TWILIO INC - Quarter Report: 2018 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

 

For the quarterly period ended March 31, 2018

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-37806

 

Twilio Inc.

(Exact name of registrant as specified in its charter)

 

 

 

375 Beale Street, Suite 300

San Francisco, California 94105

(Address of principal executive offices) (Zip Code)

 

(415) 390-2337

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of April 30, 2018, 71,849,359 shares of the registrant’s Class A common stock and 23,926,240 shares of registrant’s Class B common stock were outstanding.

 

 

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TWILIO INC.

 

Quarterly Report on Form 10-Q

 

For the Three Months Ended March 31, 2018

 

TABLE OF CONTENTS

 

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	4
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66
	Signatures	68

 

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Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

·                  our future financial performance, including our revenue, cost of revenue, gross margin and operating expenses, ability to generate positive cash flow and ability to achieve and sustain profitability;

 

·                  the impact and expected results from changes in our relationship with our larger customers;

 

·                  the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

·                  anticipated technology trends, such as the use of and demand for cloud communications;

 

·                  our ability to continue to build and maintain credibility with the global software developer community;

 

·                  our ability to attract and retain customers to use our products;

 

·                  our ability to attract and retain enterprises and international organizations as customers for our products;

 

·                  our ability to form and expand partnerships with independent software vendors and system integrators;

 

·                  the evolution of technology affecting our products and markets;

 

·                  our ability to introduce new products and enhance existing products;

 

·                  our ability to optimize our network service provider coverage and connectivity;

 

·                  our ability to pass on our savings associated with our platform optimization efforts to our customers;

 

·                  our ability to successfully enter into new markets and manage our international expansion;

 

·                  the attraction and retention of qualified employees and key personnel;

 

·                  our ability to effectively manage our growth and future expenses and maintain our corporate culture;

 

·                  our anticipated investments in sales and marketing and research and development;

 

·                  our ability to maintain, protect and enhance our intellectual property;

 

·                  our ability to successfully defend litigation brought against us; and

 

·                  our ability to comply with modified or new laws and regulations applying to our business, including GDPR and other privacy regulations that may be implemented in the future.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

 

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You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TWILIO INC.

 

Condensed Consolidated Balance Sheets

 

(In thousands)

 

(Unaudited)

 

		As of March 31,			As of December 31,
		2018			2017
ASSETS
Current assets:
Cash and cash equivalents		$	117,737		$	115,286
Short-term marketable securities		190,271			175,587
Accounts receivable, net		57,310			43,113
Prepaid expenses and other current assets		16,791			19,279
Total current assets		382,109			353,265
Restricted cash		5,502			5,502
Property and equipment, net		53,694			50,541
Intangible assets, net		18,981			20,064
Goodwill		18,269			17,851
Other long-term assets		4,240			2,559
Total assets		$	482,795		$	449,782
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	17,924		$	11,116
Accrued expenses and other current liabilities		76,595			53,614
Customer deposits		7,442			—
Deferred revenue		7,343			13,797
Total current liabilities		109,304			78,527
Long-term liabilities		10,951			11,409
Total liabilities		120,255			89,936
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock		—			—
Class A and Class B common stock		95			94
Additional paid-in capital		633,460			608,165
Accumulated other comprehensive income		2,439			2,025
Accumulated deficit		(273,454		)	(250,438		)
Total stockholders’ equity		362,540			359,846
Total liabilities and stockholders’ equity		$	482,795		$	449,782

 

See accompanying notes to condensed consolidated financial statements.

 

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TWILIO INC.

 

Condensed Consolidated Statements of Operations

 

(In thousands, except share and per share amounts)

 

(Unaudited)

 

		Three Months Ended March 31,
		2018			2017
Revenue		$	129,116		$	87,372
Cost of revenue		59,582			37,286
Gross profit		69,534			50,086
Operating expenses:
Research and development		37,576			26,522
Sales and marketing		32,822			21,116
General and administrative		23,393			17,203
Total operating expenses		93,791			64,841
Loss from operations		(24,257		)	(14,755		)
Other income (expenses), net		665			498
Loss before (provision) benefit for income taxes		(23,592		)	(14,257		)
(Provision) benefit for income taxes		(137		)	30
Net loss attributable to common stockholders		$	(23,729	)	$	(14,227	)
Net loss per share attributable to common stockholders, basic and diluted		$	(0.25	)	$	(0.16	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted		94,673,557			88,612,804

 

See accompanying notes to condensed consolidated financial statements.

 

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TWILIO INC.

 

Condensed Consolidated Statements of Comprehensive Loss

 

(In thousands)

 

(Unaudited)

 

		Three Months Ended March 31,
		2018			2017
Net loss		$	(23,729	)	$	(14,227	)
Other comprehensive income (loss):
Unrealized loss on marketable securities		(317		)	(88		)
Foreign currency translation		731			(102		)
Total other comprehensive income (loss)		414			(190		)
Comprehensive loss attributable to common stockholders		$	(23,315	)	$	(14,417	)

 

See accompanying notes to condensed consolidated financial statements.

 

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TWILIO INC.

 

Condensed Consolidated Statements of Cash Flows

 

(In thousands)

 

(Unaudited)

 

		Three Months Ended March 31,
		2018			2017
					As Adjusted
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(23,729	)	$	(14,227	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		5,631			3,955
Amortization of bond premium		28			63
Stock-based compensation		17,540			9,385
Provision for doubtful accounts		375			72
Write-off of internal-use software		182			26
Gain on lease termination		—			(295		)
Changes in operating assets and liabilities:
Accounts receivable		(14,612		)	(1,950		)
Prepaid expenses and other current assets		2,512			(972		)
Other long-term assets		(1,169		)	(178		)
Accounts payable		6,703			149
Accrued expenses and other current liabilities		22,789			5,221
Customer deposits		7,441			—
Deferred revenue		(6,256		)	885
Long-term liabilities		(499		)	306
Net cash provided by operating activities		16,936			2,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities		(42,693		)	(170,769		)
Maturities of marketable securities		27,600			—
Capitalized software development costs		(4,795		)	(3,649		)
Purchases of property and equipment		(940		)	(4,971		)
Purchases of intangible assets		(112		)	(8		)
Acquisition, net of cash acquired		—			(22,621		)
Net cash used in investing activities		(20,940		)	(202,018		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of costs related to public offerings		—			(238		)
Proceeds from exercises of stock options		6,678			12,735
Value of equity awards withheld for tax liabilities		(371		)	(155		)
Net cash provided by financing activities		6,307			12,342
Effect of exchange rate changes on cash, cash equivalents and restricted cash		148			11
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		2,451			(187,225		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period		120,788			314,280
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period		$	123,239		$	127,055
Cash paid for income taxes		$	18		$	42
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property, equipment and intangible assets, accrued but not paid		$	473		$	1,184
Stock-based compensation capitalized in software development costs		$	1,428		$	709
Costs related to public offerings, accrued but not paid		$	—		$	192

 

See accompanying notes to condensed consolidated financial statements.

 

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TWILIO INC.

 

Notes to Condensed Consolidated Financial Statements

 

(Unaudited)

 

1. Organization and Description of Business

 

Twilio Inc. (the “Company”) was incorporated in the state of Delaware on March 13, 2008. The Company is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.

 

The Company’s headquarters are located in San Francisco, California and the Company has subsidiaries in the United Kingdom, Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore, Bermuda, Spain, Sweden and Australia.

 

2. Summary of Significant Accounting Policies

 

(a)                                 Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018 (“Annual Report”).

 

The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited financial statements as of that date, but may not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.

 

(b)                                 Principles of Consolidation

 

The condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

(c)                                  Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

 

(d)                                 Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash

 

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equivalents, marketable securities and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.

 

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the three months ended March 31, 2018, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the three months ended March 31, 2017, one customer organization represented approximately 12% of the Company’s total revenue.

 

As of March 31, 2018, one customer organization represented 16% of the Company’s gross accounts receivable, and as of December 31, 2017, no customer organization represented more than 10% of the Company’s gross accounts receivable.

 

(e)                                  Significant Accounting Policies

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, which replaced the existing revenue recognition guidance, ASC 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

 

The Company adopted ASC 606 using the modified retrospective method with cumulative catch-up adjustment to the opening retained earnings as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the standard, the Company elected to apply the new guidance only to those contracts which were not completed as of the date of the adoption.

 

The impact of adopting the new standard on the Company’s consolidated financial statements was insignificant. The Company recorded a net cumulative catch-up adjustment to the beginning retained earnings as of January 1, 2018, of $0.7 million.

 

The primary impact relates to the deferral of incremental commission costs of obtaining new contracts. Under ASC 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortizes these costs on a straight-line basis over the expected term of benefit of the underlying asset, which was determined to be five years.

 

The impact on the Company’s revenue recognition policies was insignificant. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue according to the usage by its customers in the period in which that usage occurred. ASC 606 continues to support the recognition of revenue over time, and on a usage basis, for the majority of the Company’s contracts due to continuous transfer of control to the customer. The impact on the Company’s balance sheet presentation includes presenting customer refundable prepayments as customer deposit liabilities, whereas under ASC 605 these were included in deferred revenues.

 

There was not a significant tax impact to the Company’s consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there is a full valuation allowance due to the Company’s history of continued losses.

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for credits and any taxes

 

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collected from customers, which are subsequently remitted to governmental authorities.

 

The Company determines revenue recognition through the following steps:

 

·                  Identification of the contract, or contracts, with a customer

·                  Identification of the performance obligations in the contract

·                  Determination of the transaction price

·                  Allocation of the transaction price to the performance obligations in the contract

·                  Recognition of revenue when, or as, the Company satisfies a performance obligation

 

Nature of Products and Services

 

The Company’s revenue is primarily derived from usage-based fees earned from customers accessing the Company’s enterprise cloud computing services. Platform access is considered a monthly series comprising one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the three months ended March 31, 2018 and 2017, the revenue from usage-based fees represented 84% and 83% of total revenue, respectively.

 

Subscription-based fees are derived from certain term-based contracts, such as with the sales of short codes and support. Term-based contracts revenue is recognized on a ratable basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer. In the three months ended March 31, 2018 and 2017, the revenue from term-based fees represented 16% and 17% of total revenue, respectively.

 

No significant judgments are required in determining whether products and services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (“SSP”).

 

Refer to Note 9, Revenue by Geographic Area, for additional disaggregation.

 

The Company’s arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.

 

The reserve for sales credits is included in accounts receivable and is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue.

 

Deferred Revenue and Customer Deposits

 

Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancellable contracts. Customer refundable prepayments are recorded as customer deposits. During the three months ended March 31, 2018, the Company recognized $3.6 million of revenue that was included in the deferred revenue balance, as adjusted for ASC 606 at the beginning of the period.

 

Deferred Sales Commissions

 

The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts, upsells and renewals and such expense is recognized over the estimated period of benefit of the capitalized commissions, which is determined to be five years. Total net capitalized costs as of March 31, 2018 were $4.1 million and are included in prepaid expenses and other current assets and other long-term assets in the accompanying condensed consolidated balance sheet. Amortization of these assets was $0.2 million during the three months ended March 31, 2018 and is included in sales and marketing expense in the accompanying condensed consolidated statement of operations.

 

Other than adoption of ASC 606, there were no changes to our significant accounting policies as described in our Annual Report.

 

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(f)                                    Restricted Cash

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230) — Restricted Cash”. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-18 in the first quarter of 2018 and applied the guidance retrospectively to the prior period’s condensed consolidated statement of cash flows with the following impact (in thousands):

 

		Three Months Ended March 31, 2017
		As Originally Reported			As Adjusted
Cash, cash equivalents and restricted cash — beginning of period		$	305,665		$	314,280
Cash, cash equivalents and restricted cash — end of period		$	118,440		$	127,055

 

Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on the Company’s financial position and results of operations.

 

(g)           Recently Issued Accounting Guidance, Not yet Adopted

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. For public companies, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, the Company has not yet determined the full impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

 

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3. Fair Value Measurements

 

The following tables provide the financial assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in thousands):

 

		Amortized Cost or Carrying			Gross Unrealized			Gross Unrealized Losses Less Than			Gross Unrealized Losses More Than			Fair Value Hierarchy as of March 31, 2018									Aggregate
		Value			Gains			12 Months			12 Months			Level 1			Level 2			Level 3			Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds		$	93,103		$	—		$	—		$	—		$	93,103		$	—		$	—		$	93,103
Total included in cash and cash equivalents		93,103			—			—			—			93,103			—			—			93,103
Marketable securities:
U.S. Treasury securities		59,973			—			(127		)	(73		)	59,773			—			—			59,773
Corporate debt securities		131,213			—			(715		)	—			—			130,498			—			130,498
Total marketable securities		191,186			—			(842		)	(73		)	59,773			130,498			—			190,271
Total financial assets		$	284,289		$	—		$	(842	)	$	(73	)	$	152,876		$	130,498		—			$	283,374

 

		Amortized Cost or Carrying			Gross Unrealized			Gross Unrealized Losses Less Than			Gross Unrealized Losses More Than			Fair Value Hierarchy as of December 31, 2017									Aggregate
		Value			Gains			12 Months			12 Months			Level 1			Level 2			Level 3			Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds		$	95,432		$	—		$	—		$	—		$	95,432		$	—		$	—		$	95,432
Total included in cash and cash equivalents		95,432			—			—			—			95,432			—			—			95,432
Marketable securities:
U.S. Treasury securities		59,962			—			(216		)	—			59,746			—			—			59,746
Corporate debt securities		116,223			—			(382		)	—			—			115,841			—			115,841
Total marketable securities		176,185			—			(598		)	—			59,746			115,841			—			175,587
Total financial assets		$	271,617		$	—		$	(598	)	$	—		$	155,178		$	115,841		$	—		$	271,019

 

As the Company views these securities as available to support current operations, it has classified all available for sale securities as short-term. As of March 31, 2018, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of March 31, 2018, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three month ended March 31, 2018. Interest earned on marketable securities in the three months ended March 31, 2018 and 2017, was $0.7 million and $0.5 million, respectively, and is recorded as other income (expense), net, in the accompanying condensed consolidated statements of operations.

 

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The following table summarizes the contractual maturities of marketable securities as of March 31, 2018 and December 31, 2017 (in thousands):

 

		March 31, 2018						December 31, 2017
		Amortized Cost			Aggregate Fair Value			Amortized Cost			Aggregate Fair Value
Financial Assets:
Less than one year		$	147,714		$	147,156		$	108,584		$	108,360
One to two years		43,472			43,115			67,601			67,227
Total		$	191,186		$	190,271		$	176,185		$	175,587

 

4. Property and Equipment

 

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

 

		As of March 31,			As of December 31,
		2018			2017
Capitalized internal-use software development costs		$	55,328		$	49,177
Leasehold improvements		14,422			14,246
Office equipment		10,410			9,652
Furniture and fixtures		2,108			1,976
Software		1,765			1,675
Total property and equipment		84,033			76,726
Less: accumulated depreciation and amortization		(30,339		)	(26,185		)
Total property and equipment, net		$	53,694		$	50,541

 

Depreciation and amortization expense was $4.2 million and $2.8 million for the three months ended March 31, 2018 and 2017, respectively.

 

The Company capitalized $6.4 million and $4.3 million in internal-use software development costs in the three months ended March 31, 2018 and 2017, respectively, of which $1.4 million and $0.7 million, respectively, was stock-based compensation expense. Amortization of capitalized software development costs was $2.7 million and $1.8 million in the three months ended March 31, 2018 and 2017, respectively.

 

5. Business Combinations

 

In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow with a term of 18 months.

 

Additionally, the Company deposited $2.0 million into a separate escrow that was conditioned upon future service conditions and was recorded ratably into the compensation expense as the services were rendered. As of March 31, 2018, the remaining balance in the escrow was $0.3 million.

 

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity’s results of operations have been included in the condensed consolidated financial statements of the Company from the date of acquisition.

 

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The following table presents the purchase price allocation, as adjusted, recorded in the Company’s condensed consolidated balance sheet as of March 31, 2017 (in thousands):

 

		Total
Net tangible liabilities		$	(3,575	)
Goodwill(1)		12,837
Intangible assets(2)		13,700
Total purchase price		$	22,962

 

(1)                                     The goodwill is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes.

 

(2)                                     Identifiable finite-lived intangible assets were comprised of the following (in thousands):

 

		Total			Estimated life (in years)
Developed technology		$	5,000		4
Customer relationships		6,100			7 - 8
Supplier relationships		2,600			5
Total intangible assets acquired		$	13,700

 

The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheets.

 

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets.

 

The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million and $0.4 million were incurred during fiscal years 2017 and 2016, respectively. All acquisition-related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s condensed consolidated financial statements is immaterial.

 

6. Goodwill and Intangible Assets

 

Goodwill

 

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

 

		Total
Balance as of December 31, 2017		$	17,851
Effect of exchange rate		418
Balance as of March 31, 2018		$	18,269

 

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Intangible assets

 

Intangible assets consisted of the following (in thousands):

 

		As of March 31, 2018
		Gross			Accumulated Amortization			Net
Amortizable intangible assets:
Developed technology		$	15,040		$	(6,529	)	$	8,511
Customer relationships		7,280			(1,229		)	6,051
Supplier relationships		2,932			(631		)	2,301
Trade name		60			(60		)	—
Patent		1,947			(124		)	1,823
Total amortizable intangible assets		27,259			(8,573		)	18,686
Non-amortizable intangible assets:
Domain names		32			—			32
Trademarks		263			—			263
Total		$	27,554		$	(8,573	)	$	18,981

 

		As of December 31, 2017
		Gross			Accumulated Amortization			Net
Amortizable intangible assets:
Developed technology		$	14,941		$	(5,476	)	$	9,465
Customer relationships		7,159			(1,006		)	6,153
Supplier relationships		2,881			(500		)	2,381
Trade name		60			(60		)	—
Patent		1,878			(108		)	1,770
Total amortizable intangible assets		26,919			(7,150		)	19,769
Non-amortizable intangible assets:
Domain names		32			—			32
Trademarks		263			—			263
Total		$	27,214		$	(7,150	)	$	20,064

 

Amortization expense was $1.4 million and $1.2 million for the three months ended March 31, 2018 and December 31, 2017, respectively.

 

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

 

		As of March 31, 2018
2018 (remaining nine months)		$	5,646
2019		5,088
2020		2,658
2021		1,525
2022		929
Thereafter		2,840
Total		$	18,686

 

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7. Accrued Expenses and Other Liabilities

 

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

		As of March 31,			As of December 31,
		2018			2017
Accrued payroll and related		$	10,042		$	4,898
Accrued bonus and commission		5,721			4,777
Accrued cost of revenue		18,690			10,876
Sales and other taxes payable		21,227			20,877
ESPP contributions		3,345			1,338
Deferred rent		1,179			1,048
Accrued other expense		16,391			9,800
Total accrued expenses and other current liabilities		$	76,595		$	53,614

 

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

 

		As of March 31,			As of December 31,
		2018			2017
Deferred rent		$	8,217		$	8,480
Deferred tax liability, net		2,262			2,452
Accrued other expense		472			477
Total long-term liabilities		$	10,951		$	11,409

 

8. Supplemental Balance Sheet Information

 

A roll-forward of the Company’s reserves for the three months ended March 31, 2018 and 2017 is as follows (in thousands):

 

(a)                                 Allowance for doubtful accounts:

 

		Three Months Ended March 31,
		2018			2017
Balance, beginning of period		$	1,033		$	1,076
Additions		375			72
Write-offs		(4		)	(378		)
Balance, end of period		$	1,404		$	770

 

b)                                     Sales credit reserve:

 

		Three Months Ended March 31,
		2018			2017
Balance, beginning of period		$	1,761		$	544
Additions		1,107			551
Deductions against reserve		(1,166		)	(277		)
Balance, end of period		$	1,702		$	818

 

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9. Revenue by Geographic Area

 

Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (dollars in thousands):

 

		Three Months Ended March 31,
		2018			2017
Revenue by geographic area:
United States		$	98,635		$	70,098
International		30,481			17,274
Total		$	129,116		$	87,372
Percentage of revenue by geographic area:
United States		76		%	80		%
International		24		%	20		%

 

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

 

10. Commitments and Contingencies

 

(a)                                 Lease Commitments

 

The Company entered into various non-cancelable operating lease agreements for its facilities that expire over the next six years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight-line basis over the term of the lease.

 

Rent expense was $2.1 million and $1.9 million for the three months ended March 31, 2018 and 2017, respectively.

 

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

 

Year Ending December 31:		As of March 31, 2018
2018 (remaining nine months)		$	6,607
2019		7,952
2020		7,112
2021		7,033
2022		5,864
Thereafter		10,189
Total minimum lease payments		$	44,757

 

Additionally, in the three months ended March 31, 2018, the Company entered into a 22 month non-cancellable agreement with a cloud services vendor for a total commitment of $4.5 million. Except for this new commitment, there have been no material changes to the Company’s principle commitments described in the Company’s most recent Annual Report.

 

(b)                                 Legal Matters

 

On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against the Company in the United States District Court, Central District of California (“Telesign I”). Telesign alleges that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (“920”), U.S. Patent No. 8,687,038 (“038”) and U.S. Patent No. 7,945,034 (“034”). The patent infringement allegations in the lawsuit relate to the Company’s Account Security products, its two-factor authentication use case and an API tool to find information about a phone number. The Company petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the patents at issue. On July 8, 2016, the PTO denied the Company’s petition for inter partes review of the ‘920 and ‘038 patents, and on June 26, 2017, it upheld the patentability of the ‘034 patent.

 

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On March 28, 2016, Telesign filed a second lawsuit against the Company in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 (‘792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the PTO issued an order instituting the inter partes review for the ‘792 patent. On March 6, 2018, the PTO found all claims challenged by Twilio in the inter partes review unpatentable. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the ‘792 patent inter partes review, which the court granted. The Central District of California court lifted the stay on April 13, 2018. With respect to each of the patents asserted in the now-consolidated Telesign I and Telesign II cases, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits. The Telesign I/II litigation is currently ongoing.

 

On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021 (“021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the Court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the ‘021, ‘465, and ‘376 patents. On March 9, 2018, the PTO denied Telesign’s petition for inter partes review of the ‘021 patent and granted Telesign’s petitions for inter partes review of the ‘465 and ‘376 patents.  The Northern District of California litigation is currently stayed pending resolution of the inter partes reviews of the ‘465 and ‘376 patents. The Company is seeking a judgment of infringement, a judgment of willful infringement, monetary and injunctive relief, enhanced damages, and an award of costs and expenses against Telesign.

 

On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, the Company filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Following a period of discovery, the plaintiff filed a motion for class certification on September 20, 2017. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of the Company’s customers that were recorded. The court has not yet finalized a schedule for notice to potential class members, additional discovery, summary judgment motions, or trial.

 

The Company intends to vigorously defend itself against these lawsuits and believes it has meritorious defenses to each matter in which it is a defendant. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate ranges of possible losses.

 

In addition to the litigation matters discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations.

 

Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

(c)                                  Indemnification Agreements

 

The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company.

 

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In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary.

 

As of March 31, 2018 and December 31, 2017, no amounts were accrued.

 

(d)                                 Other Taxes

 

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s operations. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions, and since then, has expanded the number of jurisdictions where these taxes are being collected. Effective January 2018, the Company began to collect taxes in one additional jurisdiction and accordingly, the Company is no longer recording a provision for its exposure in that jurisdiction. The Company expects to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, the Company was and continues to be in discussions with certain states regarding its prior state sales and other taxes, if any, that the Company may owe.

 

During 2017, the Company revised its estimates of its tax exposure based on settlements reached with various states indicating that certain revisions to the key assumptions including, but not limited to, the sourcing of revenue and the taxability of the Company’s services were appropriate in the current period. In the year ended December 31, 2017, the total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.4 million. As of March 31, 2018 and December 31, 2017, the liability recorded for these taxes was $21.2 million and $20.9 million, respectively.

 

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

 

11. Stockholders’ Equity

 

(a)                                 Preferred Stock

 

As of March 31, 2018 and December 31, 2017, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.

 

(b)           Common Stock

 

As of March 31, 2018 and December 31, 2017, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share. As of March 31, 2018, 71,748,415 shares of Class A common stock and 23,943,253 shares of Class B common stock were issued and outstanding. As of December 31, 2017, 69,906,550 shares of Class A common stock and 24,063,246 shares of Class B common stock were issued and outstanding.

 

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The Company had reserved shares of common stock for issuance as follows:

 

		As of March 31,		As of December 31,
		2018		2017
Stock options issued and outstanding		10,392,199		10,710,427
Nonvested restricted stock units issued and outstanding		7,106,203		5,665,459
Class A common stock reserved for Twilio.org		635,014		635,014
Stock-based awards available for grant under 2016 Plan		12,054,291		10,200,189
Class A common stock committed under 2016 ESPP		249,730		235,372
Total		30,437,437		27,446,461

 

12. Stock-Based Compensation

 

2008 Stock Option Plan

 

The Company granted options under its 2008 Stock Option Plan (the “2008 Plan”), as amended and restated, until June 22, 2016, when the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder.

 

2016 Stock Option Plan

 

The Company’s 2016 Stock Option and Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2018, the shares available for grant under the 2016 Plan were automatically increased by 4,698,490 shares.

 

Under the 2016 Plan, the stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four-year term from the date of grant, at a rate of 25% after one year, then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period.

 

2016 Employee Stock Purchase Plan

 

The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2018, the shares available for grant under the 2016 Plan were automatically increased by 939,698 shares.

 

The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year, starting in May 2017.

 

On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.

 

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In the three months ended March 31, 2018 and 2017, no shares of Class A common stock were purchased under the 2016 ESPP and 249,730 shares are expected to be purchased in the second quarter of 2018. As of March 31, 2018, total unrecognized compensation cost related to the 2016 ESPP was $0.4 million, which will be amortized over a weighted-average period of 0.1 years.

 

Stock-based awards activity under the 2008 Plan and 2016 Plan was as follows:

 

Stock Options

 

		Number of options outstanding		Weighted- average exercise price (per share)			Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Outstanding options as of December 31, 2017		10,155,427		$	10.31		7.12		$	145,763
Granted		1,003,733		33.01
Exercised		(1,190,387	)	5.61
Forfeited and cancelled		(131,574	)	8.83
Outstanding options as of March 31, 2018		9,837,199		$	13.21		7.34		$	245,614
Options vested and exercisable as of March 31, 2018		5,054,924		$	7.71		6.37		$	154,024

 

Aggregate intrinsic value represents the difference between the fair value of the Company’s Class A common stock as reported on the New York Stock Exchange and the exercise price of outstanding “in-the-money” options. The aggregate intrinsic value of stock options exercised was $31.1 million and $78.2 million during the three months ended March 31, 2018 and 2017, respectively.

 

The total estimated grant date fair value of options vested was $7.8 million and $4.1 million during the three months ended March 31, 2018 and 2017, respectively. The weighted-average grant-date fair value of options granted was $15.24 and $13.72 during the three months ended March 31, 2018 and 2017, respectively.

 

On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grant value of $5.9 million. The first half of each award vests upon satisfaction of a performance condition and the remainder vests thereafter in equal monthly installments over a 24-month period. The achievement window expires after 4.3 years from the date of grant and the stock options expire seven years after the date of grant. The stock options are amortized over a derived service period, as adjusted, of 3.1 years, 4.6 years and 5.3 years, respectively. The stock options value and the derived service period were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance options:

 

		Number of awards outstanding		Weighted- average exercise price (per share)			Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Outstanding options as of December 31, 2017		555,000		$	31.72		6.0		$	—
Granted		—		—
Exercised		—		—
Forfeited and cancelled		—		—
Outstanding options as of March 31, 2018		555,000		$	31.72		5.9		$	3,585
Options vested and exercisable as of March 31, 2018		92,500	*	$	31.72		5.9		$	598

 

*Vesting of these shares is triggered by the filing of the Company’s Quarterly Report on Form 10-Q.

 

As of March 31, 2018, total unrecognized compensation cost related to nonvested stock options was $44.5 million, which will be amortized over a weighted-average period of 2.3 years.

 

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