspendingbycurrentandprospectivecustomers,weakeningeconomicconditionsandothercauses.Ifourmarketdoesnotexperiencesignificantgrowthordemandforourproductsdecreases,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.
We have a history of losses and we are uncertain about our future profitability.
Wehaveincurrednetlossesineachyearsinceourinception,includingnetlossesof$26.9million,$26.8million,$35.5millionand$6.5millionin2013,2014and2015andthethreemonthsendedMarch31,2016,respectively.Wehadanaccumulateddeficitof$151.9millionasofMarch31,2016.Weexpecttocontinuetoexpendsubstantialfinancialandotherresourceson,amongotherthings:
• investmentsinourengineeringteam,thedevelopmentofnewproducts,featuresandfunctionalityandenhancementstoourplatform;
• salesandmarketing,includingexpandingourdirectsalesorganizationandmarketingprograms,especiallyforenterprisesandfororganizationsoutsideoftheUnitedStates,and
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expandingourprogramsdirectedatincreasingourbrandawarenessamongcurrentandnewdevelopers;
• expansionofouroperationsandinfrastructure,bothdomesticallyandinternationally;and
• generaladministration,includinglegal,accountingandotherexpensesrelatedtobeingapubliccompany.
Theseinvestmentsmaynotresultinincreasedrevenueorgrowthofourbusiness.Wealsoexpectthatourrevenuegrowthratewilldeclineovertime.Accordingly,wemaynotbeabletogeneratesufficientrevenuetooffsetourexpectedcostincreasesandachieveandsustainprofitability.Ifwefailtoachieveandsustainprofitability,thenourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.
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 financialcondition could be adversely affected.
Wehaveexperiencedsubstantialgrowthinourbusinesssinceinception.Forexample,ourheadcounthasgrownfrom386employeesonMarch31,2015to567employeesonMarch31,2016.Inaddition,wearerapidlyexpandingourinternationaloperations,andweestablishedoperationsinthreenewcountriesbetweenMarch31,2015andMarch31,2016.Weexpecttocontinuetoexpandourinternationaloperationsinthefuture.Wehavealsoexperiencedsignificantgrowthinthenumberofcustomers,usageandamountofdatathatourplatformandassociatedinfrastructuresupport.Thisgrowthhasplacedandmaycontinuetoplacesignificantdemandsonourcorporateculture,operationalinfrastructureandmanagement.
Webelievethatourcorporateculturehasbeenacriticalcomponentofoursuccess.Wehaveinvestedsubstantialtimeandresourcesinbuildingourteamandnurturingourculture.Asweexpandourbusinessandmatureasapubliccompany,wemayfinditdifficulttomaintainourcorporateculturewhilemanagingthisgrowth.Anyfailuretomanageouranticipatedgrowthandorganizationalchangesinamannerthatpreservesthekeyaspectsofourculturecouldhurtourchanceforfuturesuccess,includingourabilitytorecruitandretainpersonnel,andeffectivelyfocusonandpursueourcorporateobjectives.This,inturn,couldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
Inaddition,inordertosuccessfullymanageourrapidgrowth,ourorganizationalstructurehasbecomemorecomplex.Inordertomanagetheseincreasingcomplexities,wewillneedtocontinuetoscaleandadaptouroperational,financialandmanagementcontrols,aswellasourreportingsystemsandprocedures.Theexpansionofoursystemsandinfrastructurewillrequireustocommitsubstantialfinancial,operationalandmanagementresourcesbeforeourrevenueincreasesandwithoutanyassurancesthatourrevenuewillincrease.
Finally,continuedgrowthcouldstrainourabilitytomaintainreliableservicelevelsforourcustomers.Ifwefailtoachievethenecessarylevelofefficiencyinourorganizationaswegrow,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.
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 ofyour investment could decline substantially.
Ourresultsofoperations,includingthelevelsofourrevenue,costofrevenue,grossmarginandoperatingexpenses,havefluctuatedfromquartertoquarterinthepastandmaycontinuetovarysignificantlyinthefuture.Thesefluctuationsarearesultofavarietyoffactors,manyofwhichareoutsideofourcontrol,maybedifficulttopredictandmayormaynotfullyreflecttheunderlying
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performanceofourbusiness.Ifourquarterlyresultsofoperationsfallbelowtheexpectationsofinvestorsorsecuritiesanalysts,thenthetradingpriceofourClassAcommonstockcoulddeclinesubstantially.Someoftheimportantfactorsthatmaycauseourresultsofoperationstofluctuatefromquartertoquarterinclude:
• ourabilitytoretainandincreaserevenuefromexistingcustomersandattractnewcustomers;
• fluctuationsintheamountofrevenuefromourVariableCustomerAccounts;
• ourabilitytoattractenterprisesandinternationalorganizationsascustomers;
• ourabilitytointroducenewproductsandenhanceexistingproducts;
• competitionandtheactionsofourcompetitors,includingpricingchangesandtheintroductionofnewproducts,servicesandgeographies;
• thenumberofnewemployees;
• changesinnetworkserviceproviderfeesthatwepayinconnectionwiththedeliveryofcommunicationsonourplatform;
• changesincloudinfrastructurefeesthatwepayinconnectionwiththeoperationofourplatform;
• changesinourpricingasaresultofouroptimizationeffortsorotherwise;
• reductionsinpricingasaresultofnegotiationswithourlargercustomers;
• therateofexpansionandproductivityofoursalesforce,includingourenterprisesalesforce,whichhasbeenafocusofourrecentexpansionefforts;
• changeinthemixofproductsthatourcustomersuse;
• changeintherevenuemixofU.S.andinternationalproducts;
• theamountandtimingofoperatingcostsandcapitalexpendituresrelatedtotheoperationsandexpansionofourbusiness,includinginvestmentsinourinternationalexpansion;
• significantsecuritybreachesof,technicaldifficultieswith,orinterruptionsto,thedeliveryanduseofourproductsonourplatform;
• thetimingofcustomerpaymentsandanydifficultyincollectingaccountsreceivablefromcustomers;
• generaleconomicconditionsthatmayadverselyaffectaprospectivecustomer'sabilityorwillingnesstoadoptourproducts,delayaprospectivecustomer'sadoptiondecision,reducetherevenuethatwegeneratefromtheuseofourproductsoraffectcustomerretention;
• changesinforeigncurrencyexchangerates;
• extraordinaryexpensessuchaslitigationorotherdispute-relatedsettlementpayments;
• salestaxandothertaxdeterminationsbyauthoritiesinthejurisdictionsinwhichweconductbusiness;
• theimpactofnewaccountingpronouncements;
• expensesinconnectionwithmergers,acquisitionsorotherstrategictransactions;and
• fluctuationsinstock-basedcompensationexpense.
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Theoccurrenceofoneormoreoftheforegoingandotherfactorsmaycauseourresultsofoperationstovarysignificantly.Assuch,webelievethatquarter-to-quartercomparisonsofourresultsofoperationsmaynotbemeaningfulandshouldnotberelieduponasanindicationoffutureperformance.Inaddition,asignificantpercentageofouroperatingexpensesisfixedinnatureandisbasedonforecastedrevenuetrends.Accordingly,intheeventofarevenueshortfall,wemaynotbeabletomitigatethenegativeimpactonourincome(loss)andmarginsintheshortterm.Ifwefailtomeetorexceedtheexpectationsofinvestorsorsecuritiesanalysts,thenthetradingpriceofourClassAcommonstockcouldfallsubstantially,andwecouldfacecostlylawsuits,includingsecuritiesclassactionsuits.
Additionally,certainlargescaleevents,suchasmajorelectionsandsportingevents,cansignificantlyimpactusagelevelsonourplatform,whichcouldcausefluctuationsinourresultsofoperations.Weexpectthatsignificantlyincreasedusageofallcommunicationsplatforms,includingours,duringcertainseasonalandone-timeeventscouldimpactdeliveryandqualityofourproductsduringthoseevents.Wealsoexperiencedincreasedexpensesinthesecondquarterof2015duetoourdeveloperconference,SIGNAL,whichweplantohostannually.Suchannualandone-timeeventsmaycausefluctuationsinourresultsofoperationsandmayimpactbothourrevenueandoperatingexpenses.
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 financialcondition may be adversely affected.
Webelievethatmaintainingandenhancingthe"Twilio"brandidentityandincreasingmarketawarenessofourcompanyandproducts,particularlyamongdevelopers,iscriticaltoachievingwidespreadacceptanceofourplatform,tostrengthenourrelationshipswithourexistingcustomersandtoourabilitytoattractnewcustomers.Thesuccessfulpromotionofourbrandwilldependlargelyonourcontinuedmarketingefforts,ourabilitytocontinuetoofferhighqualityproducts,ourabilitytobethoughtleadersinthecloudcommunicationsmarketandourabilitytosuccessfullydifferentiateourproductsandplatformfromcompetingproductsandservices.Ourbrandpromotionandthoughtleadershipactivitiesmaynotbesuccessfuloryieldincreasedrevenue.Inaddition,independentindustryanalystsoftenprovidereviewsofourproductsandcompetingproductsandservices,whichmaysignificantlyinfluencetheperceptionofourproductsinthemarketplace.Ifthesereviewsarenegativeornotasstrongasreviewsofourcompetitors'productsandservices,thenourbrandmaybeharmed.
Fromtimetotime,ourcustomershavecomplainedaboutourproducts,suchascomplaintsaboutourpricingandcustomersupport.Ifwedonothandlecustomercomplaintseffectively,thenourbrandandreputationmaysuffer,ourcustomersmayloseconfidenceinusandtheymayreduceorceasetheiruseofourproducts.Inaddition,manyofourcustomerspostanddiscussonsocialmediaaboutInternet-basedproductsandservices,includingourproductsandplatform.Oursuccessdepends,inpart,onourabilitytogeneratepositivecustomerfeedbackandminimizenegativefeedbackonsocialmediachannelswhereexistingandpotentialcustomersseekandshareinformation.Ifactionswetakeorchangeswemaketoourproductsorplatformupsetthesecustomers,thentheironlinecommentarycouldnegativelyaffectourbrandandreputation.Complaintsornegativepublicityaboutus,ourproductsorourplatformcouldmateriallyandadverselyimpactourabilitytoattractandretaincustomers,ourbusiness,resultsofoperationsandfinancialcondition.
Thepromotionofourbrandalsorequiresustomakesubstantialexpenditures,andweanticipatethattheseexpenditureswillincreaseasourmarketbecomesmorecompetitiveandasweexpandintonewmarkets.Totheextentthattheseactivitiesincreaserevenue,thisrevenuestillmaynotbeenoughtooffsettheincreasedexpensesweincur.Ifwedonotsuccessfullymaintainand
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enhanceourbrand,thenourbusinessmaynotgrow,wemayseeourpricingpowerreducedrelativetocompetitorsandwemaylosecustomers,allofwhichwouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
Our business depends on customers increasing their use of our products and any loss of customers or decline in their use of our products could materially and adverselyaffect our business, results of operations and financial condition.
Ourabilitytogrowandgenerateincrementalrevenuedepends,inpart,onourabilitytomaintainandgrowourrelationshipswithexistingcustomersandtohavethemincreasetheirusageofourplatform.Ifourcustomersdonotincreasetheiruseofourproducts,thenourrevenuemaydeclineandourresultsofoperationsmaybeharmed.Customersarechargedbasedontheusageofourproducts.Mostofourcustomersdonothavelong-termcontractualfinancialcommitmentstousand,therefore,mostofourcustomersmayreduceorceasetheiruseofourproductsatanytimewithoutpenaltyorterminationcharges.Wecannotaccuratelypredictcustomers'usagelevelsandthelossofcustomersorreductionsintheirusagelevelsofourproductsmayeachhaveanegativeimpactonourbusiness,resultsofoperationsandfinancialcondition.ReductionsinusagefromexistingcustomersandthelossofcustomerscouldcauseourDollar-BasedNetExpansionRatetodeclineinthefutureifcustomersarenotsatisfiedwithourproducts,thevaluepropositionofourproductsorourabilitytootherwisemeettheirneedsandexpectations.Ifasignificantnumberofcustomersceaseusing,orreducetheirusageofourproducts,thenwemayberequiredtospendsignificantlymoreonsalesandmarketingthanwecurrentlyplantospendinordertomaintainorincreaserevenuefromcustomers.Suchadditionalsalesandmarketingexpenditurescouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
If we are unable to attract new customers in a cost-effective manner, then our business, results of operations and financial condition would be adversely affected.
Inordertogrowourbusiness,wemustcontinuetoattractnewcustomersinacost-effectivemanner.Weuseavarietyofmarketingchannelstopromoteourproductsandplatform,suchasdevelopereventsandevangelism,aswellassearchenginemarketingandoptimization.Weperiodicallyadjustthemixofourothermarketingprogramssuchasregionalcustomerevents,emailcampaigns,billboardadvertisingandpublicrelationsinitiatives.Ifthecostsofthemarketingchannelsweuseincreasedramatically,thenwemaychoosetousealternativeandlessexpensivechannels,whichmaynotbeaseffectiveasthechannelswecurrentlyuse.Asweaddtoorchangethemixofourmarketingstrategies,wemayneedtoexpandintomoreexpensivechannelsthanthosewearecurrentlyin,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Wewillincurmarketingexpensesbeforeweareabletorecognizeanyrevenuethatthemarketinginitiativesmaygenerate,andtheseexpensesmaynotresultinincreasedrevenueorbrandawareness.Wehavemadeinthepast,andmaymakeinthefuture,significantexpendituresandinvestmentsinnewmarketingcampaigns,andwecannotassureyouthatanysuchinvestmentswillleadtothecost-effectiveacquisitionofadditionalcustomers.Ifweareunabletomaintaineffectivemarketingprograms,thenourabilitytoattractnewcustomerscouldbemateriallyandadverselyaffected,ouradvertisingandmarketingexpensescouldincreasesubstantiallyandourresultsofoperationsmaysuffer.
If we do not develop enhancements to our products and introduce new products that achieve market acceptance, our business, results of operations and financial conditioncould be adversely affected.
Ourabilitytoattractnewcustomersandincreaserevenuefromexistingcustomersdependsinpartonourabilitytoenhanceandimproveourexistingproducts,increaseadoptionandusageof
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ourproductsandintroducenewproducts.Thesuccessofanyenhancementsornewproductsdependsonseveralfactors,includingtimelycompletion,adequatequalitytesting,actualperformancequality,market-acceptedpricinglevelsandoverallmarketacceptance.Enhancementsandnewproductsthatwedevelopmaynotbeintroducedinatimelyorcost-effectivemanner,maycontainerrorsordefects,mayhaveinteroperabilitydifficultieswithourplatformorotherproductsormaynotachievethebroadmarketacceptancenecessarytogeneratesignificantrevenue.Furthermore,ourabilitytoincreasetheusageofourproductsdepends,inpart,onthedevelopmentofnewusecasesforourproducts,whichistypicallydrivenbyourdevelopercommunityandmaybeoutsideofourcontrol.Wealsohaveinvested,andmaycontinuetoinvest,intheacquisitionofcomplementarybusinesses,technologies,services,productsandotherassetsthatexpandtheproductsthatwecanofferourcustomers.Wemaymaketheseinvestmentswithoutbeingcertainthattheywillresultinproductsorenhancementsthatwillbeacceptedbyexistingorprospectivecustomers.Ourabilitytogenerateusageofadditionalproductsbyourcustomersmayalsorequireincreasinglysophisticatedandmorecostlysaleseffortsandresultinalongersalescycle.Ifweareunabletosuccessfullyenhanceourexistingproductstomeetevolvingcustomerrequirements,increaseadoptionandusageofourproducts,developnewproducts,orifoureffortstoincreasetheusageofourproductsaremoreexpensivethanweexpect,thenourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.
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,wehavereliedontheadoptionofourproductsbysoftwaredevelopersthroughourself-servicemodelforasignificantmajorityofourrevenue,andwecurrentlygenerateonlyasmallportionofourrevenuefromenterprisecustomers.Ourabilitytoincreaseourcustomerbase,especiallyamongenterprises,andachievebroadermarketacceptanceofourproductswilldepend,inpart,onourabilitytoeffectivelyorganize,focusandtrainoursalesandmarketingpersonnel.Wehavelimitedexperiencesellingtoenterprisesandonlyrecentlyestablishedanenterprise-focusedsalesforce.
Ourabilitytoconvinceenterprisestoadoptourproductswilldepend,inpart,onourabilitytoattractandretainsalespersonnelwithexperiencesellingtoenterprises.Webelievethatthereissignificantcompetitionforexperiencedsalesprofessionalswiththeskillsandtechnicalknowledgethatwerequire.Ourabilitytoachievesignificantrevenuegrowthinthefuturewilldepend,inpart,onourabilitytorecruit,trainandretainasufficientnumberofexperiencedsalesprofessionals,particularlythosewithexperiencesellingtoenterprises.Inaddition,evenifwearesuccessfulinhiringqualifiedsalespersonnel,newhiresrequiresignificanttrainingandexperiencebeforetheyachievefullproductivity,particularlyforsaleseffortstargetedatenterprisesandnewterritories.Ourrecenthiresandplannedhiresmaynotbecomeasproductiveasquicklyasweexpectandwemaybeunabletohireorretainsufficientnumbersofqualifiedindividualsinthefutureinthemarketswherewedobusiness.Becausewedonothavealonghistoryoftargetingoursaleseffortsatenterprises,wecannotpredictwhether,ortowhatextent,oursaleswillincreaseasweorganizeandtrainoursalesforceorhowlongitwilltakeforsalespersonneltobecomeproductive.
Asweseektoincreasetheadoptionofourproductsbyenterprises,weexpecttoincurhighercostsandlongersalescycles.Inthismarketsegment,thedecisiontoadoptourproductsmayrequiretheapprovalofmultipletechnicalandbusinessdecisionmakers,includingsecurity,compliance,procurement,operationsandIT.Inaddition,whileenterprisecustomersmayquicklydeployourproductsonalimitedbasis,beforetheywillcommittodeployingourproductsatscale,theyoftenrequireextensiveeducationaboutourproductsandsignificantcustomersupporttime,engageinprotractedpricingnegotiationsandseektosecurereadilyavailabledevelopmentresources.Inaddition,salescyclesforenterprisesareinherentlymorecomplexandless
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predictablethanthesalesthroughourself-servicemodel,andsomeenterprisecustomersmaynotuseourproductsenoughtogeneraterevenuethatjustifiesthecosttoobtainsuchcustomers.Inaddition,thesecomplexandresourceintensivesaleseffortscouldplaceadditionalstrainonourlimitedproductandengineeringresources.Further,enterprises,includingsomeofourcustomers,maychoosetodeveloptheirownsolutionsthatdonotincludeourproducts.Theyalsomaydemandreductionsinpricingastheirusageofourproductsincreases,whichcouldhaveanadverseimpactonourgrossmargin.Asaresultofourlimitedexperiencesellingandmarketingtoenterprises,oureffortstoselltothesepotentialcustomersmaynotbesuccessful.Ifweareunabletoincreasetherevenuethatwederivefromenterprises,thenourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.
If we are unable to expand our relationships with existing Solution Partner customers and add new Solution Partner customers, our business, results of operations andfinancial condition could be adversely affected.
WebelievethatthecontinuedgrowthofourbusinessdependsinpartupondevelopingandexpandingstrategicrelationshipswithSolutionPartnercustomers.SolutionPartnercustomersembedoursoftwareproductsintheirsolutions,suchassoftwareapplicationsforcontactcentersandsalesforceandmarketingautomation,andthensellsuchsolutionstootherbusinesses.Whenpotentialcustomersdonothavetheavailabledeveloperresourcestobuildtheirownapplications,wereferthemtoournetworkofSolutionPartnercustomers.
Aspartofourgrowthstrategy,weintendtoexpandourrelationshipswithexistingSolutionPartnercustomersandaddnewSolutionPartnercustomers.IfwefailtoexpandourrelationshipswithexistingSolutionPartnercustomersorestablishrelationshipswithnewSolutionPartnercustomers,inatimelyandcost-effectivemanner,oratall,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.Additionally,evenifwearesuccessfulatbuildingtheserelationshipsbutthereareproblemsorissueswithintegratingourproductsintothesolutionsofthesecustomers,ourreputationandabilitytogrowourbusinessmaybeharmed.
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.
WeoutsourcesubstantiallyallofourcloudinfrastructuretoAmazonWebServices,orAWS,whichhostsourproductsandplatform.Customersofourproductsneedtobeabletoaccessourplatformatanytime,withoutinterruptionordegradationofperformance.AWSrunsitsownplatformthatweaccess,andweare,therefore,vulnerabletoserviceinterruptionsatAWS.Wehaveexperienced,andexpectthatinthefuturewemayexperienceinterruptions,delaysandoutagesinserviceandavailabilityfromtimetotimeduetoavarietyoffactors,includinginfrastructurechanges,humanorsoftwareerrors,websitehostingdisruptionsandcapacityconstraints.Capacityconstraintscouldbeduetoanumberofpotentialcausesincludingtechnicalfailures,naturaldisasters,fraudorsecurityattacks.Forinstance,inSeptember2015,AWSsufferedasignificantoutagethathadawidespreadimpactontheabilityofourcustomerstouseseveralofourproducts.Inaddition,ifoursecurity,orthatofAWS,iscompromised,ourproductsorplatformareunavailableorourusersareunabletouseourproductswithinareasonableamountoftimeoratall,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.Insomeinstances,wemaynotbeabletoidentifythecauseorcausesoftheseperformanceproblemswithinaperiodoftimeacceptabletoourcustomers.Itmaybecomeincreasinglydifficulttomaintainandimproveourplatformperformance,especiallyduringpeakusagetimes,asourproductsbecomemorecomplexandtheusageofourproductsincreases.Totheextentthatwedonoteffectivelyaddresscapacityconstraints,eitherthroughAWSoralternativeprovidersofcloud
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infrastructure,ourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.Inaddition,anychangesinservicelevelsfromAWSmayadverselyaffectourabilitytomeetourcustomers'requirements.
ThesubstantialmajorityoftheservicesweusefromAWSareforcloud-basedservercapacityand,toalesserextent,storageandotheroptimizationofferings.AWSenablesustoorderandreserveservercapacityinvaryingamountsandsizesdistributedacrossmultipleregions.WeaccessAWSinfrastructurethroughstandardIPconnectivity.AWSprovidesuswithcomputingandstoragecapacitypursuanttoanagreementthatcontinuesuntilterminatedbyeitherparty.AWSmayterminatetheagreementbyproviding30dayspriorwrittennotice,andmayinsomecasesterminatetheagreementimmediatelyforcauseuponnotice.Althoughweexpectthatwecouldreceivesimilarservicesfromotherthirdparties,ifanyofourarrangementswithAWSareterminated,wecouldexperienceinterruptionsonourplatformandinourabilitytomakeourproductsavailabletocustomers,aswellasdelaysandadditionalexpensesinarrangingalternativecloudinfrastructureservices.
Anyoftheabovecircumstancesoreventsmayharmourreputation,causecustomerstostopusingourproducts,impairourabilitytoincreaserevenuefromexistingcustomers,impairourabilitytogrowourcustomerbase,subjectustofinancialpenaltiesandliabilitiesunderourservicelevelagreementsandotherwiseharmourbusiness,resultsofoperationsandfinancialcondition.
To deliver our products, we rely on network service providers for our network service.
Wecurrentlyinterconnectwithnetworkserviceprovidersaroundtheworldtoenabletheusebyourcustomersofourproductsovertheirnetworks.Weexpectthatwewillcontinuetorelyheavilyonnetworkserviceprovidersfortheseservicesgoingforward.Ourrelianceonnetworkserviceprovidershasreducedouroperatingflexibility,abilitytomaketimelyservicechangesandcontrolqualityofservice.Inaddition,thefeesthatwearechargedbynetworkserviceprovidersmaychangedailyorweekly,whilewedonottypicallychangeourcustomers'pricingasrapidly.Furthermore,manyofthesenetworkserviceprovidersdonothavelong-termcommittedcontractswithusandmayterminatetheiragreementswithuswithoutnoticeorrestriction.Ifasignificantportionofournetworkserviceprovidersstopprovidinguswithaccesstotheirinfrastructure,failtoprovidetheseservicestousonacost-effectivebasis,ceaseoperations,orotherwiseterminatetheseservices,thedelaycausedbyqualifyingandswitchingtoothernetworkserviceproviderscouldbetimeconsumingandcostlyandcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
Further,ifproblemsoccurwithournetworkserviceproviders,itmaycauseerrorsorpoorqualitycommunicationswithourproducts,andwecouldencounterdifficultyidentifyingthesourceoftheproblem.Theoccurrenceoferrorsorpoorqualitycommunicationsonourproducts,whethercausedbyourplatformoranetworkserviceprovider,mayresultinthelossofourexistingcustomersorthedelayofadoptionofourproductsbypotentialcustomersandmayadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
Our future success depends in part on our ability to drive the adoption of our products by international customers.
In2013,2014and2015andthethreemonthsendedMarch31,2016,wederived9%,12%,14%and15%ofourrevenue,respectively,fromcustomeraccountslocatedoutsidetheUnitedStates.Thefuturesuccessofourbusinesswilldepend,inpart,onourabilitytoexpandourcustomerbaseworldwide.Whilewehavebeenrapidlyexpandingoursaleseffortsinternationally,ourexperienceinsellingourproductsoutsideoftheUnitedStatesislimited.Furthermore,ourdeveloper-firstbusinessmodelmaynotbesuccessfulorhavethesametractionoutsidetheUnited
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States.Asaresult,ourinvestmentinmarketingourproductstothesepotentialcustomersmaynotbesuccessful.Ifweareunabletoincreasetherevenuethatwederivefrominternationalcustomers,thenourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.
We are in the process of expanding our international operations, which exposes us to significant risks.
WearecontinuingtoexpandourinternationaloperationstoincreaseourrevenuefromcustomersoutsideoftheUnitedStatesaspartofourgrowthstrategy.BetweenMarch31,2015andMarch31,2016,weopenedthreeofficesoutsideoftheUnitedStates,allofwhichareprimarilyfocusedonsellingefforts.Weexpect,inthefuture,toopenadditionalforeignofficesandhireemployeestoworkattheseofficesinordertoreachnewcustomersandgainaccesstoadditionaltechnicaltalent.Operatingininternationalmarketsrequiressignificantresourcesandmanagementattentionandwillsubjectustoregulatory,economicandpoliticalrisksinadditiontothosewealreadyfaceintheUnitedStates.Becauseofourlimitedexperiencewithinternationaloperationsaswellasdevelopingandmanagingsalesininternationalmarkets,ourinternationalexpansioneffortsmaynotbesuccessful.
Inaddition,wewillfacerisksindoingbusinessinternationallythatcouldadverselyaffectourbusiness,including:
• thedifficultyofmanagingandstaffinginternationaloperationsandtheincreasedoperations,travel,infrastructureandlegalcompliancecostsassociatedwithnumerousinternationallocations;
• ourabilitytoeffectivelypriceourproductsincompetitiveinternationalmarkets;
• newanddifferentsourcesofcompetition;
• potentiallygreaterdifficultycollectingaccountsreceivableandlongerpaymentcycles;
• higherormorevariablenetworkserviceproviderfeesoutsideoftheUnitedStates;
• theneedtoadaptandlocalizeourproductsforspecificcountries;
• theneedtooffercustomersupportinvariouslanguages;
• difficultiesinunderstandingandcomplyingwithlocallaws,regulationsandcustomsinforeignjurisdictions;
• difficultieswithdifferingtechnicalandenvironmentalstandards,dataprivacyandtelecommunicationsregulationsandcertificationrequirementsoutsidetheUnitedStates,whichcouldpreventcustomersfromdeployingourproductsorlimittheirusage;
• exportcontrolsandeconomicsanctionsadministeredbytheDepartmentofCommerceBureauofIndustryandSecurityandtheTreasuryDepartment'sOfficeofForeignAssetsControl;
• compliancewithvariousanti-briberyandanti-corruptionlawssuchastheForeignCorruptPracticesActandUnitedKingdomBriberyActof2010;
• tariffsandothernon-tariffbarriers,suchasquotasandlocalcontentrules;
• morelimitedprotectionforintellectualpropertyrightsinsomecountries;
• adversetaxconsequences;
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• fluctuationsincurrencyexchangerates,whichcouldincreasethepriceofourproductsoutsideoftheUnitedStates,increasetheexpensesofourinternationaloperationsandexposeustoforeigncurrencyexchangeraterisk;
• currencycontrolregulations,whichmightrestrictorprohibitourconversionofothercurrenciesintoU.S.dollars;
• restrictionsonthetransferoffunds;
• deteriorationofpoliticalrelationsbetweentheUnitedStatesandothercountries;and
• politicalorsocialunrestoreconomicinstabilityinaspecificcountryorregioninwhichweoperate,whichcouldhaveanadverseimpactonouroperationsinthatlocation.
Also,duetocostsfromourinternationalexpansioneffortsandnetworkserviceproviderfeesoutsideoftheUnitedStatesthataregenerallyhigherthandomesticrates,ourgrossmarginforinternationalcustomersistypicallylowerthanourgrossmarginfordomesticcustomers.Asaresult,ourgrossmarginmaybeimpactedandfluctuateasweexpandouroperationsandcustomerbaseworldwide.
Ourfailuretomanageanyoftheseriskssuccessfullycouldharmourinternationaloperations,andadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
We currently generate significant revenue from WhatsApp and the loss of WhatsApp could harm our business, results of operations and financial condition.
In2013,2014and2015andthethreemonthsendedMarch31,2016,WhatsAppaccountedfor11%,13%,17%and15%ofourrevenue,respectively.WhatsAppusesourProgrammableVoiceproductsandProgrammableMessagingproductsinitsapplicationstoverifynewandexistingusersonitsservice.Wehaveseenyear-over-yeargrowthinWhatsApp'suseofourproductssince2013asitsservicehasexpandedandasithasincreasedtheuseofourproductswithinitsapplications.OurVariableCustomerAccounts,includingWhatsApp,donothavelong-termcontractswithusandmayreduceorfullyterminatetheirusageofourproductsatanytimewithoutpenaltyorterminationcharges.Inaddition,theusageofourproductsbyWhatsAppandotherVariableCustomerAccountsmaychangesignificantlybetweenperiods.
Whileweexpectthattherevenueforourlargestcustomers,includingWhatsApp,willdecreaseovertimeasapercentageofourtotalrevenueaswegeneratemorerevenuefromothercustomers,wealsobelievethatrevenuefromWhatsAppmaycontinuetoaccountforasignificantportionofourrevenue,atleastinthenearterm.WhatsApphasnoobligationtoprovideanynoticetousiftheyelecttostopusingourproductsentirelyand,assuch,thecontributionfromWhatsAppcoulddeclinetozeroinanyfutureperiodwithoutadvancenotice.IntheeventthatWhatsAppdoesnotcontinuetouseourproducts,usesfewerofourproducts,orusesourproductsinamorelimitedcapacity,ornotatall,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.
The market in which we participate is intensely competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed.
Themarketforcloudcommunicationsisrapidlyevolving,significantlyfragmentedandhighlycompetitive,withrelativelylowbarrierstoentryinsomesegments.Theprincipalcompetitivefactorsinourmarketincludecompletenessofoffering,credibilitywithdevelopers,globalreach,easeofintegrationandprogrammability,productfeatures,platformscalability,reliability,securityandperformance,brandawarenessandreputation,thestrengthofsalesandmarketingefforts,
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customersupport,aswellasthecostofdeployingandusingourproducts.Ourcompetitorsfallintofourprimarycategories:
• legacyon-premisevendors,suchasAvayaandCisco;
• regionalnetworkserviceprovidersthatofferlimiteddeveloperfunctionalityontopoftheirownphysicalinfrastructure;
• smallersoftwarecompaniesthatcompetewithportionsofourproductline;and
• SaaScompaniesthatofferprepackagedapplicationsforanarrowsetofusecases.
Someofourcompetitorsandpotentialcompetitorsarelargerandhavegreaternamerecognition,longeroperatinghistories,moreestablishedcustomerrelationships,largerbudgetsandsignificantlygreaterresourcesthanwedo.Inaddition,theyhavetheoperatingflexibilitytobundlecompetingproductsandservicesatlittleornoperceivedincrementalcost,includingofferingthematalowerpriceaspartofalargersalestransaction.Asaresult,ourcompetitorsmaybeabletorespondmorequicklyandeffectivelythanwecantoneworchangingopportunities,technologies,standardsorcustomerrequirements.Inaddition,somecompetitorsmayofferproductsorservicesthataddressoneoralimitednumberoffunctionsatlowerprices,withgreaterdepththanourproductsorindifferentgeographies.Ourcurrentandpotentialcompetitorsmaydevelopandmarketnewproductsandserviceswithcomparablefunctionalitytoourproducts,andthiscouldleadtoushavingtodecreasepricesinordertoremaincompetitive.Customersutilizeourproductsinmanyways,andusevaryinglevelsoffunctionalitythatourproductsofferorarecapableofsupportingorenablingwithintheirapplications.Customersthatusemanyofthefeaturesofourproductsoruseourproductstosupportorenablecorefunctionalityfortheirapplicationsmayhavedifficultyorfinditimpracticaltoreplaceourproductswithacompetitor'sproductsorservices,whilecustomersthatuseonlylimitedfunctionalitymaybeabletomoreeasilyreplaceourproductswithcompetitiveofferings.
Withtheintroductionofnewproductsandservicesandnewmarketentrants,weexpectcompetitiontointensifyinthefuture.Inaddition,someofourcustomersmaychoosetouseourproductsandourcompetitors'productsatthesametime.Moreover,asweexpandthescopeofourproducts,wemayfaceadditionalcompetition.Ifoneormoreofourcompetitorsweretomergeorpartnerwithanotherofourcompetitors,thechangeinthecompetitivelandscapecouldalsoadverselyaffectourabilitytocompeteeffectively.Inaddition,someofourcompetitorshavelowerlistpricesthanus,whichmaybeattractivetocertaincustomersevenifthoseproductshavedifferentorlesserfunctionality.Ifweareunabletomaintainourcurrentpricingduetothecompetitivepressures,ourmarginswillbereducedandourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.Inaddition,pricingpressuresandincreasedcompetitiongenerallycouldresultinreducedrevenue,reducedmargins,increasedlossesorthefailureofourproductstoachieveormaintainwidespreadmarketacceptance,anyofwhichcouldharmourbusiness,resultsofoperationsandfinancialcondition.
We have a limited operating history, which makes it difficult to evaluate our current business and future prospects and increases the risk of your investment.
Wewerefoundedandlaunchedourfirstproductin2008.Asaresultofourlimitedoperatinghistory,ourabilitytoforecastourfutureresultsofoperationsislimitedandsubjecttoanumberofuncertainties,includingourabilitytoplanforfuturegrowth.Ourhistoricalrevenuegrowthshouldnotbeconsideredindicativeofourfutureperformance.Wehaveencounteredandwillencounterrisksanduncertaintiesfrequentlyexperiencedbygrowingcompaniesinrapidlychangingindustries,suchas:
• marketacceptanceofourproductsandplatform;