Item 1.
Business
Overview
Software developers are reinventing nearly every aspect of business today. Yet as developers, we repeatedly encountered an area where we could
not innovatecommunications. Because communication is a fundamental human activity and vital to building great businesses, we wanted to incorporate communications into our software
applications, but the barriers to innovation were too high. Twilio was started to solve this problem.
We
believe the future of communications will be written in software, by the developers of the worldour customers. By empowering them, our mission is to fuel the future of
communications.
Cloud
platforms are a new category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure.
These platforms have arisen to enable a fast pace of innovation across a range of categories, such as computing and storage. We are the leader in the Cloud Communications Platform category. We enable
developers to build, scale and operate real-time communications within software applications.
Our
developer-first platform approach consists of three things: our Programmable Communications Cloud, Super Network and Business Model for Innovators. Our Programmable Communications
Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via our simple-to-use Application Programming Interfaces, or APIs. We do not
aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. 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. Our Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging
experimentation and enabling developers to grow as customers as their ideas succeed.
We
had 36,606 Active Customer Accounts as of December 31, 2016, representing organizations big and small, old and young, across nearly every industry, with one thing in common:
they are competing by using the power of software to build differentiation through communications. With our platform, our customers are disrupting existing industries and creating new ones. For
example, our customers have reinvented hired transportation by connecting riders and drivers, with communications as a critical part of each transaction. Our customers' software applications use our
platform to notify a diner when a table is ready, a traveler when a flight is delayed or a shopper when a package has shipped. The range of applications that developers build with the Twilio platform
has proven to be nearly limitless.
Our
goal is for Twilio to be in the toolkit of every software developer in the world. Because big ideas often start small, we encourage developers to experiment and iterate on our
platform. We love when developers explore what they can do with Twilio, because one day they may have a business problem that they will use our products to solve.
As
our customers succeed, we share in their success through our usage-based revenue model. Our revenue grows as customers increase their usage of a product, extend their usage of a
product to new applications or adopt a new product. We believe the most useful indicator of this increased activity from our existing customer accounts is our Dollar-Based Net Expansion Rate, which
was 161% and 155% for the years ended December 31, 2016 and 2015, respectively. See the section titled "Management's Discussion and Analysis of Financial Condition and Results of
OperationsKey Business MetricsDollar-Based Net Expansion Rate."
5
Table of Contents
Our Platform Approach
Twilio's mission is to fuel the future of communications. We enable developers to build, scale and operate real-time communications within
software applications.
We
believe every application can be enhanced through the power of communication. Over time, we believe that all of our communications that do not occur in person will be integrated into
software applications. Our platform approach enables developers to build this future.
Our
Programmable Communications Cloud, Super Network and Business Model for Innovators work together to create value for our customers and a competitive advantage for our company.
Our Programmable Communications Cloud
Our Programmable Communications Cloud provides a range of products that enables developers to embed voice, messaging, video and authentication
capabilities into their applications. Our easy-to-use developer APIs provide a programmatic channel to access our software. Developers can utilize our
6
Table of Contents
intuitive
programming language, TwiML, to specify application functions such as <Dial>, <Record> and <Play>, leveraging our software to manage the
complexity of executing the specified functions.
Our
Programmable Communications Cloud consists of software products that can be used individually or in combination to build rich contextual communications within applications. We do not
aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. Our Programmable
Communications Cloud includes:
-
-
Programmable Voice.
Our
Programmable Voice software products allow developers to build solutions to make and receive phone calls globally, and incorporate advanced voice functionality such as text-to-speech, conferencing,
recording and transcription. Programmable Voice, through our advanced call control software, allows developers to build customized applications that address use cases such as contact centers, call
tracking and analytics solutions and anonymized communications.
-
-
Programmable Messaging.
Our
Programmable Messaging software products allow developers to build solutions to send and receive text messages globally, and incorporate advanced messaging functionality such as emoji, picture
messaging and localized languages. Our customers use Programmable Messaging, through software controls, to power use cases, such as appointment reminders, delivery notifications, order confirmations
and customer care.
-
-
Programmable Video.
Our recently
introduced Programmable Video software products enable developers to build next-generation mobile and web applications with embedded video, including for use cases such as customer care, collaboration
and physician consultations.
-
-
Use Case APIs.
While developers
can build a broad range of applications on our platform, certain use cases are more common. Our Use Case APIs build upon the above products to offer more fully implemented functionality for a specific
purpose, such as two-factor authentication, thereby saving developers significant time in building their applications.
Using
our software, developers, including our Solution Partner customers, are able to incorporate communications into applications that span a range of industries and functionalities.
Common Use Cases
-
-
Anonymous
Communications.
Enabling users to have a trusted means of communications where they prefer not to share private information like their telephone
number. Examples include conversations between drivers and riders or texting after meeting through a dating website.
-
-
Alerts and
Notifications.
Alerting a user that an event has occurred, such as when a table is ready, a flight is delayed or a package is shipped.
-
-
Contextual Support.
Improving
customer care with voice, messaging and video capabilities that integrate with other systems to add context, such as a caller's support ticket history or present location.
-
-
Call Tracking.
Using phone
numbers to provide detailed analytics on phone calls to measure the effectiveness of marketing campaigns or lead generation activities in a manner similar to how web analytics track and measure online
activity.
-
-
Mobile Marketing.
Integrating
messaging with marketing automation technology, allowing organizations to deliver targeted and timely contextualized communications to consumers.
-
-
User Security.
Verifying user
identity through two-factor authentication prior to log-in or validating transactions within an application's workflow. This adds an additional layer of security to any application.
7
Table of Contents
-
-
Twilio For Good.
Partnering with
nonprofit organizations through Twilio.org, to use the power of communications to help solve social challenges, such as an SMS hotline to fight human trafficking, an emergency volunteer dispatch
system and appointment reminders for medical visits in developing nations.
Our developers continually impress us with what they are able to build using our platform. In addition to our common use cases, we have a number
of uncommon use cases that demonstrate the versatility of our platform and the creativity of our developer community.
-
-
Magic Routines.
Doug McKenzie is
making magic new again by using his audience's own phones to perform classic street illusions. Audience members select a card, put it in their pocket without looking at it, and then text Doug's Twilio
app which tells them their card correctly, every single time.
-
-
Robocall Firewall.
Aaron Foss
turned a weekend project with Twilio's products into a service that won the FTC's first Robocall Challenge and then blocked over 15.1 million robocalls in 2014. He anonymized and printed out
each call blocked in 2014, and brought the reams of paper with him to the FCC to show the extent of robocalling.
-
-
Music Fan
Engagement.
Grammy-winning musicians have utilized Twilio's platform to interact with fans by sharing lyrics, new releases and insights via voice
recordings, text messages and videos.
-
-
Parkinson's Voice Initiative.
A
team of mathematicians and clinicians have devised a system using Twilio that allows a person to call a number that records his or her voice to assist in identifying individuals that may have
Parkinson's disease, potentially enabling early detection for those affected.
Our Programmable Communications Cloud is built on top of our global software layer, which we call our Super Network. Our Super Network
interfaces intelligently with communications networks globally. We do not own any physical network infrastructure. We use software to build a high performance network that optimizes performance for
our customers. Our Super Network breaks down the geopolitical boundaries and scale limitations of the physical network infrastructure.
Our
platform has global reach, consisting of 26 cloud data centers in eight regions. We interconnect those cloud data centers with network service providers around the world, giving us
redundant means to reach users globally. These distributed data centers also allow our software to run in close proximity to end users and network service providers to minimize latency. Our Super
Network interconnects with network service providers around the world, including carriers, mobile network operators and real-time data information service providers. When our customers use our
products, the communications are transmitted through one or more of the network service providers that are connected to our Super Network. Our proprietary technology selects which network service
providers to use and routes the communications in order to optimize the quality and cost of the communications across our product offerings. In addition, a very small number of customers have chosen
to use certain Programmable Voice products to build one or more applications that augment their existing communications infrastructure and operate through their own network service providers. We are
continually adding new network service provider relationships as we scale, and we are not dependent upon any single network service provider to conduct our business. We are continually adding new
network service provider relationships as we scale.
8
Table of Contents
Our
Super Network analyzes massive volumes of data from end users, their applications and the communications networks to optimize our customers' communications for quality and cost. With
every new message and call, our Super Network becomes more robust, intelligent and efficient, enabling us to provide better performance at lower prices to our customers. Our Super Network's
sophistication becomes increasingly difficult for others to replicate over time.
Our
Super Network analyzes massive volumes of data from end users, their applications and the communications networks to optimize our customers' communications for quality and cost. With
every new message and call, our Super Network becomes more robust, intelligent and efficient, enabling us to provide better performance at lower prices to our customers. Our Super Network's
sophistication becomes increasingly difficult for others to replicate over time.
Our goal is to include Twilio in the toolkit of every developer in the world. Because big ideas often start small, developers need the freedom
and tools to experiment and iterate on their ideas.
In
order to empower developers to experiment, our developer-first business model is low friction, eliminating the upfront costs, time and complexity that typically hinder innovation.
Developers can begin building with a free trial. They have access to self-service documentation and free customer support to guide them through the process. Once developers determine that our software
meets their needs, they can flexibly increase consumption and pay based on usage. In short, we acquire developers like consumers and enable them to spend like enterprises.
Our Growth Strategy
We are the leader in the Cloud Communications Platform category based on revenue, market share and reputation, and intend to continue to set the
pace for innovation. We will continue to invest aggressively in our platform approach, which prioritizes increasing our reach and scale. We intend to pursue the following growth
strategies:
-
-
Continue Significant Investment in our Technology
Platform.
We will continue to invest in building new software capabilities and extending our platform to bring the power of contextual
communications to a broader range of applications, geographies and customers. We have a substantial research and development team, comprising 53% of our headcount as of December 31, 2016.
Additionally, we were recently awarded an ISO 27001 certification, a widely recognized and internationally accepted set of information security standards that identifies requirements for a
comprehensive Information Security Management System, and defines how organizations should manage and handle information in a secure manner, including appropriate security controls.
-
-
Grow Our Developer Community and Accelerate
Adoption.
We will continue to enhance our relationships with developers globally and seek to increase the number of developers on our platform.
As of December 31, 2016, we had 36,606 Active Customer Accounts and well over one million registered developer accounts registered on our platform. In addition to adding new developers, we
believe there is significant opportunity for revenue growth from developers who have already registered accounts with us but who have not yet built their software applications with us, or whose
applications are in their infancy and will grow with Twilio into an Active Customer Account.
-
-
Increase Our International
Presence.
Our platform operates in over 180 countries today, making it as simple to communicate from São Paulo as it is from San
Francisco. Customers outside the United States are increasingly adopting our platform, and for the year ended December 31, 2016, revenue from international customer accounts accounted for 16%
of our
9
Table of Contents
Our Values and Leadership Principles
Our core values, called our "Nine Values," are at the center of everything that we do. As a company built by developers for developers, these
values guide us to work in a way that exemplifies many attributes of the developer ethos. These are not mere words on the wall. We introduce these values to new hires upon joining our company, and we
continually weave these values into everything we do. Our values provide a guide for the way our teams work, communicate, set goals and make decisions.
10
Table of Contents
We
believe leadership is a behavior, not a position. In addition to our values, we have articulated the leadership traits we all strive to achieve. Our leadership principles apply to
every Twilion, not just managers or executives, and provide a personal growth path for employees in their journeys to become better leaders.
The
combination of our Nine Values and our leadership principles has created a blueprint for how Twilions worldwide interact with customers and with each other, and for how they respond
to new challenges and opportunities.
11
Table of Contents
Twilio.org
We believe we can create greater social good through better communications. Through Twilio.org, which is a part of our company and not a
separate legal entity, we donate and discount our products to nonprofits, who use our products to engage their audience, expand their reach and focus on making a meaningful change in the world.
Twilio.org's mission is to send a billion messages for good. To that end, we have reserved 780,397 shares of our Class A common stock to fund and support operations of Twilio.org, which
represented 1% of our outstanding capital stock on the date it was approved by our board of directors. In our follow-on public offering, we sold 100,000 shares of Class A common stock to fund
and support the operations of Twilio.org, and the number of remaining reserved shares was reduced accordingly to 680,397.
Our Products
Our Programmable Communications Cloud consists of software for voice, messaging, video and authentication that empowers developers to build
applications that can communicate with connected devices globally. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks
that enable our customers to build what they need.
Our Programmable Voice software products allow developers to build solutions to make and receive phone calls globally, and incorporate advanced
voice functionality such as text-to-speech, conferencing, recording and transcription. Programmable Voice, through our advanced call control software, allows developers to build customized
applications that address use cases such as contact centers, call tracking and analytics solutions and anonymized communications. Our voice software works over both the traditional public switch
telephone network, as Twilio Voice, and over Internet Protocol, as Twilio Client. Programmable Voice includes:
-
-
Twilio Voice.
Initiate, receive
and manage phone calls globally.
-
-
Twilio Client Web.
Initiate,
receive and control calls between web browsers and landlines or mobile phones.
-
-
Twilio Client Mobile.
Embed IP
voice calling into native Apple iOS and Google Android apps.
-
-
Call Recording.
Securely record,
store, transcribe and retrieve voice calls in the cloud.
-
-
Global Conference.
Integrate
audio conferencing that intelligently routes calls through cloud data centers in the closest of six geographic regions to reduce latency. Scales from Basic, for a limited number of participants, to
Epic, for an unlimited number of participants.
-
-
Instant Phone Number
Provisioning.
Acquire local, national, mobile and toll-free phone numbers on demand in over 50 countries and connect them into the customers'
applications.
-
-
Elastic SIP Trunking.
Connect
legacy applications over IP infrastructure to our Super Network with globally-available phone numbers and pay-as-you-go pricing.
-
-
Interconnect.
Connect privately
to Twilio to enable enterprise grade security and quality of service for Twilio Voice and Elastic SIP Trunking.
We
charge on a per-minute or per-phone-number basis for most of our Programmable Voice products.
12
Table of Contents
Our Programmable Messaging software products allow developers to build solutions to send and receive text messages globally, and incorporate
advanced messaging functionality such as emoji, picture messaging and localized languages. Our customers use Programmable Messaging, through software controls, to power use cases, such as appointment
reminders, delivery notifications,
order confirmations and customer care. We offer messaging over long-code numbers, short-code numbers, messaging apps such as Facebook Messenger and over IP through our Android, iOS and JavaScript
software development kits. Programmable Messaging includes:
-
-
Twilio SMS.
Programmatically
send, receive and track SMS messages around the world, supporting localized languages in nearly every market.
-
-
Twilio MMS.
Exchange picture
messages and more over U.S. and Canadian phone numbers from customer applications with built-in image transcoding and media storage.
-
-
Copilot.
Intelligent software
layer that handles tasks, such as dynamically sending messages from a phone number that best matches the geographic location of the recipient based on a global pool of numbers.
-
-
Programmable Chat.
Deploy
contextual, in-app messaging at global scale.
-
-
Short Codes.
A five to seven
digit phone number in the United States, Canada and the United Kingdom used to send and receive a high-volume of messages per second.
-
-
Messaging App
Integration.
Programmatically send, receive and track messages to messaging apps such as Facebook Messenger and Viber globally.
-
-
Toll-Free SMS.
Send and receive
text messages with the same toll-free number used for voice calls in the United States and Canada.
-
-
Instant Phone Number
Provisioning.
Acquire local, national, mobile and toll-free phone numbers on demand in over 50 countries and connect them into the customers'
applications.
We
charge on a per-message or per-phone-number basis for most of our Programmable Messaging products.
Our recently introduced Programmable Video software products enable developers to build next-generation mobile and web applications with
embedded video, including for use cases such as customer care, collaboration and physician consultations. Programmable Video includes:
-
-
Twilio Video.
Create rich,
multi-party video experiences in applications powered by a global cloud infrastructure for peer-to-peer calls.
-
-
Network Traversal.
Provide
low-latency, cost-effective and reliable Session Traversal Utilities for NAT (STUN) and Traversal Using Relay for NAT (TURN) capabilities distributed across five continents. This functionality
allows developers to initiate peer-to-peer video session across any internet-connected device globally.
In
November 2016, we acquired the proprietary WebRTC media processing technologies built by the team behind the Kurento Open Source Project. The Kurento Media Server capabilities,
including large group communications, transcoding, recording and advanced media processing, has been integrated into Twilio Programmable Video.
We
charge on a per-connected-endpoint, per-active-endpoint and per-gigabit basis for our Programmable Video products.
13
Table of Contents
While developers can build a broad range of applications on our platform, certain use cases are more common. Our Use Case APIs build upon the
above products to offer more fully implemented functionality for a specific purpose, such as two-factor authentication, thereby saving developers significant time in building their applications. The
following are common uses cases for our Use Case APIs:
Identity and communications are closely linked, and this is a critical business need for our customers. Using our two-factor authentication
APIs, developers can add an extra layer of security to their applications with second-factor passwords sent to a user's phone via SMS, voice or push notifications. Our Programmable Authentication
products include:
-
-
Authy SoftToken.
Users
authenticate with a dynamic seven-digit code available from the Authy app on their registered mobile phone, desktop or Apple Watch.
-
-
Authy OneTouch.
Users receive
push notifications to approve or deny an authentication request with a simple "yes" or "no" response on their registered smartphone.
-
-
Authy OneCode.
Users authenticate
with a unique code delivered to their registered phone number via SMS or voice automated phone call.
A software product that enables intelligent multi-task routing in contact centers to optimize workflows, such as routing a call to an available
agent. A task can be a phone call, SMS, lead, support ticket or even machine learning from a connected device.
We
charge on a per-use basis for most of our Use Case APIs.
Launched in May 2016, our Add-on Marketplace allows third parties to integrate their capabilities directly into our Cloud Communications
Platform. This capability allows us to further leverage our community to provide new and differentiated functionality for our customers, while also opening up a new market for our partners.
We
share in the revenue generated by our partners for their solutions sold through our Add-on Marketplace.
Our Employees
As of December 31, 2016, we had a total 730 employees, including 125 employees located outside the United States. None of our employees
are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Research and Development
Our research and development efforts are focused on ensuring that our platform is resilient and available to our customers at any time, and on
enhancing our existing products and developing new products.
Our
research and development organization is built around small development teams. Our small development teams foster greater agility, which enables us to develop new, innovative
products and
14
Table of Contents
make
rapid changes to our infrastructure that increase resiliency and operational efficiency. Our development teams designed, built and continue to expand our Programmable Communications Cloud, which
enables developers to embed voice, messaging, video and authentication capabilities into their applications. Our development teams have also designed, built and continue to expand the software
infrastructure that we have deployed to create our Super Network.
As
of December 31, 2016, we had 390 employees in our research and development organization. We intend to continue to invest in our research and development capabilities to extend
our platform and bring the power of contextual communications to a broader range of applications, geographies and customers. Our research and development expenses for the years ended
December 31, 2016, 2015 and 2014 were $77.9 million, $42.6 million and $21.8 million, respectively.
Sales and Marketing
Our sales and marketing teams work together closely to drive awareness and adoption of our platform, accelerate customer acquisition and
generate revenue from customers.
Our
go-to-market model is primarily focused on reaching and serving the needs of developers. We are a pioneer of developer evangelism and education and have cultivated a large global
developer community. We reach developers through community events and conferences, including our SIGNAL developer conference, to demonstrate how every developer can create differentiated applications
incorporating communications using our products.
Once
developers are introduced to our platform, we provide them with a low-friction trial experience. By accessing our easy-to-configure APIs, extensive self-service documentation and
customer support team, developers can build our products into their applications and then test such applications during an initial free trial period that we provide. Once they have decided to use our
products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products. Our self-serve pricing matrix is publicly available
and it allows for customers to receive automatic tiered discounts as their usage of our products increases. As customers' use of our products grows larger, some enter into negotiated contracts with
terms that dictate pricing, and typically include some level of minimum revenue commitments. Historically, we have acquired the substantial majority of our customers through this self-service model.
As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with
us, we support them with account managers or customer success advocates to ensure their satisfaction and expand their usage of our products.
When
potential customers do not have the available developer resources to build their own applications, we refer them to our Solution Partners, who embed our products in their solutions
that they sell to other businesses, such as contact centers and sales force and marketing automation.
We
also supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through an enterprise sales approach.
We have supplemented this sales effort with a new product launch, our Twilio Enterprise Plan, which provides new capabilities for advanced security, access management and granular administration. Our
sales organization targets technical leaders and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing
applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our
products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel.
As
of December 31, 2016, we had 240 employees in our sales and marketing organization.
15
Table of Contents
Customer Support
We have designed our products and platform to be self-service and require minimal customer support. To enable seamless self-service, we provide
all of our users with helper libraries, comprehensive documentation, how-to's and tutorials. We supplement and enhance these tools with the participation of our engaged developer community. In
addition, we provide support options to address the individualized needs of our customers. All developers get free email based support with API status notifications. Our developers also engage with
the broader Twilio community to resolve certain issues.
We
also offer three additional paid tiers of email and phone support with increasing levels of availability and guaranteed response times. Our highest tier personalized plan is intended
for our largest customers and includes guaranteed response times that vary based on the priority of the request, a dedicated support engineer, a duty manager and quarterly status review. Our support
model is global, with 24x7 coverage and support offices located in the United States, the United Kingdom, Estonia and Singapore. We currently derive an insignificant amount of revenue from fees
charged for customer support.
Competition
The market for Cloud Communications Platform is rapidly evolving and increasingly competitive. We believe that the principal competitive factors
in our market are:
-
-
completeness of offering;
-
-
credibility with developers;
-
-
global reach;
-
-
ease of integration and programmability;
-
-
product features;
-
-
platform scalability, reliability, security and performance;
-
-
brand awareness and reputation;
-
-
the strength of sales and marketing efforts;
-
-
customer support; and
-
-
the cost of deploying and using our products.
We
believe that we compete favorably on the basis of the factors listed above. We believe that none of our competitors currently compete directly with us across all of our product
offerings.
Our
competitors fall into four primary categories:
-
-
legacy on-premise vendors, such as Avaya and Cisco;
-
-
regional network service providers that offer limited developer functionality on top of their own physical infrastructure;
-
-
smaller software companies that compete with portions of our product line; and
-
-
SaaS companies that offer prepackaged applications for a narrow set of use cases.
Some
of our competitors have greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets and larger intellectual property portfolios.
As a result, certain of our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition,
some competitors may offer products or services that address one or a limited number of functions at lower
16
Table of Contents
prices,
with greater depth than our products or geographies where we do not operate. With the introduction of new products and services and new market entrants, we expect competition to intensify in
the future. Moreover, as we expand the scope of our platform, we may face additional competition.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license
agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand.
As
of December 31, 2016, in the United States, we had been issued 58 patents, which expire between 2029 and 2036, and had 43 patent applications pending for examination and four
pending provisional applications. As of such date, we also had six issued patents and eight patent applications pending for examination in foreign jurisdictions, all of which are related to U.S.
patents and patent applications. In addition, as of December 31, 2016, we had 13 trademarks registered in the United States and 35 trademarks registered in foreign jurisdictions.
In
addition, we seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in development of intellectual
property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any
rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.
Despite
our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and other contractual protections, unauthorized parties may still copy
or otherwise obtain and use our software and other technology. In addition, we intend to continue to expand our international operations, and effective intellectual property, copyright, trademark and
trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete.
Further, companies in the communications and technology industries may own large numbers of patents, copyrights and trademarks and may frequently threaten litigation, or file suit against us based on
allegations of infringement or other violations of intellectual property rights. We are currently subject to, and expect to face in the future, allegations that we have infringed the intellectual
property rights of third parties, including our competitors and non-practicing entities.
Regulatory
We are subject to a number of U.S. federal and state and foreign laws and regulations that involve matters central to our business. These laws
and regulations may involve privacy,
data protection, intellectual property, competition, consumer protection, export taxation or other subjects. Many of the laws and regulations to which we are subject are still evolving and being
tested in courts and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the
new and rapidly evolving industry in which we operate. Because global laws and regulations have continued to develop and evolve rapidly, it is possible that we may not be, or may not have been,
compliant with each such applicable law or regulation.
The
Telephone Consumer Protection Act of 1991, or TCPA, restricts telemarketing and the use of automatic text messages without proper consent. The scope and interpretation of the laws
that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or
regulations due to
17
Table of Contents
the
failure of our customers to comply with these laws by obtaining proper consent, we could face direct liability.
Corporate Information
Twilio Inc. was incorporated in Delaware in March 2008. Our principal executive offices are located at 375 Beale Street, Third Floor, San
Francisco, California 94105, and our telephone number is (415) 390-2337. Our website address is www.twilio.com. Information contained on, or that can be accessed through, our website does not
constitute part of this Annual Report on Form 10-K.
Information about Geographic Revenue
Information about geographic revenue is set forth in Note 9 of our Notes to our Consolidated Financial Statements included in
Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Additional Information
The following filings are available through our investor relations website after we file them with the Securities and Exchange Commission
("SEC"): Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and our Proxy Statement for our annual meeting of stockholders. These filings are also available for download free of
charge on our investor relations website. Our investor relations website is located at http://investors.twilio.com/. You may obtain copies of this information by mail from the Public Reference Section
of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers,
like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We
webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide
notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website.
Further corporate governance information, including our corporate governance guidelines and code of business conduct and ethics, is also available on our investor relations website under the heading
"Corporate Governance." The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the
SEC, and any references to our websites are intended to be inactive textual references only.
18
Table of Contents
Item 1A.
Risk Factors
A description of the risks and uncertainties associated with our business is set forth below. You should carefully
consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our condensed consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The
risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially
and adversely affected. In that event, the market price of our Class A common stock could decline.
Risks Related to Our Business and Our Industry
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 our platform and use our products.
We were founded in 2008, and have been developing and providing a cloud-based platform that enables developers and organizations to integrate
voice, messaging and video communications capabilities into their software applications. This market is relatively new and unproven 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, of
this market. The utilization of APIs by 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.
We have 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 $41.3 million, $35.5 million and
$26.8 million in 2016, 2015 and 2014, respectively. We had an accumulated deficit of $186.7 million as of December 31, 2016. We expect to continue to expend substantial financial
and other resources on, among other things:
-
-
investments in our engineering team, the development of new products, features and functionality and enhancements to our platform;
-
-
sales and marketing, including expanding our direct sales organization and marketing programs, especially for enterprises and for organizations
outside of the United States, and expanding our programs directed at increasing our brand awareness among current and new developers;
-
-
expansion of our operations and infrastructure, both domestically and internationally; and
19
Table of Contents
-
-
general administration, including legal, accounting and other expenses related 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 headcount has grown from 521 employees on
December 31, 2015 to 730 employees on December 31, 2016. In addition, we are rapidly expanding our international operations. Our international headcount grew from 69 employees as of
December 31, 2015 to 125 employees as of December 31, 2016, and we established operations in one new country 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. Any failure to manage 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, could adversely affect our business, results of operations and financial condition.
In
addition, in order to successfully manage our rapid growth, our organizational structure has become more complex. In order to manage these increasing complexities, we will need to
continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure will require us to
commit substantial financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase.
Finally,
continued growth could strain our ability to maintain reliable service levels for our customers. If we fail to achieve the necessary level of efficiency in our organization as
we grow, then our business, results of operations and financial condition could be adversely affected.
Our quarterly results may fluctuate, and if we fail to meet securities analysts' and investors' expectations,
then the trading price of our Class A common stock and the value of your investment could decline substantially.
Our results of operations, including the levels of our revenue, cost of revenue, gross margin and operating expenses, have fluctuated from
quarter to quarter in the past and may
continue to vary significantly in the future. These fluctuations are a result of a variety of factors, many of which are outside of our control, 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
20
Table of Contents
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;
-
-
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.
21
Table of Contents
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 2015 due to our developer conference, SIGNAL, which we again hosted in the second quarter of 2016 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.
22
Table of Contents
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 adversely affect our business, results of operations and financial condition.
Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing
customers and to have them increase their usage of our platform. If our customers do not increase their use of our products, then our revenue may decline and our results of operations may be harmed.
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. We cannot accurately predict customers' usage levels and the loss of customers or reductions in their usage levels of our
products may each have a negative impact on our business, results of operations and financial condition. Reductions in usage from existing customers and the loss of customers could 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.
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.
In order to grow our business, we must continue to attract new customers in a cost-effective manner. We use a variety of marketing channels to
promote our products and platform, such as developer events and evangelism, as well as search engine marketing and optimization. We periodically adjust the mix of our other marketing programs such as
regional customer events, email campaigns, billboard advertising and public relations initiatives. If the costs of the marketing channels we use increase dramatically, then we may choose to use
alternative and less expensive channels, which may not be as effective as the channels we currently use. As we add to or change the mix of our marketing strategies, we may need to expand into more
expensive channels than those we are currently in, which could adversely affect our business, results of operations and financial condition. We will incur marketing expenses before we are able to
recognize any revenue that the marketing initiatives may generate, and these expenses may not result in increased revenue or brand awareness. We have made in the past, and may make in the future,
significant expenditures and investments in new marketing campaigns, and we cannot assure you 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 do not develop enhancements to our products and introduce new products that achieve market acceptance,
our business, results of operations and financial condition could be adversely affected.
Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our
existing products, increase adoption and usage of our products and introduce new products. The success of any enhancements or new products depends on several factors, including timely completion,
adequate quality testing, actual performance quality, market-accepted pricing levels and overall market acceptance. Enhancements and new products that we develop may not be introduced in a timely or
cost-effective manner, may contain errors or defects, may have interoperability difficulties with our platform or other products or may not achieve the broad market acceptance necessary to generate
significant revenue. Furthermore, our ability to increase the
23
Table of Contents
usage
of our products depends, in part, on the development of new use cases for our products, which is typically driven by our developer community and may be outside of our control. We also have
invested, and may continue to invest, in the acquisition of complementary businesses, technologies, services, products and other assets that expand the products that we can offer our customers. We may
make these investments without being certain that they will result in products or enhancements that will be accepted by existing or prospective customers. Our ability to generate usage of additional
products by our customers may also require increasingly sophisticated and more costly sales efforts and result in a longer sales cycle. If we are unable to successfully enhance our existing products
to meet evolving customer requirements, increase adoption and usage of our products, develop new products, or if our efforts to increase the usage of our products are more expensive than we expect,
then our business, results of operations and financial condition would be adversely affected.
If we are unable to increase adoption of our products by enterprises, our business, results of operations and
financial condition may be adversely affected.
Historically, we have relied on the adoption of our products by software developers through our self-service model for a significant majority of
our revenue, and we currently generate only a small portion of our revenue from enterprise customers. Our ability to increase our customer base, especially among enterprises, and achieve broader
market acceptance of our products will depend, in part, on our ability to effectively organize, focus and train our sales and marketing personnel. We have limited experience selling to enterprises and
only recently established an enterprise-focused sales force.
Our
ability to convince enterprises to adopt our products will depend, in part, on our ability to attract and retain sales personnel with experience selling to enterprises. We believe
that there is significant competition for experienced sales professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will
depend, in part, on our ability to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling to enterprises. In addition, even if we
are successful in hiring qualified sales personnel, new hires require significant training and experience before they achieve full productivity, particularly for sales efforts targeted at enterprises
and new territories. Our recent hires and planned hires may not become as productive as quickly as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals in the
future in the markets where we do business. Because we do not have a long history of targeting our sales efforts at enterprises, we cannot predict whether, or to what extent, our sales will increase
as we organize and train our sales force or how long it will take for sales personnel to become productive.
As
we seek to increase the adoption of our products by enterprises, 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.
24
Table of Contents
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.
25
Table of Contents
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 2016, 2015 and 2014, we derived 16%, 14% and 12% of our revenue, respectively, from customer accounts located outside the United States. The
future success of our business will depend, in part, on our ability to expand our customer base worldwide. While we have been rapidly expanding our sales efforts internationally, our experience in
selling our products outside of the United States is limited. Furthermore, our developer-first business model may not be successful or have the same traction outside the United States. As a result,
our investment in marketing our products to these potential customers may not be successful. If we are unable to increase the revenue that we derive from international customers, then our business,
results of operations and financial condition may be adversely affected.
We are in the process of expanding our international operations, which exposes us to significant risks.
We are continuing to expand our international operations to increase our revenue from customers outside of the United States as part of our
growth strategy. Between December 31, 2015 and December 31, 2016, our international headcount grew from 69 employees to 125 employees, and we opened one new office 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.
26
Table of Contents
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,
27
Table of Contents
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 2016, 2015 and 2014, our 10 largest Active Customer Accounts generated an aggregate of 30%, 32% and 28% 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
2016, 2015 and 2014, WhatsApp, a Variable Customer Account, accounted for 9%, 17% and 13% 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.
A
second customer, Uber, a Base Customer Account, accounted for more than 10% of our revenue in 2016, and accounted for less than 10% of our revenue in each of 2015 and 2014. 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.
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.
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.
The market for cloud communications is rapidly evolving, significantly fragmented and highly competitive, with relatively low barriers to entry
in some segments. The principal competitive factors in our market include completeness of offering, credibility with developers, global reach, ease of integration and programmability, product
features, platform scalability, reliability, security and performance, brand awareness and reputation, the strength of sales and marketing efforts, customer support, as well as the cost of deploying
and using our products. Our competitors fall into four primary categories:
-
-
legacy on-premise vendors, such as Avaya and Cisco;
-
-
regional network service providers that offer limited developer functionality on top of their own physical infrastructure;
-
-
smaller software companies that compete with portions of our product line; and
-
-
SaaS companies that offer prepackaged applications for a narrow set of use cases.
Some
of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, larger budgets and
significantly greater resources than we do. In addition, they have the operating flexibility to bundle competing products and services at little or no perceived incremental cost, including offering
them at a lower price
28
Table of Contents
as
part of a larger sales transaction. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or
customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in
different geographies. Our current and potential competitors may develop and market new products and services with comparable functionality to our products, and this could lead to us having to
decrease prices in order to remain competitive. Customers utilize our products in many ways, and use varying levels of functionality that our products offer or are capable of supporting or enabling
within their applications. Customers that use many of the features of our products or use our products to support or enable core functionality for their applications may have difficulty or find it
impractical to replace our products with a competitor's products or services, while customers that use only limited functionality may be able to more easily replace our products with competitive
offerings.
With
the introduction of new products and services and new market entrants, we expect competition to intensify in the future. In addition, some of our customers may choose to use our
products and our competitors' products at the same time. Further, customers and consumers may choose to adopt other forms of electronic communications or alternative communication platforms.
Moreover,
as we expand the scope of our products, we may face additional competition. If one or more of our competitors were to merge or partner with another of our competitors, the
change in the competitive landscape could also adversely affect our ability to compete effectively. 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.
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.
We were founded and launched our first product in 2008. As a result of our limited operating history, our ability to forecast our future 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 not be considered indicative of our future
performance. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such
as:
-
-
market acceptance of our products and platform;
-
-
adding new customers, particularly enterprises;
-
-
retention of customers;
-
-
the successful expansion of our business, particularly in markets outside of the United States;
-
-
competition;
-
-
our ability to control costs, particularly our operating expenses;
-
-
network outages or security breaches and any associated expenses;
-
-
foreign currency exchange rate fluctuations;
-
-
executing acquisitions and integrating the acquired businesses, technologies, services, products and other assets; and
-
-
general economic and political conditions.
If
we do not address these risks successfully, our business, results of operations and financial condition could be adversely affected.
29
Table of Contents
We have limited experience with respect to determining the optimal prices for our products.
We charge our customers based on their use of our products. We expect that we may need to change our pricing from time to time. In the past we
have sometimes reduced our prices either for individual customers in connection with long-term agreements or for a particular product. 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 introduce new products or services that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on
our historical
pricing. As we expand internationally, we also must determine the appropriate price to enable us to compete effectively internationally. Moreover, enterprises, which are a primary focus for our direct
sales efforts, may demand substantial price concessions. In addition, if the mix of products sold changes, including for a shift to IP-based products, then we may need to, or choose to, revise our
pricing. As a result, in the future we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, results of operations and financial
condition.
We typically provide monthly uptime service level commitments of up to 99.95% under our agreements with
customers. If we fail to meet these contractual commitments, then our business, results of operations and financial condition could be adversely affected.
Our agreements with customers typically provide for service level commitments. If we suffer extended periods of downtime for our products or
platform and we are unable to meet these commitments, then we are contractually obligated to provide a service credit, which is typically 10% of the customer's amounts due for the month in question.
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, our business, results of operations and financial condition could be adversely affected if we suffer unscheduled downtime that exceeds the service level commitments we have
made to our customers. Any extended service outages could adversely affect our business and reputation.
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
30
Table of Contents
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 condition could be adversely affected.
Defects or errors in our products could diminish demand for our products, harm our business and results of
operations and subject us to liability.
Our customers use our products for important aspects of their businesses, and any errors, defects or disruptions to our products and any other
performance problems with our products could damage our customers' businesses and, in turn, hurt our brand and reputation. 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, we may not carry insurance sufficient to
compensate us for any losses that may result from claims arising from defects or disruptions in our products. As a result, our reputation and our brand could be harmed, and our business, results of
operations and financial condition may be adversely affected.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards,
changing regulations, and changing customer needs, requirements or preferences, our products may become less competitive.
The market for communications in general, and cloud communications in particular, is subject to rapid technological change, evolving industry
standards, changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to
these changes on a timely basis. If we are unable to develop new products that satisfy our customers and provide enhancements and new features for our existing products that keep pace with rapid
technological and industry change, our business, results of operations and financial condition could be adversely affected. If new technologies
emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete
effectively.
Our
platform must 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. If customers 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 may adversely affect our business, results of operations
and financial condition.
We rely heavily on hosted SaaS technologies from third parties in order to operate critical internal functions of our business, including
enterprise resource planning, customer support and customer
31
Table of Contents
relations
management services. If these services become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms or prices, our
expenses could increase. As a result, our ability to manage our operations could be interrupted and our processes for managing our sales process and supporting our customers could be impaired until
equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business, results of operations and financial condition.
If we are unable to develop and maintain successful relationships with independent software vendors and
system integrators, our business, results of operations and financial condition could be adversely affected.
We believe that continued growth of our business depends in part upon identifying, developing and maintaining strategic relationships with
independent software vendor (ISV) development platforms and system integrators. 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. If we fail to establish these relationships, 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 developing these
relationships but there are problems or issues with the integrations or enterprises are not willing to purchase through ISV development platforms, our reputation and ability to grow our business may
also be adversely affected.
Any failure to offer high-quality customer support may adversely affect our relationships with our customers
and prospective customers, and adversely affect our business, results of operations and financial condition.
Many of our customers depend on our customer support team to assist them in deploying our products effectively to help them to resolve
post-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-term increases in demand
for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased
demand for customer support, without corresponding revenue, could increase costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our
business reputation and on positive recommendations from developers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer
support, could adversely affect our reputation, business, results of operations and financial condition.
We have been sued, and may, in the future, be sued by third parties for alleged infringement of their
proprietary rights, which could adversely affect our business, results of operations and financial condition.
There is considerable patent and other intellectual property development activity in our industry. Our future success depends, in part, on not
infringing the intellectual property rights of others. Our competitors or other third parties have claimed and may, in the future, claim that we 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 us in the United States District Court, Central District 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.
Subsequently, 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
32
Table of Contents
patent
family as the '920 and '038 patents 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." We intend to vigorously defend these lawsuits and believe we have meritorious defenses to each. However, litigation is
inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In
addition, litigation can involve significant management time and attention and be expensive, regardless of outcome. 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.
In
the future, we may receive claims from third parties, including our competitors, that our products or platform and underlying technology infringe or violate a third party's
intellectual property rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any
claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from
offering our products, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to
obtain licenses or modify our products or platform, which could further exhaust our resources. 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-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.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual
property infringement and other losses.
Our agreements with customers and other third parties typically include indemnification or other provisions under which we agree to indemnify or
otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons or other liabilities relating to or
arising from our products or platform or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity
payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although we 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.
We could incur substantial costs in protecting or defending our intellectual property rights, and any failure
to protect our intellectual property could adversely affect our business, results of operations and financial condition.
Our success depends, in part, on our ability to protect our brand and the proprietary methods and technologies that we develop under patent and
other intellectual property laws of the United States and foreign jurisdictions so that we can prevent others from using our inventions and proprietary information. As of December 31, 2016, we
had 13 registered trademarks in the United States and 35 registered trademarks in foreign jurisdictions. In addition, as of December 31, 2016, in the United States, we had been issued 58
patents, which expire between 2029 and 2036, and had 43 patent
33
Table of Contents
applications
pending for examination and four pending provisional applications. As of such date, we also had six issued patents and eight patent applications pending for examination in foreign
jurisdictions, all of which are related to U.S. patents and patent applications. 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. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our
technology and our business, results of operations and financial condition may be adversely affected.
There
can be no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file trademark applications and patent
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-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.
We
also rely, in part, on confidentiality agreements with our business partners, employees, consultants, advisors, customers and others in our efforts to protect our proprietary
technology, processes and methods. These agreements may not effectively prevent disclosure of our confidential information, and it may be possible for unauthorized parties to copy our software or
other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our confidential information. In
addition, others may independently discover our trade secrets and proprietary information, and in these cases we would not be able to assert any trade secret rights against those parties. Costly and
time-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.
In
addition, the laws of some countries do not protect intellectual property and other proprietary rights to the same extent as the laws of the United States. To the extent we expand our
international activities, our exposure to unauthorized copying, transfer and use of our proprietary technology or information may increase.
We
cannot be certain that our means of protecting our intellectual property and proprietary rights will be adequate or that our competitors will not independently develop similar
technology. If we fail to meaningfully protect our intellectual property and proprietary rights, our business, results of operations and financial condition could be adversely affected.
Our use of open source software could negatively affect our ability to sell our products and subject us to
possible litigation.
Our products and platform incorporate open source software, and we expect to continue to incorporate open source software in our products and
platform in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that
these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products and platform. Moreover, although we have
implemented policies to regulate the use and incorporation of open source software into our products and platform, we cannot be certain that we have not incorporated open source software in our
products or platform in a manner that is inconsistent with such policies. If we fail to comply with open source licenses, we
34
Table of Contents
may
be subject to certain requirements, including requirements that we offer our products that incorporate the open source software for no cost, that we make available source code for modifications or
derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If
an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur
significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from generating revenue from customers using products that contained the open source
software and required to comply with onerous conditions or restrictions on these products. In any of these events, we and our customers could be required to seek licenses from third parties in order
to continue offering our products and platform and to re-engineer our products or platform or discontinue offering our products to customers in the event re-engineering cannot be accomplished on a
timely basis. Any of the foregoing could require us to devote additional research and development resources to re-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, including our acquisition of Authy, of the proprietary WebRTC media processing technologies built by the team behind the Kurento Open Source Project and of
Beepsend A.B., 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.
35
Table of Contents
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.
36
Table of Contents
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 or 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 their residents 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, email addresses and, in some jurisdictions, IP addresses. 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, opinion 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 Data Protection Directive (and member states' implementations thereof) regarding the transfer of
data outside of the European Economic Area. In light of the ECJ opinion, 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
37
Table of Contents
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.
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.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may
diminish the demand for our products, and could adversely affect our business, results of operations and financial condition.
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communications and business
applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial
medium. Changes in these laws or regulations could require us to modify our products and platform in order to comply with these changes. In addition, government agencies or private organizations have
imposed and may impose additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related
commerce or communications generally, or result in reductions in the demand for Internet-based products and services such as our products and platform. 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, accessibility and
quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by "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.
38
Table of Contents
Certain of our products are subject to telecommunications-related regulations, and future legislative or
regulatory actions could adversely affect our business, results of operations and financial condition.
As a provider of communications products, we are subject to existing or potential FCC regulations relating to privacy, Telecommunications Relay
Service Fund contributions and other requirements. FCC classification of our Internet voice communications products as telecommunications services could result in additional federal and state
regulatory obligations. If we do not comply with FCC rules and regulations, we could be subject to FCC enforcement actions, fines, loss of licenses and possibly restrictions on our ability to operate
or offer certain of our products. Any enforcement action by the FCC, which may be a public process, would hurt our reputation in the industry, 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 Assistance 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, and we may have to restructure our
offerings, exit certain markets or raise the price of our products. In addition, any uncertainty regarding whether particular regulations apply to our business, and how they apply, could increase our
costs or limit our ability to grow. Any of the foregoing could adversely affect our business, results of operations and financial condition.
As
we continue to expand internationally, we have become subject to telecommunications laws and regulations in the foreign countries where we offer our products. Internationally, we
currently offer our products in over 180 countries.
Our
international operations are subject to country-specific governmental regulation and related actions that have increased and may continue to increase our costs or impact our products
and platform or prevent us from offering or providing our products in certain countries. Certain of our products may be used by customers located in countries where voice and other forms of IP
communications may be illegal or require special licensing or in countries on a U.S. embargo list. Even where our products are reportedly illegal or become illegal or where users are located in an
embargoed country, users in those countries may be able to continue to use our products in those countries notwithstanding the illegality or embargo. We may be subject to penalties or governmental
action if consumers continue to use our products in countries where it is illegal to do so, and any such penalties or governmental action may be costly and may harm our business and damage our brand
and reputation. We may be required to incur additional expenses to meet applicable international regulatory
39
Table of Contents
requirements
or be required to discontinue those services if required by law or if we cannot or will not meet those requirements.
If we are unable to effectively process local number and toll-free number portability provisioning in a
timely manner or to obtain or retain direct inward dialing numbers and local or toll-free numbers, our business and results of operations may be adversely affected.
We support local number and toll-free number portability, which allows our customers to transfer their existing phone numbers to us and thereby
retain their existing phone numbers when subscribing to our voice products. Transferring existing numbers is a manual process that can take up to 15 business days or longer to complete. A new 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 network service providers to transfer these numbers, a process that we do not control, and these network service provider may refuse or substantially
delay the transfer of these numbers to us. Local number portability is considered an important feature by many potential customers, and if we fail to reduce any related delays, then we may experience
increased difficulty in acquiring new customers.
In
addition, our future success depends in part on our ability to procure large quantities of local and toll-free direct inward dialing numbers, or DIDs, in the United States and foreign
countries at a reasonable cost and without restrictions. Our ability to procure, distribute and retain DIDs depends on factors outside of our control, such as applicable regulations, the practices of
network service providers that provide DIDs, such as offering DIDs with conditional minimum volume call level requirements, the cost of these DIDs and the level of overall competitive demand for new
DIDs. Due to 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 customers in the affected local geographic areas. In addition, future growth in
our customer base, together with growth in the customer bases of other providers of cloud communications, has increased, which increases our dependence on needing sufficiently large quantities of
DIDs. It may become 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 foregoing could adversely affect our business, 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, including liabilities or claims relating to consumer protection laws. For example, the
Telephone Consumer Protection Act of 1991 restricts telemarketing 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 or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could
face direct liability.
We may be subject to governmental export controls and economic sanctions regulations that could impair our
ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Various of our products and services may be subject to export control 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
40
Table of Contents
Office
of Foreign Assets Controls. Exports of our products and the provision of our services must be made in compliance with these laws and regulations. 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, 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 export or economic sanctions
regulations, 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 limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.
Further,
we incorporate encryption technology into certain of our products. Various countries regulate the import of certain encryption technology, including through import permitting
and licensing requirements, and have enacted laws that could limit our customers' ability to import our products into those countries. Encryption products and the underlying technology may also be
subject to export control restrictions. Governmental regulation of encryption technology and regulation of exports of encryption products, or our failure to obtain required approval for our products,
when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products and provision of our
services, including with respect to new releases of our products and services, may create delays in the introduction of our products and services in international markets, prevent our customers with
international operations from deploying our products and using our services throughout their globally-distributed systems or, in some cases, prevent the export of our products or provision of our
services to some countries altogether.
We may have additional tax liabilities, which could harm our business, results of operations and financial
condition.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our tax expense may be
impacted, for example, if tax laws change or are clarified to our detriment or if tax authorities successfully challenge the tax positions that we take, such as, for example, positions relating to the
arms-length pricing standards for our intercompany transactions and our state sales and use 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, 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 could be subject to liability for historic and future sales, use and similar taxes, which could adversely
affect our results of operations.
We conduct operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as
sales and use and telecommunications taxes, are assessed
41
Table of Contents
on
our operations. 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 and, in
accordance with generally accepted accounting principles in the United States, or U.S. 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, and the sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual
exposure could differ materially from our current estimates.
We
are undergoing an audit in one jurisdiction and may be subject to additional scrutiny from state tax authorities in these or other jurisdictions and may have additional exposure
related to our historic operations. Furthermore, certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties
and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations
and financial condition.
Currently,
we do not collect telecommunications-based taxes from our customers. We are developing the operational capability to collect these taxes from customers. When we begin to
collect such taxes from customers, 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.
Our global operations and structure subject us to potentially adverse tax consequences.
We generally conduct our global operations through subsidiaries and report our taxable income in various jurisdictions worldwide based upon our
business operations in those jurisdictions. In particular, our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various
jurisdictions. Also, our tax expense could be affected depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related
intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. The relevant revenue and taxing authorities may disagree with positions we have taken
generally, or our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were
not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall
profitability of our operations.
Certain
government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational companies. In addition,
the Organization for Economic Co-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. 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.
Changes in the U.S. taxation of international business activities or the adoption of other tax reform
policies could materially impact our business, results of operations 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 expansion of our
international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our business, results of operations and
financial condition.
42
Table of Contents
If we experience excessive credit card or fraudulent activity, we could incur substantial costs.
Most of our customers authorize us to bill their credit card accounts directly for service fees that we charge. If people pay for our
subscriptions with stolen credit cards, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our customers provide us with credit card billing information
online, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent activity. We also incur charges, which we refer to as chargebacks,
from the credit card companies from claims that the customer did not authorize the credit card transaction to purchase our subscription. If the number of unauthorized credit card transactions becomes
excessive, we could be assessed substantial fines for excess chargebacks and we could lose the right to accept credit cards for payment.
Our
products may also be subject to fraudulent usage, including but not limited to revenue share fraud, domestic traffic pumping, subscription fraud, premium text message scams and other
fraudulent schemes. Although our customers are required to set passwords or personal identification numbers to
protect their accounts, third parties have in the past been, and may in the future be, able to access and use their accounts through fraudulent means. Furthermore, spammers attempt to use our products
to send targeted and untargeted spam messages. We cannot be certain that our efforts to defeat spamming attacks will be able to eliminate 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.
We may require additional capital to support our business, and this capital might not be available on
acceptable terms, if at all.
We intend to continue to make investments to support our business and may require additional funds. In particular, we may seek additional funds
to develop new products and enhance our platform and existing products, expand our operations, including our sales and marketing organizations and our presence outside of the United States, improve
our infrastructure or acquire complementary businesses, technologies, services, products and other assets. In addition, we may use a portion of our cash to satisfy tax withholding and remittance
obligations related to outstanding restricted stock units. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future
issuances of equity or convertible debt securities, our stockholders
43
Table of Contents
could
suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A and Class B common
stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it
more difficult for us to obtain additional capital and to pursue business opportunities. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to
obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements
and to respond to business challenges could be significantly impaired, and our business, results of operations and financial condition may be adversely affected.
Our credit facility contains restrictive and financial covenants that may limit our operating flexibility.
Our credit facility contains certain restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we,
incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, change business locations, make
certain investments, pay dividends, make any payments on any subordinated debt, transfer or dispose of assets, amend certain material agreements, and enter into various specified transactions. We,
therefore, may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lender or prepay the outstanding amount under the credit facility. The credit facility
also contains certain financial covenants and financial reporting requirements. Our obligations under the credit facility are secured by all of our property, with certain exceptions. We may not be
able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the credit facility. Furthermore, our future working capital, borrowings, or
equity financing could be unavailable to repay or refinance the amounts outstanding under the credit facility. In the event of a liquidation, our lender would be repaid all outstanding principal and
interest prior to distribution of assets to unsecured creditors, and the holders of our Class A and Class B common stock would receive a portion of any liquidation proceeds only if all
of our creditors, including our lender, were first repaid in full.
We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect
our business, results of operations and financial condition.
As our international operations expand, our exposure to the effects of fluctuations in currency exchange rates grows. While we have primarily
transacted with customers and business partners in U.S. dollars, we have transacted with customers in Japan in Japanese Yen, and expect to significantly expand the number of transactions with
customers that are denominated in foreign
currencies in the future as we expand our business internationally. We 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. locations in the local currency for such locations. Fluctuations in the exchange rates between the U.S. dollar and other currencies could
result in an increase to the U.S. dollar equivalent of such expenses.
In
addition, our international subsidiaries maintain net assets that are denominated in currencies other than the functional operating currencies of these entities. As we continue to
expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Accordingly, changes in the value of foreign currencies relative to the U.S.
dollar can affect our results of operations due to transactional and translational remeasurements. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect
underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or
the expectations of our investors
44
Table of Contents
and
securities analysts who follow our stock, the trading price of our Class A common stock could be adversely affected.
We
do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may 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.
Our ability to use our net operating losses to offset future taxable income may be subject to certain
limitations.
As of December 31, 2016, we had federal and state net operating loss carryforwards, or NOLs, of $104.0 million and
$88.7 million, respectively, due to prior period losses. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an
"ownership change" (generally defined as a greater than 50-percentage-point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period) is subject to
limitations on its ability to utilize its pre-change NOLs to offset post-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 is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be
unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, even if we attain profitability.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results
of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, as provided in "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 assumptions and estimates used in
preparing our consolidated financial statements include those related to revenue recognition, capitalized internal-use software costs, other non-income taxes, business combination and valuation of
goodwill and purchased intangible assets and stock-based compensation. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our
assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common
stock.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting
fluctuations and affect our results of operations.
A change in accounting standards or practices may have a significant effect on our results of operations and may even affect our reporting of
transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have
45
Table of Contents
occurred
and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
If we fail to maintain an effective system of disclosure controls and internal control over financial
reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-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 requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Our disclosure controls
and other procedures are designed to ensure that information required to be disclosed by us 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 anticipate that we will continue to expend, significant resources, including
accounting-related costs and significant management oversight.
Our
current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and
internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement
could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and
maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm
attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be 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
likely have a negative effect on 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
46
Table of Contents
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.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to
earnings.
We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
Goodwill is required to be tested for impairment at least annually. As of December 31, 2016, we carried a net $12.1 million of goodwill and intangible assets related to acquired
businesses. 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 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,
47
Table of Contents
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.
Risks Related to Ownership of Our Class A Common Stock
The trading price of our Class A common stock has been volatile and may continue to be volatile, and
you could lose all or part of your investment.
Prior to our initial public offering, there was no public market for shares of our Class A common stock. On June 23, 2016, we sold
shares of our Class A common stock to the public at $15.00 per share. From June 23, 2016, the date that our Class A common stock started trading on the New York Stock Exchange,
through January 31, 2017, the trading price of our Class A common stock has ranged from $23.66 per share to $70.96 per share. The trading price of our Class A common stock may
continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
-
-
price and volume fluctuations in the overall stock market from time to time;
-
-
volatility in the trading prices and trading volumes of technology stocks;
-
-
changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
-
-
sales of shares of our Class A common stock by us or our stockholders;
-
-
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our
failure to meet these estimates or the expectations of investors;
-
-
the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
-
-
announcements by us or our competitors of new products or services;
-
-
the public's reaction to our press releases, other public announcements and filings with the SEC;
-
-
rumors and market speculation involving us or other companies in our industry;
-
-
actual or anticipated changes in our results of operations or fluctuations in our results of operations;
-
-
actual or anticipated developments in our business, our competitors' businesses or the competitive landscape generally;
-
-
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
-
-
developments or disputes concerning our intellectual property or other proprietary rights;
-
-
announced or completed acquisitions of businesses, products, services or technologies us or our competitors;
-
-
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
-
-
changes in accounting standards, policies, guidelines, interpretations or principles;
-
-
any significant change in our management; and
-
-
general economic conditions and slow or negative growth of our markets.
48
Table of Contents
In
addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often
been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
Substantial future sales of shares of our Class A common stock could cause the market price of our
Class A common stock to decline.
The market price of our Class A common stock could decline as a result of substantial sales of our Class A common stock,
particularly sales by our directors, executive officers and significant stockholders, or the perception in the market that holders of a large number of shares intend to sell their shares.
Additionally,
the shares of Class A common stock subject to outstanding options and restricted stock unit awards under our equity incentive plans and the shares reserved for
future issuance under our equity incentive plans will become eligible for sale in the public market upon issuance. Certain holders of our Class A common stock have rights, subject to some
conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for our stockholders or ourselves.
The dual class structure of our common stock has the effect of concentrating voting control with those
stockholders who held our capital stock prior to the completion of our initial public offering, including our directors, executive officers and significant stockholders and their respective affiliates
who held in the aggregate 83.9% of the voting power of our capital stock as of December 31, 2016. This limits or precludes your ability to influence corporate matters, including the election of
directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder
approval.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. As of December 31,
2016, our directors, executive officers and holders of more than 5% of our common stock, and their respective affiliates, hold in the aggregate 83.9% of the voting power of our capital stock. Because
of the 10-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 control a majority
of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the earlier of (i) June 22, 2023, or
(ii) the date the holders of two-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
preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of
all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for
our capital stock that you may feel are in your best interest as one of our stockholders.
Future
transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain
transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power
of those holders of Class B common stock who retain their shares in the long term.
49
Table of Contents
If securities or industry analysts cease publishing research or reports about us, our business or our market,
or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline.
The trading market for our Class A common stock is influenced by the research and reports that securities or industry analysts may
publish about us, our business, our market or our
competitors. If any of the analysts who cover us change their recommendation regarding our Class A common stock adversely, or provide more favorable relative recommendations about our
competitors, the trading price of our Class A common stock would likely decline. If any analyst who covers us were to cease coverage of our company or fail to regularly publish reports on us,
we could lose visibility in the financial markets, which in turn could cause the trading price of our Class A common stock or trading volume to decline.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and
restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the
effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and
amended and restated bylaws include provisions:
-
-
authorizing "blank check" preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting,
liquidation, dividend and other rights superior to our Class A and Class B common stock;
-
-
limiting the liability of, and providing indemnification to, our directors and officers;
-
-
limiting the ability of our stockholders to call and bring business before special meetings;
-
-
providing for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome
of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election
of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
-
-
providing that our board of directors is classified into three classes of directors with staggered three-year terms;
-
-
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
-
-
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of
candidates for election to our board of directors; and
-
-
controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings.
These
provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
As
a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders
holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by
such 15% or greater stockholder.
Any
provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in
control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our
Class A common stock.
50
Table of Contents
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to
rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends
should not purchase our Class A common stock. In addition, our credit facility contains restrictions on our ability to pay dividends.