UsetheselinkstorapidlyreviewthedocumentTABLEOFCONTENTSItem8.FinancialStatementsandSupplementaryData

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UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION

Washington,D.C.20549

FORM10-K

CommissionFileNumber:001-37806

TwilioInc.(Exactnameofregistrantasspecifiedinitscharter)

Delaware(Stateorotherjurisdictionofincorporationororganization)

26-2574840(I.R.S.EmployerIdentification

Number)

375BealeStreet,Suite300SanFrancisco,California94105

(Addressofprincipalexecutiveoffices)(ZipCode)

(415)390-2337(Registrant'stelephonenumber,includingareacode)

SecuritiesregisteredpursuanttoSection12(b)oftheAct:

Titleofeachclass (Nameofeachexchangeonwhichregistered)ClassACommonStock,parvalue$0.001pershare TheNewYorkStockExchange

SecuritiesregisteredpursuanttoSection12(g)oftheAct:None

Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct:YesýNoo

IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheAct:YesoNoý

Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirements

ý ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACT1934

ForthefiscalyearendedDecember31,2018

or

o TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

Forthetransitionperiodfromto

forthepast90days.YesýNoo

IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyeveryInteractiveDataFilerequiredtobesubmittedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitsuchfiles).YesýNoo

IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.o

Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,asmallerreportingcompany,oremerginggrowthcompany.Seethedefinitionsof"largeacceleratedfiler,""acceleratedfiler,""smallerreportingcompany"and"emerginggrowthcompany"inRule12b-2oftheExchangeAct.

Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.o

Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesoNoý

Theaggregatemarketvalueofstockheldbynon-affiliatesasofJune29,2018(thelastbusinessdayoftheregistrant'smostrecentlycompletedsecondquarter)was$4.4billionbasedupon$56.02pershare,theclosingpriceonJune29,2018ontheNewYorkStockExchange.Determinationofstockownershipbynon-affiliateswasmadesolelyforthepurposeofrespondingtothisrequirementandtheregistrantisnotboundbythisdeterminationforanyotherpurpose.

OnFebruary1,2019,theregistranthad104,277,870sharesofClassAcommonstockand19,303,259sharesofClassBcommonstockoutstanding.

DOCUMENTSINCORPORATEDBYREFERENCE

Portionsoftheregistrant'sdefinitiveProxyStatementforthe2019AnnualMeetingofStockholdersareincorporatedhereinbyreferenceinPartIIIofthisAnnualReportonForm10-Ktotheextentstatedherein.SuchProxyStatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysoftheregistrant'sfiscalyearendedDecember31,2018.

Largeacceleratedfilerý Acceleratedfilero Non-acceleratedfilero SmallerreportingcompanyoEmerginggrowthcompanyo

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TwilioInc.AnnualReportonForm10-K

FortheFiscalYearEndedDecember31,2018TABLEOFCONTENTS

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Page PARTI

Item1. Business 4Item1A. RiskFactors 17Item1B. UnresolvedStaffComments 53Item2. Properties 53Item3. LegalProceedings 54Item4. MineSafetyDisclosures 56

PARTII Item5. MarketforRegistrant'sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquity

Securities 57

Item6. SelectedFinancialData 60Item7. Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations 64Item7A. QuantitativeandQualitativeDisclosuresAboutMarketRisk 84Item8. FinancialStatementsandSupplementaryData 86Item9. ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure 139Item9A. ControlsandProcedures 139Item9B. OtherInformation 140

PARTIII Item10. Directors,ExecutiveOfficersandCorporateGovernance 141Item11. ExecutiveCompensation 141Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 141Item13. CertainRelationshipsandRelatedTransactionsandDirectorIndependence 141Item14. PrincipalAccountantFeesandServices 141

PARTIV Item15. Exhibits,FinancialStatementSchedules 142Item16. Form10-KSummary 145

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SpecialNoteRegardingForward-LookingStatements

ThisAnnualReportonForm10-Kcontainsforward-lookingstatementswithinthemeaningofSection27AoftheSecuritiesActof1933,asamended(the"SecuritiesAct"),andSection21EoftheSecuritiesExchangeActof1934,asamended(the"ExchangeAct"),whichstatementsinvolvesubstantialrisksanduncertainties.Forward-lookingstatementsgenerallyrelatetofutureeventsorourfuturefinancialoroperatingperformance.Insomecases,youcanidentifyforward-lookingstatementsbecausetheycontainwordssuchas"may,""will,""should,""expects,""plans,""anticipates,""could,""intends,""target,""projects,""contemplates,""believes,""estimates,""predicts,""potential"or"continue"orthenegativeofthesewordsorothersimilartermsorexpressionsthatconcernourexpectations,strategy,plansorintentions.Forward-lookingstatementscontainedinthisAnnualReportonForm10-Kinclude,butarenotlimitedto,statementsabout:

• ourfuturefinancialperformance,includingourrevenue,costofrevenue,grossmarginandoperatingexpenses,abilitytogeneratepositivecashflowandabilitytoachieveandsustainprofitability;

• theimpactandexpectedresultsfromchangesinourrelationshipwithourlargercustomers;

• thesufficiencyofourcashandcashequivalentstomeetourliquidityneeds;

• anticipatedtechnologytrends,suchastheuseofanddemandforcloudcommunications;

• ourabilitytocontinuetobuildandmaintaincredibilitywiththeglobalsoftwaredevelopercommunity;

• ourabilitytoattractandretaincustomerstouseourproducts;

• ourabilitytoattractandretainenterprisesandinternationalorganizationsascustomersforourproducts;

• ourabilitytoformandexpandpartnershipswithtechnologypartnersandconsultingpartners;

• theevolutionoftechnologyaffectingourproductsandmarkets;

• ourabilitytointroducenewproductsandenhanceexistingproducts;

• ourabilitytooptimizeournetworkserviceprovidercoverageandconnectivity;

• ourabilitytomanagechangesinnetworkserviceproviderfeesthatwepayinconnectionwiththedeliveryofcommunicationsonourplatform;

• ourabilitytopassonoursavingsassociatedwithourplatformoptimizationeffortstoourcustomers;

• ourabilitytosuccessfullyenterintonewmarketsandmanageourinternationalexpansion;

• theattractionandretentionofqualifiedemployeesandkeypersonnel;

• ourabilitytoeffectivelymanageourgrowthandfutureexpensesandmaintainourcorporateculture;

• ouranticipatedinvestmentsinsalesandmarketingandresearchanddevelopment;

• ourabilitytomaintain,protectandenhanceourintellectualproperty;

• ourabilitytosuccessfullydefendlitigationbroughtagainstus;

• ourabilitytoservicetheinterestonourconvertiblenotesandrepaysuchnotes,totheextentrequired;

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• ourabilitytocomplywithmodifiedornewlawsandregulationsapplyingtoourbusiness,includingtheGeneralDataProtectionRegulation("GDPR"),theCaliforniaConsumerPrivacyActof2018andotherprivacyregulationsthatmaybeimplementedinthefuture;and

• ourabilitytosuccessfullyintegrateandrealizethebenefitsofourpastorfuturestrategicacquisitionsorinvestments,includingouracquisitionofSendGrid,Inc.("SendGrid").

Wecautionyouthattheforegoinglistmaynotcontainalloftheforward-lookingstatementsmadeinthisAnnualReportonForm10-K.

Youshouldnotrelyuponforward-lookingstatementsaspredictionsoffutureevents.Wehavebasedtheforward-lookingstatementscontainedinthisAnnualReportonForm10-Kprimarilyonourcurrentexpectationsandprojectionsaboutfutureeventsandtrendsthatwebelievemayaffectourbusiness,financialcondition,resultsofoperationsandprospects.Theoutcomeoftheeventsdescribedintheseforward-lookingstatementsissubjecttorisks,uncertaintiesandotherfactorsdescribedinPartI,Item1A,"RiskFactors"andelsewhereinthisAnnualReportonForm10-K.Moreover,weoperateinaverycompetitiveandrapidlychangingenvironment.Newrisksanduncertaintiesemergefromtimetotimeanditisnotpossibleforustopredictallrisksanduncertaintiesthatcouldhaveanimpactontheforward-lookingstatementscontainedinthisAnnualReportonForm10-K.Wecannotassureyouthattheresults,eventsandcircumstancesreflectedintheforward-lookingstatementswillbeachievedoroccur,andactualresults,eventsorcircumstancescoulddiffermateriallyfromthosedescribedintheforward-lookingstatements.

Theforward-lookingstatementsmadeinthisAnnualReportonForm10-Krelateonlytoeventsasofthedateonwhichthestatementsaremade.Weundertakenoobligationtoupdateanyforward-lookingstatementsmadeinthisAnnualReportonForm10-KtoreflecteventsorcircumstancesafterthedateofthisAnnualReportonForm10-Kortoreflectnewinformationortheoccurrenceofunanticipatedevents,exceptasrequiredbylaw.Wemaynotactuallyachievetheplans,intentionsorexpectationsdisclosedinourforward-lookingstatementsandyoushouldnotplaceunduerelianceonourforward-lookingstatements.Ourforward-lookingstatementsdonotreflectthepotentialimpactofanyfutureacquisitions,mergers,dispositions,jointventuresorinvestmentswemaymake.

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PARTI

Item1.Business

Overview

Softwaredevelopersarereinventingnearlyeveryaspectofbusinesstoday.Yetasdevelopers,werepeatedlyencounteredanareawherewecouldnotinnovate—communications.Becausecommunicationisafundamentalhumanactivityandvitaltobuildinggreatbusinesses,wewantedtoincorporatecommunicationsintooursoftwareapplications,butthebarrierstoinnovationweretoohigh.Twiliowasstartedtosolvethisproblem.

Webelievethefutureofcommunicationswillbewritteninsoftware,bythedevelopersoftheworld—ourcustomers.Byempoweringthem,ourmissionistofuelthefutureofcommunications.

Cloudplatformsareanewcategoryofsoftwarethatenabledeveloperstobuildandmanageapplicationswithoutthecomplexityofcreatingandmaintainingtheunderlyinginfrastructure.Theseplatformshavearisentoenableafastpaceofinnovationacrossarangeofcategories,suchascomputingandstorage.WearetheleaderintheCloudCommunicationsPlatformcategory.Weenabledeveloperstobuild,scaleandoperatereal-timecommunicationswithinsoftwareapplications.

Ourplatformconsistsofthreelayers:ourEngagementCloud,ProgrammableCommunicationsCloudandSuperNetwork.OurEngagementCloudsoftwareisdesignedtoaddressspecificusecaseslikeaccountsecurityandcontactcentersandisasetofApplicationProgrammingInterfaces("APIs")thathandlesthehigher-levelcommunicationlogicneededfornearlyeverytypeofcustomerengagement.TheseAPIsarefocusedonthebusinesschallengesthatadeveloperislookingtoaddress,allowingourcustomerstomorequicklyandeasilybuildbetterwaystoengagewiththeircustomersthroughouttheirjourney.OurProgrammableCommunicationsCloudsoftwareisasetofAPIsthatenablesdeveloperstoembedvoice,messagingandvideocapabilitiesintotheirapplications.TheProgrammableCommunicationsCloudisdesignedtosupportalmostallthefundamentalwayshumanscommunicate,unlockinginnovatorstoaddressjustaboutanycommunicationmarket.TheSuperNetworkisoursoftwarelayerthatallowsourcustomers'softwaretocommunicatewithconnecteddevicesglobally.Itinterconnectswithcommunicationsnetworksaroundtheworldandcontinuallyanalyzesdatatooptimizethequalityandcostofcommunicationsthatflowthroughourplatform.TheSuperNetworkalsocontainsasetofAPI'sgivingourcustomersaccesstomorefoundationalcomponentsofourplatform,likephonenumbers.

InFebruary2019,wecompletedouracquisitionofSendGrid,theleadingemailAPIplatform.Emailisanimportantchannelforbusinessestocommunicatewiththeircustomers,andincorporatingSendGrid'sproductsintoourplatformwillallowustoenablebusinessestoengagewiththeircustomersviaemaileffectivelyandatscale.Inaddition,addingthisimportantchanneltoourplatformwillallowustomorestrategicallyaddressourcustomer'sengagementstrategyacrossvoice,messaging,video,andnowe-mail.

Wehad64,286ActiveCustomerAccountsasofDecember31,2018,representingorganizationsbigandsmall,oldandyoung,acrossnearlyeveryindustry,withonethingincommon:theyarecompetingbyusingthepowerofsoftwaretobuilddifferentiationthroughcommunications.Withourplatform,ourcustomersaredisruptingexistingindustriesandcreatingnewones.Forexample,ourcustomers'softwareapplicationsuseourplatformtonotifyadinerwhenatableisready,provideenhancedapplicationsecuritythroughtwo-factorauthentication,connectpotentialbuyerstorealestateagents,andpowerlarge,omni-channelcontactcenters.TherangeofapplicationsthatdevelopersbuildwiththeTwilioplatformhasproventobenearlylimitless.

OurgoalisforTwiliotobeinthetoolkitofeverysoftwaredeveloperintheworld.Becausebigideasoftenstartsmall,weencouragedeveloperstoexperimentanditerateonourplatform.Welove

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whendevelopersexplorewhattheycandowithTwilio,becauseonedaytheymayhaveabusinessproblemthattheywilluseourproductstosolve.

Asourcustomerssucceed,weshareintheirsuccessthroughourusage-basedrevenuemodel.Ourrevenuegrowsascustomersincreasetheirusageofaproduct,extendtheirusageofaproducttonewapplicationsoradoptanewproduct.WebelievethemostusefulindicatorofthisincreasedactivityfromourexistingcustomeraccountsisourDollar-BasedNetExpansionRate,whichcomparestherevenuefromacohortofActiveCustomerAccounts,otherthanVariableCustomerAccounts,inaquartertothesamequarterintheprioryear.Dollar-BasedNetExpansionRatewas140%and128%fortheyearsendedDecember31,2018and2017,respectively.SeePartII,Item7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—KeyBusinessMetrics—Dollar-BasedNetExpansionRate."

OurPlatformApproach

Twilio'smissionistofuelthefutureofcommunications.Weenabledeveloperstobuild,scaleandoperatereal-timecommunicationswithinsoftwareapplications.

Webelieveeveryapplicationcanbeenhancedthroughthepowerofcommunication.Overtime,webelievethatallofourcommunicationsthatdonotoccurinpersonwillbeintegratedintosoftwareapplications.Ourplatformapproachenablesdeveloperstobuildthisfuture.

Usingoursoftware,developersareabletoincorporatecommunicationsintoapplicationsthatspanarangeofindustriesandfunctionalities.Ourtechnologypartnercustomers,whichembedourproductsinthesolutionstheyselltootherbusinesses,arealsoabletoleverageourproductstodelivertheirapplications.

Common Use Cases

• AnonymousCommunications.Enablinguserstohaveatrustedmeansofcommunicationswheretheyprefernottoshareprivateinformationliketheirtelephonenumber.Examplesincludeconversationsbetweendriversandridersortextingaftermeetingthroughadatingwebsite.

• AlertsandNotifications.Alertingauserthataneventhasoccurred,suchaswhenatableisready,aflightisdelayedorapackageisshipped.

• ContactCenter.Improvingcustomersupportofpoweringcustomercareteamswithvoice,messagingandvideocapabilitiesthatintegratewithothersystemstoaddcontext,suchasacaller'ssupporttickethistoryofpresentlocation.

• CallTracking.Usingphonenumberstoprovidedetailedanalyticsonphonecallstomeasuretheeffectivenessofmarketingcampaignsorleadgenerationactivitiesinamannersimilartohowwebanalyticstrackandmeasureonlineactivity.

• MobileMarketing.Integratingmessagingwithmarketingautomationtechnology,allowingorganizationstodelivertargetedandtimelycontextualizedcommunicationstoconsumers.

• UserSecurity.Verifyinguseridentitythroughtwo-factorauthenticationpriortolog-inorvalidatingtransactionswithinanapplication'sworkflow.Thisaddsanadditionallayerofsecuritytoanyapplication.

• TwilioForGood.PartneringwithnonprofitorganizationsthroughTwilio.org,tousethepowerofcommunicationstohelpsolvesocialchallenges,suchasanSMShotlinetofighthumantrafficking,anemergencyvolunteerdispatchsystemandappointmentremindersformedicalvisitsindevelopingnations.

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OurPlatform

EngagementCloud

Partofourcorestrategyistoprovideabroadsetoflowerlevelbuildingblocks(i.e.theproductsinourProgrammableCommunicationsCloudandSuperNetwork)thatcanbeusedtobuildvirtuallyanyusecase.Bydoingthis,weallowdevelopers'creativitytoflourishacrossthewidestsetofusecases—someofwhichhaven'tevenbeeninventedyet.Asweobservewhatusecasesaremostcommon,andtheworkflowsourcustomersfindmostchallenging,wecreatetheproductsinourEngagementCloudtobringtheselearningstoabroaderaudience.Whiledeveloperscanbuildabroadrangeofapplicationsonourplatform,certainusecasesaremorecommon.OurEngagementCloudAPIsbuilduponourProgrammableCommunicationsCloudtooffermorefullyimplementedfunctionalityforaspecificpurpose,suchastwo-factorauthenticationoracontactcenter,therebysavingdeveloperssignificanttimeinbuildingtheirapplications.

ThehigherlevelAPIswehavecreatedinthislayerofourplatformarefocusedonaddressingamassiveopportunitytorecreateandmodernizethefieldofcustomerengagement.Themeansbywhichmostcompaniesengagewiththeircustomersisarchaicanddisjointed,mademoreglaringbythepaceofdevelopmentinotherareasofcommunication.OurproductsintheEngagementCloudcombinetheflexibilityprovidedbyourplatformmodelalongwiththelearningswe'vegainedoverthepasttenyearsfocusedondrivingsuccessattensofthousandsofcustomers.

ProgrammableCommunicationsCloud

OurProgrammableCommunicationsCloudprovidesarangeofproductsthatenablesdeveloperstoembedvoice,messagingandvideocapabilitiesintotheirapplications.Oureasy-to-usedeveloperAPIsprovideaprogrammaticchanneltoaccessoursoftware.Developerscanutilizeourintuitiveprogramminglanguage,TwiML,tospecifyapplicationfunctionssuchas<Dial>,<Record>and<Play>,leveragingoursoftwaretomanagethecomplexityofexecutingthespecifiedfunctions.

OurProgrammableCommunicationsCloudconsistsofsoftwareproductsthatcanbeusedindividuallyorincombinationtobuildrichcontextualcommunicationswithinapplications.Wedonotaimtoprovidecompletebusinesssolutions,ratherourProgrammableCommunicationsCloudoffersflexiblebuildingblocksthatenableourcustomerstobuildwhattheyneed.OurProgrammableCommunicationsCloudincludes:

• ProgrammableVoice.OurProgrammableVoicesoftwareproductsallowdeveloperstobuildsolutionstomakeandreceivephonecallsglobally,andtoincorporateadvancedvoicefunctionalitysuchastext-to-speech,conferencing,recordingandtranscription.ProgrammableVoice,throughouradvancedcallcontrolsoftware,allowsdeveloperstobuildcustomizedapplicationsthataddressusecasessuchascontactcenters,calltrackingandanalyticssolutionsandanonymizedcommunications.

• ProgrammableMessaging.OurProgrammableMessagingsoftwareproductsallowdeveloperstobuildsolutionstosendandreceivemessagesglobally,throughchannelslikeSMS,MMS,shortcodes,WhatsApp,FacebookMessenger,andLINE,andincorporateadvancedmessagingfunctionalitysuchasemoji,picturemessagingandlocalizedlanguages.OurcustomersuseProgrammableMessaging,throughsoftwarecontrols,topowerusecases,suchasappointmentreminders,deliverynotifications,orderconfirmationsandcustomercare.

• ProgrammableVideo.OurProgrammableVideosoftwareproductsenabledeveloperstobuildnext-generationmobileandwebapplicationswithembeddedvideo,includingforusecasessuchascustomercare,collaborationandphysicianconsultations.

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SuperNetwork

OurProgrammableCommunicationsCloudisbuiltontopofourglobalsoftwarelayer,whichwecallourSuperNetwork.OurSuperNetworkinterfacesintelligentlywithcommunicationsnetworksglobally.Weusesoftwaretoconstructahighperformancenetworkthatcontinuouslyoptimizesqualityanddeliverabilityforourcustomers.OurSuperNetworkbreaksdownthegeopoliticalboundariesandscalelimitationsofphysicalnetworkinfrastructureandprovidesourcustomersthatuseourProgrammableCommunicationsCloudandEngagementCloudofferingaccesstoover180countries.TheSuperNetworkalsocontainsasetofAPI'sgivingourcustomersaccesstomorefoundationalcomponentsofourplatform,suchasphonenumbers.

Wehavestrategicallybuiltoutourglobalinfrastructureandoperatein27clouddatacentersinninegeographicallydistinctregions.Thesedatacentersserveasinterconnectionpointswithnetworkserviceprovidersandcustomersalike,givingusatrulyglobalreachandaredundantmeanstoconnectbusinesseswithbillionsofcustomersallovertheworld.Ourproviderrelationshipsanddeployedinfrastructurehaveallowedustocataloguethemanydifferentcommunicationsstandardsthatexisttodayandofferthemuptobusinessesasoneconsolidatedplatformwithsimple,easy-to-useAPIs.Wearecontinuallyaddingnewnetworkserviceproviderrelationshipsaswescale,andwearenotdependentuponanysinglenetworkserviceprovidertoconductourbusiness.

ThestrengthofTwilio'sSuperNetworkcomesfromthesoftwareintelligencewe'veembeddedthroughoutourcommunicationsnetwork.Byleveragingoursoftwareexpertiseweeliminatethetraditionalcomplexitiesanduncertaintiesoftelecommunicationsanddeliveraconsistentandhighqualitycommunicationsplatformforourcustomers.Thisallowscustomerstospendlesstimefocusingonmasteringthehighlyspecializedandcomplextelecommunicationsindustryandmoretimefocusingonbuildingbest-in-classcustomerengagementexperiences.Ourproprietarytechnologyselectswhichnetworkserviceproviderstouseandroutesthecommunicationsinordertooptimizethequalityandcostofthecommunicationsacrossourproductofferings.

OurSuperNetworkanalyzesmassivevolumesofdatafromourtraffic,theapplicationsthatpowerit,andtheunderlyingprovidernetworksinordertooptimizeourcustomers'communicationsforqualityandcost.Assuch,witheverynewmessageandcall,ourSuperNetworkbecomesmorerobust,intelligentandefficient,enablingustoprovidebetterperformanceanddeliverabilityforourcustomers.OurSuperNetwork'ssophisticationbecomesincreasinglydifficultforotherstoreplicateovertimeasitiscontinuallylearning,improvingandscaling.

OurBusinessModelforInnovators

OurgoalistoincludeTwiliointhetoolkitofeverydeveloperintheworld.Becausebigideasoftenstartsmall,developersneedthefreedomandtoolstoexperimentanditerateontheirideas.

Inordertoempowerdeveloperstoexperiment,ourdeveloper-firstbusinessmodelislowfriction,eliminatingtheupfrontcosts,timeandcomplexitythattypicallyhinderinnovation.WecallthisapproachourBusinessModelforInnovators,whichempowersdevelopersbyreducingfrictionandupfrontcosts,encouragingexperimentation,andenablingdeveloperstogrowascustomersastheirideassucceed.Developerscanbeginbuildingwithafreetrial.Theyhaveaccesstoself-servicedocumentationandfreecustomersupporttoguidethemthroughtheprocess.Oncedevelopersdeterminethatoursoftwaremeetstheirneeds,theycanflexiblyincreaseconsumptionandpaybasedonusage.Inshort,weacquiredeveloperslikeconsumersandenablethemtospendlikeenterprises.

OurGrowthStrategy

WearetheleaderintheCloudCommunicationsPlatformcategorybasedonrevenue,marketshareandreputation,andintendtocontinuetosetthepaceforinnovation.Wewillcontinuetoinvest

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aggressivelyinourplatformapproach,whichprioritizesincreasingourreachandscale.Weintendtopursuethefollowinggrowthstrategies:

• ContinueSignificantInvestmentinourTechnologyPlatform.Wewillcontinuetoinvestinbuildingnewsoftwarecapabilitiesandextendingourplatformtobringthepowerofcontextualcommunicationstoabroaderrangeofapplications,geographiesandcustomers.Wehaveasubstantialresearchanddevelopmentteam,comprisingapproximately47%ofourheadcountasofDecember31,2018.

• GrowOurDeveloperCommunityandAccelerateAdoption.Wewillcontinuetoenhanceourrelationshipswithdevelopersgloballyandseektoincreasethenumberofdevelopersonourplatform.AsofDecember31,2018,wehad64,286ActiveCustomerAccountsandwellovertwomillionregistereddeveloperaccountsregisteredonourplatform.Inadditiontoaddingnewdevelopers,webelievethereissignificantopportunityforrevenuegrowthfromdeveloperswhohavealreadyregisteredaccountswithusbutwhohavenotyetbuilttheirsoftwareapplicationswithus,orwhoseapplicationsareintheirinfancyandwillgrowwithTwiliointoanActiveCustomerAccount.

• IncreaseOurInternationalPresence.Ourplatformservesover180countriestoday,makingitassimpletocommunicatefromSãoPauloasitisfromSanFrancisco.CustomersoutsidetheUnitedStatesareincreasinglyadoptingourplatform,andfortheyearsendedDecember31,2018and2017,revenuefrominternationalcustomeraccountsaccountedfor25%and23%ofourtotalrevenue,respectively.Weareinvestingtomeettherequirementsofabroaderrangeofglobaldevelopersandenterprises.WeplantogrowinternationallybycontinuingtoexpandouroperationsoutsideoftheUnitedStatesandcollaboratingwithinternationalstrategicpartners.

• FurtherPenetratetheEnterprises.WeplantodrivegreaterawarenessandadoptionofTwiliofromenterprisesacrossindustries.Weintendtofurtherincreaseourinvestmentinsalesandmarketingtomeetevolvingenterpriseneedsglobally,inadditiontoextendingourenterprise-focusedusecasesandplatformcapabilities,likeourTwilioEnterprisePlan.Additionally,webelievethereissignificantopportunitytoexpandourrelationshipswithexistingenterprisecustomers.

• ExpandOurPartnerChannel.OurTwilioBuildpartnerprogramisfocusedongrowingourcommunityoftechnologyandconsultingpartners.TwilioBuild'secosystemofpartnersofferscustomersbothpackagedapplicationsandconsultingexpertisethatmakeitpossibleforanycustomertoinnovatewithTwilioregardlessofregion,industry,businessmodelordevelopmentresources.Tohelpourpartnersgrowtheirbusinessesandinnovatefortheircustomers,thisprogramprovidesgo-to-marketsupport,certificationandtrainingprograms,andapartnersuccessteam.Wehaverelationshipswithanumberoftechnologypartnercustomersthatembedourproductsinthesolutionsthattheyselltootherbusinesses.Weintendtoexpandourrelationshipswithexistingtechnologypartnercustomersandtoaddnewtechnologypartnercustomers.Weplantoinvestinarangeofinitiativestoencourageincreasedcollaborationwith,andgenerationofrevenuefrom,technologypartnercustomers.Wehavestarteddevelopingrelationshipswithconsultingpartnerswhoprovideconsultinganddevelopmentservicesfororganizationsthathavelimitedsoftwaredevelopmentexpertisetobuildourplatformintotheirsoftwareapplications.Weintendtocontinuetoinvestinanddeveloptheecosystemforoursolutionsinpartnershipwithconsultingpartnerstoaccelerateawarenessandadoptionofourplatform.

• SelectivelyPursueAcquisitionsandStrategicInvestments.Wemayselectivelypursueacquisitionsandstrategicinvestmentsinbusinessesandtechnologiesthatstrengthenourplatform.InFebruary2015,weacquiredAuthy,aleadingproviderofauthentication-as-a-serviceforlarge-scaleapplications.WiththeintegrationofAuthy,wenowprovideacloud-basedAPIto

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seamlesslyembedtwo-factorauthenticationandphoneverificationintoanyapplication.InNovember2016,weacquiredtheproprietaryWebReal-Time-Communication("WebRTC")mediaprocessingtechnologiesbuiltbytheteambehindtheKurentoOpenSourceProject.TheKurentoMediaServercapabilities,includinglargegroupcommunications,transcoding,recordingandadvancedmediaprocessing,hasbeenintegratedintoTwilioProgrammableVideo.InFebruary2017,weacquiredBeepsend,AB,amessagingproviderbasedinSwedenspecializinginmessagingandSMSsolutions.In2018,weacquiredYtica.com,acontactcenteranalyticstooldeveloperbasedinCzechRepublic;CoreNetworkDynamics,asoftwaremobilenetworkinfrastructuredeveloperbasedinGermany;andcertainassetsofVAITechnologies,alanguagerecognitionplatform.InFebruary2019,weacquiredSendGrid,Inc.,theleadinge-mailAPIplatform.

TheTwilioMagic

Webelievethere'sauniquespirittoTwilio,manifestedinwhoweareandhowweworktogether.Thesearetheprinciplesweusetobuildanimpactful,highgrowthbusinesswhilestayingtruetoourselves.Collectively,theseprinciplesguidehowweact,howwemakedecisions,andhowwewin.

How We Act

BeanOwner.Ownersknowtheirbusiness,embracingthegoodnewsandthebad.Ownerssweatthedetailsand"pickupthetrash."Ownersthinklongterm,andspendmoneywisely.

EmpowerOthers.Webelievethatunleashinghumanpotential—bothinsideandoutsideourcompany—isthekeytooursuccess.Behumbleandrealizeit'snotjustaboutus.Investineachother.

NoShenanigans.Alwaysactinanhonest,directandtransparentway.

How We Make Decisions

WeartheCustomer'sShoes.Spendthetimetodeeplyunderstandcustomers,andsolveproblemsfromtheirperspective.Earntrustthrougheveryinteraction.

WriteItDown.Ourbusinessiscomplex,sotakethetimetoexpressyourselfinprose—foryoursake,andforthefolkswithwhomyou'recollaborating.

RuthlesslyPrioritize.Prioritizationhelpsbreakdowncomplexproblems,andprovidesclarityinthefaceofuncertainty.Decisionsareprogress,somakedecisionswithavailableinformationandkeeplearning.

How We Win

BeBold.We'redrivenbyahungertobuildameaningfulandimpactfulcompany.Embracecrazyideasandremember,everybigideastartssmall.

BeInclusive.Toachieveourgoals,weneedadiversesetofvoicesintheroom.Builddiverseteams,andseekoutuniquepointsofview.

DrawtheOwl.There'snoinstructionbook,it'sourstowrite.Figureitout,shipit,anditerate.Inventthefuture,butdon'twingit.

Don'tSettle.Expectthebestfromyourselfandothers,becausethere'snofeelinggreaterthanbeingproudofourwork.Hirethebestpeopleforeveryrole.

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Twilio.org

Webelievewecancreategreatersocialgoodthroughbettercommunications.ThroughTwilio.org,whichisapartofourcompanyandnotaseparatelegalentity,wedonateanddiscountourproductstononprofits,whouseourproductstoengagetheiraudience,expandtheirreachandfocusonmakingameaningfulchangeintheworld.Twilio.org'smissionistofuelcommunicationsthatgivehope,power,andfreedomwitha10-yeargoaltohelponebillionpeopleeveryyear.In2015,wereserved1%ofourcommonstocktofundsocialimpactatTwilio.Sincethen,Twilio.orghasmadeseveraldonationsconsistentwithitsphilanthropicgoalswhichweretreatedascharitablecontributionsinourconsolidatedstatementsofoperationsincludedelsewhereinthisAnnualReportonForm10-K.AsofDecember31,2018,thetotalremainingsharesreservedforTwilio.orgwas572,676.

OurProducts

EngagementCloud

Whiledeveloperscanbuildabroadrangeofapplicationsonourplatform,certainusecasesaremorecommon.OurEngagementCloudAPIsbuilduponourProgrammableCommunicationsCloudtooffermorefullyimplementedfunctionalityforaspecificpurpose,suchastwo-factorauthenticationoracontactcenter,therebysavingdeveloperssignificanttimeinbuildingtheirapplications.

Flex

Flexisafullyprogrammablecloudcontactcenterplatformdesignedtogivebusinessescompletecontroloftheircontactcenterexperience.WithFlex,customerscanquicklydeployanomnichannelcontactcenterplatformandalsoprogrammaticallycustomizeeveryelementoftheexperienceincludingtheinterface,communicationchannels,agentrouting,andreportingtomeettheuniqueneedsofthebusiness.

AccountSecurity

Identityandcommunicationsarecloselylinked,andthisisacriticalbusinessneedforourcustomers.Usingourtwo-factorauthenticationAPIs,developerscanaddanextralayerofsecuritytotheirapplicationswithsecond-factorpasswordssenttoauser'sphoneviaSMS,voiceorpushnotifications.OurAccountSecurityproductsinclude:

• Authy.Providesuserauthenticationcodesthroughavarietyofformatsbasedonthedeveloper'sneeds.AuthenticationcodescanbedeliveredthroughtheAuthyapponregisteredmobilephones,desktop,orsmartdevicesorviaSMSandvoiceautomatedphonecalls.Inaddition,authenticationcanbedeterminedthroughapushnotificationonregisteredsmartphones

• Lookup.Allowsdeveloperstovalidatenumberformat,devicetype,andproviderpriortosendingmessagesorinitiatingcalls.

• Verify.Allowsdeveloperstodeliveraone-timepasscodethroughSMSorvoicetoverifythatauserisinpossessionofthedevicebeingregistered

Wechargeonaper-seatorper-usebasisforourEngagementCloudAPIs.

ProgrammableCommunicationsCloud

OurProgrammableCommunicationsCloudconsistsofsoftwareforvoice,messaging,videoandauthenticationthatempowersdeveloperstobuildapplicationsthatcancommunicatewithconnecteddevicesglobally.Wedonotaimtoprovidecompletebusinesssolutions,ratherourProgrammableCommunicationsCloudoffersflexiblebuildingblocksthatenableourcustomerstobuildwhattheyneed.

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ProgrammableVoice

OurProgrammableVoicesoftwareproductsallowdeveloperstobuildsolutionstomakeandreceivephonecallsglobally,andtoincorporateadvancedvoicefunctionalitysuchastext-to-speech,conferencing,recordingandtranscription.ProgrammableVoice,throughouradvancedcallcontrolsoftware,allowsdeveloperstobuildcustomizedapplicationsthataddressusecasessuchascontactcenters,calltrackingandanalyticssolutionsandanonymizedcommunications.OurvoicesoftwareworksoverboththetraditionalpublicswitchtelephonenetworkandoverInternetProtocol.ProgrammableVoiceincludes:

• TwilioVoice.Initiate,receiveandmanagephonecallsglobally,endtoendthroughtraditionalvoicetechnologyorbetweenwebbrowsersandlandlinesormobilephones.VoicecallingcanalsobeintegratednativelyinAppleiOSandGoogleAndroidapps.

• CallRecording.Securelyrecord,store,transcribeandretrievevoicecallsinthecloud.

• GlobalConference.Integrateaudioconferencingthatintelligentlyroutescallsthroughclouddatacentersintheclosestofninegeographicregionstoreducelatency.ScalesfromBasic,foralimitednumberofparticipants,toEpic,foranunlimitednumberofparticipants.

Wechargeonaper-minutebasisformostofourProgrammableVoiceproducts.

ProgrammableMessaging

OurProgrammableMessagingsoftwareproductsallowdeveloperstobuildsolutionstosendandreceivemessagesglobally,andincorporateadvancedmessagingfunctionalitysuchasemoji,picturemessagingandlocalizedlanguages.OurcustomersuseProgrammableMessaging,throughsoftwarecontrols,topowerusecases,suchasappointmentreminders,deliverynotifications,orderconfirmationsandcustomercare.Weoffermessagingoverlong-codenumbers,short-codenumbers,messagingappssuchasWhatsApp,FacebookMessengerandLINE,andoverIPthroughourAndroid,iOSandJavaScriptsoftwaredevelopmentkits.ProgrammableMessagingincludes:

• TwilioSMS.Programmaticallysend,receiveandtrackSMSmessagesaroundtheworld,supportinglocalizedlanguagesinnearlyeverymarket.

• TwilioMMS.ExchangepicturemessagesandmoreoverU.S.andCanadianphonenumbersfromcustomerapplicationswithbuilt-inimagetranscodingandmediastorage.

• Copilot.Intelligentsoftwarelayerthathandlestasks,suchasdynamicallysendingmessagesfromaphonenumberthatbestmatchesthegeographiclocationoftherecipientbasedonaglobalpoolofnumbers.

• ProgrammableChat.Deploycontextual,in-appmessagingatglobalscale.

• Channels.Programmaticallysend,receiveandtrackmessagestomessagingappssuchasWhatsApp,FacebookMessengerandLINEglobally.

• Toll-FreeSMS.Sendandreceivetextmessageswiththesametoll-freenumberusedforvoicecallsintheUnitedStatesandCanada.

Wechargeonaper-messagebasisformostofourProgrammableMessagingproducts.

ProgrammableVideo

ProgrammableVideoprovidesdeveloperswiththebuildingblockstoaddvoiceandvideotowebandmobileapplications.Developerscanaddressmultipleusecasessuchasremotecustomercare,

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multi-partycollaboration,videoconsultationsandmorebyleveragingProgrammableVideo'sglobalcloudinfrastructureandpowerfulSDKstobuildonWebRTC.ProgrammableVideoincludes:

• TwilioVideo.Createrich,multi-partyvideoexperiencesinwebandmobileapplicationswithfeaturessuchasone-to-oneandmulti-partyvideocalling,cloudbasedrecordings,screensharingetc.

• NetworkTraversal.Providelow-latency,cost-effectiveandreliableSessionTraversalUtilitiesforNetworkAddressTranslation(STUN)andTraversalUsingRelayforNetworkAddressTranslation(TURN)capabilitiesdistributedacrossfivecontinents.Thisfunctionalityallowsdeveloperstoinitiatepeer-to-peervideosessionsacrossanyinternet-connecteddeviceglobally.

Wechargeonaper-connected-endpoint,per-active-endpointandper-gigabitbasisforourProgrammableVideoproducts.

SuperNetwork

OurProgrammableCommunicationsCloudisbuiltontopofourglobalsoftwarelayer,whichwecallourSuperNetwork.OurSuperNetworkinterfacesintelligentlywithcommunicationsnetworksglobally.Wedonotownanyphysicalnetworkinfrastructure.Weusesoftwaretobuildahighperformancenetworkthatoptimizesperformanceforourcustomers.TheSuperNetworkalsocontainsasetofAPI'sgivingourcustomersaccesstomorefoundationalcomponentsofourplatform,likephonenumbersandSessionInitiationProtocol("SIP")Trunking.

• InstantPhoneNumberProvisioning.Acquirelocal,national,mobileandtoll-freephonenumbersondemandinover100countriesandconnectthemintothecustomers'applications.

• ShortCodes.AfivetosevendigitphonenumberintheUnitedStates,CanadaandtheUnitedKingdomusedtosendandreceiveahigh-volumeofmessagespersecond.

• ElasticSIPTrunking.ConnectlegacyvoiceapplicationstoourSuperNetworkoverIPinfrastructurewithglobally-availablephonenumbersandpay-as-you-gopricing.

• Interconnect.ConnectprivatelytoTwiliotoenableenterprisegradesecurityandqualityofserviceforTwilioVoiceandElasticSIPTrunking.

Wechargeonaper-minuteorper-phone-numberbasisformostofourSuperNetworkproducts.

OurEmployees

AsofDecember31,2018,wehadatotalof1,440employees,including351employeeslocatedoutsideoftheUnitedStates.Noneofouremployeesarerepresentedbyalaborunionorcoveredbyacollectivebargainingagreement.Wehavenotexperiencedanyworkstoppages,andweconsiderourrelationswithouremployeestobegood.

ResearchandDevelopment

Ourresearchanddevelopmenteffortsarefocusedonensuringthatourplatformisresilientandavailabletoourcustomersatanytime,andonenhancingourexistingproductsanddevelopingnewproducts.

Ourresearchanddevelopmentorganizationisbuiltaroundsmalldevelopmentteams.Oursmalldevelopmentteamsfostergreateragility,whichenablesustodevelopnew,innovativeproductsandmakerapidchangestoourinfrastructurethatincreaseresiliencyandoperationalefficiency.Ourdevelopmentteamsdesigned,builtandcontinuetoexpandourEngagementCloud,ProgrammableCommunicationsCloudandSuperNetwork.

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AsofDecember31,2018,wehad673employeesinourresearchanddevelopmentorganization.Weintendtocontinuetoinvestinourresearchanddevelopmentcapabilitiestoextendourplatformandbringthepowerofcontextualcommunicationstoabroaderrangeofapplications,geographiesandcustomers.

SalesandMarketing

Oursalesandmarketingteamsworktogethercloselytodriveawarenessandadoptionofourplatform,acceleratecustomeracquisitionandgeneraterevenuefromcustomers.

Ourgo-to-marketmodelisprimarilyfocusedonreachingandservingtheneedsofdevelopers.Weareapioneerofdeveloperevangelismandeducationandhavecultivatedalargeglobaldevelopercommunity.Wereachdevelopersthroughcommunityeventsandconferences,includingourSIGNALdeveloperconference,todemonstratehoweverydevelopercancreatedifferentiatedapplicationsincorporatingcommunicationsusingourproducts.

Oncedevelopersareintroducedtoourplatform,weprovidethemwithalow-frictiontrialexperience.Byaccessingoureasy-to-configureAPIs,extensiveself-servicedocumentationandcustomersupportteam,developerscanbuildourproductsintotheirapplicationsandthentestsuchapplicationsduringaninitialfreetrialperiodthatweprovide.Oncetheyhavedecidedtouseourproductsbeyondtheinitialfreetrialperiod,customersprovidetheircreditcardinformationandonlypayfortheactualusageofourproducts.Ourself-servepricingmatrixispubliclyavailableanditallowsforcustomerstoreceiveautomatictiereddiscountsastheirusageofourproductsincreases.Ascustomers'useofourproductsgrowslarger,someenterintonegotiatedcontractswithtermsthatdictatepricing,andtypicallyincludesomelevelofminimumrevenuecommitments.Historically,wehaveacquiredthesubstantialmajorityofourcustomersthroughthisself-servicemodel.Ascustomersexpandtheirusageofourplatform,ourrelationshipswiththemoftenevolvetoincludebusinessleaderswithintheirorganizations.Onceourcustomersreachacertainspendinglevelwithus,wesupportthemwithaccountmanagersorcustomersuccessadvocatestoensuretheirsatisfactionandexpandtheirusageofourproducts.

Wealsosupplementourself-servicemodelwithasaleseffortaimedatengaginglargerpotentialcustomers,strategicleadsandexistingcustomersthroughadirectsalesapproach.Tohelpincreaseourawarenessintheenterprise,wehaveexpandedourmarketingeffortsthroughprogramslikeourTwilioEngageroadshowwereweseektobringbusinessleadersanddeveloperstogethertodiscussthefutureofcustomerengagement.Wehavedevelopedproductstosupportthiseffortaswell,liketheTwilioEnterprisePlan,whichprovidescapabilitiesforadvancedsecurity,accessmanagementandgranularadministration.Oursalesorganizationtargetstechnicalleadersandbusinessleaderswhoareseekingtoleveragesoftwaretodrivecompetitivedifferentiation.Asweeducatetheseleadersonthebenefitsofdevelopingapplicationsincorporatingourproductstodifferentiatetheirbusiness,theyoftenconsultwiththeirdevelopersregardingimplementation.Webelievethatdevelopersareoftenadvocatesforourproductsasaresultofourdeveloper-focusedapproach.Oursalesorganizationincludessalesdevelopment,insidesales,fieldsalesandsalesengineeringpersonnel.

Whenpotentialcustomersdonothavetheavailabledeveloperresourcestobuildtheirownapplications,wereferthemtoeitherourtechnologypartnerswhoembedourproductsinthesolutionsthattheyselltootherbusinesses(suchascontactcentersandsalesforceandmarketingautomation)orourconsultingpartnerswhoprovideconsultinganddevelopmentservicesfororganizationsthathavelimitedsoftwaredevelopmentexpertisetobuildourplatformintotheirsoftwareapplications.

AsofDecember31,2018,wehad549employeesinoursalesandmarketingorganization.

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CustomerSupport

Wehavedesignedourproductsandplatformtobeself-serviceandrequireminimalcustomersupport.Toenableseamlessself-service,weprovideallofouruserswithhelperlibraries,comprehensivedocumentation,how-to'sandtutorials.Wesupplementandenhancethesetoolswiththeparticipationofourengageddevelopercommunity.Inaddition,weprovidesupportoptionstoaddresstheindividualizedneedsofourcustomers.Alldevelopersgetfreeemail-basedsupportwithAPIstatusnotifications.OurdevelopersalsoengagewiththebroaderTwiliocommunitytoresolvecertainissues.

Wealsoofferthreepaidtiersofemailandphonesupportwithincreasinglevelsofavailabilityandguaranteedresponsetimes.Ourhighesttierpersonalizedplanisintendedforourlargestcustomersandincludesguaranteedresponsetimesthatvarybasedonthepriorityoftherequest,adedicatedsupportengineer,adutymanagerandquarterlystatusreview.Oursupportmodelisglobal,with24x7coverageandsupportofficeslocatedintheUnitedStates,theUnitedKingdom,EstoniaandSingapore.Wecurrentlyderiveaninsignificantamountofrevenuefromfeeschargedforcustomersupport.

Competition

ThemarketforCloudCommunicationsPlatformisrapidlyevolvingandincreasinglycompetitive.Webelievethattheprincipalcompetitivefactorsinourmarketare:

• completenessofoffering;

• credibilitywithdevelopers;

• globalreach;

• easeofintegrationandprogrammability;

• productfeatures;

• platformscalability,reliability,securityandperformance;

• brandawarenessandreputation;

• thestrengthofsalesandmarketingefforts;

• customersupport;and

• thecostofdeployingandusingourproducts.

Webelievethatwecompetefavorablyonthebasisofthefactorslistedabove.Webelievethatnoneofourcompetitorscurrentlycompetesdirectlywithusacrossallofourproductofferings.

Ourcompetitorsfallintofourprimarycategories:

• legacyon-premisevendors,suchasAvayaandCisco;

• regionalnetworkserviceprovidersthatofferlimiteddeveloperfunctionalityontopoftheirownphysicalinfrastructure;

• smallersoftwarecompaniesthatcompetewithportionsofourproductline;and

• software-as-a-service"SaaS"companiesandcloudplatformvendorsthatofferprepackagedapplicationsandplatforms.

Someofourcompetitorshavegreaterfinancial,technicalandotherresources,greaternamerecognition,largersalesandmarketingbudgetsandlargerintellectualpropertyportfolios.Asaresult,certainofourcompetitorsmaybeabletorespondmorequicklyandeffectivelythanwecantoneworchangingopportunities,technologies,standardsorcustomerrequirements.Inaddition,somecompetitorsmayofferproductsorservicesthataddressoneoralimitednumberoffunctionsatlower

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prices,withgreaterdepththanourproductsorgeographieswherewedonotoperate.Withtheintroductionofnewproductsandservicesandnewmarketentrants,weexpectcompetitiontointensifyinthefuture.Moreover,asweexpandthescopeofourplatform,wemayfaceadditionalcompetition.

IntellectualProperty

Werelyonacombinationofpatent,copyright,trademarkandtradesecretlawsintheUnitedStatesandotherjurisdictions,aswellaslicenseagreementsandothercontractualprotections,toprotectourproprietarytechnology.Wealsorelyonanumberofregisteredandunregisteredtrademarkstoprotectourbrand.

AsofDecember31,2018,intheUnitedStates,wehadbeenissued104patents,whichexpirebetween2029and2037.Asofsuchdate,wealsohad13issuedpatentsinforeignjurisdictions,allofwhicharerelatedtoU.S.patentsandpatentapplications.WehavealsofiledvariousapplicationsforprotectionofcertainaspectsofourintellectualpropertyintheUnitedStatesandinternationally.Inaddition,asofDecember31,2018,wehad15trademarksregisteredintheUnitedStatesand94trademarksregisteredinforeignjurisdictions.

Wefurtherseektoprotectourintellectualpropertyrightsbyimplementingapolicythatrequiresouremployeesandindependentcontractorsinvolvedindevelopmentofintellectualpropertyonourbehalftoenterintoagreementsacknowledgingthatallworksorotherintellectualpropertygeneratedorconceivedbythemonourbehalfareourproperty,andassigningtousanyrights,includingintellectualpropertyrights,thattheymayclaimorotherwisehaveinthoseworksorproperty,totheextentallowableunderapplicablelaw.

Despiteoureffortstoprotectourtechnologyandproprietaryrightsthroughintellectualpropertyrights,licensesandothercontractualprotections,unauthorizedpartiesmaystillcopyorotherwiseobtainanduseoursoftwareandothertechnology.Inaddition,weintendtocontinuetoexpandourinternationaloperations,andeffectiveintellectualproperty,copyright,trademarkandtradesecretprotectionmaynotbeavailableormaybelimitedinforeigncountries.Anysignificantimpairmentofourintellectualpropertyrightscouldharmourbusinessorourabilitytocompete.Further,companiesinthecommunicationsandtechnologyindustriesmayownlargenumbersofpatents,copyrightsandtrademarksandmayfrequentlythreatenlitigation,orfilesuitagainstusbasedonallegationsofinfringementorotherviolationsofintellectualpropertyrights.Wecurrentlyaresubjectto,andexpecttofaceinthefuture,allegationsthatwehaveinfringedtheintellectualpropertyrightsofthirdparties,includingourcompetitorsandnon-practicingentities.

Regulatory

WearesubjecttoanumberofU.S.federalandstateandforeignlawsandregulationsthatinvolvematterscentraltoourbusiness.Theselawsandregulationsmayinvolveprivacy,dataprotection,intellectualproperty,competition,consumerprotection,exporttaxationorothersubjects.Manyofthelawsandregulationstowhichwearesubjectarestillevolvingandbeingtestedincourtsandcouldbeinterpretedinwaysthatcouldharmourbusiness.Inaddition,theapplicationandinterpretationoftheselawsandregulationsoftenareuncertain,particularlyinthenewandrapidlyevolvingindustryinwhichweoperate.Becausegloballawsandregulationshavecontinuedtodevelopandevolverapidly,itispossiblethatweorourproductsorourplatformmaynotbe,ormaynothavebeen,compliantwitheachsuchapplicablelaworregulation.

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Forexample,GDPR,whichtookfulleffectonMay25,2018,enhanceddataprotectionobligationsforbusinessesandrequiresserviceproviders(dataprocessors)processingpersonaldataonbehalfofcustomerstocooperatewithEuropeandataprotectionauthorities,implementsecuritymeasuresandkeeprecordsofpersonaldataprocessingactivities.NoncompliancewiththeGDPRcantriggerfinesequaltothegreaterof€20millionor4%ofglobalannualrevenue.Giventhebreadthanddepthofchangesindataprotectionobligations,meetingtherequirementsofGDPRhasrequiredsignificanttimeandresources,includingareviewofourtechnologyandsystemscurrentlyinuseagainsttherequirementsofGDPR.WehavetakenstepstoprepareforcomplyingwithGDPR,includingintegratingGDPR-compliantprivacyprotectionsintoourproductsandplatform,commercialagreementsandrecord-keepingpracticestohelpusandourcustomersmeetthecomplianceobligationsofGDPR.However,additionalEUlawsandregulations(andmemberstates'implementationsthereof)furthergoverntheprotectionofconsumersandofelectroniccommunications.IfoureffortstocomplywithGDPRorotherapplicableEUlawsandregulationsarenotsuccessful,wemaybesubjecttopenaltiesandfinesthatwouldadverselyimpactourbusinessandresultsofoperations,andourabilitytoconductbusinessintheEUcouldbesignificantlyimpaired.

Inaddition,theTelephoneConsumerProtectionActof1991("TCPA"),restrictstelemarketingandtheuseofautomatictextmessageswithoutproperconsent.Thescopeandinterpretationofthelawsthatareormaybeapplicabletothedeliveryoftextmessagesarecontinuouslyevolvinganddeveloping.Ifwedonotcomplywiththeselaws,orregulationsorifwebecomeliableundertheselawsorregulationsduetothefailureofourcustomerstocomplywiththeselawsbyobtainingproperconsent,wecouldfacedirectliability.

CorporateInformation

TwilioInc.wasincorporatedinDelawareinMarch2008.Ourprincipalexecutiveofficesarelocatedat375BealeStreet,ThirdFloor,SanFrancisco,California94105,andourtelephonenumberis(415)390-2337.Ourwebsiteaddressiswww.twilio.com.Informationcontainedon,orthatcanbeaccessedthrough,ourwebsitedoesnotconstitutepartofthisAnnualReportonForm10-K.

Twilio,theTwiliologoandothertrademarksorservicemarksofTwilioappearinginthisAnnualReportonForm10-KarethepropertyofTwilio.Tradenames,trademarksandservicemarksofothercompaniesappearinginthisAnnualReportonForm10-Karethepropertyoftheirrespectiveholders

InformationaboutGeographicRevenue

InformationaboutgeographicrevenueissetforthinNote10ofourNotestoourConsolidatedFinancialStatementsincludedinPartII,Item8,"FinancialStatementsandSupplementaryData"ofthisAnnualReportonForm10-K.

AvailableInformation

ThefollowingfilingsareavailablethroughourinvestorrelationswebsiteafterwefilethemwiththeSecuritiesandExchangeCommission("SEC"):AnnualReportonForm10-K,QuarterlyReportsonForm10-QandourProxyStatementforourannualmeetingofstockholders.Thesefilingsarealsoavailablefordownloadfreeofchargeonourinvestorrelationswebsite.Ourinvestorrelationswebsiteislocatedathttp://investors.twilio.com.TheSECalsomaintainsanInternetwebsitethatcontainsreports,proxystatementsandotherinformationaboutissuers,likeus,thatfileelectronicallywiththeSEC.Theaddressofthatwebsiteiswww.sec.gov.

Wewebcastourearningscallsandcertaineventsweparticipateinorhostwithmembersoftheinvestmentcommunityonourinvestorrelationswebsite.Additionally,weprovidenotificationsofnewsorannouncementsregardingourfinancialperformance,includingSECfilings,investorevents,pressandearningsreleases,andblogsaspartofourinvestorrelationswebsite.Furthercorporategovernance

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information,includingourcorporategovernanceguidelinesandcodeofbusinessconductandethics,isalsoavailableonourinvestorrelationswebsiteundertheheading"CorporateGovernance."ThecontentsofourwebsitesarenotintendedtobeincorporatedbyreferenceintothisAnnualReportonForm10-KorinanyotherreportordocumentwefilewiththeSEC,andanyreferencestoourwebsitesareintendedtobeinactivetextualreferencesonly.

Item1A.RiskFactors

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertaintiesdescribed below, together with all of the other information in this Annual Report on Form 10-K, including Part II, Item 7, "Management's Discussion and Analysisof Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this Annual Report onForm 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.

RisksRelatedtoOurBusinessandOurIndustry

Themarketforourproductsandplatformisnewandunproven,maydeclineorexperiencelimitedgrowthandisdependentinpartondeveloperscontinuingtoadoptourplatformanduseourproducts.

Wewerefoundedin2008,andwehavebeendevelopingandprovidingacloud-basedplatformthatenablesdevelopersandorganizationstointegratevoice,messagingandvideocommunicationscapabilitiesintotheirsoftwareapplications.Thismarketisrelativelynewandunprovenandissubjecttoanumberofrisksanduncertainties.Webelievethatourrevenuecurrentlyconstitutesasignificantportionofthetotalrevenueinthismarket,andtherefore,webelievethatourfuturesuccesswilldependinlargepartonthegrowth,ifany,ofthismarket.TheutilizationofAPIsbydevelopersandorganizationstobuildcommunicationsfunctionalityintotheirapplicationsisstillrelativelynew,anddevelopersandorganizationsmaynotrecognizetheneedfor,orbenefitsof,ourproductsandplatform.Moreover,iftheydonotrecognizetheneedforandbenefitsofourproductsandplatform,theymaydecidetoadoptalternativeproductsandservicestosatisfysomeportionoftheirbusinessneeds.Inordertogrowourbusinessandextendourmarketposition,weintendtofocusoneducatingdevelopersandotherpotentialcustomersaboutthebenefitsofourproductsandplatform,expandingthefunctionalityofourproductsandbringingnewtechnologiestomarkettoincreasemarketacceptanceanduseofourplatform.Ourabilitytoexpandthemarketthatourproductsandplatformaddressdependsuponanumberoffactors,includingthecost,performanceandperceivedvalueassociatedwithsuchproductsandplatform.Themarketforourproductsandplatformcouldfailtogrowsignificantlyortherecouldbeareductionindemandforourproductsasaresultofalackofdeveloperacceptance,technologicalchallenges,competingproductsandservices,decreasesinspendingbycurrentandprospectivecustomers,weakeningeconomicconditionsandothercauses.Ifourmarketdoesnotexperiencesignificantgrowthordemandforourproductsdecreases,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Wehaveahistoryoflossesandweareuncertainaboutourfutureprofitability.

Wehaveincurrednetlossesineachyearsinceourinception,includingnetlossesof$121.9million,$63.7millionand$41.3millionin2018,2017and2016,respectively.Wehadanaccumulateddeficitof$371.7millionasofDecember31,2018.Weexpecttocontinuetoexpendsubstantialfinancialandotherresourceson,amongotherthings:

• investmentsinourengineeringteam,thedevelopmentofnewproducts,featuresandfunctionalityandenhancementstoourplatform;

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• salesandmarketing,includingthecontinuedexpansionofourdirectsalesorganizationandmarketingprograms,especiallyforenterprisesandfororganizationsoutsideoftheUnitedStates,andexpandingourprogramsdirectedatincreasingourbrandawarenessamongcurrentandnewdevelopers;

• expansionofouroperationsandinfrastructure,bothdomesticallyandinternationally;and

• generaladministration,includinglegal,accountingandotherexpensesrelatedtobeingapubliccompany.

Theseinvestmentsmaynotresultinincreasedrevenueorgrowthofourbusiness.Wealsoexpectthatourrevenuegrowthratewilldeclineovertime.Accordingly,wemaynotbeabletogeneratesufficientrevenuetooffsetourexpectedcostincreasesandachieveandsustainprofitability.Ifwefailtoachieveandsustainprofitability,thenourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.

Wehaveexperiencedrapidgrowthandexpectourgrowthtocontinue,andifwefailtoeffectivelymanageourgrowth,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Wehaveexperiencedsubstantialgrowthinourbusinesssinceinception.Forexample,ourheadcounthasgrownfrom996employeesonDecember31,2017to1,440employeesonDecember31,2018.Inaddition,wearerapidlyexpandingourinternationaloperations.Ourinternationalheadcountgrewfrom215employeesasofDecember31,2017to351employeesasofDecember31,2018.Weexpecttocontinuetoexpandourinternationaloperationsinthefuture.Wehavealsoexperiencedsignificantgrowthinthenumberofcustomers,usageandamountofdatathatourplatformandassociatedinfrastructuresupport.Thisgrowthhasplacedandmaycontinuetoplacesignificantdemandsonourcorporateculture,operationalinfrastructureandmanagement.

Webelievethatourcorporateculturehasbeenacriticalcomponentofoursuccess.Wehaveinvestedsubstantialtimeandresourcesinbuildingourteamandnurturingourculture.Asweexpandourbusinessandmatureasapubliccompany,wemayfinditdifficulttomaintainourcorporateculturewhilemanagingthisgrowth.Anyfailuretomanageouranticipatedgrowthandorganizationalchangesinamannerthatpreservesthekeyaspectsofourculturecouldhurtourchanceforfuturesuccess,includingourabilitytorecruitandretainpersonnel,andeffectivelyfocusonandpursueourcorporateobjectives.This,inturn,couldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Inaddition,inordertosuccessfullymanageourrapidgrowth,ourorganizationalstructurehasbecomemorecomplex.Inordertomanagetheseincreasingcomplexities,wewillneedtocontinuetoscaleandadaptouroperational,financialandmanagementcontrols,aswellasourreportingsystemsandprocedures.Theexpansionofoursystemsandinfrastructurewillrequireustocommitsubstantialfinancial,operationalandmanagementresourcesbeforeourrevenueincreasesandwithoutanyassurancesthatourrevenuewillincrease.

Finally,continuedgrowthcouldstrainourabilitytomaintainreliableservicelevelsforourcustomers.Ifwefailtoachievethenecessarylevelofefficiencyinourorganizationaswegrow,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Ourquarterlyresultsmayfluctuate,andifwefailtomeetsecuritiesanalysts'andinvestors'expectations,thenthetradingpriceofourClassAcommonstockandthevalueofyourinvestmentcoulddeclinesubstantially.

Ourresultsofoperations,includingthelevelsofourrevenue,costofrevenue,grossmarginandoperatingexpenses,havefluctuatedfromquartertoquarterinthepastandmaycontinuetovarysignificantlyinthefuture.Thesefluctuationsarearesultofavarietyoffactors,manyofwhichareoutsideofourcontrol,maybedifficulttopredictandmayormaynotfullyreflecttheunderlyingperformanceof

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ourbusiness.Ifourquarterlyresultsofoperationsfallbelowtheexpectationsofinvestorsorsecuritiesanalysts,thenthetradingpriceofourClassAcommonstockcoulddeclinesubstantially.Someoftheimportantfactorsthatmaycauseourresultsofoperationstofluctuatefromquartertoquarterinclude:

• ourabilitytoretainandincreaserevenuefromexistingcustomersandattractnewcustomers;

• fluctuationsintheamountofrevenuefromourVariableCustomerAccountsandourlargerBaseCustomerAccounts;

• ourabilitytoattractandretainenterprisesandinternationalorganizationsascustomers;

• ourabilitytointroducenewproductsandenhanceexistingproducts;

• competitionandtheactionsofourcompetitors,includingpricingchangesandtheintroductionofnewproducts,servicesandgeographies;

• thenumberofnewemployees;

• changesinnetworkserviceproviderfeesthatwepayinconnectionwiththedeliveryofcommunicationsonourplatform;

• changesincloudinfrastructurefeesthatwepayinconnectionwiththeoperationofourplatform;

• changesinourpricingasaresultofouroptimizationeffortsorotherwise;

• reductionsinpricingasaresultofnegotiationswithourlargercustomers;

• therateofexpansionandproductivityofoursalesforce,includingourenterprisesalesforce,whichhasbeenafocusofourrecentexpansionefforts;

• changeinthemixofproductsthatourcustomersuse;

• changeintherevenuemixofU.S.andinternationalproducts;

• changesinlaws,regulationsorregulatoryenforcement,intheUnitedStatesorinternationally,thatimpactourabilitytomarket,sellordeliverourproducts;

• theamountandtimingofoperatingcostsandcapitalexpendituresrelatedtotheoperationsandexpansionofourbusiness,includinginvestmentsinourinternationalexpansion;

• significantsecuritybreachesof,technicaldifficultieswith,orinterruptionsto,thedeliveryanduseofourproductsonourplatform;

• thetimingofcustomerpaymentsandanydifficultyincollectingaccountsreceivablefromcustomers;

• generaleconomicconditionsthatmayadverselyaffectaprospectivecustomer'sabilityorwillingnesstoadoptourproducts,delayaprospectivecustomer'sadoptiondecision,reducetherevenuethatwegeneratefromtheuseofourproductsoraffectcustomerretention;

• changesinforeigncurrencyexchangerates;

• extraordinaryexpensessuchaslitigationorotherdispute-relatedsettlementpayments;

• salestaxandothertaxdeterminationsbyauthoritiesinthejurisdictionsinwhichweconductbusiness;

• theimpactofnewaccountingpronouncements;

• expensesinconnectionwithmergers,acquisitionsorotherstrategictransactions;and

• fluctuationsinstock-basedcompensationexpense.

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Theoccurrenceofoneormoreoftheforegoingandotherfactorsmaycauseourresultsofoperationstovarysignificantly.Assuch,webelievethatquarter-to-quartercomparisonsofourresultsofoperationsmaynotbemeaningfulandshouldnotberelieduponasanindicationoffutureperformance.Inaddition,asignificantpercentageofouroperatingexpensesisfixedinnatureandisbasedonforecastedrevenuetrends.Accordingly,intheeventofarevenueshortfall,wemaynotbeabletomitigatethenegativeimpactonourincome(loss)andmarginsintheshortterm.Ifwefailtomeetorexceedtheexpectationsofinvestorsorsecuritiesanalysts,thenthetradingpriceofourClassAcommonstockcouldfallsubstantially,andwecouldfacecostlylawsuits,includingsecuritiesclassactionsuits.

Additionally,certainlargescaleevents,suchasmajorelectionsandsportingevents,cansignificantlyimpactusagelevelsonourplatform,whichcouldcausefluctuationsinourresultsofoperations.Weexpectthatsignificantlyincreasedusageofallcommunicationsplatforms,includingours,duringcertainseasonalandone-timeeventscouldimpactdeliveryandqualityofourproductsduringthoseevents.WealsotendtoexperienceincreasedexpensesinconnectionwiththehostingofSIGNAL,ourdeveloperconference,whichwehostedinthefourthquarterof2018andplantohostannually.Suchannualandone-timeeventsmaycausefluctuationsinourresultsofoperationsandmayimpactbothourrevenueandoperatingexpenses.

Ifwearenotabletomaintainandenhanceourbrandandincreasemarketawarenessofourcompanyandproducts,thenourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Webelievethatmaintainingandenhancingthe"Twilio"brandidentityandincreasingmarketawarenessofourcompanyandproducts,particularlyamongdevelopers,iscriticaltoachievingwidespreadacceptanceofourplatform,tostrengthenourrelationshipswithourexistingcustomersandtoourabilitytoattractnewcustomers.Thesuccessfulpromotionofourbrandwilldependlargelyonourcontinuedmarketingefforts,ourabilitytocontinuetoofferhighqualityproducts,ourabilitytobethoughtleadersinthecloudcommunicationsmarketandourabilitytosuccessfullydifferentiateourproductsandplatformfromcompetingproductsandservices.Ourbrandpromotionandthoughtleadershipactivitiesmaynotbesuccessfuloryieldincreasedrevenue.Inaddition,independentindustryanalystsoftenprovidereviewsofourproductsandcompetingproductsandservices,whichmaysignificantlyinfluencetheperceptionofourproductsinthemarketplace.Ifthesereviewsarenegativeornotasstrongasreviewsofourcompetitors'productsandservices,thenourbrandmaybeharmed.

Fromtimetotime,ourcustomershavecomplainedaboutourproducts,suchascomplaintsaboutourpricingandcustomersupport.Ifwedonothandlecustomercomplaintseffectively,thenourbrandandreputationmaysuffer,ourcustomersmayloseconfidenceinusandtheymayreduceorceasetheiruseofourproducts.Inaddition,manyofourcustomerspostanddiscussonsocialmediaaboutInternet-basedproductsandservices,includingourproductsandplatform.Oursuccessdepends,inpart,onourabilitytogeneratepositivecustomerfeedbackandminimizenegativefeedbackonsocialmediachannelswhereexistingandpotentialcustomersseekandshareinformation.Ifactionswetakeorchangeswemaketoourproductsorplatformupsetthesecustomers,thentheironlinecommentarycouldnegativelyaffectourbrandandreputation.Complaintsornegativepublicityaboutus,ourproductsorourplatformcouldmateriallyandadverselyimpactourabilitytoattractandretaincustomers,ourbusiness,resultsofoperationsandfinancialcondition.

Thepromotionofourbrandalsorequiresustomakesubstantialexpenditures,andweanticipatethattheseexpenditureswillincreaseasourmarketbecomesmorecompetitiveandasweexpandintonewmarkets.Totheextentthattheseactivitiesincreaserevenue,thisrevenuestillmaynotbeenoughtooffsettheincreasedexpensesweincur.Ifwedonotsuccessfullymaintainandenhanceourbrand,thenourbusinessmaynotgrow,wemayseeourpricingpowerreducedrelativetocompetitorsandwemaylosecustomers,allofwhichwouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

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Ourbusinessdependsoncustomersincreasingtheiruseofourproducts,andanylossofcustomersordeclineintheiruseofourproductscouldmateriallyandadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ourabilitytogrowandgenerateincrementalrevenuedepends,inpart,onourabilitytomaintainandgrowourrelationshipswithexistingcustomersandtohavethemincreasetheirusageofourplatform.Ifourcustomersdonotincreasetheiruseofourproducts,thenourrevenuemaydeclineandourresultsofoperationsmaybeharmed.Customersarechargedbasedontheusageofourproducts.Mostofourcustomersdonothavelong-termcontractualfinancialcommitmentstousand,therefore,mostofourcustomersmayreduceorceasetheiruseofourproductsatanytimewithoutpenaltyorterminationcharges.Customersmayterminateorreducetheiruseofourproductsforanynumberofreasons,includingiftheyarenotsatisfiedwithourproducts,thevaluepropositionofourproductsorourabilitytomeettheirneedsandexpectations.Wecannotaccuratelypredictcustomers'usagelevelsandthelossofcustomersorreductionsintheirusagelevelsofourproductsmayeachhaveanegativeimpactonourbusiness,resultsofoperationsandfinancialconditionandmaycauseourDollar-BasedNetExpansionRatetodeclineinthefutureifcustomersarenotsatisfiedwithourproducts,thevaluepropositionofourproductsorourabilitytomeettheirneedsandexpectations.Ifasignificantnumberofcustomersceaseusing,orreducetheirusageofourproducts,thenwemayberequiredtospendsignificantlymoreonsalesandmarketingthanwecurrentlyplantospendinordertomaintainorincreaserevenuefromcustomers.Suchadditionalsalesandmarketingexpenditurescouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ifweareunabletoattractnewcustomersinacost-effectivemanner,thenourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.

Inordertogrowourbusiness,wemustcontinuetoattractnewcustomersinacost-effectivemanner.Weuseavarietyofmarketingchannelstopromoteourproductsandplatform,suchasdevelopereventsanddeveloperevangelism,aswellassearchenginemarketingandoptimization.Weperiodicallyadjustthemixofourothermarketingprogramssuchasregionalcustomerevents,emailcampaigns,billboardadvertisingandpublicrelationsinitiatives.Ifthecostsofthemarketingchannelsweuseincreasedramatically,thenwemaychoosetousealternativeandlessexpensivechannels,whichmaynotbeaseffectiveasthechannelswecurrentlyuse.Asweaddtoorchangethemixofourmarketingstrategies,wemayneedtoexpandintomoreexpensivechannelsthanthosewearecurrentlyin,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Wewillincurmarketingexpensesbeforeweareabletorecognizeanyrevenuethatthemarketinginitiativesmaygenerate,andtheseexpensesmaynotresultinincreasedrevenueorbrandawareness.Wehavemadeinthepast,andmaymakeinthefuture,significantexpendituresandinvestmentsinnewmarketingcampaigns,andwecannotguaranteethatanysuchinvestmentswillleadtothecost-effectiveacquisitionofadditionalcustomers.Ifweareunabletomaintaineffectivemarketingprograms,thenourabilitytoattractnewcustomerscouldbemateriallyandadverselyaffected,ouradvertisingandmarketingexpensescouldincreasesubstantiallyandourresultsofoperationsmaysuffer.

Ifwedonotdevelopenhancementstoourproductsandintroducenewproductsthatachievemarketacceptance,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Ourabilitytoattractnewcustomersandincreaserevenuefromexistingcustomersdependsinpartonourabilitytoenhanceandimproveourexistingproducts,increaseadoptionandusageofourproductsandintroducenewproducts.Thesuccessofanyenhancementsornewproductsdependsonseveralfactors,includingtimelycompletion,adequatequalitytesting,actualperformancequality,market-acceptedpricinglevelsandoverallmarketacceptance.Enhancementsandnewproductsthatwedevelopmaynotbeintroducedinatimelyorcost-effectivemanner,maycontainerrorsordefects,mayhaveinteroperabilitydifficultieswithourplatformorotherproductsormaynotachievethebroad

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marketacceptancenecessarytogeneratesignificantrevenue.Furthermore,ourabilitytoincreasetheusageofourproductsdepends,inpart,onthedevelopmentofnewusecasesforourproducts,whichistypicallydrivenbyourdevelopercommunityandmaybeoutsideofourcontrol.Wealsohaveinvested,andmaycontinuetoinvest,intheacquisitionofcomplementarybusinesses,technologies,services,productsandotherassetsthatexpandtheproductsthatwecanofferourcustomers.Wemaymaketheseinvestmentswithoutbeingcertainthattheywillresultinproductsorenhancementsthatwillbeacceptedbyexistingorprospectivecustomers.Ourabilitytogenerateusageofadditionalproductsbyourcustomersmayalsorequireincreasinglysophisticatedandmorecostlysaleseffortsandresultinalongersalescycle.Ifweareunabletosuccessfullyenhanceourexistingproductstomeetevolvingcustomerrequirements,increaseadoptionandusageofourproducts,developnewproducts,orifoureffortstoincreasetheusageofourproductsaremoreexpensivethanweexpect,thenourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.

Ifweareunabletoincreaseadoptionofourproductsbyenterprises,ourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Historically,wehavereliedontheadoptionofourproductsbysoftwaredevelopersthroughourself-servicemodelforasignificantmajorityofourrevenue,andwecurrentlygenerateonlyasmallportionofourrevenuefromenterprisecustomers.Ourabilitytoincreaseourcustomerbase,especiallyamongenterprises,andachievebroadermarketacceptanceofourproductswilldepend,inpart,onourabilitytoeffectivelyorganize,focusandtrainoursalesandmarketingpersonnel.Wehavelimitedexperiencesellingtoenterprisesandonlyrecentlyestablishedanenterprise-focusedsalesforce.

Ourabilitytoconvinceenterprisestoadoptourproductswilldepend,inpart,onourabilitytoattractandretainsalespersonnelwithexperiencesellingtoenterprises.Webelievethatthereissignificantcompetitionforexperiencedsalesprofessionalswiththeskillsandtechnicalknowledgethatwerequire.Ourabilitytoachievesignificantrevenuegrowthinthefuturewilldepend,inpart,onourabilitytorecruit,trainandretainasufficientnumberofexperiencedsalesprofessionals,particularlythosewithexperiencesellingtoenterprises.Inaddition,evenifwearesuccessfulinhiringqualifiedsalespersonnel,newhiresrequiresignificanttrainingandexperiencebeforetheyachievefullproductivity,particularlyforsaleseffortstargetedatenterprisesandnewterritories.Ourrecenthiresandplannedhiresmaynotbecomeasproductiveasquicklyasweexpectandwemaybeunabletohireorretainsufficientnumbersofqualifiedindividualsinthefutureinthemarketswherewedobusiness.Becausewedonothavealonghistoryoftargetingoursaleseffortsatenterprises,wecannotpredictwhether,ortowhatextent,oursaleswillincreaseasweorganizeandtrainoursalesforceorhowlongitwilltakeforsalespersonneltobecomeproductive.

Asweseektoincreasetheadoptionofourproductsbyenterprises,includingproductslikeFlex,whichisprimarilyaimedatcomplexcontactcenterimplementationsatlargercompanies,weexpecttoincurhighercostsandlongersalescycles.Intheenterprisemarketsegment,thedecisiontoadoptourproductsmayrequiretheapprovalofmultipletechnicalandbusinessdecisionmakers,includingsecurity,compliance,procurement,operationsandIT.Inaddition,whileenterprisecustomersmayquicklydeployourproductsonalimitedbasis,beforetheywillcommittodeployingourproductsatscale,theyoftenrequireextensiveeducationaboutourproductsandsignificantcustomersupporttime,engageinprotractedpricingnegotiationsandseektosecurereadilyavailabledevelopmentresources.Inaddition,salescyclesforenterprisesareinherentlymorecomplexandlesspredictablethanthesalesthroughourself-servicemodel,andsomeenterprisecustomersmaynotuseourproductsenoughtogeneraterevenuethatjustifiesthecosttoobtainsuchcustomers.Inaddition,thesecomplexandresourceintensivesaleseffortscouldplaceadditionalstrainonourproductandengineeringresources.Further,enterprises,includingsomeofourcustomers,maychoosetodeveloptheirownsolutionsthatdonotincludeourproducts.Theyalsomaydemandreductionsinpricingastheirusageofourproductsincreases,whichcouldhaveanadverseimpactonourgrossmargin.Asaresultofourlimited

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experiencesellingandmarketingtoenterprises,oureffortstoselltothesepotentialcustomersmaynotbesuccessful.Ifweareunabletoincreasetherevenuethatwederivefromenterprises,thenourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Ifweareunabletoexpandourrelationshipswithexistingtechnologypartnercustomersandaddnewtechnologypartnercustomers,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Webelievethatthecontinuedgrowthofourbusinessdependsinpartupondevelopingandexpandingstrategicrelationshipswithtechnologypartnercustomers.Technologypartnercustomersembedoursoftwareproductsintheirsolutions,suchassoftwareapplicationsforcontactcentersandsalesforceandmarketingautomation,andthensellsuchsolutionstootherbusinesses.Whenpotentialcustomersdonothavetheavailabledeveloperresourcestobuildtheirownapplications,wereferthemtoeitherourtechnologypartnerswhoembedourproductsinthesolutionsthattheyselltootherbusinesses(suchascontactcentersandsalesforceandmarketingautomation)orourconsultingpartnerswhoprovideconsultinganddevelopmentservicesfororganizationsthathavelimitedsoftwaredevelopmentexpertisetobuildourplatformintotheirsoftwareapplications.

Aspartofourgrowthstrategy,weintendtoexpandourrelationshipswithexistingtechnologypartnercustomersandaddnewtechnologypartnercustomers.Ifwefailtoexpandourrelationshipswithexistingtechnologypartnercustomersorestablishrelationshipswithnewtechnologypartnercustomersinatimelyandcost-effectivemanner,oratall,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.Additionally,evenifwearesuccessfulatbuildingtheserelationshipsbutthereareproblemsorissueswithintegratingourproductsintothesolutionsofthesecustomers,ourreputationandabilitytogrowourbusinessmaybeharmed.

WerelyuponAmazonWebServicestooperateourplatform,andanydisruptionoforinterferencewithouruseofAmazonWebServiceswouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

WeoutsourcesubstantiallyallofourcloudinfrastructuretoAmazonWebServices("AWS"),whichhostsourproductsandplatform.Ourcustomersneedtobeabletoaccessourplatformatanytime,withoutinterruptionordegradationofperformance.AWSrunsitsownplatformthatweaccess,andweare,therefore,vulnerabletoserviceinterruptionsatAWS.Wehaveexperienced,andexpectthatinthefuturewemayexperienceinterruptions,delaysandoutagesinserviceandavailabilityduetoavarietyoffactors,includinginfrastructurechanges,humanorsoftwareerrors,websitehostingdisruptionsandcapacityconstraints.Capacityconstraintscouldbeduetoanumberofpotentialcauses,includingtechnicalfailures,naturaldisasters,fraudorsecurityattacks.Forinstance,inSeptember2015,AWSsufferedasignificantoutagethathadawidespreadimpactontheabilityofourcustomerstouseseveralofourproducts.Inaddition,ifoursecurity,orthatofAWS,iscompromised,orourproductsorplatformareunavailableorourusersareunabletouseourproductswithinareasonableamountoftimeoratall,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.Insomeinstances,wemaynotbeabletoidentifythecauseorcausesoftheseperformanceproblemswithinaperiodoftimeacceptabletoourcustomers.Itmaybecomeincreasinglydifficulttomaintainandimproveourplatformperformance,especiallyduringpeakusagetimes,asourproductsbecomemorecomplexandtheusageofourproductsincreases.Totheextentthatwedonoteffectivelyaddresscapacityconstraints,eitherthroughAWSoralternativeprovidersofcloudinfrastructure,ourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.Inaddition,anychangesinservicelevelsfromAWSmayadverselyaffectourabilitytomeetourcustomers'requirements.

ThesubstantialmajorityoftheservicesweusefromAWSareforcloud-basedservercapacityand,toalesserextent,storageandotheroptimizationofferings.AWSenablesustoorderandreserveservercapacityinvaryingamountsandsizesdistributedacrossmultipleregions.WeaccessAWSinfrastructure

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throughstandardIPconnectivity.AWSprovidesuswithcomputingandstoragecapacitypursuanttoanagreementthatcontinuesuntilterminatedbyeitherparty.AWSmayterminatetheagreementbyproviding30dayspriorwrittennotice,anditmayinsomecasesterminatetheagreementimmediatelyforcauseuponnotice.Althoughweexpectthatwecouldreceivesimilarservicesfromotherthirdparties,ifanyofourarrangementswithAWSareterminated,wecouldexperienceinterruptionsonourplatformandinourabilitytomakeourproductsavailabletocustomers,aswellasdelaysandadditionalexpensesinarrangingalternativecloudinfrastructureservices.

Anyoftheabovecircumstancesoreventsmayharmourreputation,causecustomerstostopusingourproducts,impairourabilitytoincreaserevenuefromexistingcustomers,impairourabilitytogrowourcustomerbase,subjectustofinancialpenaltiesandliabilitiesunderourservicelevelagreementsandotherwiseharmourbusiness,resultsofoperationsandfinancialcondition.

Todeliverourproducts,werelyonnetworkserviceprovidersforournetworkservice.

Wecurrentlyinterconnectwithnetworkserviceprovidersaroundtheworldtoenabletheusebyourcustomersofourproductsovertheirnetworks.Weexpectthatwewillcontinuetorelyheavilyonnetworkserviceprovidersfortheseservicesgoingforward.Ourrelianceonnetworkserviceprovidershasreducedouroperatingflexibility,abilitytomaketimelyservicechangesandcontrolqualityofservice.Inaddition,thefeesthatwearechargedbynetworkserviceprovidersmaychangedailyorweekly,whilewedonottypicallychangeourcustomers'pricingasrapidly.

Attimes,networkserviceprovidershaveinstitutedadditionalfeesduetoregulatory,competitiveorotherindustryrelatedchangesthatincreaseournetworkcosts.Forexample,startingin2019,weareexpectingoneofthemajorU.S.cellularcarrierstointroduceanewserviceofferingforA2P,orApplicationtoPerson,SMSmessagesthatwilladdanewfeeforA2PSMSmessagesdeliveredtoitssubscribers.Whilewehavehistoricallyrespondedtothesetypesoffeeincreasesthroughacombinationoffurthernegotiatingeffortswithournetworkserviceproviders,absorbingtheincreasedcostsorchangingourpricestocustomers,thereisnoguaranteethatwewillcontinuetobeabletodosointhefuturewithoutamaterialnegativeimpacttoourbusiness.InthecaseofthisnewA2PSMSfeeanticipatedin2019,weplantopassthesefeesontoourcustomerswhoaresendingSMSmessagestothiscarrier'ssubscribers.Thisisexpectedtoincreaseourrevenueandcostofgoodssold,butisnotexpectedtoimpactthegrossprofitdollarsreceivedforsendingthesemessages.However,mathematicallythiswouldstillhaveanegativeimpactonourgrossmargins.Additionally,ourabilitytorespondtoanynewfeesmaybeconstrainedifallnetworkserviceprovidersinaparticularmarketimposeequivalentfeestructures,ifthemagnitudeofthefeesisdisproportionatelylargewhencomparedtotheunderlyingpricespaidbyourcustomers,orifthemarketconditionslimitourabilitytoincreasethepricewechargeourcustomers.

Furthermore,manyofthesenetworkserviceprovidersdonothavelong-termcommittedcontractswithusandmayterminatetheiragreementswithuswithoutnoticeorrestriction.Ifasignificantportionofournetworkserviceprovidersstopprovidinguswithaccesstotheirinfrastructure,failtoprovidetheseservicestousonacost-effectivebasis,ceaseoperations,orotherwiseterminatetheseservices,thedelaycausedbyqualifyingandswitchingtoothernetworkserviceproviderscouldbetimeconsumingandcostlyandcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Further,ifproblemsoccurwithournetworkserviceproviders,itmaycauseerrorsorpoorqualitycommunicationswithourproducts,andwecouldencounterdifficultyidentifyingthesourceoftheproblem.Theoccurrenceoferrorsorpoorqualitycommunicationsonourproducts,whethercausedbyourplatformoranetworkserviceprovider,mayresultinthelossofourexistingcustomersorthedelayofadoptionofourproductsbypotentialcustomersandmayadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

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Ourfuturesuccessdependsinpartonourabilitytodrivetheadoptionofourproductsbyinternationalcustomers.

In2018,2017and2016,wederived25%,23%and16%ofourrevenue,respectively,fromcustomeraccountslocatedoutsidetheUnitedStates.Thefuturesuccessofourbusinesswilldepend,inpart,onourabilitytoexpandourcustomerbaseworldwide.Whilewehavebeenrapidlyexpandingoursaleseffortsinternationally,ourexperienceinsellingourproductsoutsideoftheUnitedStatesislimited.Furthermore,ourdeveloper-firstbusinessmodelmaynotbesuccessfulorhavethesametractionoutsidetheUnitedStates.Asaresult,ourinvestmentinmarketingourproductstothesepotentialcustomersmaynotbesuccessful.Ifweareunabletoincreasetherevenuethatwederivefrominternationalcustomers,thenourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Weareintheprocessofexpandingourinternationaloperations,whichexposesustosignificantrisks.

WearecontinuingtoexpandourinternationaloperationstoincreaseourrevenuefromcustomersoutsideoftheUnitedStatesaspartofourgrowthstrategy.BetweenDecember31,2017andDecember31,2018,ourinternationalheadcountgrewfrom215employeesto351employees.Weexpecttoopenadditionalforeignofficesandhireemployeestoworkattheseofficesinordertoreachnewcustomersandgainaccesstoadditionaltechnicaltalent.Operatingininternationalmarketsrequiressignificantresourcesandmanagementattentionandwillsubjectustoregulatory,economicandpoliticalrisksinadditiontothosewealreadyfaceintheUnitedStates.Becauseofourlimitedexperiencewithinternationaloperationsorwithdevelopingandmanagingsalesininternationalmarkets,ourinternationalexpansioneffortsmaynotbesuccessful.

Inaddition,wewillfacerisksindoingbusinessinternationallythatcouldadverselyaffectourbusiness,including:

• exposuretopoliticaldevelopmentsintheUnitedKingdom("U.K."),includingtheplanneddepartureoftheU.K.fromtheEuropeanUnion(EU)inMarch2019,whichhascreatedanuncertainpoliticalandeconomicenvironment,instabilityforbusinessesandvolatilityinglobalfinancialmarkets;

• thedifficultyofmanagingandstaffinginternationaloperationsandtheincreasedoperations,travel,infrastructureandlegalcompliancecostsassociatedwithnumerousinternationallocations;

• ourabilitytoeffectivelypriceourproductsincompetitiveinternationalmarkets;

• newanddifferentsourcesofcompetition;

• ourabilitytocomplywithGDPR,whichwentintoeffectonMay25,2018,andtheCaliforniaConsumerPrivacyAct,whichwillbeeffectiveasofJanuary1,2020;

• potentiallygreaterdifficultycollectingaccountsreceivableandlongerpaymentcycles;

• higherormorevariablenetworkserviceproviderfeesoutsideoftheUnitedStates;

• theneedtoadaptandlocalizeourproductsforspecificcountries;

• theneedtooffercustomersupportinvariouslanguages;

• difficultiesinunderstandingandcomplyingwithlocallaws,regulationsandcustomsinforeignjurisdictions;

• difficultieswithdifferingtechnicalandenvironmentalstandards,dataprivacyandtelecommunicationsregulationsandcertificationrequirementsoutsidetheUnitedStates,whichcouldpreventcustomersfromdeployingourproductsorlimittheirusage;

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• exportcontrolsandeconomicsanctionsadministeredbytheDepartmentofCommerceBureauofIndustryandSecurityandtheTreasuryDepartment'sOfficeofForeignAssetsControl;

• compliancewithvariousanti-briberyandanti-corruptionlawssuchastheForeignCorruptPracticesActandUnitedKingdomBriberyActof2010;

• tariffsandothernon-tariffbarriers,suchasquotasandlocalcontentrules;

• morelimitedprotectionforintellectualpropertyrightsinsomecountries;

• adversetaxconsequences;

• fluctuationsincurrencyexchangerates,whichcouldincreasethepriceofourproductsoutsideoftheUnitedStates,increasetheexpensesofourinternationaloperationsandexposeustoforeigncurrencyexchangeraterisk;

• currencycontrolregulations,whichmightrestrictorprohibitourconversionofothercurrenciesintoU.S.dollars;

• restrictionsonthetransferoffunds;

• deteriorationofpoliticalrelationsbetweentheUnitedStatesandothercountries;and

• politicalorsocialunrestoreconomicinstabilityinaspecificcountryorregioninwhichweoperate,whichcouldhaveanadverseimpactonouroperationsinthatlocation.

Also,duetocostsfromourinternationalexpansioneffortsandnetworkserviceproviderfeesoutsideoftheUnitedStates,whichgenerallyarehigherthandomesticrates,ourgrossmarginforinternationalcustomersistypicallylowerthanourgrossmarginfordomesticcustomers.Asaresult,ourgrossmarginmaybeimpactedandfluctuateasweexpandouroperationsandcustomerbaseworldwide.

Ourfailuretomanageanyoftheseriskssuccessfullycouldharmourinternationaloperations,andadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Wecurrentlygeneratesignificantrevenuefromourlargestcustomers,andthelossordeclineinrevenuefromanyofthesecustomerscouldharmourbusiness,resultsofoperationsandfinancialcondition.

In2018,2017and2016,our10largestActiveCustomerAccounts,whichconsistedofbothBaseandVariableCustomers,generatedanaggregateof18%,19%and30%ofourrevenue,respectively.AsignificantportionofourrevenuecomesfromaVariableCustomer,WhatsApp.

In2018,2017and2016,WhatsAppaccountedfor7%,6%and9%ofourrevenue,respectively.WhatsAppusesourProgrammableVoiceproductsandProgrammableMessagingproductsinitsapplicationstoverifynewandexistingusersonitsservice.OurVariableCustomerAccounts,includingWhatsApp,donothavelong-termcontractswithusandmayreduceorfullyterminatetheirusageofourproductsatanytimewithoutnotice,penaltyorterminationcharges.Inaddition,theusageofourproductsbyWhatsAppandotherVariableCustomerAccountsmaychangesignificantlybetweenperiods.

IntheeventthatanyofourlargeBaseorVariablecustomersdonotcontinuetouseourproducts,usefewerofourproducts,oruseourproductsinamorelimitedcapacity,ornotatall,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

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Themarketinwhichweparticipateisintenselycompetitive,andifwedonotcompeteeffectively,ourbusiness,resultsofoperationsandfinancialconditioncouldbeharmed.

Themarketforcloudcommunicationsisrapidlyevolving,significantlyfragmentedandhighlycompetitive,withrelativelylowbarrierstoentryinsomesegments.Theprincipalcompetitivefactorsinourmarketincludecompletenessofoffering,credibilitywithdevelopers,globalreach,easeofintegrationandprogrammability,productfeatures,platformscalability,reliability,securityandperformance,brandawarenessandreputation,thestrengthofsalesandmarketingefforts,customersupport,aswellasthecostofdeployingandusingourproducts.Ourcompetitorsfallintofourprimarycategories:

• legacyon-premisevendors,suchasAvayaandCisco;

• regionalnetworkserviceprovidersthatofferlimiteddeveloperfunctionalityontopoftheirownphysicalinfrastructure;

• smallersoftwarecompaniesthatcompetewithportionsofourproductline;and

• software-as-a-service("SaaS")companiesandcloudplatformvendorsthatofferprepackagedapplicationsandplatforms.

Someofourcompetitorsandpotentialcompetitorsarelargerandhavegreaternamerecognition,longeroperatinghistories,moreestablishedcustomerrelationships,largerbudgetsandsignificantlygreaterresourcesthanwedo.Inaddition,theyhavetheoperatingflexibilitytobundlecompetingproductsandservicesatlittleornoperceivedincrementalcost,includingofferingthematalowerpriceaspartofalargersalestransaction.Asaresult,ourcompetitorsmaybeabletorespondmorequicklyandeffectivelythanwecantoneworchangingopportunities,technologies,standardsorcustomerrequirements.Inaddition,somecompetitorsmayofferproductsorservicesthataddressoneoralimitednumberoffunctionsatlowerprices,withgreaterdepththanourproductsorindifferentgeographies.Ourcurrentandpotentialcompetitorsmaydevelopandmarketnewproductsandserviceswithcomparablefunctionalitytoourproducts,andthiscouldleadtoushavingtodecreasepricesinordertoremaincompetitive.Customersutilizeourproductsinmanywaysandusevaryinglevelsoffunctionalitythatourproductsofferorarecapableofsupportingorenablingwithintheirapplications.Customersthatusemanyofthefeaturesofourproductsoruseourproductstosupportorenablecorefunctionalityfortheirapplicationsmayhavedifficultyorfinditimpracticaltoreplaceourproductswithacompetitor'sproductsorservices,whilecustomersthatuseonlylimitedfunctionalitymaybeabletomoreeasilyreplaceourproductswithcompetitiveofferings.Ourcustomersalsomaychoosetobuildsomeofthefunctionalityourproductsprovide,whichmaylimitoreliminatetheirdemandforourproducts.

Withtheintroductionofnewproductsandservicesandnewmarketentrants,weexpectcompetitiontointensifyinthefuture.Inaddition,someofourcustomersmaychoosetouseourproductsandourcompetitors'productsatthesametime.Further,customersandconsumersmaychoosetoadoptotherformsofelectroniccommunicationsoralternativecommunicationplatforms.

Moreover,asweexpandthescopeofourproducts,wemayfaceadditionalcompetition.Ifoneormoreofourcompetitorsweretomergeorpartnerwithanotherofourcompetitors,thechangeinthecompetitivelandscapecouldalsoadverselyaffectourabilitytocompeteeffectively.Inaddition,someofourcompetitorshavelowerlistpricesthanus,whichmaybeattractivetocertaincustomersevenifthoseproductshavedifferentorlesserfunctionality.Ifweareunabletomaintainourcurrentpricingduetocompetitivepressures,ourmarginswillbereducedandourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.Inaddition,pricingpressuresandincreasedcompetitiongenerallycouldresultinreducedrevenue,reducedmargins,increasedlossesorthefailureofourproductstoachieveormaintainwidespreadmarketacceptance,anyofwhichcouldharmourbusiness,resultsofoperationsandfinancialcondition.

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Wehavealimitedoperatinghistory,whichmakesitdifficulttoevaluateourcurrentbusinessandfutureprospectsandincreasestheriskofyourinvestment.

Wewerefoundedandlaunchedourfirstproductin2008.Asaresultofourlimitedoperatinghistory,ourabilitytoforecastourfutureresultsofoperationsislimitedandsubjecttoanumberofuncertainties,includingourabilitytoplanforfuturegrowth.Ourhistoricalrevenuegrowthshouldnotbeconsideredindicativeofourfutureperformance.Wehaveencounteredandwillencounterrisksanduncertaintiesfrequentlyexperiencedbygrowingcompaniesinrapidlychangingindustries,suchas:

• marketacceptanceofourproductsandplatform;

• addingnewcustomers,particularlyenterprises;

• retentionofcustomers;

• thesuccessfulexpansionofourbusiness,particularlyinmarketsoutsideoftheUnitedStates;

• competition;

• ourabilitytocontrolcosts,particularlyouroperatingexpenses;

• networkoutagesorsecuritybreachesandanyassociatedexpenses;

• foreigncurrencyexchangeratefluctuations;

• executingacquisitionsandintegratingtheacquiredbusinesses,technologies,services,productsandotherassets;and

• generaleconomicandpoliticalconditions.

Ifwedonotaddresstheseriskssuccessfully,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Wehavelimitedexperiencewithrespecttodeterminingtheoptimalpricesforourproducts.

Wechargeourcustomersbasedontheiruseofourproducts.Weexpectthatwemayneedtochangeourpricingfromtimetotime.Inthepastwehavesometimesreducedourpriceseitherforindividualcustomersinconnectionwithlong-termagreementsorforaparticularproduct.Oneofthechallengestoourpricingisthatthefeesthatwepaytonetworkserviceprovidersoverwhosenetworkswetransmitcommunicationscanvarydailyorweeklyandareaffectedbyvolumeandotherfactorsthatmaybeoutsideofourcontrolanddifficulttopredict.Thiscanresultinusincurringincreasedcoststhatwemaybeunableorunwillingtopassthroughtoourcustomers,whichcouldadverselyimpactourbusiness,resultsofoperationsandfinancialcondition.

Further,ascompetitorsintroducenewproductsorservicesthatcompetewithoursorreducetheirprices,wemaybeunabletoattractnewcustomersorretainexistingcustomersbasedonourhistoricalpricing.Asweexpandinternationally,wealsomustdeterminetheappropriatepricetoenableustocompeteeffectivelyinternationally.Moreover,enterprises,whichareaprimaryfocusforourdirectsalesefforts,maydemandsubstantialpriceconcessions.Inaddition,ifthemixofproductssoldchanges,includingforashifttoIP-basedproducts,thenwemayneedto,orchooseto,reviseourpricing.Asaresult,inthefuturewemayberequiredorchoosetoreduceourpricesorchangeourpricingmodel,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

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Wetypicallyprovidemonthlyuptimeservicelevelcommitmentsofupto99.95%underouragreementswithcustomers.Ifwefailtomeetthesecontractualcommitments,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Ouragreementswithcustomerstypicallyprovideforservicelevelcommitments.Ifwesufferextendedperiodsofdowntimeforourproductsorplatformandweareunabletomeetthesecommitments,thenwearecontractuallyobligatedtoprovideaservicecredit,whichistypically10%ofthecustomer'samountsdueforthemonthinquestion.Inaddition,theperformanceandavailabilityofAWS,whichprovidesourcloudinfrastructuresisoutsideofourcontroland,therefore,wearenotinfullcontrolofwhetherwemeetourservicelevelcommitments.Asaresult,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffectedifwesufferunscheduleddowntimethatexceedstheservicelevelcommitmentswehavemadetoourcustomers.Anyextendedserviceoutagescouldadverselyaffectourbusinessandreputation.

Breachesofournetworksorsystems,orthoseofAWSorourserviceproviders,coulddegradeourabilitytoconductourbusiness,compromisetheintegrityofourproducts,platformanddata,resultinsignificantdatalossesandthetheftofourintellectualproperty,damageourreputation,exposeustoliabilitytothirdpartiesandrequireustoincursignificantadditionalcoststomaintainthesecurityofournetworksanddata.

WedependuponourITsystemstoconductvirtuallyallofourbusinessoperations,rangingfromourinternaloperationsandresearchanddevelopmentactivitiestoourmarketingandsaleseffortsandcommunicationswithourcustomersandbusinesspartners.Individualsorentitiesmayattempttopenetrateournetworksecurity,orthatofourplatform,andtocauseharmtoourbusinessoperations,includingbymisappropriatingourproprietaryinformationorthatofourcustomers,employeesandbusinesspartnersortocauseinterruptionsofourproductsandplatform.Becausethetechniquesusedbysuchindividualsorentitiestoaccess,disruptorsabotagedevices,systemsandnetworkschangefrequentlyandmaynotberecognizeduntillaunchedagainstatarget,wemaybeunabletoanticipatethesetechniques,andwemaynotbecomeawareinatimelymannerofsuchasecuritybreach,whichcouldexacerbateanydamageweexperience.Additionally,wedependuponouremployeesandcontractorstoappropriatelyhandleconfidentialandsensitivedata,includingcustomerdata,andtodeployourITresourcesinasafeandsecuremannerthatdoesnotexposeournetworksystemstosecuritybreachesorthelossofdata.Anydatasecurityincidents,includinginternalmalfeasancebyouremployees,unauthorizedaccessorusage,virusorsimilarbreachordisruptionofusorourserviceproviders,suchasAWSorserviceproviders,couldresultinlossofconfidentialinformation,damagetoourreputation,lossofcustomers,litigation,regulatoryinvestigations,fines,penaltiesandotherliabilities.Accordingly,ifourcybersecuritymeasuresorthoseofAWSorourserviceproviders,failtoprotectagainstunauthorizedaccess,attacks(whichmayincludesophisticatedcyberattacks),compromiseorthemishandlingofdatabyouremployeesandcontractors,thenourreputation,business,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Defectsorerrorsinourproductscoulddiminishdemandforourproducts,harmourbusinessandresultsofoperationsandsubjectustoliability.

Ourcustomersuseourproductsforimportantaspectsoftheirbusinesses,andanyerrors,defectsordisruptionstoourproductsandanyotherperformanceproblemswithourproductscoulddamageourcustomers'businessesand,inturn,hurtourbrandandreputation.Weprovideregularupdatestoourproducts,whichhaveinthepastcontained,andmayinthefuturecontain,undetectederrors,failures,vulnerabilitiesandbugswhenfirstintroducedorreleased.Realorperceivederrors,failuresorbugsinourproductscouldresultinnegativepublicity,lossofordelayinmarketacceptanceofourplatform,lossofcompetitiveposition,lowercustomerretentionorclaimsbycustomersforlossessustainedbythem.Insuchanevent,wemayberequired,ormaychoose,forcustomerrelationsorotherreasons,toexpendadditionalresourcesinordertohelpcorrecttheproblem.Inaddition,wemay

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notcarryinsurancesufficienttocompensateusforanylossesthatmayresultfromclaimsarisingfromdefectsordisruptionsinourproducts.Asaresult,ourreputationandourbrandcouldbeharmed,andourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Ifwefailtoadaptandrespondeffectivelytorapidlychangingtechnology,evolvingindustrystandards,changingregulations,andchangingcustomerneeds,requirementsorpreferences,ourproductsmaybecomelesscompetitive.

Themarketforcommunicationsingeneral,andcloudcommunicationsinparticular,issubjecttorapidtechnologicalchange,evolvingindustrystandards,changingregulations,aswellaschangingcustomerneeds,requirementsandpreferences.Thesuccessofourbusinesswilldepend,inpart,onourabilitytoadaptandrespondeffectivelytothesechangesonatimelybasis.Ifweareunabletodevelopnewproductsthatsatisfyourcustomersandprovideenhancementsandnewfeaturesforourexistingproductsthatkeeppacewithrapidtechnologicalandindustrychange,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.Ifnewtechnologiesemergethatareabletodelivercompetitiveproductsandservicesatlowerprices,moreefficiently,moreconvenientlyormoresecurely,suchtechnologiescouldadverselyimpactourabilitytocompeteeffectively.

Ourplatformmustintegratewithavarietyofnetwork,hardware,mobileandsoftwareplatformsandtechnologies,andweneedtocontinuouslymodifyandenhanceourproductsandplatformtoadapttochangesandinnovationinthesetechnologies.Forexample,Apple,Googleandothercell-phoneoperatingsystemprovidersmaydevelopnewapplicationsorfunctionsintendedtofilterspamandunwantedphonecalls,andsuchapplicationsorfunctionsmayinadvertentlyfilterdesiredmessagesorcallstoorfromourcustomers.Ifcustomersortheirendusersadoptnewsoftwareplatformsorinfrastructure,wemayberequiredtodevelopnewversionsofourproductstoworkwiththosenewplatformsorinfrastructure.Thisdevelopmenteffortmayrequiresignificantresources,whichwouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Anyfailureofourproductsandplatformtooperateeffectivelywithevolvingornewplatformsandtechnologiescouldreducethedemandforourproducts.Ifweareunabletorespondtothesechangesinacost-effectivemanner,ourproductsmaybecomelessmarketableandlesscompetitiveorobsolete,andourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

OurrelianceonSaaStechnologiesfromthirdpartiesmayadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

WerelyheavilyonhostedSaaStechnologiesfromthirdpartiesinordertooperatecriticalinternalfunctionsofourbusiness,includingenterpriseresourceplanning,customersupportandcustomerrelationsmanagementservices.Iftheseservicesbecomeunavailableduetoextendedoutagesorinterruptions,orbecausetheyarenolongeravailableoncommerciallyreasonabletermsorprices,ourexpensescouldincrease.Asaresult,ourabilitytomanageouroperationscouldbeinterruptedandourprocessesformanagingoursalesprocessandsupportingourcustomerscouldbeimpaireduntilequivalentservices,ifavailable,areidentified,obtainedandimplemented,allofwhichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ifweareunabletodevelopandmaintainsuccessfulrelationshipswithconsultingpartners,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Webelievethatcontinuedgrowthofourbusinessdependsinpartuponidentifying,developingandmaintainingstrategicrelationshipswithconsultingpartners.Aspartofourgrowthstrategy,weintendtofurtherdeveloppartnershipsandspecificsolutionareaswithconsultingpartners.Ifwefailtoestablishtheserelationshipsinatimelyandcost-effectivemanner,oratall,thenourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.Additionally,evenifwearesuccessfulatdevelopingtheserelationshipsbutthereareproblemsorissueswiththeintegrationsorenterprises

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arenotwillingtopurchasethroughconsultingpartners,ourreputationandabilitytogrowourbusinessmaybeadverselyaffected.

Anyfailuretoofferhighqualitycustomersupportmayadverselyaffectourrelationshipswithourcustomersandprospectivecustomers,andadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Manyofourcustomersdependonourcustomersupportteamtoassistthemindeployingourproductseffectivelytohelpthemtoresolvepost-deploymentissuesquicklyandtoprovideongoingsupport.Ifwedonotdevotesufficientresourcesorareotherwiseunsuccessfulinassistingourcustomerseffectively,itcouldadverselyaffectourabilitytoretainexistingcustomersandcouldpreventprospectivecustomersfromadoptingourproducts.Wemaybeunabletorespondquicklyenoughtoaccommodateshort-termincreasesindemandforcustomersupport.Wealsomaybeunabletomodifythenature,scopeanddeliveryofourcustomersupporttocompetewithchangesinthesupportservicesprovidedbyourcompetitors.Increaseddemandforcustomersupport,withoutcorrespondingrevenue,couldincreasecostsandadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Oursalesarehighlydependentonourbusinessreputationandonpositiverecommendationsfromdevelopers.Anyfailuretomaintainhighqualitycustomersupport,oramarketperceptionthatwedonotmaintainhighqualitycustomersupport,couldadverselyaffectourreputation,business,resultsofoperationsandfinancialcondition.

Wehavebeensued,andmay,inthefuture,besuedbythirdpartiesforallegedinfringementoftheirproprietaryrights,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Thereisconsiderablepatentandotherintellectualpropertydevelopmentactivityinourindustry.Ourfuturesuccessdepends,inpart,onnotinfringingtheintellectualpropertyrightsofothers.Ourcompetitorsorotherthirdpartieshaveclaimedandmay,inthefuture,claimthatweareinfringingupontheirintellectualpropertyrights,andwemaybefoundtobeinfringinguponsuchrights.Forexample,TelesignCorporation("Telesign")suedTwilioin2015and2016allegingthatweareinfringingfourU.S.patentsthatitholds:U.S.PatentNo.7,945,034("034"),U.S.PatentNo.8,462,920("920"),U.S.PatentNo.8,687,038("038"),andU.S.PatentNo.9,300,792("792").ThepatentinfringementallegationsinthelawsuitrelatetotheCompany'stwo-factorauthenticationusecase, Authy, andanAPItooltofindinformationaboutaphonenumber.OnOctober19,2018,aUnitedStatesDistrictCourtintheNorthernDistrictofCaliforniaenteredjudgmentinourfavoronallassertedclaims.TelesignhasappealedandthecaseisnowpendingbeforetheCourtofAppealsfortheFederalCircuit.Seethesectiontitled"Item3.LegalProceedings."Weintendtovigorouslydefendourselvesagainstsuchlawsuitsandbelievewehavemeritoriousdefensestomattersinwhichweareadefendant.However,litigationisinherentlyuncertain,andanyjudgmentorinjunctivereliefenteredagainstusoranyadversesettlementcouldnegativelyaffectourbusiness,resultsofoperationsandfinancialcondition.Inaddition,litigationcaninvolvesignificantmanagementtimeandattentionandbeexpensive,regardlessofoutcome.Duringthecourseoftheselawsuits,theremaybeannouncementsoftheresultsofhearingsandmotionsandotherinterimdevelopmentsrelatedtothelitigation.Ifsecuritiesanalystsorinvestorsregardtheseannouncementsasnegative,thetradingpriceofourClassAcommonstockmaydecline.

Inthefuture,wemayreceiveclaimsfromthirdparties,includingourcompetitors,thatourproductsorplatformandunderlyingtechnologyinfringeorviolateathirdparty'sintellectualpropertyrights,andwemaybefoundtobeinfringinguponsuchrights.Wemaybeunawareoftheintellectualpropertyrightsofothersthatmaycoversomeorallofourtechnology.Anyclaimsorlitigationcouldcauseustoincursignificantexpensesand,ifsuccessfullyassertedagainstus,couldrequirethatwepaysubstantialdamagesorongoingroyaltypayments,preventusfromofferingourproducts,orrequirethatwecomplywithotherunfavorableterms.Wemayalsobeobligatedtoindemnifyourcustomersorbusinesspartnersinconnectionwithanysuchlitigationandtoobtainlicensesormodifyourproducts

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orplatform,whichcouldfurtherexhaustourresources.Evenifweweretoprevailintheeventofclaimsorlitigationagainstus,anyclaimorlitigationregardingintellectualpropertycouldbecostlyandtime-consuminganddiverttheattentionofourmanagementandotheremployeesfromourbusiness.Patentinfringement,trademarkinfringement,tradesecretmisappropriationandotherintellectualpropertyclaimsandproceedingsbroughtagainstus,whethersuccessfulornot,couldharmourbrand,business,resultsofoperationsandfinancialcondition.

Indemnityprovisionsinvariousagreementspotentiallyexposeustosubstantialliabilityforintellectualpropertyinfringementandotherlosses.

Ouragreementswithcustomersandotherthirdpartiestypicallyincludeindemnificationorotherprovisionsunderwhichweagreetoindemnifyorotherwisebeliabletothemforlossessufferedorincurredasaresultofclaimsofintellectualpropertyinfringement,damagescausedbyustopropertyorpersonsorotherliabilitiesrelatingtoorarisingfromourproductsorplatformorotheractsoromissions.Thetermofthesecontractualprovisionsoftensurvivesterminationorexpirationoftheapplicableagreement.Largeindemnitypaymentsordamageclaimsfromcontractualbreachcouldharmourbusiness,resultsofoperationsandfinancialcondition.Althoughtypicallywecontractuallylimitourliabilitywithrespecttosuchobligations,wemaystillincursubstantialliabilityrelatedtothem.Anydisputewithacustomerwithrespecttosuchobligationscouldhaveadverseeffectsonourrelationshipwiththatcustomerandothercurrentandprospectivecustomers,demandforourproductsandadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Wecouldincursubstantialcostsinprotectingordefendingourintellectualpropertyrights,andanyfailuretoprotectourintellectualpropertycouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Oursuccessdepends,inpart,onourabilitytoprotectourbrandandtheproprietarymethodsandtechnologiesthatwedevelopunderpatentandotherintellectualpropertylawsoftheUnitedStatesandforeignjurisdictionssothatwecanpreventothersfromusingourinventionsandproprietaryinformation.AsofDecember31,2018,intheUnitedStates,wehadbeenissued104patents,whichexpirebetween2029and2037.Asofsuchdate,wealsohad13issuedpatentsinforeignjurisdictions,allofwhicharerelatedtoU.S.patentsandpatentapplications.WehavealsofiledvariousapplicationsforprotectionofcertainaspectsofourintellectualpropertyintheUnitedStatesandinternationally.Therecanbenoassurancethatadditionalpatentswillbeissuedorthatanypatentsthathavebeenissuedorthatmaybeissuedinthefuturewillprovidesignificantprotectionforourintellectualproperty.AsofDecember31,2018,wehad15registeredtrademarksintheUnitedStatesand94registeredtrademarksinforeignjurisdictions.Ifwefailtoprotectourintellectualpropertyrightsadequately,ourcompetitorsmightgainaccesstoourtechnologyandourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Therecanbenoassurancethattheparticularformsofintellectualpropertyprotectionthatweseek,includingbusinessdecisionsaboutwhentofilepatentapplicationsandtrademarkapplications,willbeadequatetoprotectourbusiness.Wecouldberequiredtospendsignificantresourcestomonitorandprotectourintellectualpropertyrights.Litigationmaybenecessaryinthefuturetoenforceourintellectualpropertyrights,determinethevalidityandscopeofourproprietaryrightsorthoseofothers,ordefendagainstclaimsofinfringementorinvalidity.Suchlitigationcouldbecostly,time-consuminganddistractingtomanagement,resultinadiversionofsignificantresources,thenarrowingorinvalidationofportionsofourintellectualpropertyandhaveanadverseeffectonourbusiness,resultsofoperationsandfinancialcondition.Oureffortstoenforceourintellectualpropertyrightsmaybemetwithdefenses,counterclaimsandcountersuitsattackingthevalidityandenforceabilityofourintellectualpropertyrightsorallegingthatweinfringethecounterclaimant'sown

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intellectualproperty.Anyofourpatents,copyrights,trademarksorotherintellectualpropertyrightscouldbechallengedbyothersorinvalidatedthroughadministrativeprocessorlitigation.

Wealsorely,inpart,onconfidentialityagreementswithourbusinesspartners,employees,consultants,advisors,customersandothersinoureffortstoprotectourproprietarytechnology,processesandmethods.Theseagreementsmaynoteffectivelypreventdisclosureofourconfidentialinformation,anditmaybepossibleforunauthorizedpartiestocopyoursoftwareorotherproprietarytechnologyorinformation,ortodevelopsimilarsoftwareindependentlywithoutourhavinganadequateremedyforunauthorizeduseordisclosureofourconfidentialinformation.Inaddition,othersmayindependentlydiscoverourtradesecretsandproprietaryinformation,andinthesecaseswewouldnotbeabletoassertanytradesecretrightsagainstthoseparties.Costlyandtime-consuminglitigationcouldbenecessarytoenforceanddeterminethescopeofourproprietaryrights,andfailuretoobtainormaintaintradesecretprotectioncouldadverselyaffectourcompetitivebusinessposition.

Inaddition,thelawsofsomecountriesdonotprotectintellectualpropertyandotherproprietaryrightstothesameextentasthelawsoftheUnitedStates.Totheextentweexpandourinternationalactivities,ourexposuretounauthorizedcopying,transferanduseofourproprietarytechnologyorinformationmayincrease.

Wecannotbecertainthatourmeansofprotectingourintellectualpropertyandproprietaryrightswillbeadequateorthatourcompetitorswillnotindependentlydevelopsimilartechnology.Ifwefailtomeaningfullyprotectourintellectualpropertyandproprietaryrights,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Ouruseofopensourcesoftwarecouldnegativelyaffectourabilitytosellourproductsandsubjectustopossiblelitigation.

Ourproductsandplatformincorporateopensourcesoftware,andweexpecttocontinuetoincorporateopensourcesoftwareinourproductsandplatforminthefuture.Fewofthelicensesapplicabletoopensourcesoftwarehavebeeninterpretedbycourts,andthereisariskthattheselicensescouldbeconstruedinamannerthatcouldimposeunanticipatedconditionsorrestrictionsonourabilitytocommercializeourproductsandplatform.Moreover,althoughwehaveimplementedpoliciestoregulatetheuseandincorporationofopensourcesoftwareintoourproductsandplatform,wecannotbecertainthatwehavenotincorporatedopensourcesoftwareinourproductsorplatforminamannerthatisinconsistentwithsuchpolicies.Ifwefailtocomplywithopensourcelicenses,wemaybesubjecttocertainrequirements,includingrequirementsthatweofferourproductsthatincorporatetheopensourcesoftwarefornocost,thatwemakeavailablesourcecodeformodificationsorderivativeworkswecreatebasedupon,incorporatingorusingtheopensourcesoftwareandthatwelicensesuchmodificationsorderivativeworksunderthetermsofapplicableopensourcelicenses.Ifanauthororotherthirdpartythatdistributessuchopensourcesoftwareweretoallegethatwehadnotcompliedwiththeconditionsofoneormoreoftheselicenses,wecouldberequiredtoincursignificantlegalexpensesdefendingagainstsuchallegationsandcouldbesubjecttosignificantdamages,enjoinedfromgeneratingrevenuefromcustomersusingproductsthatcontainedtheopensourcesoftwareandrequiredtocomplywithonerousconditionsorrestrictionsontheseproducts.Inanyoftheseevents,weandourcustomerscouldberequiredtoseeklicensesfromthirdpartiesinordertocontinueofferingourproductsandplatformandtore-engineerourproductsorplatformordiscontinueofferingourproductstocustomersintheeventre-engineeringcannotbeaccomplishedonatimelybasis.Anyoftheforegoingcouldrequireustodevoteadditionalresearchanddevelopmentresourcestore-engineerourproductsorplatform,couldresultincustomerdissatisfactionandmayadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

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Wemayacquireorinvestincompanies,whichmaydivertourmanagement'sattentionandresultindebtordilutiontoourstockholders.Wemaybeunabletointegrateacquiredbusinessesandtechnologiessuccessfullyorachievetheexpectedbenefitsofsuchacquisitions.

Wemayevaluateandconsiderpotentialstrategictransactions,includingacquisitionsof,orinvestmentsin,businesses,technologies,services,productsandotherassetsinthefuture.Wealsomayenterintorelationshipswithotherbusinessestoexpandourproductsandplatform,whichcouldinvolvepreferredorexclusivelicenses,additionalchannelsofdistribution,discountpricingorinvestmentsinothercompanies.

Anyacquisition,investmentorbusinessrelationshipmayresultinunforeseenoperatingdifficultiesandexpenditures.Inparticular,wemayencounterdifficultiesassimilatingorintegratingthebusinesses,technologies,products,personneloroperationsoftheacquiredcompanies,particularlyifthekeypersonneloftheacquiredcompanychoosenottoworkforus,theirproductsorservicesarenoteasilyadaptedtoworkwithourplatform,orwehavedifficultyretainingthecustomersofanyacquiredbusinessduetochangesinownership,managementorotherwise.Acquisitionsalsomaydisruptourbusiness,divertourresourcesorrequiresignificantmanagementattentionthatwouldotherwisebeavailablefordevelopmentofourexistingbusiness.Moreover,theanticipatedbenefitsofanyacquisition,investmentorbusinessrelationshipmaynotberealizedorwemaybeexposedtounknownrisksorliabilities.

Negotiatingthesetransactionscanbetimeconsuming,difficultandexpensive,andourabilitytocompletethesetransactionsmayoftenbesubjecttoapprovalsthatarebeyondourcontrol.Consequently,thesetransactions,evenifannounced,maynotbecompleted.Foroneormoreofthosetransactions,wemay:

• issueadditionalequitysecuritiesthatwoulddiluteourexistingstockholders;

• usecashthatwemayneedinthefuturetooperateourbusiness;

• incurlargechargesorsubstantialliabilities;

• incurdebtontermsunfavorabletousorthatweareunabletorepay;

• encounterdifficultiesretainingkeyemployeesoftheacquiredcompanyorintegratingdiversesoftwarecodesorbusinesscultures;or

• becomesubjecttoadversetaxconsequences,substantialdepreciation,ordeferredcompensationcharges.

Theoccurrenceofanyoftheseforegoingcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Wedependlargelyonthecontinuedservicesofourseniormanagementandotherkeyemployees,thelossofanyofwhomcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ourfutureperformancedependsonthecontinuedservicesandcontributionsofourseniormanagementandotherkeyemployeestoexecuteonourbusinessplan,todevelopourproductsandplatform,todeliverourproductstocustomers,toattractandretaincustomersandtoidentifyandpursueopportunities.Thelossofservicesofseniormanagementorotherkeyemployeescouldsignificantlydelayorpreventtheachievementofourdevelopmentandstrategicobjectives.Inparticular,wedependtoaconsiderabledegreeonthevision,skills,experienceandeffortofourco-founderandChiefExecutiveOfficer,JeffLawson.Noneofourexecutiveofficersorotherseniormanagementpersonnelisboundbyawrittenemploymentagreementandanyofthemmayterminateemploymentwithusatanytimewithnoadvancenotice.OnNovember12,2018,ourChiefFinancialOfficer,LeeKirkpatrick,resignedasourChiefFinancialOfficerandKhozemaShipchandlersucceeded

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himasChiefFinancialOfficeratthattime.ThoughMr.KirkpatrickwillremainaconsultantforatransitionperiodendinginApril2019,wecouldexperienceadelayordisruptionintheachievementofourbusinessobjectivesduringtheperiodournewChiefFinancialOfficergetsuptospeedonourbusinessandfinancialandaccountingsystems.Thereplacementofanyotherofourseniormanagementpersonnelwouldlikelyinvolvesignificanttimeandcosts,andsuchlosscouldsignificantlydelayorpreventtheachievementofourbusinessobjectives.Thelossoftheservicesofanyofourseniormanagementorotherkeyemployeesforanyreasoncouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ifweareunabletohire,retainandmotivatequalifiedpersonnel,ourbusinesswillsuffer.

Ourfuturesuccessdepends,inpart,onourabilitytocontinuetoattractandretainhighlyskilledpersonnel.Webelievethatthereis,andwillcontinuetobe,intensecompetitionforhighlyskilledmanagement,technical,salesandotherpersonnelwithexperienceinourindustryintheSanFranciscoBayArea,whereourheadquartersarelocated,andinotherlocationswherewemaintainoffices.Wemustprovidecompetitivecompensationpackagesandahighqualityworkenvironmenttohire,retainandmotivateemployees.Ifweareunabletoretainandmotivateourexistingemployeesandattractqualifiedpersonneltofillkeypositions,wemaybeunabletomanageourbusinesseffectively,includingthedevelopment,marketingandsaleofourproducts,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Totheextentwehirepersonnelfromcompetitors,wealsomaybesubjecttoallegationsthattheyhavebeenimproperlysolicitedordivulgedproprietaryorotherconfidentialinformation.

Volatilityin,orlackofperformanceof,ourstockpricemayalsoaffectourabilitytoattractandretainkeypersonnel.Manyofourkeypersonnelare,orwillsoonbe,vestedinasubstantialnumberofsharesofClassAcommonstockorstockoptions.Employeesmaybemorelikelytoterminatetheiremploymentwithusifthesharestheyownorthesharesunderlyingtheirvestedoptionshavesignificantlyappreciatedinvaluerelativetotheoriginalpurchasepricesofthesharesortheexercisepricesoftheoptions,or,conversely,iftheexercisepricesoftheoptionsthattheyholdaresignificantlyabovethetradingpriceofourClassAcommonstock.Ifweareunabletoretainouremployees,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.

OurproductsandplatformandourbusinessaresubjecttoavarietyofU.S.andinternationallawsandregulations,includingthoseregardingprivacy,dataprotectionandinformationsecurity,andourcustomersmaybesubjecttoregulationsrelatedtothehandlingandtransferofcertaintypesofsensitiveandconfidentialinformation.Anyfailureofourproductstocomplywithorenableourcustomersandchannelpartnerstocomplywithapplicablelawsandregulationswouldharmourbusiness,resultsofoperationsandfinancialcondition.

Weandourcustomersthatuseourproductsmaybesubjecttoprivacy-anddataprotection-relatedlawsandregulationsthatimposeobligationsinconnectionwiththecollection,processinganduseofpersonaldata,financialdata,healthorothersimilardata.TheU.S.federalandvariousstateandforeigngovernmentshaveadoptedorproposedlimitationson,orrequirementsregarding,thecollection,distribution,use,securityandstorageofpersonallyidentifiableinformationofindividuals.TheU.S.FederalTradeCommissionandnumerousstateattorneysgeneralareapplyingfederalandstateconsumerprotectionlawstoimposestandardsontheonlinecollection,useanddisseminationofdata,andtothesecuritymeasuresappliedtosuchdata.

Similarly,manyforeigncountriesandgovernmentalbodies,includingtheEuropeanUnion("EU")memberstates,havelawsandregulationsconcerningthecollectionanduseofpersonallyidentifiableinformationobtainedfromindividualslocatedintheEUorbybusinessesoperatingwithintheirjurisdiction,whichareoftenmorerestrictivethanthoseintheUnitedStates.Lawsandregulationsinthesejurisdictionsapplybroadlytothecollection,use,storage,disclosureandsecurityofpersonally

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identifiableinformationthatidentifiesormaybeusedtoidentifyanindividual,suchasnames,telephonenumbers,emailaddressesand,insomejurisdictions,IPaddressesandotheronlineidentifiers.

Forexample,inApril2016theEUadoptedtheGeneralDataProtectionRegulation("GDPR"),whichtookfulleffectonMay25,2018.TheGDPRenhancesdataprotectionobligationsforbusinessesandrequiresserviceproviders(dataprocessors)processingpersonaldataonbehalfofcustomerstocooperatewithEuropeandataprotectionauthorities,implementsecuritymeasuresandkeeprecordsofpersonaldataprocessingactivities.NoncompliancewiththeGDPRcantriggerfinesequaltoorgreaterof€20millionor4%ofglobalannualrevenues.Giventhebreadthanddepthofchangesindataprotectionobligations,preparingtomeettherequirementsofGDPRhasrequiredsignificanttimeandresources,includingareviewofourtechnologyandsystemscurrentlyinuseagainsttherequirementsofGDPR.TherearealsoadditionalEUlawsandregulations(andmemberstatesimplementationsthereof)whichgoverntheprotectionofconsumersandofelectroniccommunications.IfoureffortstocomplywithGDPRorotherapplicableEUlawsandregulationsarenotsuccessful,wemaybesubjecttopenaltiesandfinesthatwouldadverselyimpactourbusinessandresultsofoperations,andourabilitytoconductbusinessintheEUcouldbesignificantlyimpaired.

WehaveinthepastreliedontheEU-U.SandtheSwiss-U.S.PrivacyShieldframeworksapprovedbytheEuropeanCommissioninJuly2016andtheSwissGovernmentinJanuary2017,respectively,whichweredesignedtoallowU.S.corporationstoself-certifytotheU.S.DepartmentofCommerceandpubliclycommittocomplywiththePrivacyShieldrequirementstofreelyimportpersonaldatafromtheEUandSwitzerland.However,ongoinglegalchallengestotheseframeworkshasresultedinsomeuncertaintyastotheirvalidity.WhileourBindingCorporateRules,approvedinMay2018,nowserveasourprimarymechanismtolegitimizedatatransfersfromtheEuropeanEconomicArea,wemaynonethelessexperiencehesitancy,reluctance,orrefusalbyEuropeanormultinationalcustomerstocontinuetouseourservicesduetothepotentialriskexposuretosuchcustomersasaresultofaEuropeanUnionCourtofJusticerulingnegativelyimpactingthePrivacyShieldframeworks.WeandourcustomersareatriskofenforcementactionstakenbyanEUdataprotectionauthorityuntilsuchpointintimethatweareabletoensurethatalldatatransferstousfromtheEuropeanEconomicAreaarelegitimized.Inaddition,astheUnitedKingdomtransitionsoutoftheEU,wemayencounteradditionalcomplexitywithrespecttodataprivacyanddatatransfersfromtheU.K.

Furthermore,outsideoftheEU,wecontinuetoseeincreasedregulationofdataprivacyandsecurity,includingtheadoptionofmorestringentsubjectmatterspecificstatelawsintheUnitedStates.Forexample,onJune28,2018,CaliforniaenactedtheCaliforniaConsumerPrivacyAct(CCPA),whichtakeseffectonJanuary1,2020.TheCCPAgivesCaliforniaresidentsexpandedrightstoaccessanddeletetheirpersonalinformation,optoutofcertainpersonalinformationsharing,andreceivedetailedinformationabouthowtheirpersonalinformationisused.TheCCPAprovidesforcivilpenaltiesforviolations,aswellasaprivaterightofactionfordatabreachesthatisexpectedtoincreasedatabreachlitigation.TheCCPAmayincreaseourcompliancecostsandpotentialliability.SomeobservershavenotedthattheCCPAcouldmarkthebeginningofatrendtowardmorestringentstateprivacylegislationintheU.S.,whichcouldincreaseourpotentialliabilityandadverselyaffectourbusiness.

Aswell,wecontinuetoseejurisdictionsimposingdatalocalizationlaws,whichrequirepersonalinformation,orcertainsubcategoriesofpersonalinformationtobestoredinthejurisdictionoforigin.Theseregulationsmayinhibitourabilitytoexpandintothosemarketsorprohibitusfromcontinuingtoofferservicesinthosemarketswithoutsignificantadditionalcosts

Theuncertaintyandchangesintherequirementsofmultiplejurisdictionsmayincreasethecostofcompliance,delayorreducedemandforourservices,restrictourabilitytoofferservicesincertainlocations,impactourcustomers'abilitytodeployoursolutionsincertainjurisdictions,orsubjectustosanctions,bynationaldataprotectionregulators,allofwhichcouldharmourbusiness,financialconditionandresultsofoperations.

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Additionally,althoughweendeavortohaveourproductsandplatformcomplywithapplicablelawsandregulations,theseandotherobligationsmaybemodified,theymaybeinterpretedandappliedinaninconsistentmannerfromonejurisdictiontoanother,andtheymayconflictwithoneanother,otherregulatoryrequirements,contractualcommitmentsorourinternalpractices

Wealsomaybeboundbycontractualobligationsrelatingtoourcollection,useanddisclosureofpersonal,financialandotherdataormayfinditnecessaryordesirabletojoinindustryorotherself-regulatorybodiesorotherprivacy-ordataprotection-relatedorganizationsthatrequirecompliancewiththeirrulespertainingtoprivacyanddataprotection.

Weexpectthattherewillcontinuetobenewproposedlaws,rulesofself-regulatorybodies,regulationsandindustrystandardsconcerningprivacy,dataprotectionandinformationsecurityintheUnitedStates,theEuropeanUnionandotherjurisdictions,andwecannotyetdeterminetheimpactsuchfuturelaws,rules,regulationsandstandardsmayhaveonourbusiness.Moreover,existingU.S.federalandvariousstateandforeignprivacy-anddataprotection-relatedlawsandregulationsareevolvingandsubjecttopotentiallydifferinginterpretations,andvariouslegislativeandregulatorybodiesmayexpandcurrentorenactnewlawsandregulationsregardingprivacy-anddataprotection-relatedmatters.Becausegloballaws,regulationsandindustrystandardsconcerningprivacyanddatasecurityhavecontinuedtodevelopandevolverapidly,itispossiblethatweorourproductsorplatformmaynotbe,ormaynothavebeen,compliantwitheachsuchapplicablelaw,regulationandindustrystandardandcompliancewithsuchnewlawsortochangestoexistinglawsmayimpactourbusinessandpractices,requireustoexpendsignificantresourcestoadapttothesechanges,ortostopofferingourproductsincertaincountries.Thesedevelopmentscouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Anyfailureorperceivedfailurebyus,ourproductsorourplatformtocomplywithneworexistingU.S.,EUorotherforeignprivacyordatasecuritylaws,regulations,policies,industrystandardsorlegalobligations,oranysecurityincidentthatresultsintheunauthorizedaccessto,oracquisition,releaseortransferof,personallyidentifiableinformationorothercustomerdatamayresultingovernmentalinvestigations,inquiries,enforcementactionsandprosecutions,privatelitigation,finesandpenalties,adversepublicityorpotentiallossofbusiness.Forexample,onFebruary18,2016,aputativeclassactioncomplaintwasfiledintheAlamedaCountySuperiorCourtinCalifornia.Thecomplaintallegedthatourproductspermittheinterception,recordinganddisclosureofcommunicationsatacustomer'srequestandinviolationoftheCaliforniaInvasionofPrivacyAct.Thislitigation,oranyothersuchactionsinthefutureandrelatedpenaltiescoulddivertmanagement'sattentionandresources,adverselyaffectourbrand,business,resultsofoperationsandfinancialcondition.

ChangesinlawsandregulationsrelatedtotheInternetorchangesintheInternetinfrastructureitselfmaydiminishthedemandforourproducts,andcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

ThefuturesuccessofourbusinessdependsuponthecontinueduseoftheInternetasaprimarymediumforcommerce,communicationsandbusinessapplications.Federal,stateorforeigngovernmentbodiesoragencieshaveinthepastadopted,andmayinthefutureadopt,lawsorregulationsaffectingtheuseoftheInternetasacommercialmedium.Changesintheselawsorregulationscouldrequireustomodifyourproductsandplatforminordertocomplywiththesechanges.Inaddition,governmentagenciesorprivateorganizationshaveimposedandmayimposeadditionaltaxes,feesorotherchargesforaccessingtheInternetorcommerceconductedviatheInternet.TheselawsorchargescouldlimitthegrowthofInternet-relatedcommerceorcommunicationsgenerally,orresultinreductionsinthedemandforInternet-basedproductsandservicessuchasourproductsandplatform.Inaddition,theuseoftheInternetasabusinesstoolcouldbeadverselyaffectedduetodelaysinthedevelopmentoradoptionofnewstandardsandprotocolstohandleincreaseddemandsofInternetactivity,security,reliability,cost,ease-of-use,accessibilityandqualityofservice.TheperformanceoftheInternetandits

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acceptanceasabusinesstoolhasbeenadverselyaffectedby"viruses","worms",andsimilarmaliciousprograms.IftheuseoftheInternetisreducedasaresultoftheseorotherissues,thendemandforourproductscoulddecline,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Certainofourproductsaresubjecttotelecommunications-relatedregulations,andfuturelegislativeorregulatoryactionscouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Asaproviderofcommunicationsproducts,wearesubjecttoexistingorpotentialFederalCommunicationsCommission("FCC")regulationsrelatingtoprivacy,TelecommunicationsRelayServicefundcontributionsandotherrequirements.FCCclassificationofourInternetvoicecommunicationsproductsastelecommunicationsservicescouldresultinadditionalfederalandstateregulatoryobligations.IfwedonotcomplywithFCCrulesandregulations,wecouldbesubjecttoFCCenforcementactions,fines,lossoflicensesandpossiblyrestrictionsonourabilitytooperateoroffercertainofourproducts.AnyenforcementactionbytheFCC,whichmaybeapublicprocess,wouldhurtourreputationintheindustry,possiblyimpairourabilitytosellourproductstocustomersandcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

OurproductsaresubjecttoanumberofFCCregulationsandlawsthatareadministeredbytheFCC.Amongothers,wemustcomply(inwholeorinpart)with:

• theCommunicationsActof1934,asamended,whichregulatescommunicationsservicesandtheprovisionofsuchservices;

• theTelephoneConsumerProtectionAct,whichlimitstheuseofautomaticdialingsystems,artificialorprerecordedvoicemessages,SMStextmessagesandfaxmachines;

• theCommunicationsAssistanceforLawEnforcementAct("CALEA"),whichrequirescoveredentitiestoassistlawenforcementinundertakingelectronicsurveillance;

• requirementstosafeguardtheprivacyofcertaincustomerinformation;

• paymentofannualFCCregulatoryfeesbasedonourinterstateandinternationalrevenues;

• rulespertainingtoaccesstoourservicesbypeoplewithdisabilitiesandcontributionstotheTelecommunicationsRelayServicesfund;and

• FCCrulesregardingtheuseofcustomerproprietarynetworkinformation.

Ifwedonotcomplywithanycurrentorfuturerulesorregulationsthatapplytoourbusiness,wecouldbesubjecttosubstantialfinesandpenalties,andwemayhavetorestructureourofferings,exitcertainmarketsorraisethepriceofourproducts.Inaddition,anyuncertaintyregardingwhetherparticularregulationsapplytoourbusiness,andhowtheyapply,couldincreaseourcostsorlimitourabilitytogrow.Anyoftheforegoingcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Aswecontinuetoexpandinternationally,wehavebecomesubjecttotelecommunicationslawsandregulationsintheforeigncountrieswhereweofferourproducts.Internationally,wecurrentlyofferourproductsinover180countries.

Ourinternationaloperationsaresubjecttocountry-specificgovernmentalregulationandrelatedactionsthathaveincreasedandmaycontinuetoincreaseourcostsorimpactourproductsandplatformorpreventusfromofferingorprovidingourproductsincertaincountries.CertainofourproductsmaybeusedbycustomerslocatedincountrieswherevoiceandotherformsofIPcommunicationsmaybeillegalorrequirespeciallicensingorincountriesonaU.S.embargolist.Evenwhereourproductsarereportedlyillegalorbecomeillegalorwhereusersarelocatedinanembargoedcountry,usersinthosecountriesmaybeabletocontinuetouseourproductsinthosecountries

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notwithstandingtheillegalityorembargo.Wemaybesubjecttopenaltiesorgovernmentalactionifconsumerscontinuetouseourproductsincountrieswhereitisillegaltodoso,andanysuchpenaltiesorgovernmentalactionmaybecostlyandmayharmourbusinessanddamageourbrandandreputation.Wemayberequiredtoincuradditionalexpensestomeetapplicableinternationalregulatoryrequirementsorberequiredtodiscontinuethoseservicesifrequiredbylaworifwecannotorwillnotmeetthoserequirements.

Ifweareunabletoeffectivelyprocesslocalnumberandtoll-freenumberportabilityprovisioninginatimelymannerortoobtainorretaindirectinwarddialingnumbersandlocalortoll-freenumbers,ourbusinessandresultsofoperationsmaybeadverselyaffected.

Wesupportlocalnumberandtoll-freenumberportability,whichallowsourcustomerstotransfertheirexistingphonenumberstousandtherebyretaintheirexistingphonenumberswhensubscribingtoourvoiceproducts.Transferringexistingnumbersisamanualprocessthatcantakeupto15businessdaysorlongertocomplete.Anewcustomerofourvoiceproductsmustmaintainbothourvoiceproductandthecustomer'sexistingphoneserviceduringthenumbertransferringprocess.Anydelaythatweexperienceintransferringthesenumberstypicallyresultsfromthefactthatwedependonnetworkserviceproviderstotransferthesenumbers,aprocessthatwedonotcontrol,andthesenetworkserviceprovidersmayrefuseorsubstantiallydelaythetransferofthesenumberstous.Localnumberportabilityisconsideredanimportantfeaturebymanypotentialcustomers,andifwefailtoreduceanyrelateddelays,thenwemayexperienceincreaseddifficultyinacquiringnewcustomers.

Inaddition,ourfuturesuccessdependsinpartonourabilitytoprocurelargequantitiesoflocalandtoll-freedirectinwarddialingnumbers("DIDs"),intheUnitedStatesandforeigncountriesatareasonablecostandwithoutrestrictions.Ourabilitytoprocure,distributeandretainDIDsdependsonfactorsoutsideofourcontrol,suchasapplicableregulations,thepracticesofnetworkserviceprovidersthatprovideDIDs,suchasofferingDIDswithconditionalminimumvolumecalllevelrequirements,thecostoftheseDIDsandthelevelofoverallcompetitivedemandfornewDIDs.

Inaddition,inordertoprocure,distributeandretaintelephonenumbersfromtheEuropeanUnionorcertainotherregions,weareoftenrequiredtoregisterwiththelocaltelecommunicationsregulatoryauthorities,someofwhichhavebeenincreasinglymonitoringandregulatingthecategoriesofphonenumbersthatareeligibleforprovisioningtoourcustomers.Weareintheprocessofregisteringinvariouscountriesinwhichwedobusiness,butinsomecountries,theregulatoryregimearoundprovisioningofphonenumbersisunclear,subjecttochangeovertime,andsometimesmayconflictfromjurisdictiontojurisdiction.Furthermore,theseregulationsandgovernments'approachtotheirenforcement,aswellasourproductsandservices,arestillevolvingandwemaybeunabletomaintaincompliancewithapplicableregulations,orenforcecompliancebyourcustomers,onatimelybasisorwithoutsignificantcost.Also,compliancewiththesetypesofregulationmayrequirechangesinproductsorbusinesspracticesthatresultinreducedrevenue.Ifweorourcustomersusephonenumbersinthesecountriesinamannerthatviolatesapplicablerulesandregulations,wemayalsobesubjecttosignificantpenaltiesorgovernmentalaction,includinggovernment-initiatedauditsand,inextremecases,maybeprecludedfromdoingbusinessinthatparticularcountry.Intheeventofsuchnon-compliance,wemaybeforcedtoreclaimphonenumbersfromourcustomers,whichcouldresultinlossofcustomers,breachofcontractclaims,lossofrevenueandreputationalharm,allofwhichcouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsandfinancialcondition.

Duetotheirlimitedavailability,therearecertainpopularareacodeprefixesthatwegenerallycannotobtain.OurinabilitytoacquireorretainDIDsforouroperationswouldmakeourvoiceandmessagingproductslessattractivetopotentialcustomersintheaffectedlocalgeographicareas.Inaddition,futuregrowthinourcustomerbase,togetherwithgrowthinthecustomerbasesofotherprovidersofcloudcommunications,hasincreased,whichincreasesourdependenceonneedingsufficientlylargequantitiesofDIDs.Itmaybecomeincreasinglydifficulttosourcelargerquantitiesof

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DIDsaswescaleandwemayneedtopayhighercostsforDIDs,andDIDsmaybecomesubjecttomorestringentregulationorconditionsofusagesuchastheregistrationandon-goingcompliancerequirementsdiscussedabove.Anyoftheforegoingcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

WefaceariskoflitigationresultingfromcustomermisuseofoursoftwaretosendunauthorizedtextmessagesinviolationoftheTelephoneConsumerProtectionAct.

Theactualorperceivedimpropersendingoftextmessagesmaysubjectustopotentialrisks,includingliabilitiesorclaimsrelatingtoconsumerprotectionlaws.Forexample,theTelephoneConsumerProtectionActof1991restrictstelemarketingandtheuseofautomaticSMStextmessageswithoutproperconsent.Thishasresultedincivilclaimsagainstourcompanyandrequestsforinformationthroughthird-partysubpoenas.Thescopeandinterpretationofthelawsthatareormaybeapplicabletothedeliveryoftextmessagesarecontinuouslyevolvinganddeveloping.Ifwedonotcomplywiththeselawsorregulationsorifwebecomeliableundertheselawsorregulationsduetothefailureofourcustomerstocomplywiththeselawsbyobtainingproperconsent,wecouldfacedirectliability.

Wemaybesubjecttogovernmentalexportcontrolsandeconomicsanctionsregulationsthatcouldimpairourabilitytocompeteininternationalmarketsduetolicensingrequirementsandcouldsubjectustoliabilityifwearenotincompliancewithapplicablelaws.

Certainofourproductsandservicesmaybesubjecttoexportcontrolandeconomicsanctionsregulations,includingtheU.S.ExportAdministrationRegulations,U.S.CustomsregulationsandvariouseconomicandtradesanctionsregulationsadministeredbytheU.S.TreasuryDepartment'sOfficeofForeignAssetsControls.Exportsofourproductsandtheprovisionofourservicesmustbemadeincompliancewiththeselawsandregulations.Althoughwetakeprecautionstopreventourproductsfrombeingprovidedinviolationofsuchlaws,weareawareofpreviousexportsofcertainofourproductstoasmallnumberofpersonsandorganizationsthatarethesubjectofU.S.sanctionsorlocatedincountriesorregionssubjecttoU.S.sanctions.Ifwefailtocomplywiththeselawsandregulations,weandcertainofouremployeescouldbesubjecttosubstantialcivilorcriminalpenalties,including:thepossiblelossofexportprivileges;fines,whichmaybeimposedonusandresponsibleemployeesormanagers;and,inextremecases,theincarcerationofresponsibleemployeesormanagers.Obtainingthenecessaryauthorizations,includinganyrequiredlicense,foraparticulardeploymentmaybetime-consuming,isnotguaranteedandmayresultinthedelayorlossofsalesopportunities.Inaddition,changesinourproductsorservices,orchangesinapplicableexportoreconomicsanctionsregulationsmaycreatedelaysintheintroductionanddeploymentofourproductsandservicesininternationalmarkets,or,insomecases,preventtheexportofourproductsorprovisionofourservicestocertaincountriesorendusers.Anychangeinexportoreconomicsanctionsregulations,shiftintheenforcementorscopeofexistingregulations,orchangeinthecountries,governments,personsortechnologiestargetedbysuchregulations,couldalsoresultindecreaseduseofourproductsandservices,orinourdecreasedabilitytoexportourproductsorprovideourservicestoexistingorprospectivecustomerswithinternationaloperations.Anydecreaseduseofourproductsandservicesorlimitationonourabilitytoexportourproductsandprovideourservicescouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Further,weincorporateencryptiontechnologyintocertainofourproducts.Variouscountriesregulatetheimportofcertainencryptiontechnology,includingthroughimportpermittingandlicensingrequirements,andhaveenactedlawsthatcouldlimitourcustomers'abilitytoimportourproductsintothosecountries.Encryptionproductsandtheunderlyingtechnologymayalsobesubjecttoexportcontrolrestrictions.Governmentalregulationofencryptiontechnologyandregulationofexportsofencryptionproducts,orourfailuretoobtainrequiredapprovalforourproducts,whenapplicable,could

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harmourinternationalsalesandadverselyaffectourrevenue.Compliancewithapplicableregulatoryrequirementsregardingtheexportofourproductsandprovisionofourservices,includingwithrespecttonewreleasesofourproductsandservices,maycreatedelaysintheintroductionofourproductsandservicesininternationalmarkets,preventourcustomerswithinternationaloperationsfromdeployingourproductsandusingourservicesthroughouttheirglobally-distributedsystemsor,insomecases,preventtheexportofourproductsorprovisionofourservicestosomecountriesaltogether.

Wemayhaveadditionaltaxliabilities,whichcouldharmourbusiness,resultsofoperationsandfinancialcondition.

Significantjudgmentsandestimatesarerequiredindeterminingourprovisionforincometaxesandothertaxliabilities.Ourtaxexpensemaybeimpacted,forexample,iftaxlawschangeorareclarifiedtoourdetrimentoriftaxauthoritiessuccessfullychallengethetaxpositionsthatwetake,suchas,forexample,positionsrelatingtothearms-lengthpricingstandardsforourintercompanytransactionsandourstatesalesandusetaxpositions.Indeterminingtheadequacyofincometaxes,weassessthelikelihoodofadverseoutcomesthatcouldresultifourtaxpositionswerechallengedbytheInternalRevenueService("IRS"),andothertaxauthorities.ShouldtheIRSorothertaxauthoritiesassessadditionaltaxesasaresultofexaminations,wemayberequiredtorecordchargestooperationsthatcouldadverselyaffectourresultsofoperationsandfinancialcondition.Wearecurrentlyindiscussionswithcertainstatesregardingpriorstatesalestaxesthatwemayowe.Wehavereserved$22.6milliononourDecember31,2018balancesheetforthesetaxpayments.Theactualexposurecoulddiffermateriallyfromourcurrentestimates,andiftheactualpaymentswemaketotheseandotherstatesexceedtheaccrualinourbalancesheet,ourresultsofoperationswouldbeharmed.

Wecouldbesubjecttoliabilityforhistoricalandfuturesales,useandsimilartaxes,whichcouldadverselyaffectourresultsofoperations.

WeconductoperationsinmanytaxjurisdictionsthroughouttheUnitedStates.Inmanyofthesejurisdictions,non-income-basedtaxes,suchassalesanduseandtelecommunicationstaxes,areassessedonouroperations.Wearesubjecttoindirecttaxes,andmaybesubjecttocertainothertaxes,insomeofthesejurisdictions.Historically,wehavenotbilledorcollectedthesetaxesand,inaccordancewithgenerallyacceptedaccountingprinciplesintheUnitedStates("U.S.GAAP"),wehaverecordedaprovisionforourtaxexposureinthesejurisdictionswhenitisbothprobablethataliabilityhasbeenincurredandtheamountoftheexposurecanbereasonablyestimated.Theseestimatesincludeseveralkeyassumptions,including,butnotlimitedto,thetaxabilityofourproducts,thejurisdictionsinwhichwebelievewehavenexus,andthesourcingofrevenuestothosejurisdictions.Intheeventthesejurisdictionschallengeourassumptionsandanalysis,ouractualexposurecoulddiffermateriallyfromourcurrentestimates.

Wemaybesubjecttoscrutinyfromstatetaxauthoritiesinvariousjurisdictionsandmayhaveadditionalexposurerelatedtoourhistoricaloperations.Furthermore,certainjurisdictionsinwhichwedonotcollectsuchtaxesmayassertthatsuchtaxesareapplicable,whichcouldresultintaxassessments,penaltiesandinterest,andwemayberequiredtocollectsuchtaxesinthefuture.Suchtaxassessments,penaltiesandinterestorfuturerequirementsmayadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

EffectiveMarch2017,webegancollectingtelecommunications-basedtaxesfromourcustomersincertainjurisdictions.Sincethen,wehaveaddedmorejurisdictionswherewecollectthesetaxesandweexpecttocontinueexpandingthenumberofjurisdictionsinwhichwewillcollectthesetaxesinthefuture.Somecustomersmayquestiontheincrementaltaxchargesandsomemayseektonegotiatelowerpricingfromus,whichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

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Ourglobaloperationsandstructuresubjectustopotentiallyadversetaxconsequences.

Wegenerallyconductourglobaloperationsthroughsubsidiariesandreportourtaxableincomeinvariousjurisdictionsworldwidebaseduponourbusinessoperationsinthosejurisdictions.Inparticular,ourintercompanyrelationshipsaresubjecttocomplextransferpricingregulationsadministeredbytaxingauthoritiesinvariousjurisdictions.Also,ourtaxexpensecouldbeaffecteddependingontheapplicabilityofwithholdingandothertaxes(includingwithholdingandindirecttaxesonsoftwarelicensesandrelatedintercompanytransactions)underthetaxlawsofcertainjurisdictionsinwhichwehavebusinessoperations.Therelevantrevenueandtaxingauthoritiesmaydisagreewithpositionswehavetakengenerally,orourdeterminationsastothevalueofassetssoldoracquiredorincomeandexpensesattributabletospecificjurisdictions.Ifsuchadisagreementweretooccur,andourpositionwerenotsustained,wecouldberequiredtopayadditionaltaxes,interestandpenalties,whichcouldresultinone-timetaxcharges,highereffectivetaxrates,reducedcashflowsandloweroverallprofitabilityofouroperations.

Certaingovernmentagenciesinjurisdictionswhereweandouraffiliatesdobusinesshavehadanextendedfocusonissuesrelatedtothetaxationofmultinationalcompanies.Inaddition,theOrganizationforEconomicCo-operationandDevelopmentisconductingaprojectfocusedonbaseerosionandprofitshiftingininternationalstructures,whichseekstoestablishcertaininternationalstandardsfortaxingtheworldwideincomeofmultinationalcompanies.Asaresultofthesedevelopments,thetaxlawsofcertaincountriesinwhichweandouraffiliatesdobusinesscouldchangeonaprospectiveorretroactivebasis,andanysuchchangescouldincreaseourliabilitiesfortaxes,interestandpenalties,andthereforecouldharmourbusiness,cashflows,resultsofoperationsandfinancialposition.

ChangesintheU.S.taxationofinternationalbusinessactivitiesortheadoptionofothertaxreformpoliciescouldmateriallyimpactourbusiness,resultsofoperationsandfinancialcondition.

ChangestoU.S.taxlawsthatmaybeenactedinthefuturecouldimpactthetaxtreatmentofourforeignearnings.Duetotheexpansionofourinternationalbusinessactivities,anychangesintheU.S.taxationofsuchactivitiesmayincreaseourworldwideeffectivetaxrateandadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ifweexperienceexcessivecreditcardorfraudulentactivity,wecouldincursubstantialcosts.

Mostofourcustomersauthorizeustobilltheircreditcardaccountsdirectlyforservicefeesthatwecharge.Ifpeoplepayforourserviceswithstolencreditcards,wecouldincursubstantialthird-partyvendorcostsforwhichwemaynotbereimbursed.Further,ourcustomersprovideuswithcreditcardbillinginformationonline,andwedonotreviewthephysicalcreditcardsusedinthesetransactions,whichincreasesourriskofexposuretofraudulentactivity.Wealsoincurcharges,whichwerefertoaschargebacks,fromthecreditcardcompaniesfromclaimsthatthecustomerdidnotauthorizethecreditcardtransactiontopurchaseourservices.Ifthenumberofunauthorizedcreditcardtransactionsbecomesexcessive,wecouldbeassessedsubstantialfinesforexcesschargebacksandwecouldlosetherighttoacceptcreditcardsforpayment.

Ourproductsmayalsobesubjecttofraudulentusage,includingbutnotlimitedtorevenuesharefraud,domestictrafficpumping,subscriptionfraud,premiumtextmessagescamsandotherfraudulentschemes.Althoughourcustomersarerequiredtosetpasswordsorpersonalidentificationnumberstoprotecttheiraccounts,thirdpartieshaveinthepastbeen,andmayinthefuturebe,abletoaccessandusetheiraccountsthroughfraudulentmeans.Furthermore,spammersattempttouseourproductstosendtargetedanduntargetedspammessages.Wecannotbecertainthatoureffortstodefeatspammingattackswillbesuccessfulineliminatingallspammessagesfrombeingsentusingourplatform.Inaddition,acybersecuritybreachofourcustomers'systemscouldresultinexposureoftheir

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authenticationcredentials,unauthorizedaccesstotheiraccountsorfraudulentcallsontheiraccounts,anyofwhichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Unfavorableconditionsinourindustryortheglobaleconomyorreductionsinspendingoninformationtechnologyandcommunicationscouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Ourresultsofoperationsmayvarybasedontheimpactofchangesinourindustryortheglobaleconomyonourcustomers.Ourresultsofoperationsdependinpartondemandforinformationtechnologyandcloudcommunications.Inaddition,ourrevenueisdependentontheusageofourproducts,whichinturnisinfluencedbythescaleofbusinessthatourcustomersareconducting.Totheextentthatweakeconomicconditionsresultinareducedvolumeofbusinessfor,andcommunicationsby,ourcustomersandprospectivecustomers,demandfor,anduseof,ourproductsmaydecline.Furthermore,weakeconomicconditionsmaymakeitmoredifficulttocollectonoutstandingaccountsreceivable.Additionally,historically,wehavegeneratedthesubstantialmajorityofourrevenuefromsmallandmedium-sizedbusinesses,andweexpectthistocontinuefortheforeseeablefuture.Smallandmedium-sizedbusinessmaybeaffectedbyeconomicdownturnstoagreaterextentthanenterprises,andtypicallyhavemorelimitedfinancialresources,includingcapitalborrowingcapacity,thanenterprises.Ifourcustomersreducetheiruseofourproducts,orprospectivecustomersdelayadoptionorelectnottoadoptourproducts,asaresultofaweakeconomy,thiscouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Wemayrequireadditionalcapitaltosupportourbusiness,andthiscapitalmightnotbeavailableonacceptableterms,ifatall.

Weintendtocontinuetomakeinvestmentstosupportourbusinessandmayrequireadditionalfunds.Inparticular,wemayseekadditionalfundstodevelopnewproductsandenhanceourplatformandexistingproducts,expandouroperations,includingoursalesandmarketingorganizationsandourpresenceoutsideoftheUnitedStates,improveourinfrastructureoracquirecomplementarybusinesses,technologies,services,productsandotherassets.Inaddition,wemayuseaportionofourcashtosatisfytaxwithholdingandremittanceobligationsrelatedtooutstandingrestrictedstockunits.Accordingly,wemayneedtoengageinequityordebtfinancingstosecureadditionalfunds.Ifweraiseadditionalfundsthroughfutureissuancesofequityorconvertibledebtsecurities,ourstockholderscouldsuffersignificantdilution,andanynewequitysecuritiesweissuecouldhaverights,preferencesandprivilegessuperiortothoseofholdersofourClassAandClassBcommonstock.Anydebtfinancingthatwemaysecureinthefuturecouldinvolverestrictivecovenantsrelatingtoourcapitalraisingactivitiesandotherfinancialandoperationalmatters,whichmaymakeitmoredifficultforustoobtainadditionalcapitalandtopursuebusinessopportunities.Wemaynotbeabletoobtainadditionalfinancingontermsfavorabletous,ifatall.Ifweareunabletoobtainadequatefinancingorfinancingontermssatisfactorytouswhenwerequireit,ourabilitytocontinuetosupportourbusinessgrowth,scaleourinfrastructure,developproductenhancementsandtorespondtobusinesschallengescouldbesignificantlyimpaired,andourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.

Wefaceexposuretoforeigncurrencyexchangeratefluctuations,andsuchfluctuationscouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Asourinternationaloperationsexpand,ourexposuretotheeffectsoffluctuationsincurrencyexchangeratesgrows.WhilewehaveprimarilytransactedwithcustomersandbusinesspartnersinU.S.dollars,wehavetransactedwithcustomersinJapaninJapaneseYenandinEuropeinEurosandSwedishKronas.Weexpecttosignificantlyexpandthenumberoftransactionswithcustomersthataredenominatedinforeigncurrenciesinthefutureaswecontinuetoexpandourbusinessinternationally.

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WealsoincurexpensesforsomeofournetworkserviceprovidercostsoutsideoftheUnitedStatesinlocalcurrenciesandforemployeecompensationandotheroperatingexpensesatournon-U.S.locationsinthelocalcurrencyforsuchlocations.FluctuationsintheexchangeratesbetweentheU.S.dollarandothercurrenciescouldresultinanincreasetotheU.S.dollarequivalentofsuchexpenses.

Inaddition,ourinternationalsubsidiariesmaintainnetassetsthataredenominatedincurrenciesotherthanthefunctionaloperatingcurrenciesoftheseentities.Aswecontinuetoexpandourinternationaloperations,webecomemoreexposedtotheeffectsoffluctuationsincurrencyexchangerates.Accordingly,changesinthevalueofforeigncurrenciesrelativetotheU.S.dollarcanaffectourresultsofoperationsduetotransactionalandtranslationalremeasurements.Asaresultofsuchforeigncurrencyexchangeratefluctuations,itcouldbemoredifficulttodetectunderlyingtrendsinourbusinessandresultsofoperations.Inaddition,totheextentthatfluctuationsincurrencyexchangeratescauseourresultsofoperationstodifferfromourexpectationsortheexpectationsofourinvestorsandsecuritiesanalystswhofollowourstock,thetradingpriceofourClassAcommonstockcouldbeadverselyaffected.

Wedonotcurrentlymaintainaprogramtohedgetransactionalexposuresinforeigncurrencies.However,inthefuture,wemayusederivativeinstruments,suchasforeigncurrencyforwardandoptioncontracts,tohedgecertainexposurestofluctuationsinforeigncurrencyexchangerates.Theuseofsuchhedgingactivitiesmaynotoffsetanyormorethanaportionoftheadversefinancialeffectsofunfavorablemovementsinforeignexchangeratesoverthelimitedtimethehedgesareinplace.Moreover,theuseofhedginginstrumentsmayintroduceadditionalrisksifweareunabletostructureeffectivehedgeswithsuchinstruments.

Ourabilitytouseournetoperatinglossestooffsetfuturetaxableincomemaybesubjecttocertainlimitations.

AsofDecember31,2018,wehadfederal,stateandforeignnetoperatinglosscarryforwards("NOLs"),of$452.7million,$347.1millionand$8.1million,respectively,duetopriorperiodlosses.Ingeneral,underSection382oftheInternalRevenueCodeof1986,asamended(the"Code"),acorporationthatundergoesan"ownershipchange"(generallydefinedasagreaterthan50-percentage-pointcumulativechange(byvalue)intheequityownershipofcertainstockholdersoverarollingthree-yearperiod)issubjecttolimitationsonitsabilitytoutilizeitspre-changeNOLstooffsetpost-changetaxableincome.OurexistingNOLsmaybesubjecttolimitationsarisingfrompreviousownershipchanges,andifweundergoanownershipchangeinthefuture,ourabilitytoutilizeNOLscouldbefurtherlimitedbySection382oftheCode.Futurechangesinourstockownership,someofwhichmaybeoutsideofourcontrol,couldresultinanownershipchangeunderSection382oftheCode.

OnDecember22,2017,theU.S.governmentenactednewtaxlegislationcommonlyreferredtoastheTaxCutsandJobsAct(the"TaxAct").TheTaxActmakesbroadandcomplexchangestotheU.S.taxcodeincludingchangestotheusesandlimitationsofnetoperatinglosses.Forexample,whiletheTaxActallowsforfederalnetoperatinglossesincurredintaxyearsbeginningafterDecember31,2017tobecarriedforwardindefinitely,theTaxActalsoimposesan80%limitationontheuseofnetoperatinglossesthataregeneratedintaxyearsbeginningafterDecember31,2017.However,netoperatinglossesgeneratedpriortoDecember31,2017willstillhavea20-yearcarryforwardperiod,butarenotsubjecttothe80%limitation.Furthermore,ourabilitytoutilizeournetoperatinglossesisconditioneduponourmaintainingprofitabilityinthefutureandgeneratingU.S.federaltaxableincome.SincewedonotknowwhetherorwhenwewillgeneratetheU.S.federaltaxableincomenecessarytoutilizeourremainingnetoperatinglosses,thesenetoperatinglosscarryforwardsgeneratedpriortoDecember31,2017couldexpireunused.

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Ifourestimatesorjudgmentsrelatingtoourcriticalaccountingpoliciesprovetobeincorrect,ourresultsofoperationscouldbeadverselyaffected.

ThepreparationoffinancialstatementsinconformitywithU.S.GAAPrequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedintheconsolidatedfinancialstatementsandaccompanyingnotes.Webaseourestimatesonhistoricalexperienceandonvariousotherassumptionsthatwebelievetobereasonableunderthecircumstances,asprovidedPartII,Item7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations."Theresultsoftheseestimatesformthebasisformakingjudgmentsaboutthecarryingvaluesofassets,liabilitiesandequity,andtheamountofrevenueandexpensesthatarenotreadilyapparentfromothersources.Assumptionsandestimatesusedinpreparingourconsolidatedfinancialstatementsincludethoserelatedtorevenuerecognition,capitalizationofourinternal-usesoftwaredevelopmentcostsandstock-basedcompensation.Ourresultsofoperationsmaybeadverselyaffectedifourassumptionschangeorifactualcircumstancesdifferfromthoseinourassumptions,whichcouldcauseourresultsofoperationstofallbelowtheexpectationsofsecuritiesanalystsandinvestors,resultinginadeclineinthetradingpriceofourClassAcommonstock.

Changesinfinancialaccountingstandardsorpracticesmaycauseadverse,unexpectedfinancialreportingfluctuationsandaffectourresultsofoperations.

Achangeinaccountingstandardsorpracticesmayhaveasignificanteffectonourresultsofoperationsandmayevenaffectourreportingoftransactionscompletedbeforethechangeiseffective.Newaccountingpronouncementsandvaryinginterpretationsofaccountingpronouncementshaveoccurredandmayoccurinthefuture.Changestoexistingrulesorthequestioningofcurrentpracticesmayadverselyaffectourreportedfinancialresultsorthewayweconductourbusiness.

Forexample,anewaccountingguidance,AccountingStandardsCodification("ASC")606,"Revenue from Contracts with Customers", becameeffectiveonJanuary1,2018.WeadoptedASC606onJanuary1,2018,anditresultedinanadjustmentof$0.7milliontoouropeningretainedearningsasofJanuary1,2018.Althoughthisaccountingguidancedidnothaveamaterialimpactonourconsolidatedfinancialstatements,theremaybeotherstandardsthatcanbecomeeffectiveinthefuturethatmayhaveamaterialimpactonourconsolidatedfinancialstatements,suchasAccountingStandardsUpdate("ASU")2016-12,"Leases", whichwillbecomeeffectiveonJanuary1,2019,andwillresultinasignificantgrossupofourassetsandliabilities.Adoptionofthesetypesofaccountingstandardsandanydifficultiesinimplementationofchangesinaccountingprinciples,includingtheabilitytomodifyouraccountingsystems,couldcauseustofailtomeetourfinancialreportingobligations,whichresultinregulatorydisciplineandharminvestorsconfidenceinus.

Ifwefailtomaintainaneffectivesystemofdisclosurecontrolsandinternalcontroloverfinancialreporting,ourabilitytoproducetimelyandaccuratefinancialstatementsorcomplywithapplicableregulationscouldbeimpaired.

Asapubliccompany,wearerequiredtomaintaininternalcontroloverfinancialreportingandtoreportanymaterialweaknessesinsuchinternalcontrol.Section404oftheSarbanes-OxleyActof2002,ortheSarbanes-OxleyAct,requiresthatweevaluateanddeterminetheeffectivenessofourinternalcontroloverfinancialreportingandprovideamanagementreportoninternalcontroloverfinancialreporting.Amaterialweaknessisadeficiency,orcombinationofdeficiencies,ininternalcontroloverfinancialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementofourfinancialstatementswillnotbepreventedordetectedonatimelybasis.

WereportedinourAnnualReportonForm10-KasofDecember31,2017,amaterialweaknessrelatedtothetrackingofqualifyinginternalusesoftwaredevelopmentcostseligibleforcapitalization.During2018,wecompletedtheremediationmeasuresrelatedtoourpreviouslyreportedmaterial

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weakness,andconcludedthatourinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2018.However,completionofremediationdoesnotprovideassurancethatourremediatedcontrolswillcontinuetooperateproperlyorthatourfinancialstatementswillbefreefromerror.

Ourcurrentcontrolsandanynewcontrolsthatwedevelopmaybecomeinadequatebecauseofchangesinconditionsinourbusiness.Further,weaknessesinourdisclosurecontrolsandinternalcontroloverfinancialreportingmaybediscoveredinthefuture.Anyfailuretodevelopormaintaineffectivecontrolsoranydifficultiesencounteredintheirimplementationorimprovementcouldharmourresultsofoperationsorcauseustofailtomeetourreportingobligationsandmayresultinarestatementofourfinancialstatementsforpriorperiods.AnyfailuretoimplementandmaintaineffectiveinternalcontroloverfinancialreportingalsocouldadverselyaffecttheresultsofperiodicmanagementevaluationsandannualindependentregisteredpublicaccountingfirmattestationreportsregardingtheeffectivenessofourinternalcontroloverfinancialreportingthatwearerequiredtoincludeinourperiodicreportsthatwillbefiledwiththeSEC.Ineffectivedisclosurecontrolsandproceduresandinternalcontroloverfinancialreportingcouldalsocauseinvestorstoloseconfidenceinourreportedfinancialandotherinformation,andcouldhaveamaterialandadverseeffectonourbusiness,resultsofoperationsandfinancialconditionandcouldcauseadeclineinthetradingpriceofourClassAcommonstock.Inaddition,ifweareunabletocontinuetomeettheserequirements,wemaynotbeabletoremainlistedontheNewYorkStockExchange.

Ifourgoodwillorintangibleassetsbecomeimpaired,wemayberequiredtorecordasignificantchargetoearnings.

Wereviewourintangibleassetsforimpairmentwheneventsorchangesincircumstancesindicatethecarryingvaluemaynotberecoverable.Goodwillisrequiredtobetestedforimpairmentatleastannually.AsofDecember31,2018,wecarriedanet$63.3millionofgoodwillandintangibleassetsrelatedtoacquiredbusinesses.Anadversechangeinmarketconditions,particularlyifsuchchangehastheeffectofchangingoneofourcriticalassumptionsorestimates,couldresultinachangetotheestimationoffairvaluethatcouldresultinanimpairmentchargetoourgoodwillorintangibleassets.Anysuchchargesmayadverselyaffectourresultsofoperations.

Ourbusinessissubjecttotherisksofearthquakes,fire,floodsandothernaturalcatastrophicevents,andtointerruptionbyman-madeproblemssuchaspowerdisruptions,computerviruses,datasecuritybreachesorterrorism.

OurcorporateheadquartersarelocatedintheSanFranciscoBayArea,aregionknownforseismicactivity.Asignificantnaturaldisaster,suchasanearthquake,fireorflood,occurringatourheadquarters,atoneofourotherfacilitiesorwhereabusinesspartnerislocatedcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.Further,ifanaturaldisasterorman-madeproblemweretoaffectourserviceproviders,thiscouldadverselyaffecttheabilityofourcustomerstouseourproductsandplatform.Inaddition,naturaldisastersandactsofterrorismcouldcausedisruptionsinourorourcustomers'businesses,nationaleconomiesortheworldeconomyasawhole.Wealsorelyonournetworkandthird-partyinfrastructureandenterpriseapplicationsandinternaltechnologysystemsforourengineering,salesandmarketing,andoperationsactivities.Althoughwemaintainincidentmanagementanddisasterresponseplans,intheeventofamajordisruptioncausedbyanaturaldisasterorman-madeproblem,wemaybeunabletocontinueouroperationsandmayenduresysteminterruptions,reputationalharm,delaysinourdevelopmentactivities,lengthyinterruptionsinservice,breachesofdatasecurityandlossofcriticaldata,anyofwhichcouldadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.

Inaddition,computermalware,virusesandcomputerhacking,fraudulentuseattemptsandphishingattackshavebecomemoreprevalentinourindustry,haveoccurredonourplatforminthe

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pastandmayoccuronourplatforminthefuture.Thoughitisdifficulttodeterminewhat,ifany,harmmaydirectlyresultfromanyspecificinterruptionorattack,anyfailuretomaintainperformance,reliability,security,integrityandavailabilityofourproductsandtechnicalinfrastructuretothesatisfactionofourusersmayharmourreputationandourabilitytoretainexistingusersandattractnewusers.

RisksRelatedtoOwnershipofOurClassACommonStock

ThetradingpriceofourClassAcommonstockhasbeenvolatileandmaycontinuetobevolatile,andyoucouldloseallorpartofyourinvestment.

PriortoourinitialpublicofferinginJune2016,therewasnopublicmarketforsharesofourClassAcommonstock.OnJune23,2016,wesoldsharesofourClassAcommonstocktothepublicat$15.00pershare.FromJune23,2016,thedatethatourClassAcommonstockstartedtradingontheNewYorkStockExchange,throughJanuary31,2019,thetradingpriceofourClassAcommonstockhasrangedfrom$22.80pershareto$113.3pershare.ThetradingpriceofourClassAcommonstockmaycontinuetofluctuatesignificantlyinresponsetonumerousfactors,manyofwhicharebeyondourcontrol,including:

• priceandvolumefluctuationsintheoverallstockmarketfromtimetotime;

• volatilityinthetradingpricesandtradingvolumesoftechnologystocks;

• changesinoperatingperformanceandstockmarketvaluationsofothertechnologycompaniesgenerally,orthoseinourindustryinparticular;

• salesofsharesofourClassAcommonstockbyusorourstockholders;

• failureofsecuritiesanalyststomaintaincoverageofus,changesinfinancialestimatesbysecuritiesanalystswhofollowourcompany,orourfailuretomeettheseestimatesortheexpectationsofinvestors;

• thefinancialprojectionswemayprovidetothepublic,anychangesinthoseprojectionsorourfailuretomeetthoseprojections;

• announcementsbyusorourcompetitorsofnewproductsorservices;

• thepublic'sreactiontoourpressreleases,otherpublicannouncementsandfilingswiththeSEC;

• rumorsandmarketspeculationinvolvingusorothercompaniesinourindustry;

• actualoranticipatedchangesinourresultsofoperationsorfluctuationsinourresultsofoperations;

• actualoranticipateddevelopmentsinourbusiness,ourcompetitors'businessesorthecompetitivelandscapegenerally;

• litigationinvolvingus,ourindustryorboth,orinvestigationsbyregulatorsintoouroperationsorthoseofourcompetitors;

• developmentsordisputesconcerningourintellectualpropertyorotherproprietaryrights;

• announcedorcompletedacquisitionsofbusinesses,products,servicesortechnologiesbyusorourcompetitors;

• newlawsorregulationsornewinterpretationsofexistinglawsorregulationsapplicabletoourbusiness;

• changesinaccountingstandards,policies,guidelines,interpretationsorprinciples;

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• anysignificantchangeinourmanagement;and

• generaleconomicconditionsandslowornegativegrowthofourmarkets.

Inaddition,inthepast,followingperiodsofvolatilityintheoverallmarketandthemarketpriceofaparticularcompany'ssecurities,securitiesclassactionlitigationhasoftenbeeninstitutedagainstthesecompanies.Thislitigation,ifinstitutedagainstus,couldresultinsubstantialcostsandadiversionofourmanagement'sattentionandresources.

SubstantialfuturesalesofsharesofourClassAcommonstockcouldcausethemarketpriceofourClassAcommonstocktodecline.

ThemarketpriceofourClassAcommonstockcoulddeclineasaresultofsubstantialsalesofourClassAcommonstock,particularlysalesbyourdirectors,executiveofficersandsignificantstockholders,ortheperceptioninthemarketthatholdersofalargenumberofsharesintendtoselltheirshares.

Additionally,thesharesofClassAcommonstocksubjecttooutstandingoptionsandrestrictedstockunitawardsunderourequityincentiveplansandthesharesreservedforfutureissuanceunderourequityincentiveplanswillbecomeeligibleforsaleinthepublicmarketuponissuance,subjecttoapplicableinsidertradingpolicies.CertainholdersofourClassAcommonstockhaverights,subjecttosomeconditions,torequireustofileregistrationstatementscoveringtheirsharesortoincludetheirsharesinregistrationstatementsthatwemayfileforourstockholdersorourselves.

Thedualclassstructureofourcommonstockhastheeffectofconcentratingvotingcontrolwiththosestockholderswhoheldourcapitalstockpriortothecompletionofourinitialpublicoffering,includingourdirectors,executiveofficersandtheirrespectiveaffiliates.Thislimitsorprecludesyourabilitytoinfluencecorporatematters,includingtheelectionofdirectors,amendmentsofourorganizationaldocumentsandanymerger,consolidation,saleofallorsubstantiallyallofourassets,orothermajorcorporatetransactionrequiringstockholderapproval.

OurClassBcommonstockhas10votespershare,andourClassAcommonstockhasonevotepershare.AsofDecember31,2018,ourdirectors,executiveofficersandtheirrespectiveaffiliates,heldintheaggregate48.8%ofthevotingpowerofourcapitalstock.Becauseofthe10-to-onevotingratiobetweenourClassBcommonstockandClassAcommonstock,theholdersofourClassBcommonstockcollectivelywillcontinuetocontrolamajorityofthecombinedvotingpowerofourcommonstockandthereforebeabletocontrolallmatterssubmittedtoourstockholdersforapprovaluntiltheearlierof(i)June28,2023,or(ii)thedatetheholdersoftwo-thirdsofourClassBcommonstockelecttoconverttheClassBcommonstocktoClassAcommonstock.Thisconcentratedcontrollimitsorprecludesyourabilitytoinfluencecorporatemattersfortheforeseeablefuture,includingtheelectionofdirectors,amendmentsofourorganizationaldocuments,andanymerger,consolidation,saleofallorsubstantiallyallofourassets,orothermajorcorporatetransactionrequiringstockholderapproval.Inaddition,thismaypreventordiscourageunsolicitedacquisitionproposalsoroffersforourcapitalstockthatyoumayfeelareinyourbestinterestasoneofourstockholders.

FuturetransfersbyholdersofClassBcommonstockwillgenerallyresultinthosesharesconvertingtoClassAcommonstock,subjecttolimitedexceptions,suchascertaintransferseffectedforestateplanningpurposes.TheconversionofClassBcommonstocktoClassAcommonstockwillhavetheeffect,overtime,ofincreasingtherelativevotingpowerofthoseholdersofClassBcommonstockwhoretaintheirsharesinthelongterm.

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Ifsecuritiesorindustryanalystsceasepublishingresearchorreportsaboutus,ourbusinessorourmarket,oriftheychangetheirrecommendationsregardingourClassAcommonstockadversely,thetradingpriceofourClassAcommonstockandtradingvolumecoulddecline.

ThetradingmarketforourClassAcommonstockisinfluencedbytheresearchandreportsthatsecuritiesorindustryanalystsmaypublishaboutus,ourbusiness,ourmarketorourcompetitors.IfanyoftheanalystswhocoveruschangetheirrecommendationregardingourClassAcommonstockadversely,orprovidemorefavorablerelativerecommendationsaboutourcompetitors,thetradingpriceofourClassAcommonstockwouldlikelydecline.Ifanyanalystwhocoversusweretoceasecoverageofourcompanyorfailtoregularlypublishreportsonus,wecouldlosevisibilityinthefinancialmarkets,whichinturncouldcausethetradingpriceofourClassAcommonstockortradingvolumetodecline.

Anti-takeoverprovisionscontainedinouramendedandrestatedcertificateofincorporationandamendedandrestatedbylaws,aswellasprovisionsofDelawarelaw,couldimpairatakeoverattempt.

Ouramendedandrestatedcertificateofincorporation,amendedandrestatedbylawsandDelawarelawcontainprovisionswhichcouldhavetheeffectofrenderingmoredifficult,delaying,orpreventinganacquisitiondeemedundesirablebyourboardofdirectors.Amongotherthings,ouramendedandrestatedcertificateofincorporationandamendedandrestatedbylawsincludeprovisions:

• authorizing"blankcheck"preferredstock,whichcouldbeissuedbyourboardofdirectorswithoutstockholderapprovalandmaycontainvoting,liquidation,dividendandotherrightssuperiortoourClassAandClassBcommonstock;

• limitingtheliabilityof,andprovidingindemnificationto,ourdirectorsandofficers;

• limitingtheabilityofourstockholderstocallandbringbusinessbeforespecialmeetings;

• providingforadualclasscommonstockstructureinwhichholdersofourClassBcommonstockhavetheabilitytocontroltheoutcomeofmattersrequiringstockholderapproval,eveniftheyownsignificantlylessthanamajorityoftheoutstandingsharesofourClassAandClassBcommonstock,includingtheelectionofdirectorsandsignificantcorporatetransactions,suchasamergerorothersaleofourcompanyoritsassets;

• providingthatourboardofdirectorsisclassifiedintothreeclassesofdirectorswithstaggeredthree-yearterms;

• prohibitstockholderactionbywrittenconsent,whichrequiresallstockholderactionstobetakenatameetingofourstockholders;

• requiringadvancenoticeofstockholderproposalsforbusinesstobeconductedatmeetingsofourstockholdersandfornominationsofcandidatesforelectiontoourboardofdirectors;and

• controllingtheproceduresfortheconductandschedulingofboardofdirectorsandstockholdermeetings.

Theseprovisions,aloneortogether,coulddelayorpreventhostiletakeoversandchangesincontrolorchangesinourmanagement.

AsaDelawarecorporation,wearealsosubjecttoprovisionsofDelawarelaw,includingSection203oftheDelawareGeneralCorporationlaw,whichpreventscertainstockholdersholdingmorethan15%ofouroutstandingcommonstockfromengagingincertainbusinesscombinationswithoutapprovaloftheholdersofatleasttwo-thirdsofouroutstandingcommonstocknotheldbysuch15%orgreaterstockholder.

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Anyprovisionofouramendedandrestatedcertificateofincorporation,amendedandrestatedbylawsorDelawarelawthathastheeffectofdelaying,preventingordeterringachangeincontrolcouldlimittheopportunityforourstockholderstoreceiveapremiumfortheirsharesofourcommonstockandcouldalsoaffectthepricethatsomeinvestorsarewillingtopayforourClassAcommonstock.

Wedonotexpecttodeclareanydividendsintheforeseeablefuture.

Wedonotanticipatedeclaringanycashdividendstoholdersofourcommonstockintheforeseeablefuture.Consequently,investorsmayneedtorelyonsalesoftheirClassAcommonstockafterpriceappreciation,whichmayneveroccur,astheonlywaytorealizeanyfuturegainsontheirinvestment.InvestorsseekingcashdividendsshouldnotpurchaseourClassAcommonstock.

RisksRelatedtotheOutstandingNotes

Servicingourfuturedebtmayrequireasignificantamountofcash,andwemaynothavesufficientcashflowfromourbusinesstopayourindebtedness.

Ourabilitytomakescheduledpaymentsoftheprincipalof,topayinterestonortorefinanceourindebtedness,includingour0.25%convertibleseniornotesdue2023(the"Notes"),dependsonourfutureperformance,whichissubjecttoeconomic,financial,competitiveandotherfactorsbeyondourcontrol.Ourbusinessmaynotgeneratecashflowfromoperationsinthefuturesufficienttoserviceourdebtandmakenecessarycapitalexpenditures.Ifweareunabletogeneratesuchcashflow,wemayberequiredtoadoptoneormorealternatives,suchassellingassets,restructuringdebtorobtainingadditionaldebtfinancingorequitycapitalontermsthatmaybeonerousorhighlydilutive.Ourabilitytorefinanceanyfutureindebtednesswilldependonthecapitalmarketsandourfinancialconditionatsuchtime.Wemaynotbeabletoengageinanyoftheseactivitiesorengageintheseactivitiesondesirableterms,whichcouldresultinadefaultonourdebtobligations.Inaddition,anyofourfuturedebtagreementsmaycontainrestrictivecovenantsthatmayprohibitusfromadoptinganyofthesealternatives.Ourfailuretocomplywiththesecovenantscouldresultinaneventofdefaultwhich,ifnotcuredorwaived,couldresultintheaccelerationofourdebt.

WemaynothavetheabilitytoraisethefundsnecessaryforcashsettlementuponconversionoftheNotesortorepurchasetheNotesforcashuponafundamentalchange,andourfuturedebtmaycontainlimitationsonourabilitytopaycashuponconversionoftheNotesortorepurchasetheNotes.

Subjecttolimitedexceptions,holdersoftheNoteshavetherighttorequireustorepurchasetheirNotesupontheoccurrenceofafundamentalchangeatafundamentalchangerepurchasepriceequalto100%oftheprincipalamountoftheNotestoberepurchased,plusaccruedandunpaidinterest,ifany,to,butexcluding,thefundamentalchangerepurchasedate.Inaddition,uponconversionoftheNotes,unlessweelecttodeliversolelysharesofourClassAcommonstocktosettlesuchconversion(otherthanpayingcashinlieuofdeliveringanyfractionalshare),wewillberequiredtomakecashpaymentsinrespectoftheNotesbeingconverted.However,wemaynothaveenoughavailablecashorbeabletoobtainfinancingatthetimewearerequiredtomakerepurchasesofNotessurrenderedtherefororpayanycashamountsdueuponconversion.Inaddition,ourabilitytorepurchasetheNotesortopaycashuponconversionsoftheNotesmaybelimitedbylaw,byregulatoryauthorityorbyagreementsgoverningourfutureindebtedness.OurfailuretorepurchaseNotesatatimewhentherepurchaseisrequiredbytheindenturegoverningtheNotesortopayanycashpayableonfutureconversionsoftheNotesasrequiredbysuchindenturewouldconstituteadefaultundersuchindenture.Adefaultundertheindentureorthefundamentalchangeitselfcouldalsoleadtoadefaultunderagreementsgoverningourfutureindebtedness.Iftherepaymentoftherelatedindebtednessweretobeacceleratedafteranyapplicablenoticeorgraceperiods,wemaynothavesufficientfundstorepaytheindebtednessandrepurchasetheNotesormakecashpaymentsuponconversionsthereof.

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TheconditionalconversionfeatureoftheNotes,iftriggered,mayadverselyaffectourfinancialconditionandoperatingresults.

IntheeventtheconditionalconversionfeatureoftheNotesistriggered,holdersofNoteswillbeentitledtoconverttheNotesatanytimeduringspecifiedperiodsattheiroption.IfoneormoreholderselecttoconverttheirNotes,unlessweelecttosatisfyourconversionobligationbydeliveringsolelysharesofourClassAcommonstock(otherthanpayingcashinlieuofdeliveringanyfractionalshare),wewouldberequiredtosettleaportionorallofourconversionobligationthroughthepaymentofcash,whichcouldadverselyaffectourliquidity.Inaddition,evenifholdersdonotelecttoconverttheirNotes,wecouldberequiredunderapplicableaccountingrulestoreclassifyalloraportionoftheoutstandingprincipaloftheNotesasacurrentratherthanlong-termliability,whichwouldresultinamaterialreductionofournetworkingcapital.

Theaccountingmethodforconvertibledebtsecuritiesthatmaybesettledincash,suchastheNotes,couldhaveamaterialeffectonourreportedfinancialresults.

UnderFinancialAccountingStandardsBoardAccountingStandardsCodification470-20,DebtwithConversionandOtherOptions,whichwerefertoasASC470-20,anentitymustseparatelyaccountfortheliabilityandequitycomponentsofconvertibledebtinstruments(suchastheNotes)thatmaybesettledentirelyorpartiallyincashuponconversioninamannerthatreflectstheissuer'seconomicinterestcost.ASC470-20requiresthevalueoftheconversionoptionoftheNotes,representingtheequitycomponent,toberecordedasadditionalpaid-incapitalwithinstockholders'equityinourconsolidatedbalancesheetandasadiscounttothedebtcomponentoftheNotes,whichreducestheirinitialdebtcarryingvaluereflectedasaliabilityonourbalancesheets.ThecarryingvalueofthedebtcomponentoftheNotes,netofthediscountrecorded,willbeaccreteduptotheprincipalamountoftheNotesfromtheissuancedateuntilmaturity,whichwillresultinnon-cashchargestointerestexpenseinourconsolidatedstatementofoperations.Accordingly,wewillreportlowernetincomeorhighernetlossinourfinancialresultsbecauseASC470-20requiresinteresttoincludeboththecurrentperiod'saccretionofthedebtdiscountandtheinstrument'scouponinterest,whichcouldadverselyaffectourreportedorfuturefinancialresults,thetradingpriceofourClassAcommonstockandthetradingpriceoftheNotes.

Inaddition,undercertaincircumstances,convertibledebtinstruments(suchastheNotes)thatmaybesettledentirelyorpartlyincasharecurrentlyaccountedforutilizingthetreasurystockmethod,theeffectofwhichisthatthesharesissuableuponconversionoftheNotesarenotincludedinthecalculationofdilutedearningspershareexcepttotheextentthattheconversionvalueoftheNotesexceedstheirprincipalamount.Underthetreasurystockmethod,fordilutedearningspersharepurposes,thetransactionisaccountedforasifthenumberofsharesofClassAcommonstockthatwouldbenecessarytosettlesuchexcess,ifweelectedtosettlesuchexcessinshares,areissued.Wecannotbesurethattheaccountingstandardsinthefuturewillcontinuetopermittheuseofthetreasurystockmethod.IfweareunabletousethetreasurystockmethodinaccountingforthesharesissuableuponconversionoftheNotes,thenourdilutedearningspersharewouldbeadverselyaffectedinperiodswhenwereportnetincome.

ThecappedcalltransactionsmayaffectthevalueoftheNotesandourClassAcommonstock.

InconnectionwiththepricingoftheNotes,weenteredintoprivatelynegotiatedcappedcalltransactionswiththeoptioncounterparties.ThecappedcalltransactionsareexpectedgenerallytoreducethepotentialdilutiontoourClassAcommonstockuponanyconversionoftheNotesand/oroffsetanypotentialcashpaymentswearerequiredtomakeinexcessoftheprincipalamountofconvertedNotes,asthecasemaybe,withsuchreductionand/oroffsetsubjecttoacap.

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Inconnectionwithestablishingtheirinitialhedgesofthecappedcalltransactions,theoptioncounterpartiesortheirrespectiveaffiliatesenteredintovariousderivativetransactionswithrespecttoourClassAcommonstockand/orpurchasedsharesofourClassAcommonstockconcurrentlywithorshortlyafterthepricingoftheNotes.

Inaddition,theoptioncounterpartiesand/ortheirrespectiveaffiliatesmaymodifytheirhedgepositionsbyenteringintoorunwindingvariousderivativeswithrespecttoourClassAcommonstockand/orpurchasingorsellingourClassAcommonstockorothersecuritiesofoursinsecondarymarkettransactionsatanytimepriortothematurityoftheNotes(andarelikelytodosoduringanyobservationperiodrelatedtoaconversionofNotes).ThisactivitycouldcauseoravoidanincreaseoradecreaseinthemarketpriceofourClassAcommonstock.

WedonotmakeanyrepresentationorpredictionastothedirectionormagnitudeofanypotentialeffectthatthetransactionsdescribedabovemayhaveonthepriceoftheNotesorourClassAcommonstock.Inaddition,wedonotmakeanyrepresentationthattheoptioncounterpartieswillengageinthesetransactionsorthatthesetransactions,oncecommenced,willnotbediscontinuedwithoutnotice.

Wearesubjecttocounterpartyriskwithrespecttothecappedcalltransactions.

Theoptioncounterpartiesarefinancialinstitutions,andwewillbesubjecttotheriskthatanyorallofthemmightdefaultunderthecappedcalltransactions.Ourexposuretothecreditriskoftheoptioncounterpartieswillnotbesecuredbyanycollateral.Pastglobaleconomicconditionshaveresultedintheactualorperceivedfailureorfinancialdifficultiesofmanyfinancialinstitutions.Ifanoptioncounterpartybecomessubjecttoinsolvencyproceedings,wewillbecomeanunsecuredcreditorinthoseproceedingswithaclaimequaltoourexposureatthattimeunderthecappedcalltransactionswithsuchoptioncounterparty.Ourexposurewilldependonmanyfactorsbut,generally,anincreaseinourexposurewillbecorrelatedtoanincreaseinthemarketpriceandinthevolatilityofourClassAcommonstock.Inaddition,uponadefaultbyanoptioncounterparty,wemaysufferadversetaxconsequencesandmoredilutionthanwecurrentlyanticipatewithrespecttoourClassAcommonstock.Wecanprovidenoassurancesastothefinancialstabilityorviabilityoftheoptioncounterparties.

RisksRelatedtotheAcquisitionofSendGrid

AlthoughweexpectthattheacquisitionofSendGridwillresultinsynergiesandotherbenefitstous,wemaynotrealizethosebenefitsbecauseofdifficultiesrelatedtointegration,theachievementofsynergies,andotherchallenges.

WeacquiredSendGridonFebruary1,2019.Priortothecompletionoftheacquisition,weandSendGridoperatedindependently,andtherecanbenoassurancesthatourbusinessescanbecombinedinamannerthatallowsfortheachievementofsubstantialbenefits.Theintegrationprocesswillrequiresignificanttimeandresources,andwemaynotbeabletomanagetheprocesssuccessfullyasourabilitytoacquireandintegratelargerormorecomplexcompanies,products,ortechnologyinasuccessfulmannerisunproven.IfwearenotabletosuccessfullyintegrateSendGrid'sbusinesseswithoursorpursueourcustomerandproductstrategysuccessfully,theanticipatedbenefitsoftheacquisitionmaynotberealizedfullyormaytakelongerthanexpectedtoberealized.Further,itispossiblethattherecouldbealossofourand/orSendGrid'skeyemployeesandcustomers,disruptionofeithercompany'sorbothcompanies'ongoingbusinessesorunexpectedissues,higherthanexpectedcostsandanoverallpost-completionprocessthattakeslongerthanoriginallyanticipated.Specifically,thefollowingissues,amongothers,mustbeaddressedincombiningSendGrid'soperationswithoursinordertorealizetheanticipatedbenefitsoftheacquisitionsothecombinedcompanyperformsasthepartieshope:

• combiningthecompanies'corporatefunctions;

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• combiningSendGrid'sbusinesswithourbusinessinamannerthatpermitsustoachievethesynergiesanticipatedtoresultfromtheacquisition,thefailureofwhichwouldresultintheanticipatedbenefitsoftheacquisitionnotbeingrealizedinthetimeframecurrentlyanticipatedoratall;

• maintainingexistingagreementswithcustomers,distributors,providers,talentandvendorsandavoidingdelaysinenteringintonewagreementswithprospectivecustomers,distributors,providers,talentandvendors;

• determiningwhetherandhowtoaddresspossibledifferencesincorporateculturesandmanagementphilosophies;

• integratingthecompanies'administrativeandinformationtechnologyinfrastructure;

• developingproductsandtechnologythatallowvaluetobeunlockedinthefuture;

• evaluatingandforecastingthefinancialimpactoftheacquisitiontransaction,includingaccountingcharges;and

• effectingpotentialactionsthatmayberequiredinconnectionwithobtainingregulatoryapprovals.

Inaddition,attimestheattentionofcertainmembersofourmanagementandresourcesmaybefocusedonintegrationofthebusinessesofthetwocompaniesanddivertedfromday-to-daybusinessoperations,whichmaydisruptourongoingbusinessandthebusinessofthecombinedcompany.

Wehaveincurred,andmaycontinuetoincur,significant,non-recurringcostsinconnectionwiththeacquisitionofSendGridandintegratingtheoperationsofTwilioandSendGrid,includingcoststomaintainemployeemoraleandtoretainkeyemployees.Managementcannotensurethattheeliminationofduplicativecostsortherealizationofotherefficiencieswilloffsetthetransactionandintegrationcostsintheneartermoratall.

PurchasepriceaccountinginconnectionwithouracquisitionofSendGridrequiresestimatesthatmaybesubjecttochangeandcouldimpactourconsolidatedfinancialstatementsandfutureresultsofoperationsandfinancialposition.

Pursuanttotheacquisitionmethodofaccounting,thepurchasepricewepaidforSendGridwillbeallocatedtotheunderlyingSendGridtangibleandintangibleassetsacquiredandliabilitiesassumedbasedontheirrespectivefairmarketvalueswithanyexcesspurchasepriceallocatedtogoodwill.Theacquisitionmethodofaccountingisdependentuponcertainvaluationsandotherstudiesthatarepreliminary.Accordingly,thepurchasepriceallocationasoftheacquisitiondatewillbepreliminary.Wecurrentlyanticipatethatalltheinformationneededtoidentifyandmeasurevaluesassignedtotheassetsacquiredandliabilitiesassumedwillbeobtainedandfinalizedduringtheone-yearmeasurementperiodfollowingthedateofcompletionoftheacquisition.Differencesbetweenthesepreliminaryestimatesandthefinalacquisitionaccountingmayoccur,andthesedifferencescouldhaveamaterialimpactontheconsolidatedfinancialstatementsandthecombinedcompany'sfutureresultsofoperationsandfinancialposition.

Item1B.UnresolvedStaffComments

None.

Item2.Properties

OurheadquartersislocatedinSanFrancisco,California,whereweleaseapproximately90,000squarefeetofofficespaceunderaleasethatexpiresin2024.Theleasepaymentsrangefrom

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$0.4millionpermonthinthefirst60monthsto$0.5millionpermonththereafter.Theleaseincludedatenantimprovementallowancetocoverconstructionofcertainleaseholdimprovementsforupto$8.3million.AllofthisamounthadbeencollectedfromthelandlordasofDecember31,2017.Wesecuredourleaseobligationwitha$7.4millionletterofcredit,whichwedesignatedasrestrictedcashonourbalancesheetasofDecember31,2016.Thisletterofcreditisperiodicallyreduced,asstipulatedintheleaseagreementanduponsatisfactionofrequiredconditions.AsofDecember31,2018,therestrictedcashonourbalancesheetrelatedtothisleasewas$3.3million.

InSeptember2018,weenteredintoasub-leaseagreement("Sub-lease")foratotalof259,416rentablesquarefeetofofficespaceat101SpearStreetinSanFrancisco,California.TheSub-leasecoversseveralfloorsforwhichthetermscommenceonDecember1,2018andApril1,2020,andwillbeexpiringatvariousdatesbetweenMarch2025andJune2028.Theleasepaymentswillrangefrom$0.8millionpermonthsto$2.2millionpermonth.Wesecuredourleaseobligationwitha$14.7millionletterofcredit,whichitdesignatedasrestrictedcashonourbalancesheetasofDecember31,2018.Weintendforthislocationtobecomeourheadquartersatsometimein2019.

Inadditiontoourheadquarters,weleasespaceinMountainView,Tallinn,Bogota,Madrid,Malmo,PragueandBerlinasadditionalresearchanddevelopmentoffices.WealsoleasespaceforadditionalsalesandmarketingofficesinNewYork,Atlanta,Dublin,London,Munich,HongKong,Singapore,SydneyandMelbourne.OurDublinofficeisourinternationalheadquarters.

Weleaseallofourfacilitiesanddonotownanyrealproperty.Weintendtoprocureadditionalspaceinthefutureaswecontinuetoaddemployeesandexpandgeographically.Webelieveourfacilitiesareadequateandsuitableforourcurrentneedsandthat,shoulditbeneeded,suitableadditionaloralternativespacewillbeavailabletoaccommodateouroperations.

Item3.LegalProceedings

OnApril30,2015andMarch28,2016,TelesignCorporation("Telesign")filedlawsuits(whichweresubsequentlyconsolidated)againstusintheUnitedStatesDistrictCourt,CentralDistrictofCalifornia("TelesignI/II").TelesignallegesinTelesignI/IIthatweareinfringingfourU.S.patentsthatitholds:U.S.PatentNo.7,945,034("034"),U.S.PatentNo.8,462,920("920"),U.S.PatentNo.8,687,038("038")andU.S.PatentNo.9,300,792("792").TheconsolidatedTelesignI/IIactionshavebeentransferredtotheUnitedStatesDistrictCourt,NorthernDistrict.Thepatentinfringementallegationsinthelawsuitrelatetoourtwo-factorauthenticationusecase, Authy, andanAPItooltofindinformationaboutaphonenumber.Telesignseeks,amongotherthings,toenjoinusfromallegedlyinfringingthepatents,alongwithdamagesforlostprofits.

OnMarch8,2017,inresponsetoapetitionbyus,theU.S.PatentandTrademarkOfficer("PTO")issuedanorderinstitutinganinter partes reviewforthe'792patent.OnMarch6,2018,thePTOfoundallclaimschallengedbyusintheinter partes reviewunpatentable.OnOctober19,2018,thedistrictcourtgrantedourmotionthatallassertedclaimsoftheassertedpatentsareinvalidunder35U.S.C.§101andenteredjudgmentinourfavor.OnNovember8,2018,TelesignappealedthejudgmenttotheUnitedStatesCourtofAppealsfortheFederalCircuitwherethecaseisnowpending.Basedon,amongotherthings,finaljudgmentbeingenteredbythedistrictcourtinourfavor,wedonotbelievealossisreasonablypossibleorestimable.

OnDecember1,2016,wefiledapatentinfringementlawsuitagainstTelesignintheUnitedStatesDistrictCourt,NorthernDistrictofCalifornia("TelesignIII"),allegingindirectinfringementofUnitedStatesPatentNo.8,306,021("021"),UnitedStatesPatentNo.8,837,465("465"),UnitedStatesPatentNo.8,755,376("376"),UnitedStatesPatentNo.8,736,051("051"),UnitedStatesPatentNo.8,737,962("962"),UnitedStatesPatentNo.9,270,833("833"),andUnitedStatesPatentNo.9,226,217("217").TelesignfiledamotiontodismissthecomplaintonJanuary25,2017.Intwoorders,issuedonMarch31,2017andApril17,2017,thecourtgrantedTelesign'smotiontodismisswithrespecttothe

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'962,'833,'051and'217patents,butdeniedTelesign'smotiontodismissastothe'021,'465and'376patents.OnAugust23,2017,TelesignpetitionedtheU.S.PatentandTrademarkOffice("U.S.PTO")forinter partes reviewofthe'021,'465,and'376patents.OnMarch9,2018,thePTOdeniedTelesign'spetitionforinter partes reviewofthe'021patentandgrantedTelesign'spetitionsforinter partes reviewofthe'465and'376patents.TelesignIIIiscurrentlystayedpendingresolutionoftheinter partes reviewsofthe'465and'376patents.Weareisseekingajudgmentofinfringement,ajudgmentofwillfulinfringement,monetaryandinjunctiverelief,enhanceddamages,andanawardofcostsandexpensesagainstTelesign.

OnFebruary18,2016,aputativeclassactioncomplaintwasfiledintheAlamedaCountySuperiorCourtinCalifornia,entitledAngelaFlowersv.TwilioInc.Thecomplaintallegesthatourproductspermittheinterception,recordinganddisclosureofcommunicationsatacustomer'srequestandareinviolationoftheCaliforniaInvasionofPrivacyAct.Thecomplaintseeksinjunctivereliefaswellasmonetarydamages.OnJanuary2,2018,thecourtissuedanordergrantinginpartanddenyinginparttheplaintiff'sclasscertificationmotion.Thecourtcertifiedtwoclassesofindividualswho,duringspecifiedtimeperiods,allegedlysentorreceivedcertaincommunicationsinvolvingtheaccountsofthreeofourcustomersthatwererecorded.Followingmediation,onJanuary7,2019,thepartiessignedalong-formsettlementagreement,providingforapaymentof$10millionintoacommonfundandinjunctivereliefinvolvingcertainupdatestoTwilio'sAcceptableUsePolicyandcustomerdocumentation.OnJanuary15,2019,thecourtenteredanordergrantingpreliminaryapprovalofthesettlement,andthepartiessignedanamendedsettlementagreementtoconformtothecourt'sorder.AfinalapprovalhearingisscheduledforJune11,2019.Giveninsurancecoverage,wecurrentlyestimateourpotentialliabilityintheFlowersmattertobe$1.7millionandwereservedthisamountinourconsolidatedbalancesheetasofDecember31,2018,presentedelsewhereinthisAnnualReportonForm10-K.

OnSeptember1,2015,TwiliowasnamedasadefendantinaFirstAmendedComplaintinaputativeclassactioncaptionedJeremyBaumanv.DavidSaxe,etal.pendingintheUnitedStatesDistrictCourt,DistrictofNevadarelatingtotheallegedsendingofunsolicitedtextmessagestotheplaintiffsandputativeclassmembers.TheCompanyfiledamotiontodismiss,whichwasgranted,andonSeptember20,2016theplaintifffiledaSecondAmendedComplaintwithadditionalallegationsthattheCompanyviolatedtheTelephoneConsumerProtectionAct("TCPA"),andtheNevadaDeceptiveTradePracticesAct("NDTPA"),NRS41.600(2)(e).OnJanuary10,2019,thecourtgrantedPlaintiffs'motionforclasscertificationundertheTCPAanddeniedplaintiff'srequesttocertifyaclassundertheNDTPA.OnFebruary13,2019,thecourtissuedanorderdenyingTwilio'smotiontodismissastoPlaintiffs'TCPAclaimandgrantingdismissalastoPlaintiffs'NDTPAclaim.TheCompanyintendstovigorouslydefenditselfagainstandbelievesithasmeritoriousdefensestothislawsuit.Itistooearlyinthesematterstoreasonablypredicttheprobabilityoftheoutcomesortoestimatetherangeofpossibleloss,ifany.

SendGridStockholderLitigation

OnDecember5,2018,purportedstockholdersofSendGridfiledputativeclassactioncomplaintsintheUnitedStatesDistrictCourtfortheDistrictofDelaware,Rosenblattv.SendGrid,Inc.,etal.,CaseNo.1:18-cv-01931-UNA(the"RosenblattComplaint"),andintheUnitedStatesDistrictCourtfortheDistrictofColorado,Chenv.SendGrid,Inc.,etal.,CaseNo.1:18-cv-03131-MEH(the"ChenComplaint"),againstSendGrid,theindividualmembersoftheSendGridboardofdirectors(the"IndividualDefendants"),TwilioandTopazMergerSubsidiary,Inc..Thereafter,onDecember19,2018andJanuary3,2019,purportedstockholdersofSendGridfiledputativeclassactioncomplaintsagainstSendGridandtheIndividualDefendantsintheUnitedStatesDistrictCourtfortheDistrictofColorado,respectively,Bushanskyv.SendGrid,Inc.,etal.,1:18-cv-03260-SKC(the"Bushansky

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Complaint"),andConnerv.SendGrid,Inc.,etal.,1:19-cv-00016-PAB-SKC(the"ConnerComplaint").AsofFebruary11,2019,allfourcomplaintshavebeenvoluntarilydismissed.

Amongotherthings,theRosenblattComplaintallegesthatSendGridandtheIndividualDefendantsmisrepresentedand/oromittedmaterialinformationinaregistrationstatementonFormS-4,renderingitfalseandmisleadingandinviolationoftheExchangeActandrelatedregulations.Inaddition,theRosenblattComplaintallegesthattheIndividualDefendantsandTwilioactedascontrollingpersonswithinthemeaningandinviolationofSection20(a)oftheExchangeActtoinfluenceandcontrolthedisseminationoftheallegedlydefectiveregistrationstatementonFormS-4.

TheRosenblattComplaintseeks,amongotherthings,rescissionofthemergerorrescissorydamages,anorderdirectingtheSendGridboardofdirectorstofilearegistrationstatementonFormS-4thatdoesnotcontainanyuntruestatementsofmaterialfactandstatesallmaterialfacts,adeclarationthatthedefendantsviolatedSections14(a)and/or20(a)oftheExchangeActandRule14a-9promulgatedthereunderandanawardofplaintiffcosts,includingreasonableattorneys'andexperts'fees.OnFebruary11,2019,theRosenblattComplaintwasvoluntarilydismissed.

Amongotherthings,theChenComplaintallegesthatthedefendantsmisrepresentedand/oromittedmaterialinformationinaregistrationstatementonFormS-4,renderingitfalseandmisleadingandinviolationoftheExchangeActandrelatedregulations.Inaddition,theChenComplaintallegesthattheIndividualDefendantsactedascontrollingpersonswithinthemeaningandinviolationofSection20(a)oftheExchangeActtoinfluenceandcontrolthedisseminationoftheallegedlydefectiveFormS-4.TheChenComplaintalsoallegesthattheIndividualDefendantsbreachedtheirfiduciarydutiestoSendGridstockholders,andthattheotherdefendantsaidedandabettedsuchbreaches,byseekingtosellSendGridthroughanallegedlyunfairprocessandforanunfairpriceandonunfairterms,andbyfailingtodiscloseallmaterialinformation.TheChenComplaintseeks,amongotherthings,rescissionofthemergerorrescissorydamages,anorderdirectingtheSendGridboardofdirectorstocommenceanewsaleprocess,adeclarationthatthemergeragreementwasagreedtoinbreachoftheIndividualDefendants'fiduciarydutiesandisthereforeunlawfulandunenforceable,anorderdirectingthedefendantstoaccounttotheputativeclassfordamagesallegedlysustained,andanawardofplaintiffcosts,includingreasonableattorneys'andexperts'fees.OnFebruary4,2019,theChenComplaintwasvoluntarilydismissed.

Amongotherthings,theBushanskyandConnerComplaintsallegethatSendGridandtheIndividualDefendantsmisrepresentedand/oromittedmaterialinformationinaSchedule14ADefinitiveProxyStatement,renderingitfalseandmisleadingandinviolationoftheExchangeActandrelatedregulations.Inaddition,theBushanskyandConnerComplaintsallegethattheIndividualDefendantsactedascontrollingpersonswithinthemeaningandinviolationofSection20(a)oftheExchangeActtoinfluenceandcontrolthedisseminationoftheallegedlydefectiveSchedule14ADefinitiveProxyStatement.TheBushanskyandConnerComplaintsseek,amongotherthings,rescissionofthemergerorrescissorydamages,andanawardofplaintiffcosts,includingreasonableattorneys'andexperts'fees.OnFebruary4,2019,theBushanskyComplaintwasvoluntarilydismissed.OnFebruary11,2019,theConnerComplaintwasvoluntarilydismissed.

Inadditiontothelitigationdiscussedabove,fromtimetotime,wemaybesubjecttolegalactionsandclaimsintheordinarycourseofbusiness.Wehavereceived,andmayinthefuturecontinuetoreceive,claimsfromthirdpartiesasserting,amongotherthings,infringementoftheirintellectualpropertyrights.Futurelitigationmaybenecessarytodefendourselves,ourpartnersandourcustomersbydeterminingthescope,enforceabilityandvalidityofthird-partyproprietaryrights,ortoestablishourproprietaryrights.Theresultsofanycurrentorfuturelitigationcannotbepredictedwithcertainty,andregardlessoftheoutcome,litigationcanhaveanadverseimpactonusbecauseofdefenseandsettlementcosts,diversionofmanagementresources,andotherfactors.

Item4.MineSafetyDisclosures.

Notapplicable.

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PARTII

Item5.MarketforRegistrant'sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities

MarketPriceofOurClassACommonStock

AsofJanuary31,2019,wehad85holdersofrecordofourClassAandClassBcommonstock.Theactualnumberofstockholdersisgreaterthanthisnumberofrecordholdersandincludesstockholderswhoarebeneficialownersbutwhosesharesareheldinstreetnamebybrokersandothernominees.

DividendPolicy

Wehaveneverdeclaredorpaidanycashdividendsonourcapitalstock.Weintendtoretainanyfutureearningsanddonotexpecttopayanydividendsintheforeseeablefuture.

StockPerformanceGraph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwisesubject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Twilio Inc. under the Securities Act or theExchange Act

WehavepresentedbelowthecumulativetotalreturntoourstockholdersbetweenJune23,2016(thedateourClassAcommonstockcommencedtradingontheNYSE)throughDecember31,2018incomparisontotheS&P500IndexandS&P500InformationTechnologyIndex.Allvaluesassumea$100initialinvestmentanddatafortheS&P500IndexandS&P500InformationTechnologyIndex

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assumereinvestmentofdividends.Thecomparisonsarebasedonhistoricaldataandarenotindicativeof,norintendedtoforecast,thefutureperformanceofourClassAcommonstock.

RecentSalesofUnregisteredSecuritiesandUseofProceedsfromRegisteredSecurities

(a)SalesofUnregisteredSecurities

InMay2018,weissued$550millioninaggregateprincipalamountof0.25%ConvertibleSeniorNotesdue2023(the"Notes").InconnectionwiththeofferingoftheNotes,weenteredintoprivately-negotiatedcappedcalltransactionswithcertaincounterparties(the"cappedcalls").Thecappedcallseachhaveaninitialstrikepriceofapproximately$70.90pershare,subjecttocertainadjustments,whichcorrespondstotheinitialconversionpriceoftheNotes.Thecappedcallshaveinitialcappricesof$105.04pershare,subjecttocertainadjustments.Thecappedcallscover,subjecttoanti-dilutionadjustments,approximately7,757,200sharesofClassACommonStock.SeeNote8toourconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-KforadditionalinformationabouttheNotesandcappedcalls.

TheCompanyofferedandsoldtheNotestotheinitialpurchasersinrelianceontheexemptionfromregistrationprovidedbySection4(a)(2)oftheSecuritiesAct,andforresalebytheinitialpurchaserstoqualifiedinstitutionalbuyerspursuanttotheexemptionfromregistrationprovidedbyRule144AundertheSecuritiesAct.TheCompanyreliedontheseexemptionsfromregistrationbasedinpartonrepresentationsmadebytheinitialpurchasersinthepurchaseagreementdatedMay14,2018.ThesharesoftheClassAcommonstockissuableuponconversionoftheNotes,ifany,havenotbeenregisteredundertheSecuritiesActandmaynotbeofferedorsoldintheUnitedStatesabsentregistrationoranapplicableexemptionfromregistrationrequirements.

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TotheextentthatanysharesoftheClassAcommonstockareissueduponconversionoftheNotes,theywillbeissuedintransactionsanticipatedtobeexemptfromregistrationundertheSecuritiesActbyvirtueofSection3(a)(9)thereof,becausenocommissionorotherremunerationisexpectedtobepaidinconnectionwithconversionoftheNotes,andanyresultingissuanceofsharesoftheClassAcommonstock.

InNovember2018,Twilio.orgdonated62,338sharesofunregisteredClassAcommonstocktoanindependentDAFtofurtherourphilanthropicgoals.Thesharesare"restrictedsecurities"forpurposesofRule144undertheSecuritiesActandthefairmarketvalueofthesesharesonthedateofthedonationwas$6.0million.ThisamountisrecordedascharitablecontributionintheconsolidatedstatementofoperationsincludedelsewhereinthisAnnualReportonForm10-K.

(b)UseofProceeds

InJune2016,weclosedourinitialpublicoffering("IPO"),inwhichwesold11,500,000sharesofClassAcommonstockatapricetothepublicof$15.00pershare,includingsharessoldinconnectionwiththeexerciseoftheunderwriters'optiontopurchaseadditionalshares.TheofferandsaleofallofthesharesintheIPOwereregisteredundertheSecuritiesActpursuanttoaregistrationstatementonFormS-1(FileNo.333-211634),whichwasdeclaredeffectivebytheSEConJune22,2016.Weraised$155.5millioninnetproceedsafterdeductingunderwritingdiscountsandcommissionsof$12.1millionandofferingexpensesof$4.9million.Nopaymentsweremadebyustodirectors,officersorpersonsowning10percentormoreofourcapitalstockortotheirassociates,ortoouraffiliates,otherthanpaymentsintheordinarycourseofbusinesstoofficersforsalaries.TherehasbeennomaterialchangeintheplanneduseofproceedsfromourIPOasdescribedinourfinalprospectusfiledwiththeSEConJune23,2016pursuanttoRule424(b).Weinvestedthefundsreceivedinaccordancewithourboard-approvedinvestmentpolicy,whichprovidesforinvestmentsinobligationsoftheU.S.government,moneymarketinstruments,registeredmoneymarketfundsandcorporatebonds.ThemanagingunderwritersofourIPOwereGoldman,Sachs&Co.andJ.P.MorganSecuritiesLLC.

InOctober2016,weclosedourfollow-onpublicoffering,inwhichwesold1,691,222sharesofClassAcommonstockatapricetothepublicof$40.00pershare,includingsharessoldinconnectionwiththeexerciseoftheunderwriters'optiontopurchaseadditionalshares.Theofferandsaleofallofthesharesinthefollow-onofferingwereregisteredundertheSecuritiesActpursuanttoaregistrationstatementonFormS-1(FileNo.333-214034),whichwasdeclaredeffectivebytheSEConOctober20,2016.Weraised$64.4millioninnetproceedsafterdeductingunderwritingdiscountsandcommissionsandofferingexpensespaidandpayablebyus.Nopaymentsweremadebyustodirectors,officersorpersonsowning10percentormoreofourcapitalstockortotheirassociates,ortoouraffiliates,otherthanpaymentsintheordinarycourseofbusinesstoofficersforsalaries.Therehasbeennomaterialchangeintheplanneduseofproceedsfromourfollow-onofferingasdescribedinourfinalprospectusfiledwiththeSEConOctober21,2016pursuanttoRule424(b).Weinvestedthefundsreceivedinaccordancewithourboard-approvedinvestmentpolicy,whichprovidesforinvestmentsinobligationsoftheU.S.government,moneymarketinstruments,registeredmoneymarketfundsandcorporatebonds.Themanagingunderwritersofourfollow-onofferingwereGoldman,Sachs&Co.andJ.P.MorganSecuritiesLLC.

(c)IssuerPurchasesofEquitySecurities

None.

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Item6.SelectedFinancialandOtherData

WehavederivedtheselectedconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2018,2017and2016andthebalancesheetdataasofDecember31,2018and2017fromourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.TheselectedconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2015and2014andtheconsolidatedbalancesheetdataasofDecember31,2016,2015and2014arederivedfromauditedconsolidatedfinancialstatementsnotincludedinthisAnnualReportonForm10-K.Ourhistoricalresultsarenotnecessarilyindicativeoftheresultsthatmaybeexpectedinthefuture.ThefollowingselectedconsolidatedfinancialandotherdatashouldbereadinconjunctionwithPartII,Item7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations",andourconsolidatedfinancialstatementsandtherelatednotesappearinginPartII,Item8,"FinancialStatementsandSupplementaryData",ofthisAnnualReportonForm10-Ktofullyunderstandfactorsthatmayaffectthecomparabilityoftheinformationpresentedbelow.

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YearEndedDecember31, 2018 2017 2016 2015 2014 (Inthousands,exceptshare,pershareandcustomerdata) ConsolidatedStatementofOperationsData: Revenue $ 650,067 $ 399,020 $ 277,335 $ 166,919 $ 88,846Costofrevenue(1)(2) 300,841 182,895 120,520 74,454 41,423

Grossprofit 349,226 216,125 156,815 92,465 47,423Operatingexpenses: Researchanddevelopment(1)(2) 171,358 120,739 77,926 42,559 21,824Salesandmarketing(1)(2) 175,555 100,669 65,267 49,308 33,322Generalandadministrative(1)(2) 110,427 59,619 51,077 35,991 18,960Charitablecontribution 7,121 1,172 3,860 — —Totaloperatingexpenses 464,461 282,199 198,130 127,858 74,106Lossfromoperations (115,235) (66,074) (41,315) (35,393) (26,683)

Otherincome(expenses),net (5,923) 3,071 317 11 (62)Lossbeforeprovisionforincometaxes (121,158) (63,003) (40,998) (35,382) (26,745)

Provisionforincometaxes (791) (705) (326) (122) (13)Netloss (121,949) (63,708) (41,324) (35,504) (26,758)

Deemeddividendtoinvestorsinrelationtotenderoffer — — — (3,392) —

Netlossattributabletocommonstockholders $ (121,949) $ (63,708) $ (41,324) $ (38,896) $ (26,758)Netlosspershareattributabletocommonstockholders,basicanddiluted $ (1.26) $ (0.70) $ (0.78) $ (2.19) $ (1.58)

Weighted-averagesharesusedincomputingnetlosspershareattributabletocommonstockholders,basicanddiluted 97,130,339 91,224,607 53,116,675 17,746,526 16,900,124

KeyBusinessMetrics: NumberofActiveCustomerAccounts(3)(as of

end date of period ) 64,286 48,979 36,606 25,347 16,631BaseRevenue(4) $ 593,017 $ 365,490 $ 245,548 $ 136,851 $ 75,697

Base Revenue Growth Rate 62% 49% 79% 81% 81%Dollar-BasedNetExpansionRate(5) 140% 128% 161% 155% 153%

(1) Includesstock-basedcompensationexpenseasfollows:

YearEndedDecember31, 2018 2017 2016 2015 2014 (Inthousands) Costofrevenue $ 1,126 $ 650 $ 291 $ 65 $ 39Researchanddevelopment 42,277 22,808 12,946 4,046 1,577Salesandmarketing 23,616 9,822 4,972 2,389 1,335Generalandadministrative 26,254 16,339 6,016 2,377 1,027Total $ 93,273 $ 49,619 $ 24,225 $ 8,877 $ 3,978

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Non-GAAPFinancialMeasures

Weusethefollowingnon-GAAPfinancialinformation,collectively,toevaluateourongoingoperationsandforinternalplanningandforecastingpurposes.Webelievethatnon-GAAPfinancialinformation,whentakencollectively,maybehelpfultoinvestorsbecauseitprovidesconsistencyandcomparabilitywithpastfinancialperformance,facilitatesperiod-to-periodcomparisonsofresultsofoperations,andassistsincomparisonswithothercompanies,manyofwhichusesimilarnon-GAAPfinancialinformationtosupplementtheirGAAPresults.Non-GAAPfinancialinformationispresentedforsupplementalinformationalpurposesonly,andshouldnotbeconsideredasubstituteforfinancialinformationpresentedinaccordancewithgenerallyacceptedaccountingprinciples,andmaybedifferentfromsimilarly-titlednon-GAAPmeasuresusedbyothercompanies.Wheneverweuseanon-GAAPfinancialmeasure,areconciliationisprovidedtothemostcloselyapplicablefinancialmeasurestatedinaccordancewithgenerallyacceptedaccountingprinciples.InvestorsareencouragedtoreviewtherelatedGAAPfinancialmeasuresandthereconciliationofthesenon-GAAPfinancialmeasurestotheirmostdirectlycomparableGAAPfinancialmeasures.

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(2) Includesamortizationofacquiredintangiblesasfollows:

YearEndedDecember31, 2018 2017 2016 2015 2014 (Inthousands) Costofrevenue $ 5,656 $ 4,644 $ 619 $ 239 $ —Researchanddevelopment 22 139 151 130 —Salesandmarketing 1,117 753 — — —Generalandadministrative 375 84 110 95 —Total $ 7,170 $ 5,620 $ 880 $ 464 $ —

(3) SeeItem7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—KeyBusinessMetrics—NumberofActiveCustomerAccounts."

(4) SeeItem7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—KeyBusinessMetrics—BaseRevenue."

(5) SeeItem7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—KeyBusinessMetrics—Dollar-BasedNetExpansionRate."

AsofDecember31, 2018 2017 2016 2015 2014 (Inthousands) ConsolidatedBalanceSheetData: Cashandcashequivalents $ 487,215 $ 115,286 $ 305,665 $ 108,835 $ 32,627Marketablesecurities 261,128 175,587 — — —Workingcapital 735,138 274,738 279,676 96,032 23,151Propertyandequipment,net 63,534 50,541 37,552 14,058 6,751Totalassets 1,028,710 449,782 412,694 157,516 54,974Totalstockholders'equity $ 438,235 $ 359,846 $ 329,447 $ 116,625 $ 31,194

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Non-GAAPGrossProfitandNon-GAAPGrossMargin.Fortheperiodspresented,wedefinenon-GAAPgrossprofitandnon-GAAPgrossmarginasGAAPgrossprofitandGAAPgrossmargin,respectively,adjustedtoexcludestock-basedcompensationandamortizationofacquiredintangibles.

Non-GAAPOperatingExpenses.Fortheperiodspresented,wedefinenon-GAAPoperatingexpenses(includingcategoriesofoperatingexpenses)asGAAPoperatingexpenses(andcategoriesofoperatingexpenses)adjustedtoexclude,asapplicable,stock-basedcompensation,amortizationofacquiredintangibles,stockrepurchases,acquisition-relatedexpenses,releaseoftaxliabilityuponobligationsettlement,charitablecontribution,legalsettlements/accruals,gainonleaseterminationandpayrolltaxesrelatedtostock-basedcompensation.

Non-GAAPLossfromOperationsandNon-GAAPOperatingMargin.Fortheperiodspresented,wedefinenon-GAAPlossfromoperationsandnon-GAAPoperatingmarginasGAAPlossfromoperationsandGAAPoperatingmargin,respectively,adjustedtoexclude,asapplicable,stock-basedcompensation,amortizationofacquiredintangibles,stockrepurchases,acquisition-relatedexpenses,

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YearEndedDecember31, 2018 2017 2016 2015 2014 (Inthousands) Reconciliation: Grossprofit $ 349,226 $ 216,125 $ 156,815 $ 92,465 $ 47,423Non-GAAPadjustments: Stock-basedcompensation 1,126 650 291 65 39Amortizationofacquiredintangibles 5,656 4,644 619 239 —Non-GAAPgrossprofit $ 356,008 $ 221,419 $ 157,725 $ 92,769 $ 47,462Non-GAAPgrossmargin 55% 55% 57% 56% 53%

YearEndedDecember31, 2018 2017 2016 2015 2014 (Inthousands) Reconciliation: Operatingexpenses $ 464,461 $ 282,199 $ 198,130 $ 127,858 $ 74,106Non-GAAPadjustments: Stock-basedcompensation (92,147) (48,969) (23,934) (8,812) (3,939)Amortizationofacquiredintangibles (1,514) (976) (261) (225) —Stockrepurchase — — — (1,965) —Acquisition-relatedexpenses (4,481) (310) (499) (1,165) —Releaseoftaxliabilityuponobligationsettlement — 13,365 805 — —Charitablecontribution (7,121) (1,172) (3,860) — —Legalsettlements/accruals (1,710) — — — —Gainonleasetermination — 295 — — —Payrolltaxesrelatedtostock-basedcompensation (5,617) (2,950) (434) — —Non-GAAPoperatingexpenses $ 351,871 $ 241,482 $ 169,947 $ 115,691 $ 70,167

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releaseoftaxliabilityuponobligationsettlement,charitablecontribution,legalsettlements/accruals,gainonleaseterminationandpayrolltaxesrelatedtostock-basedcompensation.

Item7.MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financialstatements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussioncontains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differmaterially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A, "Risk Factors"in this Annual Report on Form 10-K. Our fiscal year ends on December 31.

Overview

WearetheleaderintheCloudCommunicationsPlatformcategory.Weenabledeveloperstobuild,scaleandoperatereal-timecommunicationswithintheirsoftwareapplicationsviaoursimple-to-useApplicationProgrammingInterfaces("APIs").Thepower,flexibility,andreliabilityofferedbyoursoftwarebuildingblocksempowerscompaniesofvirtuallyeveryshapeandsizetobuildworld-classengagementintotheircustomerexperience.

Ourplatformconsistsofthreelayers:ourEngagementCloud,ProgrammableCommunicationsCloudandSuperNetwork.OurEngagementCloudsoftwareisdesignedtoaddressspecificusecaseslikeaccountsecurityandcontactcentersandisasetofAPIsthathandlesthehigherlevelcommunicationlogicneededfornearlyeverytypeofcustomerengagement.TheseAPIsarefocusedonthebusinesschallengesthatadeveloperislookingtoaddress,allowingourcustomerstomorequicklyandeasilybuildbetterwaystoengagewiththeircustomersthroughouttheirjourney.OurProgrammableCommunicationsCloudsoftwareisasetofAPIsthatenablesdeveloperstoembedvoice,messagingandvideocapabilitiesintotheirapplications.TheProgrammableCommunicationsCloudisdesignedtosupportalmostallthefundamentalwayshumanscommunicate,unlockinginnovatorstoaddressjustaboutanycommunicationmarket.TheSuperNetworkisoursoftwarelayer

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YearEndedDecember31, 2018 2017 2016 2015 2014 (Inthousands) Reconciliation: Lossfromoperations $ (115,235) $ (66,074) $ (41,315) $ (35,393) $ (26,683)Non-GAAPadjustments: Stock-basedcompensation 93,273 49,619 24,225 8,877 3,978Amortizationofacquiredintangibles 7,170 5,620 880 464 —Stockrepurchase — — — 1,965 —Acquisition-relatedexpenses 4,481 310 499 1,165 —Releaseoftaxliabilityuponobligationsettlement — (13,365) (805) — —Charitablecontribution 7,121 1,172 3,860 — —Legalsettlements/accruals 1,710 — — — —Gainonleasetermination — (295) — — —Payrolltaxesrelatedtostock-basedcompensation 5,617 2,950 434 — —Non-GAAPlossfromoperations $ 4,137 $ (20,063) $ (12,222) $ (22,922) $ (22,705)Non-GAAPoperatingmargin 1% (5)% (4)% (14)% (26)%

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thatallowsourcustomers'softwaretocommunicatewithconnecteddevicesglobally.Itinterconnectswithcommunicationsnetworksaroundtheworldandcontinuallyanalyzesdatatooptimizethequalityandcostofcommunicationsthatflowthroughourplatform.TheSuperNetworkalsocontainsasetofAPIsthatgivesourcustomersaccesstomorefoundationalcomponentsofourplatform,likephonenumbers.

AsofDecember31,2018,ourcustomers'applicationsthatareembeddedwithourproductscouldreachusersviavoice,messagingandvideoinnearlyeverycountryintheworld,andourplatformofferedcustomerslocaltelephonenumbersinover100countriesandtext-to-speechfunctionalityin26languages.Wesupportourglobalbusinessthrough27clouddatacentersinnineregionsaroundtheworldandhavedevelopedcontractualrelationshipswithnetworkserviceprovidersglobally.

Ourbusinessmodelisprimarilyfocusedonreachingandservingtheneedsofsoftwaredevelopers,whowebelievearebecomingincreasinglyinfluentialintechnologydecisionsinawidevarietyofcompanies.WecallthisapproachourBusinessModelforInnovators,whichempowersdevelopersbyreducingfrictionandupfrontcosts,encouragingexperimentation,andenablingdeveloperstogrowascustomersastheirideassucceed.Weestablishedandmaintainourleadershippositionbyengagingdirectlywith,andcultivating,ourdevelopercommunity,whichhasledtotherapidadoptionofourplatform.Wereachdevelopersthroughcommunityeventsandconferences,includingourSIGNALdeveloperconferences,todemonstratehoweverydevelopercancreatedifferentiatedapplicationsincorporatingcommunicationsusingourproducts.

Oncedevelopersareintroducedtoourplatform,weprovidethemwithalowfrictiontrialexperience.Byaccessingoureasy-to-adoptAPIs,extensiveself-servicedocumentationandcustomersupportteam,developersbuildourproductsintotheirapplicationsandthentestsuchapplicationsthroughfreetrials.Oncetheyhavedecidedtouseourproductsbeyondtheinitialfreetrialperiod,customersprovidetheircreditcardinformationandonlypayfortheactualusageofourproducts.Historically,wehaveacquiredthesubstantialmajorityofourcustomersthroughthisself-servicemodel.Ascustomersexpandtheirusageofourplatform,ourrelationshipswiththemoftenevolvetoincludebusinessleaderswithintheirorganizations.Onceourcustomersreachacertainspendinglevelwithus,wesupportthemwithaccountexecutivesorcustomersuccessadvocateswithinoursalesorganizationtoensuretheirsatisfactionandexpandtheirusageofourproducts.

Wealsosupplementourself-servicemodelwithasaleseffortaimedatengaginglargerpotentialcustomers,strategicleadsandexistingcustomersthroughadirectsalesapproach.Tohelpincreaseourawarenessintheenterprise,wehaveexpandedourmarketingeffortsthroughprogramslikeourTwilioEngageroadshowwereweseektobringbusinessleadersanddeveloperstogethertodiscussthefutureofcustomerengagement.Wehavedevelopedproductstosupportthiseffortaswell,liketheTwilioEnterprisePlan,whichprovidescapabilitiesforadvancedsecurity,accessmanagementandgranularadministration.Oursalesorganizationtargetstechnicalleadersandbusinessleaderswhoareseekingtoleveragesoftwaretodrivecompetitivedifferentiation.Asweeducatetheseleadersonthebenefitsofdevelopingapplicationsincorporatingourproductstodifferentiatetheirbusiness,theyoftenconsultwiththeirdevelopersregardingimplementation.Webelievethatdevelopersareoftenadvocatesforourproductsasaresultofourdeveloper-focusedapproach.Oursalesorganizationincludessalesdevelopment,insidesales,fieldsalesandsalesengineeringpersonnel.

Whenpotentialcustomersdonothavetheavailabledeveloperresourcestobuildtheirownapplications,wereferthemtoeitherourtechnologypartnerswhoembedourproductsinthesolutionsthattheyselltootherbusinesses(suchascontactcentersandsalesforceandmarketingautomation)orourconsultingpartnerswhoprovideconsultinganddevelopmentservicesfororganizationsthathavelimitedsoftwaredevelopmentexpertisetobuildourplatformintotheirsoftwareapplications.

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Wegeneratethesubstantialmajorityofourrevenuefromcustomersbasedontheirusageofoursoftwareproductsthattheyhaveincorporatedintotheirapplications.Inaddition,customerstypicallypurchaseoneormoretelephonenumbersfromus,forwhichwechargeamonthlyflatfeepernumber.Somecustomersalsochoosetopurchasevariouslevelsofpremiumcustomersupportforamonthlyfee.Customersthatregisterinourself-servicemodeltypicallypayupfrontviacreditcardanddrawdowntheirbalanceastheypurchaseoruseourproducts.Mostofourcustomersdrawdowntheirbalanceinthesamemonththeypayupfrontand,asaresult,ourdeferredrevenueandcustomerdepositsliabilityatanyparticulartimeisnotameaningfulindicatoroffuturerevenue.Asourcustomers'usagegrows,someofourcustomersenterintocontractsandareinvoicedmonthlyinarrears.Manyofthesecustomercontractshavetermsof12monthsandtypicallyincludesomelevelofminimumrevenuecommitment.Mostcustomerswithminimumrevenuecommitmentcontractsgenerateasignificantamountofrevenueinexcessoftheirminimumrevenuecommitmentinanyperiod.Historically,theaggregateminimumcommitmentrevenuefromcustomerswithwhomwehavecontractshasconstitutedaminorityofourrevenueinanyperiod,andweexpectthistocontinueinthefuture.

Ourdeveloper-focusedproductsaredeliveredtocustomersandusersthroughourSuperNetwork,whichusessoftwaretooptimizecommunicationsonourplatform.Weinterconnectwithcommunicationsnetworksgloballytodeliverourproducts,andthereforewehavearrangementswithnetworkserviceprovidersinmanyregionsintheworld.Historically,asubstantialmajorityofourcostofrevenuehasbeennetworkserviceproviderfees.Wecontinuetooptimizeournetworkserviceprovidercoverageandconnectivitythroughcontinuousimprovementsinroutingandsourcinginordertolowertheusageexpensesweincurfornetworkserviceproviderfees.Aswebenefitfromourplatformoptimizationefforts,wesometimespassthesesavingsontocustomersintheformoflowerusagepricesonourproductsinanefforttodriveincreasedusageandexpandthereachandscaleofourplatform.Inthenearterm,weintendtooperateourbusinesstoexpandthereachandscaleofourplatformandtogrowourrevenue,ratherthantomaximizeourgrossmargins.

Wehaveachievedsignificantgrowthinrecentperiods.IntheyearsendedDecember31,2018,2017and2016,ourrevenuewas$650.1million,$399.0millionand$277.3million,respectively.IntheyearsendedDecember31,2018,2017and2016,our10largestActiveCustomerAccountsgeneratedanaggregateof18%,19%and30%,respectively,ofourtotalrevenue.ForeachoftheyearsendedDecember31,2018,2017and2016,amongour10largestActiveCustomerAccountswehadthreeVariableCustomerAccounts,respectively,representing8%,8%and11%ofourtotalrevenue,respectively.IntheyearsendedDecember31,2018,2017and2016,ourBaseRevenuewas$593.0million,$365.5millionand$245.5million,respectively,andournetlosswas$121.9million,$63.7millionand$41.3million,respectively.Seethesectiontitled"—KeyBusinessMetrics—BaseRevenue"foradiscussionofBaseRevenue.

AcquisitionofSendGrid

InFebruary2019,weacquiredalloutstandingsharesofcapitalstockofSendGrid,Inc.("SendGrid"),theleadingemailAPIplatform,byissuing23.4millionsharesofourClassAcommonstockwithtotalvalueof$2.6billion.PursuanttotheAgreementandPlanofMergerandReorganization,asamended,eachoutstandingshareofSendGridcommonstockconvertedintoa0.485ofashareofourClassAcommonstock.IntheyearendedDecember31,2018,weincurred$3.6millioninexpensesrelatedtothisacquisition.

Unlessotherwisenoted,thefollowingdiscussionandanalysisofourresultsofoperationsandourliquidityandcapitalresourcesfocusesonourexistingoperationsexclusiveoftheimpactoftheacquisitionofSendGrid.Anyforward-lookingstatementscontainedhereindonottakeintoaccounttheimpactofthisacquisition.

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KeyBusinessMetrics

NumberofActiveCustomerAccounts.WebelievethatthenumberofourActiveCustomerAccountsisanimportantindicatorofthegrowthofourbusiness,themarketacceptanceofourplatformandfuturerevenuetrends.WedefineanActiveCustomerAccountattheendofanyperiodasanindividualaccount,asidentifiedbyauniqueaccountidentifier,forwhichwehaverecognizedatleast$5ofrevenueinthelastmonthoftheperiod.Webelievethattheuseofourplatformbyourcustomersatorabovethe$5permonththresholdisastrongerindicatorofpotentialfutureengagementthantrialusageofourplatformorusageatlevelsbelow$5permonth.AsingleorganizationmayconstitutemultipleuniqueActiveCustomerAccountsifithasmultipleaccountidentifiers,eachofwhichistreatedasaseparateActiveCustomerAccount.

IntheyearsendedDecember31,2018,2017and2016,revenuefromActiveCustomerAccountsrepresentedover99%oftotalrevenueineachperiod.

BaseRevenue.WemonitorBaseRevenueasoneofthemorereliableindicatorsoffuturerevenuetrends.BaseRevenueconsistsofallrevenueotherthanrevenuefromlargeActiveCustomerAccountsthathaveneverenteredinto12-monthminimumrevenuecommitmentcontractswithus,whichwerefertoasVariableCustomerAccounts.Whilealmostallofourcustomeraccountsexhibitsomelevelofvariabilityintheusageofourproducts,basedonourexperience,webelievethatVariableCustomerAccountsaremorelikelytohavesignificantfluctuationsinusageofourproductsfromperiodtoperiod,andthereforethatrevenuefromVariableCustomerAccountsmayalsofluctuatesignificantlyfromperiodtoperiod.Thisbehaviorisbestevidencedbythedecisionofsuchcustomersnottoenterintocontractswithusthatcontainminimumrevenuecommitments,eventhoughtheymayspendsignificantamountsontheuseofourproductsandtheymaybeforegoingmorefavorabletermsoftenavailabletocustomersthatenterintocommittedcontractswithus.ThisvariabilityadverselyaffectsourabilitytorelyuponrevenuefromVariableCustomerAccountswhenanalyzingexpectedtrendsinfuturerevenue.

ForhistoricalperiodsthroughMarch31,2016,wedefinedaVariableCustomerAccountasanActiveCustomerAccountthat(i)hadneversignedaminimumrevenuecommitmentcontractwithusforatermofatleast12monthsand(ii)hadmetorexceeded1%ofourrevenueinanyquarterintheperiodspresentedthroughMarch31,2016.Toallowforconsistentperiod-to-periodcomparisons,intheeventacustomeraccountqualifiedasaVariableCustomerAccountasofMarch31,2016,orapreviouslyVariableCustomerAccountceasedtobeanActiveCustomerAccountasofsuchdate,weincludedsuchcustomeraccountasaVariableCustomerAccountinallperiodspresented.ForreportingperiodsstartingwiththethreemonthsendedJune30,2016,wedefineaVariableCustomerAccountasacustomeraccountthat(a)hasbeencategorizedasaVariableCustomerAccountinanypriorquarter,aswellas(b)anynewcustomeraccountthat(i)iswithacustomerthathasneversignedaminimumrevenuecommitmentcontractwithusforatermofatleast12monthsand(ii)meetsorexceeds1%ofourrevenueinaquarter.OnceacustomeraccountisdeemedtobeaVariableCustomerAccountinanyperiod,itremainsaVariableCustomerAccountinsubsequentperiodsunlesssuchcustomerentersintoaminimumrevenuecommitmentcontractwithusforatermofatleast12months.

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YearEndedDecember31, 2018 2017 2016 NumberofActiveCustomerAccounts(as of end date of period ) 64,286 48,979 36,606BaseRevenue(in thousands ) $ 593,017 $ 365,490 $ 245,548

Base Revenue Growth Rate 62% 49% 79%Dollar-BasedNetExpansionRate 140% 128% 161%

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IntheyearsendedDecember31,2018,2017and2016,wehadsix,sixandeightVariableCustomerAccounts,whichrepresented9%,8%and11%,respectively,ofourtotalrevenue.

Dollar-BasedNetExpansionRate.Ourabilitytodrivegrowthandgenerateincrementalrevenuedepends,inpart,onourabilitytomaintainandgrowourrelationshipswithexistingActiveCustomerAccountsandtoincreasetheiruseoftheplatform.AnimportantwayinwhichwetrackourperformanceinthisareaisbymeasuringtheDollar-BasedNetExpansionRateforourActiveCustomerAccounts,otherthanourVariableCustomerAccounts.OurDollar-BasedNetExpansionRateincreaseswhensuchActiveCustomerAccountsincreaseusageofaproduct,extendusageofaproducttonewapplicationsoradoptanewproduct.OurDollar-BasedNetExpansionRatedecreaseswhensuchActiveCustomerAccountsceaseorreduceusageofaproductorwhenwelowerusagepricesonaproduct.Asourcustomersgrowtheirbusinessesandextendtheuseofourplatform,theysometimescreatemultiplecustomeraccountswithusforoperationalorotherreasons.Assuch,forreportingperiodsstartingwiththethreemonthsendedDecember31,2016,whenweidentifyasignificantcustomerorganization(definedasasinglecustomerorganizationgeneratingmorethan1%ofourrevenueinaquarterlyreportingperiod)thathascreatedanewActiveCustomerAccount,thisnewActiveCustomerAccountistiedto,andrevenuefromthisnewActiveCustomerAccountisincludedwith,theoriginalActiveCustomerAccountforthepurposesofcalculatingthismetric.WebelievemeasuringourDollar-BasedNetExpansionRateonrevenuegeneratedfromourActiveCustomerAccounts,otherthanourVariableCustomerAccounts,providesamoremeaningfulindicationoftheperformanceofoureffortstoincreaserevenuefromexistingcustomers.

OurDollar-BasedNetExpansionRatecomparestherevenuefromActiveCustomerAccounts,otherthanVariableCustomerAccounts,inaquartertothesamequarterintheprioryear.TocalculatetheDollar-BasedNetExpansionRate,wefirstidentifythecohortofActiveCustomerAccounts,otherthanVariableCustomerAccounts,thatwereActiveCustomerAccountsinthesamequarteroftheprioryear.TheDollar-BasedNetExpansionRateisthequotientobtainedbydividingtherevenuegeneratedfromthatcohortinaquarter,bytherevenuegeneratedfromthatsamecohortinthecorrespondingquarterintheprioryear.WhenwecalculateDollar-BasedNetExpansionRateforperiodslongerthanonequarter,weusetheaverageoftheapplicablequarterlyDollar-BasedNetExpansionRatesforeachofthequartersinsuchperiod.

NetLossCarryforwards

AtDecember31,2018,wehadfederal,stateandforeignnetoperatinglosscarryforwardsofapproximately$452.7million,$347.1millionand$8.1millionrespectively,andfederalandstatetaxcreditsofapproximately$26.7millionand$19.9million,respectively.Ifnotutilized,thefederalandstatelosscarryforwardswillexpireatvariousdatesbeginningin2026and2029,respectively,andthefederaltaxcreditswillexpireatvariousdatesbeginningin2029.Thestatetaxcreditscanbecarriedforwardindefinitely.Atpresent,webelievethatitismorelikelythannotthatthefederalandstatenetoperatinglossandcreditcarryforwardswillnotberealized.Accordingly,afullvaluationallowancehasbeenestablishedforthesetaxattributes,aswellastherestofthefederalandstatedeferredtaxassets.

KeyComponentsofStatementsofOperations

Revenue.Wederiveourrevenueprimarilyfromusage-basedfeesearnedfromcustomersusingthesoftwareproductswithinourEngagementCloudandProgrammableCommunicationsCloud.Theseusage-basedsoftwareproductsincludeofferings,suchasProgrammableVoice,ProgrammableMessagingandProgrammableVideo.Someexamplesoftheusage-basedfeesforwhichwechargeincludeminutesofcalldurationactivityforourProgrammableVoiceproducts,numberoftextmessagessentorreceivedusingourProgrammableMessagingproductsandnumberofauthenticationsforourAccountSecurityproducts.IntheyearsendedDecember31,2018,2017and2016,wegenerated84%,83%and83%ofourrevenue,respectively,fromusage-basedfees.Wealsoearn

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monthlyflatfeesfromcertainfee-basedproducts,suchastelephonenumbers,shortcodesandcustomersupport.

Customerstypicallypayupfrontviacreditcardinmonthlyprepaidamountsanddrawdowntheirbalancesastheypurchaseoruseourproducts.Ascustomersgrowtheirusageofourproductstheyautomaticallyreceivetieredusagediscounts.Ourlargercustomersoftenenterintocontracts,foratleast12monthsthatcontainminimumrevenuecommitments,whichmaycontainmorefavorablepricing.Customersonsuchcontractstypicallyareinvoicedmonthlyinarrearsforproductsused.

Amountsthathavebeenchargedviacreditcardorinvoicedarerecordedinaccountsreceivableandinrevenue,deferredrevenueorcustomerdeposits,dependingonwhethertherevenuerecognitioncriteriahavebeenmet.Giventhatourcreditcardprepaymentamountstendtobeapproximatelyequaltoourcreditcardconsumptionamountsineachperiod,andthatwedonothavemanyinvoicedcustomersonpre-paymentcontractterms,ourdeferredrevenueandcustomerdepositsliabilityatanyparticulartimeisnotameaningfulindicatoroffuturerevenue.

WedefineU.S.revenueasrevenuefromcustomerswithIPaddressesatthetimeofregistrationintheUnitedStates,andwedefineinternationalrevenueasrevenuefromcustomerswithIPaddressesatthetimeofregistrationoutsideoftheUnitedStates.

CostofRevenueandGrossMargin.Costofrevenueconsistsprimarilyoffeespaidtonetworkserviceproviders.Costofrevenuealsoincludescloudinfrastructurefees,personnelcosts,suchassalariesandstock-basedcompensationforourcustomersupportemployees,andnon-personnelcosts,suchasamortizationofcapitalizedinternalusesoftwaredevelopmentcostsandamortizationofacquiredintangibles.Ourarrangementswithnetworkserviceprovidersrequireustopayfeesbasedonthevolumeofphonecallsinitiatedortextmessagessent,aswellasthenumberoftelephonenumbersacquiredbyustoserviceourcustomers.Ourarrangementswithourcloudinfrastructureproviderrequireustopayfeesbasedonourservercapacityconsumption.

Ourgrossmarginhasbeenandwillcontinuetobeaffectedbyanumberoffactors,includingthetimingandextentofourinvestmentsinouroperations,ourabilitytomanageournetworkserviceproviderandcloudinfrastructure-relatedfees,themixofU.S.revenuecomparedtointernationalrevenue,thetimingofamortizationofcapitalizedsoftwaredevelopmentcostsandacquiredintangiblesandtheextenttowhichweperiodicallychoosetopassonourcostsavingsfromplatformoptimizationeffortstoourcustomersintheformoflowerusageprices.

OperatingExpenses.Themostsignificantcomponentsofoperatingexpensesarepersonnelcosts,whichconsistofsalaries,benefits,bonusesandstock-basedcompensation.Wealsoincurothernon-personnelcostsrelatedtoourgeneraloverheadexpenses.Weexpectthatouroperatingcostswillincreaseinabsolutedollarsasweaddadditionalemployeesandinvestinourinfrastructuretogrowourbusiness.

Research and Development. Researchanddevelopmentexpensesconsistprimarilyofpersonnelcosts,outsourcedengineeringservices,cloudinfrastructurefeesforstaginganddevelopment,amortizationofcapitalizedinternalusesoftwaredevelopmentcostsandanallocationofourgeneraloverheadexpenses.Wecapitalizetheportionofoursoftwaredevelopmentcoststhatmeetsthecriteriaforcapitalization.

Wecontinuetofocusourresearchanddevelopmenteffortsonaddingnewfeaturesandproducts,includingnewusecases,improvingourplatformandincreasingthefunctionalityofourexistingproducts.

Sales and Marketing. Salesandmarketingexpensesconsistprimarilyofpersonnelcosts,includingcommissionsforoursalesemployees.Salesandmarketingexpensesalsoincludeexpendituresrelatedtoadvertising,marketing,ourbrandawarenessactivitiesanddeveloperevangelism,costsrelatedtoour

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SIGNALdeveloperconferences,creditcardprocessingfees,professionalservicesfeesandanallocationofourgeneraloverheadexpenses.

Wefocusoursalesandmarketingeffortsongeneratingawarenessofourcompany,platformandproductsthroughourdeveloperevangelistteamandself-servicemodel,creatingsalesleadsandestablishingandpromotingourbrand,bothdomesticallyandinternationally.Weplantocontinueinvestinginsalesandmarketingbyincreasingoursalesandmarketingheadcount,supplementingourself-servicemodelwithanenterprisesalesapproach,expandingoursaleschannels,drivingourgo-to-marketstrategies,buildingourbrandawarenessandsponsoringadditionalmarketingevents.

General and Administrative. Generalandadministrativeexpensesconsistprimarilyofpersonnelcostsforouraccounting,finance,legal,humanresourcesandadministrativesupportpersonnelandexecutives.Generalandadministrativeexpensesalsoincludecostsrelatedtobusinessacquisitions,legalandotherprofessionalservicesfees,salesandothertaxes,depreciationandamortizationandanallocationofourgeneraloverheadexpenses.Weexpectthatwewillincurcostsassociatedwithsupportingthegrowthofourbusinessandtomeettheincreasedcompliancerequirementsassociatedwithbothourinternationalexpansionandouroperationas,apubliccompany.

Ourgeneralandadministrativeexpensesincludeacertainamountofsalesandothertaxestowhichwearesubjectbasedonthemannerwesellanddeliverourproducts.PriortoMarch2017,wedidnotcollectsuchtaxesfromourcustomersandrecordedsuchtaxesasgeneralandadministrativeexpenses.EffectiveMarch2017,webegancollectingthesetaxesfromcustomersincertainjurisdictionsandaddedmorejurisdictionsthroughout2018wherewearenowcollectingthesetaxes.Wecontinueexpandingthenumberofjurisdictionswherewewillbecollectingthesetaxesinthefuture.Weexpectthattheseexpenseswilldeclineinfutureyearsaswecontinuecollectingthesetaxesfromourcustomersinmorejurisdictions,whichwouldreduceourrateofongoingaccrual.

ProvisionforIncomeTaxes.Ourincometaxprovisionorbenefitforinterimperiodsisdeterminedusinganestimateofourannualeffectivetaxrate,adjustedfordiscreteitemsoccurringinthequarter.Theprimarydifferencebetweenoureffectivetaxrateandthefederalstatutoryraterelatestothenetoperatinglossesinjurisdictionswithavaluationallowanceorazerotaxrate.

OnDecember22,2017,theU.S.governmentenactedcomprehensivetaxlegislationcommonlyreferredtoastheTaxCutsandJobsAct(TaxAct).TheTaxActreducestheU.S.statutorycorporatetaxrateto21%,effectiveJanuary1,2018.Consequently,werecordedadecreasetotheCompany'sfederaldeferredtaxassetsof$28.0million,whichwasfullyoffsetbyareductionofourvaluationallowancefortheyearendedDecember31,2017.TheotherprovisionsoftheTaxAct,includingtheone-timetransitiontaxonthemandatorydeemedrepatriationofcumulativeforeignearnings,didnothaveamaterialimpactonourfinancialstatementsasofDecember31,2018.

InDecember2017,theSECstaffissuedStaffAccountingBulletinNo.118,IncomeTaxAccountingImplicationsoftheTaxCutsandJobsAct(SAB118),whichallowedcompaniestorecordprovisionalamountsduringameasurementperiodnottoextendbeyondoneyearoftheenactmentdate.OuraccountingfortheTaxActiscompleteandwedidnothaveanysignificationadjustmentstoprovisionalamountsrecordedasofDecember31,2017.

TheTaxActcreatesanewrequirementthatcertainincome(i.e.,GILTI)earnedbycontrolledforeigncorporations(CFCs)mustbeincludedcurrentlyinthegrossincomeoftheCFCs'U.S.shareholder.UnderU.S.GAAP,weareallowedtomakeanaccountingpolicychoiceofeither(1)treatingtaxesdueonfutureU.S.inclusionsintaxableincomerelatedtoGILTIasacurrent-periodexpensewhenincurred(the"periodcostmethod")or(2)factoringsuchamountsintothemeasurementofourdeferredtaxes(the"deferredmethod").Weselectedtheperiodcostmethod.

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ResultsofOperations

Thefollowingtablessetforthourresultsofoperationsfortheperiodspresentedandasapercentageofourtotalrevenueforthoseperiods.Theperiod-to-periodcomparisonofourhistoricalresultsarenotnecessarilyindicativeoftheresultsthatmaybeexpectedinthefuture.

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YearEndedDecember31, 2018 2017 2016 (Inthousands,exceptshareandpersharedata) ConsolidatedStatementsofOperationsData: Revenue $ 650,067 $ 399,020 $ 277,335Costofrevenue(1)(2) 300,841 182,895 120,520

Grossprofit 349,226 216,125 156,815Operatingexpenses: Researchanddevelopment(1)(2) 171,358 120,739 77,926Salesandmarketing(1)(2) 175,555 100,669 65,267Generalandadministrative(1)(2) 110,427 59,619 51,077Charitablecontribution 7,121 1,172 3,860Totaloperatingexpenses 464,461 282,199 198,130

Lossfromoperations (115,235) (66,074) (41,315)Otherincome(expenses),net (5,923) 3,071 317

Lossbeforeprovisionforincometaxes (121,158) (63,003) (40,998)Provisionforincometaxes (791) (705) (326)

Netlossattributabletocommonstockholders $ (121,949) $ (63,708) $ (41,324)Netlosspershareattributabletocommonstockholders,basicanddiluted $ (1.26) $ (0.70) $ (0.78)

Weighted-averagesharesusedincomputingnetlosspershareattributabletocommonstockholders,basicanddiluted 97,130,339 91,224,607 53,116,675

(1) Includesstock-basedcompensationexpenseasfollows:

YearEndedDecember31, 2018 2017 2016 (Inthousands) Costofrevenue $ 1,126 $ 650 $ 291Researchanddevelopment 42,277 22,808 12,946Salesandmarketing 23,616 9,822 4,972Generalandadministrative 26,254 16,339 6,016Total $ 93,273 $ 49,619 $ 24,225

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(2) Includesamortizationofacquiredintangiblesasfollows:

ComparisonoftheFiscalYearsEndedDecember31,2018,2017and2016

Revenue

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YearEndedDecember31, 2018 2017 2016 (Inthousands) Costofrevenue $ 5,656 $ 4,644 $ 619Researchanddevelopment 22 139 151Salesandmarketing 1,117 753 —Generalandadministrative 375 84 110Total $ 7,170 $ 5,620 $ 880

YearEndedDecember31,

2018 2017 2016 ConsolidatedStatementsofOperations,asapercentageofrevenue:** Revenue 100% 100% 100%Costofrevenue 46 46 43

Grossprofit 54 54 57Operatingexpenses: Researchanddevelopment 26 30 28Salesandmarketing 27 25 24Generalandadministrative 17 15 18Charitablecontribution 1 * 1Totaloperatingexpenses 71 71 71Lossfromoperations (18) (17) (15)

Otherincome(expenses),net (1) 1 *Lossbeforeprovisionforincometaxes (19) (16) (15)

Provisionforincometaxes * * *Netlossattributabletocommonstockholders (19)% (16)% (15)%

* Lessthan0.5%ofrevenue.

** Columnsmaynotaddupto100%duetorounding.

YearEndedDecember31, 2018 2017 2016 2017to2018Change 2016to2017Change (Dollarsinthousands) Baserevenue $ 593,017 $ 365,490 $ 245,548 $ 227,527 62% $ 119,942 49%Variablerevenue 57,050 33,530 31,787 23,520 70% 1,743 5%Totalrevenue $ 650,067 $ 399,020 $ 277,335 $ 251,047 63% $ 121,685 44%

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2018 Compared to 2017

In2018,BaseRevenueincreasedby$227.5million,or62%,comparedtothesameperiodlastyear,andrepresented91%and92%oftotalrevenuein2018and2017,respectively.Thisincreasewasprimarilyattributabletoanincreaseintheusageofourproducts,particularlyourProgrammableMessagingproductsandProgrammableVoiceproducts,andtheadoptionofadditionalproductsbyourexistingcustomers.Thisincreasewaspartiallyoffsetbypricingdecreasesthatwehaveimplementedovertimeintheformoflowerusageprices,inanefforttoincreasethereachandscaleofourplatform.ThechangesinusageandpriceintheyearendedDecember31,2018werereflectedinourDollar-BasedNetExpansionRateof140%.Theincreaseinusagewasalsoattributabletoa31%increaseinthenumberofActiveCustomerAccounts,from48,979asofDecember31,2017,to64,286asofDecember31,2018.

IntheyearendedDecember31,2018,VariableRevenueincreasedby$23.5million,or70%,comparedtothesameperiodlastyear,andrepresented9%and8%oftotalrevenueintheyearendedDecember31,2018and2017,respectively.ThisincreasewasprimarilyattributabletotheincreaseintheusageofproductsbyourexistingVariableCustomerAccounts.

U.S.revenueandinternationalrevenuerepresented$484.8million,or75%,and$165.3million,or25%,respectively,oftotalrevenuein2018,comparedto$308.6million,or77%,and$90.4million,or23%,respectively,oftotalrevenuein2017.Theincreaseininternationalrevenuewasattributabletothegrowthinusageofourproducts,particularlyourProgrammableMessagingproductsandProgrammableVoiceproducts,byourexistinginternationalActiveCustomerAccounts,anda57%increaseinthenumberofinternationalActiveCustomerAccountsdriveninpartbyourfocusonexpandingoursalestocustomersoutsideoftheUnitedStates.

2017 Compared to 2016

In2017,BaseRevenueincreasedby$120.0million,or49%,comparedto2016,andrepresented92%and89%oftotalrevenuein2017and2016,respectively.Thisincreasewasprimarilyattributabletoanincreaseintheusageofallourproducts,particularlyourProgrammableMessagingproductsandProgrammableVoiceproducts,andtheadoptionofadditionalproductsbyourexistingcustomers.Thisincreasewaspartiallyoffsetbypricingdecreasesthatwehaveimplementedovertimeintheformoflowerusageprices,inanefforttoincreasethereachandscaleofourplatform.Thechangesinusageandpricein2017werereflectedinourDollar-BasedNetExpansionRateof128%.Theincreaseinusagewasalsoattributabletoa34%increaseinthenumberofActiveCustomerAccounts,from36,606asofDecember31,2016to48,979asofDecember31,2017.RevenuefromUber,ourlargestBaseCustomer,decreasedin2017,duetoacombinationofproductusagedecreasesandcertainpriceadjustmentsthatweremadebyusasaresultofUber'shighvolumegrowth.

In2017,VariableRevenueincreasedby$1.7million,or5%,comparedto2016,andrepresented8%and11%oftotalrevenuein2017and2016,respectively.ThisincreasewasprimarilyattributabletotheincreaseintheusageofproductsbyourexistingVariableCustomerAccounts,partiallyoffsetbythedecreaseinnumberofVariableCustomerAccountsfromeighttosix.

U.S.revenueandinternationalrevenuerepresented$308.6million,or77%,and$90.4million,or23%,respectively,oftotalrevenuein2017,comparedto$233.9million,or84%,and$43.4million,or16%,respectively,oftotalrevenuein2016.Theincreaseininternationalrevenuewasattributabletothegrowthinusageofourproducts,particularlyourProgrammableMessagingproductsandProgrammableVoiceproducts,byourexistinginternationalActiveCustomerAccounts;a39%increaseinthenumberofinternationalActiveCustomerAccounts,excludingtheimpactfromourBeepsendacquisition,driveninpartbyourfocusonexpandingoursalestocustomersoutsideoftheUnitedStates;andourrecentacquisition.WeopenedonenewofficeoutsideoftheUnitedStatesin2017.

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CostofRevenueandGrossMargin

2018 Compared to 2017

In2018,costofrevenueincreasedby$117.9million,or64%,comparedtothesameperiodlastyear.Theincreaseincostofrevenuewasprimarilyattributabletoa$104.4millionincreaseinnetworkserviceproviders'costsanda$7.6millionincreaseincloudinfrastructurefees,bothtosupportthegrowthinusageofourproducts.

In2018,grossmarginpercentageremainedstablecomparedto2017.Highernetworkserviceprovidercostsrelatedtoforeigncurrencyfluctuations,certainpriceadjustmentsthatweremadebyusin2017asaresultofthehighvolumegrowthofalargecustomer,anincreasingmixofinternationalproductusage,andanincreaseinnetworkserviceproviderfeesincertaingeographies,werelargelyoffsetbyoperationalimprovementsandproductmix.

2017 Compared to 2016

In2017,costofrevenueincreasedby$62.4million,or52%,comparedto2016.Theincreaseincostofrevenuewasprimarilyattributabletoa$51.3millionincreaseinnetworkserviceproviders'costs,a$4.8millionincreaseincloudinfrastructurefeestosupportthegrowthinusageofourproductsanda$5.5millionincreaseinamortizationexpenseforinternalusesoftware.

In2017,grossmargindeclinedprimarilyasaresultofanincreasingmixofinternationalproductusageandcertainpriceadjustmentsthatweremadebyusasaresultofUber'shighvolumegrowth.

OperatingExpenses

2018 Compared to 2017

In2018,researchanddevelopmentexpensesincreasedby$50.6million,or42%,comparedtothesameperiodlastyear.Theincreasewasprimarilyattributabletoa$37.0millionincreaseinpersonnelcosts,netofa$3.3millionincreaseincapitalizedsoftwaredevelopmentcosts,largelyasaresultofan32%averageincreaseinourresearchanddevelopmentheadcount,aswecontinuedtofocusonenhancingourexistingproductsandintroducingnewproducts,aswellasenhancingproductmanagementandothertechnicalfunctions.Theincreasewasalsoduetoa$2.9millionincreaseincloudinfrastructurefeestosupportthestaginganddevelopmentofourproducts,a$2.1millionincreaseinprofessionalservicesfees,a$1.3millionincreaseinoutsourcedengineeringservicesanda$1.8millionincreaseinamortizationexpense.

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YearEndedDecember31,

2017to2018

Change 2016to2017

Change

2018 2017 2016 (Dollarsinthousands) Costofrevenue $ 300,841 $ 182,895 $ 120,520 $ 117,946 64% $ 62,375 52%Grossmargin 54% 54% 57%

YearEndedDecember31,

2017to2018

Change 2016to2017

Change

2018 2017 2016 (Dollarsinthousands) Researchanddevelopment $ 171,358 $ 120,739 $ 77,926 $ 50,619 42% $ 42,813 55%Salesandmarketing 175,555 100,669 65,267 74,886 74% 35,402 54%Generalandadministrative 110,427 59,619 51,077 50,808 85% 8,542 17%Charitablecontribution 7,121 1,172 3,860 5,949 508% (2,688) (70)%Totaloperatingexpenses $ 464,461 $ 282,199 $ 198,130 $ 182,262 65% $ 84,069 42%

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In2018,salesandmarketingexpensesincreasedby$74.9million,or74%,comparedtothesameperiodlastyear.Theincreasewasprimarilyattributabletoa$48.6millionincreaseinpersonnelcosts,largelyasaresultofa52%averageincreaseinsalesandmarketingheadcountaswecontinuedtoexpandoursaleseffortsintheUnitedStatesandinternationally,a$5.7millionincreaseinadvertisingexpenses,$4.7millionincreaserelatedtoourannualdeveloperconferenceSIGNAL,a$3.5millionincreaseintheexpensesrelatedtobrandawarenessprogramsand$2.3millionincreaseincreditcardfeesduetoincreasedtransactionvolumes.

In2018,generalandadministrativeexpensesincreasedby$50.8million,or85%,comparedtothesameperiodlastyear.Theincreasewaspartiallyattributabletothenon-recurrenceof$13.4millionreleaseofpreviouslyaccruedtaxliabilityuponcertainobligationsettlementsandestimaterevisions.Theremainingincreasewasprimarilyattributabletoa$18.8millionincreaseinpersonnelcosts,largelyasaresultofa49%averageincreaseingeneralandadministrativeheadcounttosupportthegrowthofourbusinessdomesticallyandinternationallyanda$8.4millionincreaseinprofessionalservicesfeesprimarilyrelatedtoouroperationsasapubliccompanyandouron-goinglitigationmatters,includinglegalsettlements/accruals,anda$4.7millionincreaseinprofessionalexpensesspecificallyrelatedtoourbusinessacquisitionsasdescribedinNote5toourconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.

In2018,charitablecontributionsexpensesincreasedby$5.9million,or508%,comparedtothesameperiodlastyear,duetoseveraldonationsthatTwilio.orgmadetoindependentorganizationsconsistentwithitsphilanthropicgoals.

2017 Compared to 2016

In2017,researchanddevelopmentexpensesincreasedby$42.8million,or55%,comparedto2016.Theincreasewasprimarilyattributabletoa$30.3millionincreaseinpersonnelcosts,netofa$7.7millionincreaseincapitalizedsoftwaredevelopmentcosts,largelyasaresultofa37%averageincreaseofourresearchanddevelopmentheadcount,aswecontinuedtofocusonenhancingourexistingproductsandintroducingnewproducts,aswellasenhancingproductmanagementandothertechnicalfunctions.Theincreasewasalsodueinparttoa$3.0millionincreaseinsoftwaresubscriptionexpense,a$2.7millionincreaseincloudinfrastructurefeestosupportthestaginganddevelopmentofourproducts,a$1.5millionincreaseinoutsourcedengineeringservices,a$1.4millionincreaseinamortizationexpenserelatedtoourinternal-usesoftwareandtheintangibleassetsacquiredthroughbusinesscombinations,a$0.7millionincreaserelatedtoemployeetravelanda$0.7millionincreaseinprofessionalfees.

In2017,salesandmarketingexpensesincreasedby$35.4million,or54%,comparedto2016.Theincreasewasprimarilyattributabletoa$25.5millionincreaseinpersonnelcosts,largelyasaresultofa42%averageincreaseinsalesandmarketingheadcountaswecontinuedtoexpandoursaleseffortsintheUnitedStatesandinternationally,a$1.9millionincreaseincreditcardprocessingfeesduetoincreasedvolumes,a$1.4millionincreaseinadvertisingexpenses,a$1.2millionincreaseinprofessionalservicesfees,a$1.2millionincreaseinemployeetravelexpenses,a$1.1millionincreaseinsoftwaresubscriptionexpense,a$1.2millionincreaseindepreciationandamortizationanda$0.4millionincreaserelatedtoourSIGNALdeveloperconferences.

In2017,generalandadministrativeexpensesincreasedby$8.5million,or17%,comparedto2016.Theincreasewasprimarilyattributabletoa$16.1millionincreaseinpersonnelcosts,largelyasaresultofa33%averageincreaseingeneralandadministrativeheadcounttosupportthegrowthofourbusinessdomesticallyandinternationally,a$4.3millionincreaseinprofessionalservicesfeesprimarilyrelatedtoouroperationsasapubliccompanyandouron-goinglitigationmatters,a$2.6millionincreaseinfacilitiesandinsurancecosts,a$0.5millionincreaserelatedtosoftwarelicenses.Theseincreaseswerepartiallyoffsetbythereleaseof$13.4milliontaxliabilityuponcertainobligation

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settlementsandestimaterevisions,discussedindetailinNote11(d)oftheconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K,anda$3.4milliondecreaseinthestateandothertaxesexpenseaswebegancollectingthosetaxesincertainjurisdictionsstartinginMarch2017,whichallowedustoreducetheongoingrateofaccrual.

In2017,charitablecontributionsexpensesdecreasedby$2.7million,or70%,comparedtothesameperiodlastyear.During2017,Twilio.orgdonated45,383sharesofClassAcommonstockwithavalueof$1.2milliontoanindependentorganizationsconsistentwithitsphilanthropicgoals.

QuarterlyResultsofOperations

ThefollowingtablessetforthourunauditedquarterlystatementsofoperationsdataforeachoftheeightquartersendedDecember31,2018,aswellasthepercentagethateachlineitemrepresentsofourrevenueforeachquarterpresented.TheinformationforeachquarterhasbeenpreparedonabasisconsistentwithourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K,andreflect,intheopinionofmanagement,alladjustmentsofanormal,recurringnaturethatarenecessaryforafairpresentationofthefinancialinformationcontainedinthosestatements.Ourhistoricalresultsarenotnecessarilyindicativeoftheresultsthatmaybeexpectedinthefuture.ThefollowingquarterlyfinancialdatashouldbereadinconjunctionwithourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.

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ThreeMonthsEnded

March31,

2017 June30,2017

Sept.30,2017

Dec.31,2017

March31,2018

June30,2018

Sept.30,2018

Dec.31,2018

(Unaudited,inthousands) ConsolidatedStatementsofOperations:

Revenue $ 87,372 $ 95,870 $ 100,542 $ 115,236 $ 129,116 $ 147,754 $ 168,895 $ 204,302Costofrevenue(1)(2) 37,286 42,333 48,254 55,022 59,582 67,940 77,031 96,288

Grossprofit 50,086 53,537 52,288 60,214 69,534 79,814 91,864 108,014Operatingexpenses: Researchanddevelopment(1)(2) 26,522 29,714 31,674 32,829 37,576 39,811 42,340 51,631

Salesandmarketing(1)(2) 21,116 26,153 25,778 27,622 32,822 37,749 45,949 59,035

Generalandadministrative(1)(2) 17,203 4,740 18,867 18,809 23,393 24,212 28,433 34,389

Charitablecontribution — — — 1,172 — — 175 6,946Totaloperatingexpenses 64,841 60,607 76,319 80,432 93,791 101,772 116,897 152,001

Lossfromoperations (14,755) (7,070) (24,031) (20,218) (24,257) (21,958) (25,033) (43,987)Otherincome(expense),net 498 471 1,000 1,102 665 (1,898) (1,939) (2,751)Lossbefore(provision)benefitforincometaxes (14,257) (6,599) (23,031) (19,116) (23,592 (23,856) (26,972) (46,738)

(Provision)benefitforincometaxes 30 (510) (422) 197 (137) (150) (84) (420)

Netlossattributabletocommonstockholders (14,227) $ (7,109) $ (23,453) $ (18,919) $ (23,729) $ (24,006) $ (27,056) $ (47,158)

(1) Includesstock-basedcompensationexpenseasfollows

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ThreeMonthsEnded

March31,

2017 June30,2017

Sept.30,2017

Dec.31,2017

March31,2018

June30,2018

Sept.30,2018

Dec.31,2018

(Unaudited,inthousands) Costofrevenue $ 138 $ 142 $ 180 $ 190 $ 222 $ 266 $ 284 $ 354Researchanddevelopment 4,484 5,710 6,493 6,121 7,872 9,749 10,879 13,777Salesandmarketing 1,995 2,363 2,603 2,861 3.859 5,049 5,246 9,462Generalandadministrative 2,768 4,185 4,912 4,474 5,587 5,942 6.332 8,393Total $ 9,385 $ 12,400 $ 14,188 $ 13,646 $ 17,540 $ 21,006 $ 22,741 $ 31,986

(2) Includesamortizationofacquiredintangiblesasfollows:

ThreeMonthsEnded

March31,

2017 June30,2017

Sept.30,2017

Dec.31,2017

March31,2018

June30,2018

Sept.30,2018

Dec.31,2018

(Unaudited,inthousands) Costofrevenue $ 997 $ 1,182 $ 1,250 $ 1,215 $ 1,198 $ 1,125 $ 1,396 $ 1,937Researchanddevelopment 38 38 25 38 22 — — —Salesandmarketing 117 202 220 214 220 206 390 301Generalandadministrative 24 20 20 20 20 20 20 315Total $ 1,176 $ 1,442 $ 1,515 $ 1,487 $ 1,460 $ 1,351 $ 1,806 $ 2,553

ThreeMonthsEnded

March31,

2017 June30,2017

Sept.30,2017

Dec.31,2017

March31,2018

June30,2018

Sept.30,2018

Dec.31,2018

(Unaudited) ConsolidatedStatementsofOperations,asapercentageofrevenue:**

Revenue 100% 100% 100% 100% 100% 100% 100% 100%Costofrevenue 43 44 48 48 46 46 46 47

Grossmargin 57 56 52 52 54 54 54 53Operatingexpenses: Researchanddevelopment 30 31 32 28 29 27 25 25Salesandmarketing 24 27 26 24 25 26 27 29Generalandadministrative 20 5 19 16 18 16 17 17Charitablecontribution — — — 1 — — — 3Totaloperatingexpenses 74 63 76 70 73 69 69 74Lossfromoperations (17) (7) (24) (18) (19) (15) (15) (22)

Otherincome(expense),net 1 * 1 1 1 (1) (1) (1)Lossbefore(provision)benefitforincometaxes (16) (7) (23) (17) (18) (16) (16) (23)

(Provision)benefitforincometaxes * (1) * * * * * *

Netlossattributabletocommonstockholders (16)% (8)% (23)% (17)% (18)% (16)% (16)% (23)%

* Lessthan0.5%ofrevenue.

** Columnsmaynotaddupto100%duetorounding.

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QuarterlyTrendsinRevenueandGrossMargin

OurquarterlyrevenueincreasedineachperiodpresentedprimarilyduetoanincreaseintheusageofproductsaswellastheadoptionofadditionalproductsbyourexistingcustomersasevidencedbyourDollar-BasedNetExpansionRates,andanincreaseinournewcustomers.Inthefirsthalfof2017,anincreasingmixofinternationalproductusageoffsetthecontinuedplatformoptimizationanddroveamodestdeclineingrossmarginpercentage.Thetrendscontinuedinthesecondhalfof2017,andfurthergrossmargindeclinesweredrivenbycertainpriceadjustmentsthatweremadebyusasaresultofUber'shighvolumegrowth.Inthefirstthreequartersof2018thegrossmarginimprovedduetocontinuedplatformoptimization,alongwithchangesinourproductandgeographicmix.Inthefourthquarterof2018,anincreasingmixofinternationalproductusageoffsetthecontinuedplatformoptimizationanddroveamodestdeclineingrossmarginpercentage.

QuarterlyTrendsinOperatingExpenses

Ouroperatingexpenseshavegenerallyincreasedsequentiallyasaresultofourgrowth,primarilyrelatedtoincreasedpersonnelcoststosupportourexpandedoperations,ourcontinuedinvestmentinourproducts,ouroperationsasapubliccompanyandongoinglitigation.

Oursalesandmarketingexpensesincluded$1.5million,$6.8millionand$3.2millionofexpensesrelatedtoourSIGNALdeveloperconference,inthethirdandfourthquartersof2018andthesecondquarterof2017,respectively.

Inthefirstquarterof2017,ourgeneralandadministrativeexpensesincludedasignificantamountofsalesandothertaxestowhichwearesubject.PriortoMarch2017,wehadnotbillednorcollectedthesetaxesfromourcustomers,and,accordingly,recordedaprovisionforthesetaxes,basedonseveralkeyassumptions,whenourliabilitywasprobableandtheamountcouldbereasonablyestimated.StartinginMarch2017,webegancollectingthesetaxesincertainjurisdictionsandhavebeenincreasingthenumberofjurisdictionswherethesetaxesarenowbeingcollectedbyus.Inthesecondquarterof2017,werevisedcertainkeyassumptionsdrivingpriorestimatesbasedonsettlementsreachedwithvariousstatesindicatingthatcertainrevisionstotheseassumptionswereappropriateinthatperiod.Theserevisionsresultedinareversalof$12.2millionofpreviouslyaccruedliability,whichcausedasignificantdecreaseinourgeneralandadministrativeexpensesinthesecondquarterof2017andresultedinareducedrateofongoingaccrualforthethirdandfourthquartersof2017andallof2018.

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ThreeMonthsEnded

March31,

2017 June30,2017

Sept.30,2017

Dec.31,2017

March31,2018

June30,2018

Sept.30,2018

Dec.31,2018

(Unaudited,dollarsinthousands) NumberofActiveCustomerAccounts(as of end date ofperiod )(1) 40,696 43,431 46,489 48,979 53,985 57,350 61,153 64,286

BaseRevenue(in thousands )(2) $ 80,643 $ 87,583 $ 91,965 $ 105,299 $ 117,507 $ 135,004 $ 154,348 $ 186,158Base Revenue Growth Rate 62% 55% 43% 40% 46% 54% 68% 77%

Dollar-BasedNetExpansionRate(3) 141% 131% 122% 118% 132% 137% 145% 147%

(1) Seethesectiontitled"—KeyBusinessMetrics—NumberofActiveCustomerAccounts."

(2) Seethesectiontitled"—KeyBusinessMetrics—BaseRevenue."

(3) Seethesectiontitled"—KeyBusinessMetrics—Dollar-BasedNetExpansionRate."

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Inthethirdquarter2018,ourgeneralandadministrativeexpensesincreasedby$1.5millionduetoapreliminarysettlementreachedinanoutstandingclassactioncase,asfurtherdescribedinNote11(b)ofourconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.

Inthefourthquartersof2018,ourgeneralandadministrativeexpensesfurtherincreasedby$2.8millionduetotheexpensesrelatedtoouracquisitionofSendGrid.

LiquidityandCapitalResources

Todate,ourprincipalsourcesofliquidityhavebeen(i)thenetproceedsof$155.5millionand$64.4million,netofunderwritingdiscountsandofferingexpenses,fromourinitialpublicofferinginJune2016andourfollow-onpublicofferinginOctober2016,respectively;(ii)thenetproceedswereceivedthroughprivatesalesofequitysecurities;(iii)thenetproceedsofapproximately$537.0million,afterdeductinginitialpurchaserdiscountsanddebtissuancecostspaidbyus,fromissuanceoftheNotes,asdescribedinNote8toourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K;and(iv)thepaymentsreceivedfromcustomersusingourproducts.FromourinceptionthroughMarch31,2016,wecompletedseveralroundsofequityfinancingthroughthesaleofourconvertiblepreferredstockfortotalnetproceedsof$237.1million.

Webelievethatourcash,cashequivalentsandmarketablesecuritiesbalances,aswellasthecashflowsgeneratedbyouroperationswillbesufficienttosatisfyouranticipatedcashneedsforworkingcapitalandcapitalexpendituresforatleastthenext12months.However,ourbeliefmayprovetobeincorrect,andwecouldutilizeouravailablefinancialresourcessoonerthanwecurrentlyexpect.Ourfuturecapitalrequirementsandtheadequacyofavailablefundswilldependonmanyfactors,includingthosesetforthinPartI,Item1A,"RiskFactors."Wemayberequiredtoseekadditionalequityordebtfinancinginordertomeetthesefuturecapitalrequirements.Intheeventthatadditionalfinancingisrequiredfromoutsidesources,wemaynotbeabletoraiseitontermsacceptabletous,oratall.Ifweareunabletoraiseadditionalcapitalwhendesired,ourbusiness,resultsofoperationsandfinancialconditionwouldbeadverselyaffected.

CashFlows

Thefollowingtablesummarizesourcashflowsfortheperiodsindicated(inthousands):

Cash Flows from Operating Activities

In2018,cashprovidedbyoperatingactivitiesconsistedprimarilyofournetlossof$121.9millionadjustedfornon-cashitems,including$93.3millionofstock-basedcompensationexpense,$26.1millionofdepreciationandamortizationexpense,$14.1millionamortizationofthedebtdiscountandissuancecostsrelatedtoourNotes,$6.0millionofcharitabledonationsand$14.8millionofcumulativechangesinoperatingassetsandliabilities.Withrespecttochangesinoperatingassetsandliabilities,accountspayableandothercurrentliabilitiesincreased$52.1millionanddeferredrevenueandcustomerdepositsincreased$6.0millionprimarilyduetoincreasesintransactionvolumes.Accountsreceivableandprepaidexpensesincreased$67.0million,whichresultedprimarilyfromthetimingofcashreceipts

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YearEndedDecember31, 2018 2017 2016 AsAdjusted Cashprovidedby(usedin)operatingactivities $ 7,983 $ (3,255) $ 10,097Cashusedininvestingactivities (139,419) (226,748) (34,986)Cashprovidedbyfinancingactivities 515,819 36,437 229,164Effectofexchangeratechangesoncashandcashequivalents 163 74 —Netincrease(decrease)incashandcashequivalents $ 384,546 $ (193,492) $ 204,275

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fromcertainofourlargercustomers,pre-paymentsforcloudinfrastructurefeesandcertainoperatingexpenses.

In2017,cashusedinoperatingactivitiesconsistedprimarilyofournetlossof$63.7millionadjustedfornon-cashitems,including$49.6millionofstock-basedcompensationexpense,$18.8millionofdepreciationandamortizationexpense,$1.2millionofcharitabledonationsand$10.2millionofcumulativechangesinoperatingassetsandliabilities.Withrespecttochangesinoperatingassetsandliabilities,accountspayableandothercurrentliabilitiesincreased$2.1millionanddeferredrevenueincreased$3.6millionduetoincreasesintransactionvolumes,whichwerepartiallyoffsetbythe$13.4millionreleaseoftaxliabilityuponcertainobligationsettlementsandestimaterevisions,discussedindetailinNote11(d)oftheconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.Accountsreceivableandprepaidexpensesincreased$13.2million,whichresultedprimarilyfromthetimingofcashreceiptsfromcertainofourlargercustomers,pre-paymentsforcloudinfrastructurefeesandcertainoperatingexpenses.

In2016,cashprovidedbyoperatingactivitiesconsistedprimarilyofournetlossof$41.3millionadjustedfornon-cashitems,including$24.2millionofstock-basedcompensationexpense,$8.3millionofdepreciationandamortizationexpenseand$16.9millionofcumulativechangesinoperatingassetsandliabilities.Withrespecttochangesinoperatingassetsandliabilities,accountspayableandotherliabilitiesincreased$25.9millionanddeferredrevenueincreased$4.1million,whichwereprimarilyduetoincreasesintransactionvolumesandadditionalaccrualsofsalesandothertaxes.Otherlong-termliabilitiesincreased$9.1million,primarilyduetotheincreaseinthedeferredrentbalancerelatedtoournewofficeleaseinSanFrancisco,California.Thiswaspartiallyoffsetbyanincreaseinaccountsreceivableandprepaidexpensesof$22.0million,whichprimarilyresultedfromthegrowthofourbusinessandthetimingofcashreceiptsfromcertainofourlargercustomers,pre-paymentsforcloudinfrastructurefeesandcertainoperatingexpenses,anda$5.7millionnetincreaserelatedtothetenantimprovementallowanceunderournewSanFrancisco,Californiaofficelease,aftercollecting$2.6millionfromthelandlordinthefourthquarterof2016.

Cash Flows from Investing Activities

In2018,cashusedininvestingactivitieswas$139.4million,primarilyconsistingof$84.2millionofpurchasesofmarketablesecurities,netofmaturities,$30.6millionofcashpaidtoacquireotherbusinessesasdescribedinNote5toourconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-Kand$19.5millionrelatedtocapitalizedsoftwaredevelopmentcosts.

In2017,cashusedininvestingactivities,asadjustedpursuanttotheadoptionofthenewaccountingguidancedescribedinNote2(p)ofourconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K,was$226.7million,primarilyconsistingof$177.3millionofpurchasesofmarketablesecurities,netofmaturities,a$22.6millionpaymenttoacquireotherbusinesses,$17.3millionrelatedtocapitalizedsoftwaredevelopmentcostsand$9.2millionpurchasesofpropertyandequipmentprimarilyrelatedtotheleaseholdimprovementsunderournewofficelease.

In2016,cashusedininvestingactivities,asadjustedpursuanttotheadoptionofthenewaccountingguidancedescribedinNote2(p)ofourconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K,was$35.0million,primarilyconsistingof$14.2millionofpaymentsrelatedtopurchasesofpropertyandequipmentaswecontinuedtoexpandourofficesandgrowourheadcounttosupportthegrowthofourbusiness,$11.5millionofpaymentsforcapitalizedsoftwaredevelopmentaswecontinuedtobuildnewproductsandenhanceourexistingproductsandan$8.5millionpaymenttoacquirecertainassetsofotherbusinesses.

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Cash Flows from Financing Activities

In2018,cashprovidedbyfinancingactivitieswas$515.8million,primarilyconsistingof$537.1millionnetproceedsfromourNotes,netofinitialpurchaserdiscountsandissuancecostspaidintheperiod,$29.8millionproceedsfromstockoptionsexercisedbyouremployeesand$10.1millionproceedsfromsharesissuedunderouremployeestockpurchaseplan.Thiswaspartiallyoffsetbya$58.5millionpaymentforcappedcalltransactions.

In2017,cashprovidedbyfinancingactivitieswas$36.4million,primarilyconsistingof$25.7millionproceedsfromstockoptionsexercisesbyouremployeesand$11.9millionproceedsfromsharesissuedunderouremployeestockpurchaseplan.

In2016,cashprovidedbyfinancingactivitieswas$229.2million,primarilyconsistingof$225.7millionofaggregateproceedsraisedinourinitialpublicofferingandfollow-onpublicoffering,netofunderwritingdiscounts,and$9.1millionofproceedsfromstockoptionsexercisesbyouremployees.Thesecashinflowswerepartiallyoffsetby$4.6millionofcostspaidinconnectionwithourpublicofferings.

Off-BalanceSheetArrangements

Wehavenotenteredintoanyoff-balancesheetarrangementsanddonothaveanyholdingsinvariableinterestentities.

ContractualObligationsandOtherCommitments

Thefollowingtablesummarizesournon-cancelablecontractualobligationsasofDecember31,2018:

SegmentInformation

Wehaveonebusinessactivityandoperateinonereportablesegment.

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LessThan1Year

1to3Years

3to5Years

5YearsorMore Total

(Inthousands) AsofDecember31,2018: Operatingleases(1) $ 24,128 $ 60,425 $ 60,614 $ 81,316 $ 226,483Capitallease(2) 306 1,085 1,198 1,939 4,528Non-cancellablepurchaseobligations(3) 37,623 3,360 7,000 — 47,983Total $ 62,057 $ 64,870 $ 68,812 $ 83,255 $ 278,994

(1) Operatingleasesrepresenttotalfutureminimumrentpaymentsundernon-cancelableoperatingleaseagreements.

(2) Capitalleaserepresenttotalfutureminimumpaymentsunderanon-cancelablecapitalleaseagreements.

(3) Non-cancellablepurchaseobligationsrepresenttotalfutureminimumpaymentsundercontractswithourcloudinfrastructureprovider,networkserviceprovidersandothervendors.Purchaseobligationsexcludeagreementsthatarecancelablewithoutpenalty.Unrecognizedtaxbenefitsarenotincludedinthetableabovebecauseanyamountsexpectedtobesettledincasharenotmaterial.

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CriticalAccountingPoliciesandEstimates

OurconsolidatedfinancialstatementsarepreparedinaccordancewithgenerallyacceptedaccountingprinciplesinU.S.GAAP.Preparationofthesefinancialstatementsrequiresustomakeestimatesandassumptionsthataffectthereportedamountsofassets,liabilities,revenue,costsandexpensesandrelateddisclosures.Webaseourestimatesonhistoricalexperienceandonvariousotherassumptionsthatwebelievetobereasonable.Inmanyinstances,wecouldhavereasonablyuseddifferentaccountingestimatesandinotherinstanceschangesintheaccountingestimatesarereasonablylikelytooccurfromperiodtoperiod.Actualresultscoulddiffersignificantlyfromourestimates.Totheextentthattherearematerialdifferencesbetweentheseestimatesandactualresults,ourfuturefinancialstatementpresentation,financialcondition,resultsofoperationsandcashflowswillbeaffected.Webelievethattheaccountingpoliciesdiscussedbelowarecriticaltounderstandingourhistoricalandfutureperformance,asthesepoliciesrelatetothemoresignificantareasinvolvingourjudgmentsandestimates.

RevenueRecognition

Revenueisrecognizedupontransferofcontrolofpromisedproductsorservicestocustomersinanamountthatreflectstheconsiderationweexpecttoreceiveinexchangeforthoseproductsorservices.Weenterintocontractsthatcanincludevariouscombinationsofproductsandservices,whicharegenerallycapableofbeingdistinctandaccountedforasseparateperformanceobligations.Revenueisrecognizednetofallowancesforcreditsandanytaxescollectedfromcustomers,whicharesubsequentlyremittedtogovernmentalauthorities.

Ourrevenueisprimarilyderivedfromusage-basedfeesearnedfromcustomersaccessingourenterprisecloudcomputingservices.Platformaccessisconsideredamonthlyseriescomprisingoneperformanceobligationandusage-basedfeesarerecognizedasrevenueintheperiodinwhichtheusageoccurs.

Subscription-basedfeesarederivedfromcertainterm-basedcontracts,suchaswiththesalesofshortcodesandcustomersupport.Term-basedcontractsrevenueisrecognizedonaratablebasisoverthecontractualtermofthearrangementbeginningonthedatethattheserviceismadeavailabletothecustomer.

Ourarrangementsdonotcontaingeneralrightsofreturn.However,creditsmaybeissuedonacase-by-casebasis.Creditsareaccountedforasvariableconsideration,areestimatedbasedonhistoricaltrendsandarerecordedagainstrevenue.Thecontractsdonotprovidecustomerswiththerighttotakepossessionofthesoftwaresupportingtheapplications.Amountsthathavebeeninvoicedarerecordedinaccountsreceivableandinrevenueordeferredrevenuedependingonwhethertherevenuerecognitioncriteriahavebeenmet.

Stock-BasedCompensation

Weaccountforstock-basedcompensationinaccordancewiththeauthoritativeguidanceonstockcompensation.Underthefairvaluerecognitionprovisionsofthisguidance,stock-basedcompensationismeasuredatthegrantdatebasedonthefairvalueoftheawardandisrecognizedasexpense,overtherequisiteserviceperiod,whichisgenerallythevestingperiodoftherespectiveaward.

Determiningthefairvalueofstock-basedawardsatthegrantdaterequiresjudgment.WeusetheBlack-Scholesoption-pricingmodeltodeterminethefairvalueofstockoptionsandpurchaserightsunderour2016EmployeeStockPurchasePlan(the"2016ESPP")grantedtoouremployeesanddirectors.Thegrantdatefairvalueofrestrictedstockunitsisdeterminedusingthefairvalueofourcommonstockonthedateofgrant.Priortoourinitialpublicoffering,thefairvalueofourClassAcommonstockwasdeterminedbytheestimatedfairvalueatthetimeofgrant.Afterourinitialpublic

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offering,weusethemarketclosingpriceofourClassAcommonstockasreportedontheNewYorkStockExchangeforthefairvalue.

Thedeterminationofthegrantdatefairvalueofoptionsusinganoption-pricingmodelisaffectedbyourestimatedClassAcommonstockfairvalueaswellasassumptionsregardinganumberofothervariables.Thesevariablesincludeourexpectedstockpricevolatilityovertheexpectedtermoftheoptions,stockoptionexerciseandcancellationbehaviors,risk-freeinterestrates,andexpecteddividends,whichareestimatedasfollows:

• Expected term. Theexpectedtermrepresentstheperiodthatthestock-basedawardsareexpectedtobeoutstanding.Weusethesimplifiedcalculationofexpectedterm,aswedonothavesufficienthistoricaldatatouseanyothermethodtoestimateexpectedterm.

• Expected volatility. Theexpectedvolatilityisderivedfromanaverageofthehistoricalvolatilitiesofthecommonstockofseveralentitieswithcharacteristicssimilartoours,suchasthesize,andoperationalandeconomicsimilaritiestoourprinciplebusinessoperations.WeusethismethodbecausewehavelimitedinformationonthevolatilityofourClassAcommonstockbecauseofourshorttradinghistory.

• Risk-free interest rate. Therisk-freeinterestrateisbasedontheU.S.TreasuryyieldcurveineffectatthetimeofgrantforzerocouponU.S.Treasurynoteswithmaturitiesapproximatelyequaltotheexpectedtermofthestock-basedawards.

• Expected dividend. Theexpecteddividendisassumedtobezeroaswehaveneverpaiddividendsandhavenocurrentplanstopayanydividendsonourcommonstock.

InFebruary2017,wegrantedperformance-basedstockoptionsthatvestuponsatisfactionofcertainperformanceconditions.ThesestockoptionswerevaluedusingtheMonte-Carlosimulationmodel.

ThefollowingtablesummarizestheassumptionsusedintheBlackScholesoption-pricingmodeltodeterminethefairvalueofourstockoptions,asfollows:

ThefollowingassumptionswereusedintheMonteCarlosimulationmodeltoestimatethefairvalueandthederivedserviceperiodoftheperformanceoptions:

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YearEndedDecember31, 2018 2017 2016EmployeeStockOptions Fairvalueofcommonstock $33.01-$76.63 $23.60-$31.96 $10.09-$15.00Expectedterm(inyears) 1-6.08 6.08 6.08Expectedvolatility 38.6%-44.2% 44.3%-47.6% 51.4%-53.0%Risk-freeinterestrate 2.9%-3.0% 1.9%-2.3% 1.3%-1.5%Dividendrate 0% 0% 0%EmployeeStockPurchasePlan Expectedterm(inyears) 0.5 0.5 0.90Expectedvolatility 39.8%-47.5% 33.2%-33.9% 52%Risk-freeinterestrate 2.1%-2.5% 1.1%-1.4% 0.6%Dividendrate 0% 0% 0%

Assetvolatility 40%Equityvolatility 45%Discountrate 14%Stockpriceatgrantdate $ 31.72

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Internal-UseSoftwareDevelopmentCosts

Wecapitalizecertaincostsrelatedtothedevelopmentofourplatformandothersoftwareapplicationsforinternaluse.Inaccordancewithauthoritativeguidance,webegintocapitalizeourcoststodevelopsoftwarewhenpreliminarydevelopmenteffortsaresuccessfullycompleted,managementhasauthorizedandcommittedprojectfunding,anditisprobablethattheprojectwillbecompletedandthesoftwarewillbeusedasintended.Westopcapitalizingthesecostswhenthesoftwareissubstantiallycompleteandreadyforitsintendeduse,includingthecompletionofallsignificanttesting.Thesecostsareamortizedonastraight-linebasisovertheestimatedusefullifeoftherelatedasset,generallyestimatedtobethreeyears.Wealsocapitalizecostsrelatedtospecificupgradesandenhancementswhenitisprobabletheexpenditurewillresultinadditionalfunctionalityandexpensecostsincurredformaintenanceandminorupgradesandenhancements.Costsincurredpriortomeetingthesecriteriatogetherwithcostsincurredfortrainingandmaintenanceareexpensedasincurredandrecordedwithinproductdevelopmentexpensesinourconsolidatedstatementsofoperations.

Weexercisejudgmentindeterminingthepointatwhichvariousprojectsmaybecapitalized,inassessingtheongoingvalueofthecapitalizedcostsandindeterminingtheestimatedusefullivesoverwhichthecostsareamortized.Totheextentthatwechangethemannerinwhichwedevelopandtestnewfeaturesandfunctionalitiesrelatedtoourplatform,assesstheongoingvalueofcapitalizedassetsordeterminetheestimatedusefullivesoverwhichthecostsareamortized,theamountofinternal-usesoftwaredevelopmentcostswecapitalizeandamortizecouldchangeinfutureperiods.

RecentAccountingPronouncementsNotYetAdopted

SeeNote2(ab)totheconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-Kforadiscussionofrecentaccountingpronouncementsnotyetadopted.

Item7A.QuantitativeandQualitativeDisclosuresaboutMarketRisk

Weareexposedtocertainmarketrisksintheordinarycourseofourbusiness.Theserisksprimarilyincludeinterestratesensitivitiesasfollows:

InterestRateRisk

Wehadcashandcashequivalentsof$487.2millionandmarketablesecuritiesof$261.1millionasofDecember31,2018.Cashandcashequivalentsconsistofbankdepositsandmoneymarketfunds.MarketablesecuritiesconsistofU.S.treasurysecuritiesandhighcreditqualitycorporatedebtsecurities.Thecashandcashequivalentsandmarketablesecuritiesareheldforworkingcapitalpurposes.Suchinterest-earninginstrumentscarryadegreeofinterestraterisk.Todate,fluctuationsininterestincomehavenotbeensignificant.Theprimaryobjectiveofourinvestmentactivitiesistopreserveprincipalwhilemaximizingincomewithoutsignificantlyincreasingrisk.Wedonotenterintoinvestmentsfortradingorspeculativepurposesandhavenotusedanyderivativefinancialinstrumentstomanageourinterestrateriskexposure.Duetotheshort-termnatureofourinvestments,wehavenotbeenexposedto,nordoweanticipatebeingexposedto,materialrisksduetochangesininterestrates.Ahypothetical10%changeininterestratesduringanyoftheperiodspresentedwouldnothavehadamaterialimpactonourconsolidatedfinancialstatements.

CurrencyExchangeRisks

ThefunctionalcurrencyofourforeignsubsidiariesistheU.S.dollarandtheEuro.Therefore,weareexposedtoforeignexchangeratefluctuationsasweconvertthefinancialstatementsofourforeignsubsidiariesintoU.S.dollars.ThelocalcurrenciesofourforeignsubsidiariesaretheBritishpound,theEuro,theColombianpeso,theSingaporedollar,theHongKongdollar,theSwedishKronaandtheCzechKoruna.Oursubsidiariesremeasuremonetaryassetsandliabilitiesatperiod-endexchangerates,

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whilenon-monetaryitemsareremeasuredathistoricalrates.Revenueandexpenseaccountsareremeasuredattheaverageexchangerateineffectduringtheyear.Ifthereisachangeinforeigncurrencyexchangerates,theconversionofourforeignsubsidiaries'financialstatementsintoU.S.dollarswouldresultinarealizedgainorlosswhichisrecordedinourconsolidatedstatementsofoperations.Wedonotcurrentlyengageinanyhedgingactivitytoreduceourpotentialexposuretocurrencyfluctuations,althoughwemaychoosetodosointhefuture.Ahypothetical10%changeinforeignexchangeratesduringanyoftheperiodspresentedwouldnothavehadamaterialimpactonourconsolidatedfinancialstatements.

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Item8.FinancialStatementsandSupplementaryData

INDEXTOCONSOLIDATEDFINANCIALSTATEMENTS

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PageReportsofIndependentRegisteredPublicAccountingFirm 87ConsolidatedBalanceSheets 89ConsolidatedStatementsofOperations 90ConsolidatedStatementsofComprehensiveLoss 91ConsolidatedStatementsofStockholders'Equity 92ConsolidatedStatementsofCashFlows 93NotestoConsolidatedFinancialStatements 94

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ReportofIndependentRegisteredPublicAccountingFirm

TotheStockholdersandBoardofDirectorsTwilioInc.:

OpinionsontheConsolidatedFinancialStatementsandInternalControlOverFinancialReporting

WehaveauditedtheaccompanyingconsolidatedbalancesheetsofTwilioInc.andsubsidiaries(theCompany)asofDecember31,2018andDecember31,2017,therelatedconsolidatedstatementsofoperations,comprehensiveloss,stockholders'equity,andcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2018,andtherelatednotes(collectively,theconsolidatedfinancialstatements).WealsohaveauditedtheCompany'sinternalcontroloverfinancialreportingasofDecember31,2018,basedoncriteriaestablishedinInternalControl—IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.

Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionoftheCompanyasofDecember31,2018andDecember31,2017,andtheresultsofitsoperationsanditscashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2018,inconformitywithU.S.generallyacceptedaccountingprinciples.Alsoinouropinion,theCompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2018basedoncriteriaestablishedinInternalControl—IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.

Basis for Opinions

TheCompany'smanagementisresponsiblefortheseconsolidatedfinancialstatements,formaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagementReportonInternalControloverFinancialReporting,appearingunderItem9A(b).OurresponsibilityistoexpressanopinionontheCompany'sconsolidatedfinancialstatementsandanopinionontheCompany'sinternalcontroloverfinancialreportingbasedonouraudits.WeareapublicaccountingfirmregisteredwiththePublicCompanyAccountingOversightBoard(UnitedStates)(PCAOB)andarerequiredtobeindependentwithrespecttotheCompanyinaccordancewiththeU.S.federalsecuritieslawsandtheapplicablerulesandregulationsoftheSecuritiesandExchangeCommissionandthePCAOB.

WeconductedourauditsinaccordancewiththestandardsofthePCAOB.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreeofmaterialmisstatement,whetherduetoerrororfraud,andwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.

Ourauditsoftheconsolidatedfinancialstatementsincludedperformingprocedurestoassesstherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetoerrororfraud,andperformingproceduresthatrespondtothoserisks.Suchproceduresincludedexamining,onatestbasis,evidenceregardingtheamountsanddisclosuresintheconsolidatedfinancialstatements.Ourauditsalsoincludedevaluatingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationoftheconsolidatedfinancialstatements.Ourauditofinternalcontroloverfinancialreportingincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,andtestingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk.Ourauditsalsoincludedperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditsprovideareasonablebasisforouropinions.

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Definition and Limitations of Internal Control Over Financial Reporting

Acompany'sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany'sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany'sassetsthatcouldhaveamaterialeffectonthefinancialstatements.

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

/s/KPMGLLP

WehaveservedastheCompany'sauditorsince2013.

SanFrancisco,CaliforniaFebruary28,2019

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TWILIOINC.

ConsolidatedBalanceSheets

(Inthousands,exceptshareandpershareamounts)

Seeaccompanyingnotestoconsolidatedfinancialstatements.

89

AsofDecember31, 2018 2017 ASSETS Currentassets: Cashandcashequivalents $ 487,215 $ 115,286Short-termmarketablesecurities 261,128 175,587Accountsreceivable,net 97,712 43,113Prepaidexpensesandothercurrentassets 26,893 19,279

Totalcurrentassets 872,948 353,265Restrictedcash 18,119 5,502Propertyandequipment,net 63,534 50,541Intangibleassets,net 27,558 20,064Goodwill 38,165 17,851Otherlong-termassets 8,386 2,559

Totalassets $ 1,028,710 $ 449,782LIABILITIESANDSTOCKHOLDERS'EQUITY Currentliabilities: Accountspayable $ 18,495 $ 11,116Accruedexpensesandothercurrentliabilities 99,758 53,614Deferredrevenueandcustomerdeposits 19,557 13,797

Totalcurrentliabilities 137,810 78,527Convertibleseniornotes,net 434,496 —Otherlong-termliabilities 18,169 11,409

Totalliabilities 590,475 89,936Commitmentsandcontingencies(Note11) Stockholders'equity: Preferredstock,$0.001parvalue,100,000,000sharesauthorized,noneissued — —Commonstock,$0.001parvaluepershare: Authorizedshares1,100,000,000asofDecember31,2018and2017;Issuedandoutstandingshares100,080,228and93,969,796asofDecember31,2018and2017 100 94

Additionalpaid-incapital 808,527 608,165Accumulatedothercomprehensiveincome 1,282 2,025Accumulateddeficit (371,674) (250,438)Totalstockholders'equity 438,235 359,846Totalliabilitiesandstockholders'equity $ 1,028,710 $ 449,782

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TWILIOINC.

ConsolidatedStatementsofOperations

(Inthousands,exceptshareandpershareamounts)

Seeaccompanyingnotestoconsolidatedfinancialstatements.

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YearEndedDecember31, 2018 2017 2016 Revenue $ 650,067 $ 399,020 $ 277,335Costofrevenue 300,841 182,895 120,520

Grossprofit 349,226 216,125 156,815Operatingexpenses:

Researchanddevelopment 171,358 120,739 77,926Salesandmarketing 175,555 100,669 65,267Generalandadministrative 110,427 59,619 51,077Charitablecontribution 7,121 1,172 3,860Totaloperatingexpenses 464,461 282,199 198,130

Lossfromoperations (115,235) (66,074) (41,315)Other(expenses)income,net (5,923) 3,071 317Lossbeforeprovisionforincometaxes (121,158) (63,003) (40,998)

Provisionforincometaxes (791) (705) (326)Netlossattributabletocommonstockholders $ (121,949) $ (63,708) $ (41,324)Netlosspershareattributabletocommonstockholders,basicanddiluted $ (1.26) $ (0.70) $ (0.78)

Weighted-averagesharesusedincomputingnetlosspershareattributabletocommonstockholders,basicanddiluted 97,130,339 91,224,607 53,116,675

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TWILIOINC.

ConsolidatedStatementsofComprehensiveLoss

(Inthousands)

Seeaccompanyingnotestoconsolidatedfinancialstatements.

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YearEndedDecember31, 2018 2017 2016 Netloss $ (121,949) $ (63,708) $ (41,324)Othercomprehensive(loss)income: Unrealizedgain(loss)onmarketablesecurities 258 (598) —Foreigncurrencytranslation (1,001) 2,623 —Totalothercomprehensive(loss)income (743) 2,025 —Comprehensivelossattributabletocommonstockholders $ (122,692) $ (61,683) $ (41,324)

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TWILIOINC.ConsolidatedStatementsofStockholders'Equity

(Inthousands,exceptshareamounts)

Convertible

preferredstock Common

Stock—ClassA Common

Stock—ClassB

AccumulatedOther

ComprehensiveIncome

Additionalpaid-incapital

Accumulateddeficit

Totalstockholders'

equity

Shares Amount Shares Amount Shares Amount BalanceasofDecember31,2015 54,508,441 $ 239,911 — $ — 17,324,003 $ 17 $ 22,103 $ — $ (145,406) $ 116,625Netloss — — — — — — — — (41,324) (41,324)IssuanceofcommonstockinconnectionwithInitialPublicOffering,netofunderwritingdiscounts — — 11,500,000 12 — — 160,414 — — 160,426

IssuanceofcommonstockinconnectionwithFollow-OnPublicOffering,netofunderwritingdiscounts — — 1,691,222 2 — — 65,279 — — 65,281

Costsrelatedtopublicofferings — — — — — — (5,730) — — (5,730)

Conversionofconvertiblepreferredstocktocommonstockinconnectionwiththeinitialpublicoffering (54,508,441) (239,911) — — 54,508,441 54 239,857 — — —

Exercisesofvestedstockoptions — — — — 2,168,287 2 8,390 — — 8,392

Vestingofearlyexercisedstockoptions — — — — — — 636 — — 636

Vestingofrestrictedstockunits — — 19,178 — 68,345 — — — — —

Valueofequityawardswithheldfortaxliability — — (1,578) — (27,036) — (1,037) — — (1,037)

Exercisesofunvestedstockoptions — — — — 126,365 — — — — —

ConversionofsharesofClassBcommonstockintosharesofClassAcommonstock — — 36,787,588 37 (36,787,588) (37) — — — —

Repurchasesofunvestedstockoptions — — — — (1,625) — — — — —

Stock-basedcompensation — — — — — — 26,178 — — 26,178Escrowsharesreturnedtotheissuer — — — — (127,054) — — — — —

BalanceasofDecember31,2016 — — 49,996,410 51 37,252,138 36 516,090 — (186,730) 329,447Netloss — — — — — — — — (63,708) (63,708)Exercisesofvestedstockoptions — — — — 5,186,539 6 25,591 — — 25,597

Vestingofearlyexercisedstockoptions — — — — — — 378 — — 378

Vestingofrestrictedstockunits — — 360,116 — 351,255 — — — — —

Valueofequityawardswithheldfortaxliability — — — (22,538) — (678) — — (678)

Exercisesofunvestedstockoptions — — — — 22,510 — — — — —

ConversionofsharesofClassBcommonstockintosharesofClassAcommonstock — — 18,710,499 18 (18,710,499) (18) — — — —

SharesissuedunderESPP — — 794,142 1 — — 11,917 — — 11,918Donatedcommonstock — — 45,383 — — — 1,172 — — 1,172Repurchasesofunvestedstockoptions — — — — (16,159) — (100) — — (100)

Unrealizedlossonmarketablesecurities — — — — — — — (598) — (598)

Foreigncurrencytranslation — — — — — — — 2,623 — 2,623Stock-basedcompensation — — — — — — 53,795 — — 53,795

BalanceasofDecember31,2017 — — 69,906,550 70 24,063,246 24 608,165 2,025 (250,438) 359,846Netloss — — — — — — — — (121,949) (121,949)AdjustmenttoopeningretainedearningsduetoadoptionofASC606 — — — — — — — — 713 713

Exercisesofvestedstockoptions — — — — 3,625,991 4 29,732 — — 29,736

Vestingofearlyexercisedstockoptions — — — — — 36 — — 36

Vestingofrestrictedstockunits — — 1,970,565 2 172,211 — — — — 2

Valueofequityawardswithheldfortaxliability — — (25,932) — (22,044) — (2,654) — — (2,654)

Exercisesofunvestedstockoptions — — — — 2,041 — — — — —

ConversionofsharesofClassBcommonstockintosharesofClassAcommonstock — — 8,530,980 8 (8,530,980) (8) — — — —

SharesissuedunderESPP — — 325,262 — — — 10,122 — — 10,122Issuanceofdebtconversionoption — — — — — — 119,435 — — 119,435

Debtconversionoptionissuancecosts — — — — — — (2,819) — — (2,819)

Cappedcalloptionissuancecosts — — — — — — (58,465) — — (58,465)

Seeaccompanyingnotestoconsolidatedfinancialstatements.

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Donatedcommonstock — — 62,338 — — — 5,996 — — 5,996Unrealizedlossonmarketablesecurities — — — — — — — 258 — 258

Foreigncurrencytranslation — — — — — — — (1,001) — (1,001)Stock-basedcompensation — — — — — — 98,979 — — 98,979

BalanceasofDecember31,2018 — $ — 80,769,763 $ 80 19,310,465 $ 20 $ 808,527 $ 1,282 $ (371,674) $ 438,235

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TWILIOINC.

ConsolidatedStatementsofCashFlows

(Inthousands)

Seeaccompanyingnotestoconsolidatedfinancialstatements.

93

YearEndedDecember31, 2018 2017 2016 CASHFLOWSFROMOPERATINGACTIVITIES: Netloss $ (121,949) $ (63,708) $ (41,324)Adjustmentstoreconcilenetlosstonetcashprovidedby(usedin)operatingactivities: Depreciationandamortization 26,095 18,764 8,315Netamortizationofinvestmentpremiumordiscount (1,496) 262 —Amortizationofdebtissuancecosts 1,102 — —Accretionofdebtdiscountonconvertibleseniornotes 12,951 — —Amortizationofdeferredcommissions 1,349 — —Stock-basedcompensation 93,273 49,619 24,225Valueofdonatedcommonstock 5,996 1,172 —Provisionfordoubtfulaccounts 3,650 580 1,145Write-offofinternallydevelopedsoftwareandintangibleassets 1,874 561 711(Gain)lossonleaseterminationandassetdisposals (45) (295) 94Changesinoperatingassetsandliabilities: Accountsreceivable (58,234) (15,280) (8,254)Prepaidexpensesandothercurrentassets (8,739) 2,214 (13,755)Otherlong-termassets (5,305) (1,984) (129)Accountspayable 6,980 5,433 1,714Accruedexpensesandothercurrentliabilities 45,120 (3,312) 24,182Deferredrevenueandcustomerdeposits 5,958 3,560 4,076Otherlong-termliabilities (597) (841) 9,097Netcashprovidedby(usedin)operatingactivities 7,983 (3,255) 10,097

CASHFLOWSFROMINVESTINGACTIVITIES: Purchasesofmarketablesecurities (279,687) (293,186) —Maturitiesofmarketablesecurities 195,497 115,877 —Capitalizedsoftwaredevelopmentcosts (19,546) (17,280) (11,527)Purchasesofpropertyandequipment (4,668) (9,248) (14,174)Purchasesofintangibleassets (441) (290) (785)Acquisition(s),netofcashacquired (30,574) (22,621) (8,500)

Netcashusedininvestingactivities (139,419) (226,748) (34,986)CASHFLOWSFROMFINANCINGACTIVITIES: ProceedsfromInitialPublicOffering,netofunderwritingdiscounts — — 160,426ProceedsfromFollow-OnPublicOffering,netofunderwritingdiscounts — — 65,281Paymentsofcostsrelatedtopublicofferings — (430) (4,606)Proceedsfromissuanceofconvertibleseniornotes 550,000 — —Paymentsofdebtissuancecosts (12,941) — —Purchaseofcappedcall (58,465) — —Proceedsfromexercisesofstockoptions 29,757 25,727 9,102ProceedsfromsharesissuedinESPP 10,122 11,918 —Valueofequityawardswithheldfortaxliabilities (2,654) (678) (1,037)Repurchasesofcommonstock — (100) (2)

Netcashprovidedbyfinancingactivities 515,819 36,437 229,164Effectofexchangeratechangesoncashandcashequivalents 163 74 —

NETINCREASE(DECREASE)INCASH,CASHEQUIVALENTSANDRESTRICTEDCASH 384,546 (193,492) 204,275CASH,CASHEQUIVALENTSANDRESTRICTEDCASH—Beginningofyear 120,788 314,280 110,005CASH,CASHEQUIVALENTSANDRESTRICTEDCASH—Endofyear $ 505,334 $ 120,788 $ 314,280Cashpaidforincometaxes $ 564 $ 605 $ 225NON-CASHINVESTINGANDFINANCINGACTIVITIES: Purchasesofpropertyandequipmentandintangibleassets,accruedbutnotpaid $ 1,418 $ 235 $ 4,201Purchasesofproperty,equipmentthroughcapitallease $ 2,478 $ — $ —Stock-basedcompensationcapitalizedinsoftwaredevelopmentcosts $ 5,706 $ 4,176 $ 1,953Businesscombinationmeasurementperiodadjustments $ 571 $ (149) $ —Acquisitionholdback $ 2,290 $ — $ —Costsrelatedtopublicofferings,accruedbutnotpaid $ — $ — $ 430

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TWILIOINC.

NotestoConsolidatedFinancialStatements

1.OrganizationandDescriptionofBusiness

TwilioInc.(the"Company")wasincorporatedinthestateofDelawareonMarch13,2008.TheCompanyistheleaderintheCloudCommunicationsPlatformcategoryandenablesdeveloperstobuild,scaleandoperatereal-timecommunicationswithintheirsoftwareapplicationsviasimple-to-useApplicationProgrammingInterfaces("API").Thepower,flexibility,andreliabilityofferedbytheCompany'ssoftwarebuildingblocksempowerentitiesofvirtuallyeveryshapeandsizetobuildworld-classengagementintotheircustomerexperience.

TheCompany'sheadquartersarelocatedinSanFrancisco,California,andtheCompanyhassubsidiariesintheUnitedStates,theUnitedKingdom,Estonia,Ireland,Colombia,Germany,HongKong,Singapore,Bermuda,Spain,Sweden,Australia,CzechRepublic,JapanandtheNetherlands.

2.SummaryofSignificantAccountingPolicies

(a)BasisofPresentation

TheCompany'sconsolidatedfinancialstatementshavebeenpreparedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica("U.S.GAAP").

(b)PrinciplesofConsolidation

TheconsolidatedfinancialstatementsincludetheCompanyanditswhollyownedsubsidiaries.Allsignificantintercompanybalancesandtransactionshavebeeneliminated.

(c)UseofEstimates

ThepreparationoffinancialstatementsinconformitywithU.S.GAAPrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Theseestimatesareusedfor,butnotlimitedto,recoverabilityoflong-livedandintangibleassets;capitalizationandusefullifeoftheCompany'scapitalizedinternal-usesoftwaredevelopmentcosts;fairvalueofacquiredintangibleassetsandgoodwill;accrualsandcontingencies.EstimatesarebasedonhistoricalexperienceandonvariousassumptionsthattheCompanybelievesarereasonableundercurrentcircumstances.However,futureeventsaresubjecttochangeandbestestimatesandjudgmentsmayrequirefurtheradjustments;therefore,actualresultscoulddiffermateriallyfromthoseestimates.Managementperiodicallyevaluatessuchestimatesandtheyareadjustedprospectivelybaseduponsuchperiodicevaluation.

(d)ConcentrationofCreditRisk

FinancialinstrumentsthatpotentiallyexposetheCompanytoaconcentrationofcreditriskconsistprimarilyofcash,cashequivalents,marketablesecurities,restrictedcashandaccountsreceivable.TheCompanymaintainscash,cashequivalents,restrictedcashandmarketablesecuritieswithfinancialinstitutionsthatmanagementbelievesarefinanciallysoundandhaveminimalcreditriskexposurealthoughthebalanceswillexceedinsuredlimits.

TheCompanysellsitsservicestoawidevarietyofcustomers.Ifthefinancialconditionorresultsofoperationsofanysignificantcustomersdeterioratesubstantially,operatingresultscouldbeadverselyaffected.Toreducecreditrisk,managementperformsongoingcreditevaluationsofthefinancial

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conditionofsignificantcustomers.TheCompanydoesnotrequirecollateralfromitscreditcustomersandmaintainsreservesforestimatedcreditlossesoncustomeraccountswhenconsiderednecessary.ActualcreditlossesmaydifferfromtheCompany'sestimates.DuringtheyearsendedDecember31,2018and2017,therewasnocustomerorganizationthataccountedformorethan10%oftheCompany'stotalrevenue.DuringtheyearendedDecember31,2016,onecustomerorganizationrepresentedapproximately14%oftheCompany'stotalrevenue.

AsofDecember31,2018and2017,therewasnocustomerorganizationthatrepresentedmorethan10%oftheCompany'sgrossaccountsreceivable.

(e)RevenueRecognition

Adoption of Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers"

EffectiveJanuary1,2018,theCompanyadoptedAccountingStandardsCodification("ASC")606,"Revenue from Contracts with Customers" ,whichreplacedtheexistingrevenuerecognitionguidance,ASC605,andoutlinesasinglesetofcomprehensiveprinciplesforrecognizingrevenueunderU.S.GAAP.Amongotherthings,ASC606requiresentitiestoassesstheproductsorservicespromisedincontractswithcustomersatcontractinceptiontodeterminetheappropriateunitatwhichtorecordrevenue,whichisreferredtoasaperformanceobligation.Revenueisrecognizedwhencontrolofthepromisedproductsorservicesistransferredtocustomersatanamountthatreflectstheconsiderationtowhichtheentityexpectstobeentitledtoinexchangeforthoseproductsorservices.

TheCompanyadoptedASC606usingthemodifiedretrospectivemethodwithacumulativecatch-upadjustmenttotheopeningretainedearningsasofJanuary1,2018.ResultsforreportingperiodsbeginningafterDecember31,2017arepresentedunderASC606,whilepriorperiodamountsarenotadjustedandcontinuetobereportedinaccordancewiththeCompany'shistoricalaccountingpoliciespriortoadoption.Inadoptingthestandard,theCompanyelectedtoapplythenewguidanceonlytothosecontractswhichwerenotcompletedasofthedateoftheadoption.

TheimpactofadoptingthenewstandardontheCompany'sconsolidatedfinancialstatementswasinsignificant.TheCompanyrecordedanetcumulativecatch-upadjustmenttothebeginningretainedearningsasofJanuary1,2018,of$0.7million.

Theprimaryimpactrelatestothedeferralofincrementalcommissioncostsofobtainingnewcontracts.UnderASC605,theCompanydeferredonlydirectandincrementalcommissioncoststoobtainacontractandamortizedthosecostsonastraight-linebasisoverthetermoftherelatedsubscriptioncontract.Underthenewstandard,theCompanydefersallincrementalcommissioncoststoobtainthecontractandamortizesthesecostsonastraight-linebasisovertheexpectedtermofbenefitoftheunderlyingasset,whichwasdeterminedtobefiveyears.

TheimpactontheCompany'srevenuerecognitionpolicieswasinsignificant.PriortotheadoptionofASC606,theCompanyrecognizedthemajorityofitsrevenueaccordingtotheusagebyitscustomersintheperiodinwhichthatusageoccurred.ASC606continuestosupporttherecognitionofrevenueovertime,andonausagebasis,forthemajorityoftheCompany'scontractsduetocontinuoustransferofcontroltothecustomer.

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TherewasnotasignificanttaximpacttotheCompany'sconsolidatedstatementsofoperationsandconsolidatedbalancesheetrelatingtotheadoptionofthenewstandardasthereisafullvaluationallowanceduetotheCompany'shistoryofcontinuedlosses.

Revenue Recognition Policy

RevenueisrecognizedupontransferofcontrolofpromisedproductsorservicestocustomersinanamountthatreflectstheconsiderationtheCompanyexpectstoreceiveinexchangeforthoseproductsorservices.TheCompanyentersintocontractsthatcanincludevariouscombinationsofproductsandservices,whicharegenerallycapableofbeingdistinctandaccountedforasseparateperformanceobligations.Revenueisrecognizednetofallowancesforcreditsandanytaxescollectedfromcustomers,whicharesubsequentlyremittedtogovernmentalauthorities.

TheCompanydeterminesrevenuerecognitionthroughthefollowingsteps:

• Identificationofthecontract,orcontracts,withacustomer;

• Identificationoftheperformanceobligationsinthecontract;

• Determinationofthetransactionprice;

• Allocationofthetransactionpricetotheperformanceobligationsinthecontract;and

• Recognitionofrevenuewhen,oras,theCompanysatisfiesaperformanceobligation.

Nature of Products and Services

TheCompany'srevenueisprimarilyderivedfromusage-basedfeesearnedfromcustomersaccessingtheCompany'senterprisecloudcomputingservices.Platformaccessisconsideredamonthlyseriescomprisingofoneperformanceobligationandusage-basedfeesarerecognizedasrevenueintheperiodinwhichtheusageoccurs.IntheyearsendedDecember31,2018,2017and2016,therevenuefromusage-basedfeesrepresented84%,83%and83%oftotalrevenue,respectively.

Subscription-basedfeesarederivedfromcertainterm-basedcontracts,suchaswiththesalesofshortcodesandcustomersupport.Term-basedcontractsrevenueisrecognizedonaratablebasisoverthecontractualtermofthearrangementbeginningonthedatethattheserviceismadeavailabletothecustomer.IntheyearsendedDecember31,2018and2017,therevenuefromterm-basedfeesrepresented16%and17%oftotalrevenue,respectively.

TheCompanyappliedtheoptionalexemptionofnotdisclosingthetransactionpriceallocatedtotheremainingperformanceobligationsforitsusage-basedcontractsandcontractswithoriginaldurationofoneyearorless.ThemajorityoftheCompany'scontractshaveadurationofoneyearorless.

Nosignificantjudgmentsarerequiredindeterminingwhetherproductsandservicesareconsidereddistinctperformanceobligationsandshouldbeaccountedforseparatelyversustogether,ortodeterminethestand-alonesellingprice("SSP").

TheCompany'sarrangementsdonotcontaingeneralrightsofreturn.However,creditsmaybeissuedonacase-by-casebasis.Thecontractsdonotprovidecustomerswiththerighttotakepossessionofthesoftwaresupportingtheapplications.Amountsthathavebeeninvoicedarerecordedinaccountsreceivableandinrevenueordeferredrevenuedependingonwhethertherevenuerecognitioncriteriahavebeenmet.

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Thereserveforsalescreditsisincludedinaccountsreceivableandiscalculatedbasedonhistoricaltrendsandanyspecificrisksidentifiedinprocessingtransactions.Changesinthereservearerecordedagainstrevenue.

Deferred Revenue and Customer Deposits

Deferredrevenueisrecordedwhencashpaymentsarereceivedinadvanceoffutureusageonnon-cancellablecontracts.Customerrefundableprepaymentsarerecordedascustomerdeposits.AsofDecember31,2018,theCompanyrecorded$10.3millionand$9.3millionasitsdeferredrevenueandcustomerdeposits,respectively.IntheyearendedDecember31,2018,theCompanyrecognized$10.5millionofrevenue,thatwasincludedinthedeferredrevenueandcustomerdepositsbalanceasofJanuary1,2018.

Deferred Sales Commissions

TheCompanyrecordsanassetfortheincrementalcostsofobtainingacontractwithacustomer,forexample,salescommissionsthatareearneduponexecutionofcontracts.TheCompanyusestheportfolioofdatamethodtodeterminetheestimatedperiodofbenefitofcapitalizedcommissionswhichisdeterminedtobefiveyears.Amortizationexpenserelatedtothesecapitalizedcostsrelatedtoinitialcontracts,upsellsandrenewals,isrecognizedonastraightlinebasisovertheestimatedperiodofbenefitofthecapitalizedcommissions.TotalnetcapitalizedcostsasofDecember31,2018were$9.4millionandareincludedinprepaidexpensesandothercurrentandlong-termassetsintheaccompanyingconsolidatedbalancesheet.Amortizationoftheseassetswas$1.4millionintheyearendedDecember31,2018,andisincludedinsalesandmarketingexpenseintheaccompanyingconsolidatedstatementofoperations.

(f)CostofRevenue

Costofrevenueconsistsprimarilyofcostsofcommunicationsservicespurchasedfromnetworkserviceproviders.CostofrevenuealsoincludesfeestosupporttheCompany'scloudinfrastructure,personnelcosts,suchassalariesandstock-basedcompensationforthecustomercareandsupportservicesemployees,andnon-personnelcosts,suchasamortizationofcapitalizedinternal-usesoftwaredevelopmentcostsandamortizationofacquiredintangibles.

(g)ResearchandDevelopmentExpenses

Researchanddevelopmentexpensesconsistprimarilyofpersonnelcosts,cloudinfrastructurefeesforstaginganddevelopment,outsourcedengineeringservices,amortizationofcapitalizedinternal-usesoftwaredevelopmentcostsandanallocationofgeneraloverheadexpenses.TheCompanycapitalizestheportionofitssoftwaredevelopmentcoststhatmeetsthecriteriaforcapitalization.

(h)Internal-UseSoftwareDevelopmentCosts

Certaincostsofplatformandothersoftwareapplicationsdevelopedforinternalusearecapitalized.TheCompanycapitalizesqualifyinginternal-usesoftwaredevelopmentcoststhatareincurredduringtheapplicationdevelopmentstage.Capitalizationofcostsbeginswhentwocriteriaaremet:(i)thepreliminaryprojectstageiscompletedand(ii)itisprobablethatthesoftwarewillbecompletedandusedforitsintendedfunction.Capitalizationceaseswhenthesoftwareissubstantially

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completeandreadyforitsintendeduse,includingthecompletionofallsignificanttesting.TheCompanyalsocapitalizescostsrelatedtospecificupgradesandenhancementswhenitisprobabletheexpenditureswillresultinadditionalfunctionalityandexpensescostsincurredformaintenanceandminorupgradesandenhancements.Costsrelatedtopreliminaryprojectactivitiesandpost-implementationoperatingactivitiesarealsoexpensedasincurred.

Capitalizedcostsofplatformandothersoftwareapplicationsareincludedinpropertyandequipment.Thesecostsareamortizedovertheestimatedusefullifeofthesoftwareonastraight-linebasisoverthreeyears.Managementevaluatestheusefullifeoftheseassetsonanannualbasisandtestsforimpairmentwhenevereventsorchangesincircumstancesoccurthatcouldimpacttherecoverabilityoftheseassets.Theamortizationofcostsrelatedtotheplatformapplicationsisincludedincostofrevenue,whiletheamortizationofcostsrelatedtoothersoftwareapplicationsdevelopedforinternaluseisincludedinoperatingexpenses.

(i)AdvertisingCosts

Advertisingcostsareexpensedasincurredandwere$10.6million,$4.9millionand$3.5millionintheyearsendedDecember31,2018,2017and2016,respectively.Advertisingcostsareincludedinsalesandmarketingexpensesintheaccompanyingconsolidatedstatementsofoperations.

(j)Stock-BasedCompensation

Allstock-basedcompensationtoemployees,includingthepurchaserightsissuedundertheCompany's2016EmployeeStockPurchasePlan(the"ESPP"),ismeasuredonthegrantdatebasedonthefairvalueoftheawardsonthedateofgrant.Thiscostisrecognizedasanexpensefollowingstraight-lineattributionmethodovertherequisiteserviceperiod.TheCompanyusestheBlack-ScholesoptionpricingmodeltomeasurethefairvalueofitsstockoptionsandthepurchaserightsissuedundertheESPP.ThefairvalueoftherestrictedstockunitsisdeterminedusingthefairvalueoftheCompany'sClassAcommonstockonthedateofgrantandrecognizedasanexpensefollowingstraight-lineattributionmethodovertherequisiteserviceperiod.PriortoadoptionofASU2016-09,thestock-basedcompensationwasrecordednetofestimatedforfeitures.

InJune2018,theFinancialAccountingStandardsBoard("FASB")issuedAccountingStandardsUpdate("ASU")2018-07,"Improvements to NonemployeeShare-Based Payment Accounting", whichalignsthemeasurementandclassificationforshare-basedpaymentstonon-employeeswiththeaccountingguidanceforshare-basedpaymentstoemployees.Amongotherrequirements,themeasurementofnon-employeeawardswillnowbefixedatthegrantdate,ratherthanremeasuredateveryreportingdate.ThisguidanceiseffectiveforinterimandannualreportingperiodsbeginningafterDecember15,2018,withearlyapplicationpermitted.TheCompanyearly-adoptedthisguidanceinthequarterendedDecember31,2018whichdidnothaveamaterialimpacttoitsfinancialstatements.

InMay2017,theFASBissuedASU2017-09,"Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting" ,ASU2017-09clarifieswhenchangestothetermsorconditionsofashare-basedpaymentawardmustbeaccountedforasmodifications.ASU2017-09allowscompaniestomakecertainchangestoawards,suchasvestingconditions,withoutaccountingforthemasmodifications.Itdoesnotchangetheaccountingformodifications.ASU2017-09shouldbeappliedprospectivelytoawardsmodifiedonoraftertheadoptiondate.TheCompanyadoptedASU2017-09in

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thefirstquarterof2018.TheadoptionofthisguidancedidnothaveanimpactontheCompany'sfinancialposition,resultsofoperationsorcashflows.

InMarch2016,FASBissuedASUNo.2016-09,"Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based PaymentAccounting ."Thisnewguidancewasintendedtosimplifyseveralareasofaccountingforstock-basedcompensationarrangements,includingtheincometaximpact,classificationonthestatementofcashflowsandforfeitures.Thisguidanceiseffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2016,andearlyadoptionispermitted.TheCompanyearlyadoptedthisguidanceinthequarterendedDecember31,2016.Thenewguidanceallowsentitiestoaccountforforfeituresastheyoccur.TheCompanyelectedtoaccountforforfeituresastheyoccurandadoptedthisprovisiononamodifiedretrospectivebasis.The$0.1millionofcumulativeprioryears'impactaswellastheimpactonthefirstthreequartersof2016of$75,000wasrecognizedasanincreasetostock-basedcompensationduringthequarterendedDecember31,2016,astheimpactonpriorperiodswasinsignificant.AdoptionofallotherchangesinthenewguidancedidnothaveasignificantimpactontheCompany'sconsolidatedfinancialstatements.

CompensationexpenseforstockoptionsgrantedtononemployeesiscalculatedusingtheBlack-Scholesoptionpricingmodelandisrecognizedinexpenseovertheserviceperiod.

TheBlack-Scholesoptionpricingmodelrequirestheuseofcomplexassumptions,whichdeterminethefairvalueofstock-basedawards.Theseassumptionsinclude:

• Fair value of the common stock. PriortotheCompany'sIPO,theboardofdirectorsconsiderednumerousobjectiveandsubjectivefactorstodeterminethefairvalueoftheCompany'scommonstockateachmeetingatwhichawardsareapproved.Thefactorsincluded,butwerenotlimitedto:(i)contemporaneousvaluationsoftheCompany'scommonstockbyanunrelatedthirdparty;(ii)thepricesatwhichtheCompanysoldsharesofitsconvertiblepreferredstocktooutsideinvestorsinarms-lengthtransactions;(iii)therights,preferencesandprivilegesoftheCompany'sconvertiblepreferredstockrelativetothoseofitscommonstock;(iv)theCompany'sresultsofoperations,financialpositionandcapitalresources;(v)currentbusinessconditionsandprojections;(vi)thelackofmarketabilityoftheCompany'scommonstock;(vii)thehiringofkeypersonnelandtheexperienceofmanagement;(viii)theintroductionofnewproducts;(ix)theriskinherentinthedevelopmentandexpansionoftheCompany'sproducts;(x)theCompany'sstageofdevelopmentandmaterialrisksrelatedtoitsbusiness;(xi)thefactthattheoptiongrantsinvolveilliquidsecuritiesinaprivatecompany;and(xii)thelikelihoodofachievingaliquidityevent,suchasaninitialpublicofferingorsaleoftheCompany,inlightofprevailingmarketconditions;

AftertheIPO,theCompanyusesthemarketclosingpriceofitsClassAcommonstock,asreportedontheNewYorkStockExchange,forthefairvalue.

• Expected term. Theexpectedtermrepresentstheperiodthatthestock-basedawardsareexpectedtobeoutstanding.TheCompanyusesthesimplifiedcalculationofexpectedterm,astheCompanydoesnothavesufficienthistoricaldatatouseanyothermethodtoestimateexpectedterm;

• Expected volatility. TheexpectedvolatilityisderivedfromanaverageofthehistoricalvolatilitiesofthecommonstockofseveralentitieswithcharacteristicssimilartothoseoftheCompany,

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suchasthesizeandoperationalandeconomicsimilaritiestotheCompany'sprincipalbusinessoperations;

• Risk -free interest rate. Therisk-freeinterestrateisbasedontheU.S.TreasuryyieldcurveineffectatthetimeofgrantforzerocouponU.S.Treasurynoteswithmaturitiesapproximatelyequaltotheexpectedtermofthestock-basedawards;and

• Expected dividend. TheexpecteddividendisassumedtobezeroastheCompanyhasneverpaiddividendsandhasnocurrentplanstopayanydividendsonitscommonstock.

IfanyoftheassumptionsusedintheBlack-Scholesmodelchanges,stock-basedcompensationforfutureoptionsmaydiffermateriallycomparedtothatassociatedwithpreviousgrants.

(k)IncomeTaxes

TheCompanyaccountsforincometaxesinaccordancewithauthoritativeguidancewhichrequirestheuseoftheassetandliabilityapproach.Deferredtaxassetsandliabilitiesarerecognizedforfuturetaxconsequencesattributabletotemporarydifferencesbetweenthefinancialstatementcarryingamountsofexistingassetsandliabilitiesandtheirrespectivetaxbases,aswellasnetoperatinglossandtaxcreditcarry-forwards.Deferredtaxamountsaredeterminedbyusingtheenactedtaxratesexpectedtobeineffectwhenthetemporarydifferencesareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate.Avaluationallowancereducesthedeferredtaxassetstotheamountthatismorelikelythannottoberealized.

TheCompanyrecognizestheeffectofuncertainincometaxpositionsonlyifthosepositionsaremorelikelythannotofbeingsustained.Recognizedincometaxpositionsaremeasuredatthelargestamountthatisgreaterthan50%likelyofbeingrealized.Changesinrecognitionormeasurementarereflectedintheperiodinwhichthechangeinjudgmentoccurs.

TheCompanyrecordsinterestandpenaltiesrelatedtouncertaintaxpositionsintheprovisionforincometaxesintheconsolidatedstatementsofoperations.

(l)ForeignCurrencyTranslation

ThefunctionalcurrencyoftheCompany'sforeignsubsidiariesisgenerallytheU.S.dollar.Accordingly,thesubsidiariesremeasuremonetaryassetsandliabilitiesatperiod-endexchangerates,whilenon-monetaryitemsareremeasuredathistoricalrates.Revenueandexpenseaccountsareremeasuredattheaverageexchangerateineffectduringtheyear.Remeasurementadjustmentsarerecognizedintheconsolidatedstatementsofoperationsasotherincomeorexpenseintheyearofoccurrence.Foreigncurrencytransactiongainsandlosseswereinsignificantforallperiodspresented.

Forthoseentitieswherethefunctionalcurrencyisaforeigncurrency,adjustmentsresultingfromtranslatingthefinancialstatementsintoU.S.dollarsarerecordedasacomponentofaccumulatedothercomprehensiveincome(loss)instockholders'equity.MonetaryassetsandliabilitiesdenominatedinaforeigncurrencyaretranslatedintoUSdollarsattheexchangerateonthebalancesheetdate.Revenueandexpensesaretranslatedattheweightedaverageexchangeratesduringtheperiod.Equitytransactionsaretranslatedusinghistoricalexchangerates.Foreigncurrencytransactiongainsandlossesareincludedinotherincome(expense),netintheconsolidatedstatementsofoperations.

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(m)ComprehensiveIncome(Loss)

Comprehensiveincome(loss)referstonetincome(loss)andotherrevenue,expenses,gainsandlossesthat,undergenerallyacceptedaccountingprinciples,arerecordedasanelementofstockholders'equitybutareexcludedfromthecalculationofnetincome(loss).

FortheyearendedDecember31,2016,theCompany'soperationsdidnotgiverisetoanymaterialitemsincludableincomprehensiveincome(loss),whichwerenotalreadyinnetincome(loss).Accordingly,forthatperiod,theCompany'scomprehensiveincome(loss)isthesameasitsnetincome(loss).

(n)NetLossPerShareAttributabletoCommonStockholders

TheCompanycalculatesitsbasicanddilutednetlosspershareattributabletocommonstockholdersinconformitywiththetwo-classmethodrequiredforcompanieswithparticipatingsecurities.Allseriesofconvertiblepreferredstockareconsideredtobeparticipatingsecuritiesastheholdersofthepreferredstockareentitledtoreceiveanon-cumulativedividendonaproratapari passu basisintheeventthatadividendisdeclaredorpaidoncommonstock.Sharesofcommonstockissueduponearlyexerciseofstockoptionsthataresubjecttorepurchasearealsoconsideredtobeparticipatingsecurities,becauseholdersofsuchshareshavenon-forfeitabledividendrightsintheeventadividendisdeclaredorpaidoncommonstock.Underthetwo-classmethod,inperiodswhentheCompanyhasnetincome,netincomeattributabletocommonstockholdersisdeterminedbyallocatingundistributedearnings,calculatedasnetincomelesscurrentperiodconvertiblepreferredstocknon-cumulativedividends,betweencommonstockandtheconvertiblepreferredstock.Incomputingdilutednetincomeattributabletocommonstockholders,undistributedearningsarere-allocatedtoreflectthepotentialimpactofdilutivesecurities.TheCompany'sbasicnetlosspershareattributabletocommonstockholdersiscalculatedbydividingthenetlossattributabletocommonstockholdersbytheweighted-averagenumberofsharesofcommonstockoutstandingfortheperiod.Thedilutednetlosspershareattributabletocommonstockholdersiscomputedbygivingeffecttoallpotentialdilutivecommonstockequivalentsoutstandingfortheperiod.Thedilutiveeffectofthesepotentialcommonsharesisreflectedindilutedearningspersharebyapplicationofthetreasurystockmethod.Forpurposesofthiscalculation,convertiblepreferredstock,optionstopurchasecommonstock,unvestedrestrictedstockunits,commonstockissuedsubjecttofuturevesting,anysharesofstockcommittedundertheESPP,anysharesofstockheldinescrowandanysharesofstockreservedforfuturedonationsareconsideredcommonstockequivalentsbuthavebeenexcludedfromthecalculationofdilutednetlosspershareattributabletocommonstockholdersastheireffectisantidilutive.

SincetheCompany'sIPOin2016,ClassAandClassBcommonstockaretheonlyoutstandingequityoftheCompany.TherightsoftheholdersofClassAandClassBcommonstockareidentical,exceptwithrespecttovotingandconversion.EachshareofClassAcommonstockisentitledtoonevotepershareandeachshareofClassBcommonstockisentitledto10votespershare.SharesofClassBcommonstockmaybeconvertedintoClassAcommonstockatanytimeattheoptionofthestockholderonaone-for-onebasis,andareautomaticallyconvertedintoClassAcommonstockuponsaleortransfer,subjecttocertainlimitedexceptions.SharesofClassAcommonstockarenotconvertible.

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(o)CashandCashEquivalents

TheCompanyconsidersallhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlesswhenpurchasedtobecashequivalents.Cashequivalentsconsistoffundsdepositedintomoneymarketfundsandreverserepurchaseagreements.Allcreditanddebitcardtransactionsthatprocessasofthelastdayofeachmonthandsettlewithinthefirstfewdaysofthesubsequentmontharealsoclassifiedascashandcashequivalentsasoftheendofthemonthinwhichtheywereprocessed.

(p)RestrictedCash

RestrictedcashconsistsofcashdepositedintoasavingsaccountwithafinancialinstitutionascollateralfortheCompany'sobligationsunderitsfacilityleasesofpremiseslocatedinSanFrancisco,California.ThefacilityleasefortheCompany'soldofficespaceexpiredinJanuary2017andthefacilityleasesfortheCompany'scurrentofficesexpireatvariousdatesbetweenOctober2024andJune2028.

InNovember2016,theFinancialAccountingStandardsBoard("FASB")issuedAccountingStandardsUpdate("ASU")No.2016-18,"Statement of CashFlows (Topic 230) —Restricted Cash" .Thisstandardprovidesguidanceonthepresentationofrestrictedcashandrestrictedcashequivalentsinthestatementofcashflows.Restrictedcashandrestrictedcashequivalentsshouldbeincludedwithcashandcashequivalentswhenreconcilingthebeginning-of-periodandend-of-periodamountsshownonthestatementsofcashflows.TheamendmentsofthisASUshouldbeappliedusingaretrospectivetransitionmethodandareeffectiveforreportingperiodsbeginningafterDecember15,2017.TheCompanyadoptedASU2016-18inthefirstquarterof2018andappliedtheguidanceretrospectivelytothepriorperiod'sconsolidatedstatementofcashflowswiththefollowingimpact(inthousands):

Otherthantherevisedstatementofcashflowspresentationofrestrictedcash,theadoptionofASU2016-18didnothaveanimpactontheCompany'sfinancialpositionandresultsofoperations.

TherestrictedcashbalancesasofDecember31,2018andDecember31,2017were$18.1millionand$5.5million,respectively.

(q)AccountsReceivableandAllowanceforDoubtfulAccounts

Accountsreceivablearerecordednetoftheallowancefordoubtfulaccountsandthereserveforsalescredits.TheallowancefordoubtfulaccountsisestimatedbasedontheCompany'sassessmentofitsabilitytocollectoncustomeraccountsreceivable.TheCompanyregularlyreviewstheallowancebyconsideringcertainfactorssuchashistoricalexperience,creditquality,ageofaccountsreceivablebalancesandotherknownconditionsthatmayaffectacustomer'sabilitytopay.Incaseswherethe

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December31,2017 YearEnded

December31,2016

AsOriginallyReported AsAdjusted

AsOriginallyReported AsAdjusted

Cashprovidedby(usedin)operatingactivities $ (3,260) $ (3,255) $ 10,091 $ 10,097Cashusedininvestingactivities $ (223,630) $ (226,748) $ (42,425) (34,986)Cash,cashequivalentsandrestrictedcash—beginningofperiod 305,665 314,280 108,835 110,005Cash,cashequivalentsandrestrictedcash—endofperiod $ 115,286 $ 120,788 $ 305,665 $ 314,280

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Companyisawareofcircumstancesthatmayimpairaspecificcustomer'sabilitytomeettheirfinancialobligations,aspecificallowanceisrecordedagainstamountsduefromthecustomerwhichreducesthenetrecognizedreceivabletotheamounttheCompanyreasonablybelievewillbecollected.TheCompanywrites-offaccountsreceivableagainsttheallowancewhenadeterminationismadethatthebalanceisuncollectibleandcollectionofthereceivableisnolongerbeingactivelypursued.Theallowancefordoubtfulaccountswas$4.9millionand$1.0millionasofDecember31,2018and2017,respectively.

(r)CostsRelatedtothePublicOfferings

Costsrelatedtothepublicofferings,whichconsistofdirectincrementallegal,printingandaccountingfees,aredeferreduntiltheofferingiscompleted.Uponcompletionoftheoffering,thesecostsareoffsetagainsttheofferingproceedswithintheconsolidatedstatementsofstockholders'equity.IntheyearendedDecember31,2016,theCompanyrecordedinitsconsolidatedstatementofstockholders'equity$5.7millionintotalofferingcosts.

(s)PropertyandEquipment

Propertyandequipment,bothownedandundercapitallease,isstatedatcostlessaccumulateddepreciationandamortization.Depreciationiscomputedusingthestraight-linemethodovertheestimatedusefullifeoftherelatedasset.Maintenanceandrepairsarechargedtoexpensesasincurred.

Theusefullivesofpropertyandequipmentareasfollows:

(t)IntangibleAssets

IntangibleassetsrecordedbytheCompanyarecostsdirectlyassociatedwithsecuringlegalregistrationofpatentsandtrademarks,acquiringdomainnamesandthefairvalueofidentifiableintangibleassetsacquiredinbusinesscombinations.

Intangibleassetswithdeterminableeconomiclivesarecarriedatcost,lessaccumulatedamortization.Amortizationiscomputedovertheestimatedusefullifeofeachassetonastraight-linebasis.TheCompanydeterminestheusefullivesofidentifiableintangibleassetsafterconsideringthespecificfactsandcircumstancesrelatedtoeachintangibleasset.FactorstheCompanyconsiderswhendeterminingusefullivesincludethecontractualtermofanyagreementrelatedtotheasset,thehistoricalperformanceoftheasset,theCompany'slong-termstrategyforusingtheasset,anylawsorotherlocalregulationswhichcouldimpacttheusefullifeoftheassetandothereconomicfactors,includingcompetitionandspecificmarketconditions.Intangibleassetswithoutdeterminableeconomiclivesarecarriedatcost,notamortizedandreviewedforimpairmentatleastannually.

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Capitalizedsoftwaredevelopmentcosts 3yearsOfficeequipment 3yearsFurnitureandfixtures 5yearsSoftware 3yearsAssetsundercapitallease 5yearsorremainingleasetermLeaseholdimprovements 5yearsorremainingleaseterm

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2.SummaryofSignificantAccountingPolicies(Continued)

Theusefullivesoftheintangibleassetsareasfollows:

(u)Goodwill

Goodwillrepresentsexcessoftheaggregatepurchasepriceoverthefairvalueofnetidentifiableassetsacquiredinabusinesscombination.Goodwillisnotamortizedandistestedforimpairmentatleastannuallyorwhenevereventsorchangesincircumstancesindicatethatthecarryingvaluemaynotberecoverable.TheCompanyhasdeterminedthatitoperatesasonereportingunitandhasselectedNovember30asthedatetoperformitsannualimpairmenttest.Inthevaluationofgoodwill,managementmustmakeassumptionsregardingestimatedfuturecashflowstobederivedfromtheCompany'sbusiness.Iftheseestimatesortheirrelatedassumptionschangeinthefuture,theCompanymayberequiredtorecordimpairmentfortheseassets.Managementmayfirstevaluatequalitativefactorstoassessifitismorelikelythannotthatthefairvalueofareportingunitislessthanitscarryingamountandtodetermineifatwo-stepimpairmenttestisnecessary.Managementmaychoosetoproceeddirectlytothetwo-stepevaluation,bypassingtheinitialqualitativeassessment.Thefirststepoftheimpairmenttestinvolvescomparingthefairvalueofthereportingunittoitsnetbookvalue,includinggoodwill.Ifthenetbookvalueexceedsitsfairvalue,thentheCompanywouldperformthesecondstepofthegoodwillimpairmenttesttodeterminetheamountoftheimpairmentloss.Theimpairmentlosswouldbecalculatedbycomparingtheimpliedfairvalueofthegoodwilltoitsnetbookvalue.Incalculatingtheimpliedfairvalueofgoodwill,thefairvalueoftheentitywouldbeallocatedtoalloftheotherassetsandliabilitiesbasedontheirfairvalues.Theexcessofthefairvalueoftheentityovertheamountassignedtootherassetsandliabilitiesistheimpliedfairvalueofgoodwill.Animpairmentlosswouldberecognizedwhenthecarryingamountofgoodwillexceedsitsimpliedfairvalue.Nogoodwillimpairmentchargeshavebeenrecordedforanyperiodpresented.

(v)ImpairmentofLong-LivedAssets

TheCompanyevaluateslong-livedassets,includingpropertyandequipmentandintangibleassets,forimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.Recoverabilityofassetsheldandusedismeasuredbyacomparisonofthecarryingamountofanassetoranassetgrouptoestimatedundiscountedfuturenetcashflowsexpectedtobegeneratedbytheassetorassetgroup.Ifsuchevaluationindicatesthatthecarryingamountoftheassetortheassetgroupisnotrecoverable,anyimpairmentlosswouldbeequaltotheamountthecarryingvalueexceedsthefairvalue.TherewasnoimpairmentduringtheyearsendedDecember31,2018,2017and2016.TheCompanywroteoff$1.7million,$0.6millionand$0.7millionofinternallydevelopedsoftwareintheyearsendedDecember31,2018,2017and2016,respectively,duetoabandonment.

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Developedtechnology 3-4yearsCustomerrelationships 2-8yearsSupplierrelationships 5yearsTradenames 2yearsPatents 20yearsTrademarks IndefiniteDomainnames Indefinite

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2.SummaryofSignificantAccountingPolicies(Continued)

(w)BusinessCombinations

TheCompanyrecognizesidentifiableassetsacquiredandliabilitiesassumedattheiracquisitiondatefairvalues.Goodwillismeasuredastheexcessoftheconsiderationtransferredoverthefairvalueofassetsacquiredandliabilitiesassumedontheacquisitiondate.WhiletheCompanyusesitsbestestimatesandassumptionsaspartofthepurchasepriceallocationprocesstoaccuratelyvalueassetsacquiredandliabilitiesassumed,theseestimatesareinherentlyuncertainandsubjecttorefinement.Theauthoritativeguidanceallowsameasurementperiodofuptooneyearfromthedateofacquisitiontomakeadjustmentstothepreliminaryallocationofthepurchaseprice.Asaresult,duringthemeasurementperiodtheCompanymayrecordadjustmentstothefairvaluesofassetsacquiredandliabilitiesassumed,withthecorrespondingoffsettogoodwilltotheextentthatitidentifiesadjustmentstothepreliminarypurchasepriceallocation.Uponconclusionofthemeasurementperiodorfinaldeterminationofthevaluesoftheassetsacquiredandliabilitiesassumed,whichevercomesfirst,anysubsequentadjustmentswillberecordedtotheconsolidatedstatementofoperations.

(x)SegmentInformation

TheCompany'sChiefExecutiveOfficeristhechiefoperatingdecisionmaker,whoreviewstheCompany'sfinancialinformationpresentedonaconsolidatedbasisforpurposesofallocatingresourcesandevaluatingtheCompany'sfinancialperformance.Accordingly,theCompanyhasdeterminedthatitoperatesinasinglereportingsegment.

(y)FairValueofFinancialInstruments

TheCompanyappliesfairvalueaccountingforallfinancialinstrumentsonarecurringbasis.TheCompany'sfinancialinstruments,whichincludecash,cashequivalents,accountsreceivableandaccountspayablearerecordedattheircarryingamounts,whichapproximatetheirfairvaluesduetotheirshort-termnature.Restrictedcashislong-terminnatureandconsistsofcashinasavingsaccount,henceitscarryingamountapproximatesitsfairvalue.MarketablesecuritiesconsistofU.S.treasurysecurities,highcreditqualitycorporatedebtsecuritiesandreverserepurchaseagreements.Allmarketablesecuritiesareconsideredtobeavailable-for-saleandrecordedattheirestimatedfairvalues.Unrealizedgainsandlossesforavailable-for-salesecuritiesarerecordedinothercomprehensiveincome(loss).Invaluingtheseitems,theCompanyusesinputsandassumptionsthatmarketparticipantswouldusetodeterminetheirfairvalue,utilizingvaluationtechniquesthatmaximizetheuseofobservableinputsandminimizetheuseofunobservableinputs.Thefairvalueoftheconvertibleseniornotesdue2023(the"Notes")isdeterminedbasedontheclosingpricefortheNotesonthelasttradingdayofthereportingperiodandisconsideredasLevel2inthefairvaluehierarchy.

Impairmentsareconsideredtobeotherthantemporaryiftheyarerelatedtodeteriorationincreditriskorifitislikelythatthesecuritywillbesoldbeforetherecoveryofitscostbasis.Realizedgainsandlossesanddeclinesinvaluedeemedtobeotherthantemporaryaredeterminedbasedonthespecificidentificationmethodandarereportedinotherincome(expense),net.

Theaccountingguidanceforfairvalueprovidesaframeworkformeasuringfairvalue,clarifiesthedefinitionoffairvalue,andexpandsdisclosuresregardingfairvaluemeasurements.Fairvalueisdefinedasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliability(anexitprice)inanorderlytransactionbetweenmarketparticipantsatthereportingdate.Theaccountingguidance

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2.SummaryofSignificantAccountingPolicies(Continued)

establishesathree-tieredhierarchy,whichprioritizestheinputsusedinthevaluationmethodologiesinmeasuringfairvalueasfollows:

• Level1Inputs:Unadjustedquotedpricesinactivemarketsforidenticalassetsorliabilitiesaccessibletothereportingentityatthemeasurementdate.

• Level2Inputs:OtherthanquotedpricesincludedinLevel1inputsthatareobservablefortheassetorliability,eitherdirectlyorindirectly,forsubstantiallythefulltermoftheassetorliability.

• Level3Inputs:Unobservableinputsfortheassetorliabilityusedtomeasurefairvaluetotheextentthatobservableinputsarenotavailable,therebyallowingforsituationsinwhichthereislittle,ifany,marketactivityfortheassetorliabilityatmeasurementdate.

Afinancialinstrument'scategorizationwithinthevaluationhierarchyisbaseduponthelowestlevelofinputthatissignificanttothefairvaluemeasurement.

(z)RecentAccountingPronouncementsNotYetAdopted

InAugust2018,theFASBissuedASU2018-15,"Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting forImplementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract". Thisstandardalignstherequirementsforcapitalizingimplementationcostsincurredinahostingarrangementthatisaservicecontractwiththerequirementsforcapitalizingimplementationcostsincurredtodeveloporobtaininternal-usesoftware.ThestandardiseffectiveforinterimandannualperiodsbeginningafterDecember15,2019,withearlyadoptionpermitted.TheCompanyiscurrentlyevaluatingtheimpactoftheadoptionofthisstandardonitsconsolidatedfinancialstatements.

InAugust2018,theFASBissuedASU2018-13,"Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements forFair Value Measurement". TheamendmentsunderASU2018-13remove,addandmodifycertaindisclosurerequirementsonfairvaluemeasurementsinASC820.TheamendmentsareeffectiveforinterimandannualreportingperiodsbeginningafterDecember15,2019.TheCompanyiscurrentlyevaluatingtheimpactthenewstandardwillhaveonitsconsolidatedfinancialstatements.

InJuly2018,theFASBissuedASU2018-09,"Codification Improvements ",whichdoesnotprescribeanynewaccountingguidance,butinsteadmakesminorimprovementsandclarificationsofseveraldifferentFASBASCareasbasedoncommentsandsuggestionsmadebyvariousstakeholders.CertainupdatesareapplicableimmediatelywhileothersprovideforatransitionperiodtoadoptaspartofthenextfiscalyearbeginningafterDecember15,2018.TheCompanydoesnotexpecttheadoptionofthisguidancetohaveamaterialimpactontheCompany'sconsolidatedfinancialstatements.

InJanuary2017,theFASBissuedASU2017-04,"Simplifying the Test for Goodwill Impairment ",whichremovesthesecondstepofthegoodwillimpairmenttestthatrequiresahypotheticalpurchasepriceallocation.Agoodwillimpairmentwillnowbetheamountbywhichareportingunit'scarryingvalueexceedsitsfairvalue,nottoexceedthecarryingamountofgoodwill.ThisguidanceiseffectiveprospectivelyforinterimandannualreportingperiodsbeginningafterDecember15,2019.TheCompanywilladoptthisguidanceuponitseffectivedate.TheCompanydoesnotexpecttheadoptionofthisguidancetohaveamaterialimpactontheCompany'sconsolidatedfinancialstatements.

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2.SummaryofSignificantAccountingPolicies(Continued)

InJune2016,theFASBissuedASU2016-13,"Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments" ,whichchangestheimpairmentmodelformostfinancialassets.Thenewmodelusesaforward-lookingexpectedlossmethod,whichwillgenerallyresultinearlierrecognitionofallowancesforlosses.InNovember2018,theFASBissuedASU2018-19,"Codification Improvements to Topic 326, Financial Instruments—Credit Losses ",whichclarifiesthatreceivablesarisingfromoperatingleasesarenotwithinthescopeofTopic 326, Financial Instruments—Credit Losses .Instead,impairmentofreceivablesarisingfromoperatingleasesshouldbeaccountedforinaccordancewithTopic 842, Leases .TheseASUsareeffectiveforannualandinterimperiodsbeginningafterDecember15,2019andearlyadoptionispermittedforannualandinterimperiodsbeginningafterDecember15,2018.TheCompanyisevaluatingtheimpactofthisguidanceonitsconsolidatedfinancialstatements.

InFebruary2016,theFASBissuedASU2016-02,"Leases ",whichwasfurtherclarifiedbyASU2018-10,"Codification Improvements to Topic 842,Leases" ,andASU2018-11,"Leases—Targeted Improvements" ,bothissuedinJuly2018.ASU2016-02affectsallentitiesthatleaseassetsandwillrequirelesseestorecognizealeaseliabilityandaright-of-useassetforallleases(exceptforshort-termleasesthathaveadurationoflessthanoneyear)asofthedateonwhichthelessormakestheunderlyingassetavailabletothelessee.Forlessors,accountingforleasesissubstantiallythesameasinpriorperiods.ASU2018-10clarifiesorcorrectsunintendedapplicationofguidancerelatedtoASU2016-02.TheamendmentaffectsnarrowaspectsofASU2016-02relatedtotheimplicitrateinthelease,impairmentofthenetinvestmentinthelease,lesseereassessmentofleaseclassification,lessorreassessmentofleasetermandpurchaseoptions,variablepaymentsthatdependonanindexorrateandcertaintransitionadjustments.ASU2018-11addsatransitionoptionforallentitiesandapracticalexpedientonlyforlessors.Thetransitionoptionallowsentitiestonotapplythenewleasesstandardinthecomparativeperiodstheypresentintheirfinancialstatementsintheyearofadoption.Underthetransitionoption,entitiescanopttocontinuetoapplythelegacyguidanceinASC840,"Leases", includingitsdisclosurerequirements,inthecomparativeperiodspresentedintheyeartheyadoptthenewleasesstandard.Entitiesthatelectthistransitionoptionwillstillberequiredtoadoptthenewleasesstandardusingthemodifiedretrospectivetransitionmethodrequiredbythestandard,buttheywillrecognizeacumulative-effectadjustmenttotheopeningbalanceofretainedearningsintheperiodofadoptionratherthanintheearliestperiodpresented.Thepracticalexpedientprovideslessorswithanoptiontonotseparatethenon-leasecomponentsfromtheassociatedleasecomponentswhencertaincriteriaaremetandrequiresthemtoaccountforthecombinedcomponentinaccordancewiththerevenuerecognitionstandardinASC606iftheassociatednon-leasecomponentsarethepredominantcomponents.ThenewstandardsareeffectiveforfiscalyearsbeginningafterDecember15,2018,includinginterimperiodswithinthosefiscalyears.Earlyadoptionispermitted.Forleasesexistingat,orenteredintoafterthebeginningoftheearliestcomparativeperiodpresentedinthefinancialstatements,lesseesandlessorsmustapplyamodifiedretrospectivetransitionapproach.WhiletheCompanyexpectstheadoptionofthesestandardstoresultinamaterialincreasetothereportedassetsandliabilities,theCompanyhasnotyetdeterminedthefullimpactthattheadoptionofthisstandardwillhaveonitsconsolidatedfinancialstatements.

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NotestoConsolidatedFinancialStatements(Continued)

3.FairValueMeasurements

ThefollowingtablesprovidetheassetsmeasuredatfairvalueonarecurringbasisasofDecember31,2018and2017(inthousands):

AsofDecember31,2018,thefairvalueofthe0.25%convertibleseniornotesdue2023(the"Notes"),asfurtherdescribedinNote8below,wasapproximately$743.4million.

AstheCompanyviewsitsmarketablesecuritiesasavailabletosupportcurrentoperations,ithasclassifiedallavailableforsalesecuritiesasshort-term.AsofDecember31,2018,forfixedincomesecuritiesthatwereinunrealizedlosspositions,theCompanyhasdeterminedthat(i)itdoesnothavetheintenttosellanyoftheseinvestments,and(ii)itisnotmorelikelythannotthatitwillberequired

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GrossUnrealizedLosses

LessThan12Months

GrossUnrealizedLosses

MoreThan12Months

FairValueHierarchyasof

December31,2018

AmortizedCostorCarryingValue

GrossUnrealized

Gains AggregateFairValue

Level1 Level2 Level3 FinancialAssets: Cashandcashequivalents: Moneymarketfunds $ 420,234 $ — $ — $ — $ 420,234 $ — $ — $ 420,234Reverserepurchaseagreements 35,000 — — — — 35,000 — 35,000

Commercialpaper 9,983 — — — — 9,983 — 9,983Totalincludedincashandcashequivalents 465,217 — — — 420,234 44,983 — 465,217

Marketablesecurities: U.S.Treasurysecurities 59,785 — (7) (9) 59,769 — — 59,769

Corporatedebtsecuritiesandcommercialpaper 201,683 23 (123) (224) — 201,359 — 201,359

Totalmarketablesecurities 261,468 23 (130) (233) 59,769 201,359 — 261,128

Totalfinancialassets $ 726,685 $ 23 $ (130) $ (233) $ 480,003 $ 246,342 $ — $ 726,345

GrossUnrealizedLosses

LessThan12Months

GrossUnrealizedLosses

MoreThan12Months

FairValueHierarchyasof

December31,2017

AmortizedCostorCarryingValue

GrossUnrealized

Gains AggregateFairValue

Level1 Level2 Level3 FinancialAssets: Cashandcashequivalents: Moneymarketfunds $ 95,432 $ — $ — $ — $ 95,432 $ — $ — $ 95,432Totalincludedincashandcashequivalents 95,432 — — — 95,432 — — 95,432

Marketablesecurities: U.S.Treasurysecurities 59,962 — (216) — 59,746 — — 59,746

Corporatedebtsecuritiesandcommercialpaper 116,223 — (382) — — 115,841 — 115,841

Totalmarketablesecurities 176,185 — (598) — 59,746 115,841 — 175,587

Totalfinancialassets $ 271,617 $ — $ (598) $ — $ 155,178 $ 115,841 $ — $ 271,019

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NotestoConsolidatedFinancialStatements(Continued)

3.FairValueMeasurements(Continued)

tosellanyoftheseinvestmentsbeforerecoveryoftheentireamortizedcostbasis.Inaddition,asofDecember31,2018,theCompanyanticipatesthatitwillrecovertheentireamortizedcostbasisofsuchfixedincomesecuritiesandhasdeterminedthatnoother-than-temporaryimpairmentsassociatedwithcreditlosseswererequiredtoberecognizedduringtheyearsendedDecember31,2018and2017.Interestearnedonmarketablesecuritieswas$3.0millionand$2.6millionintheyearsendedDecember31,2018and2017,respectively.Theinterestisrecordedasotherincome(expense),net,intheaccompanyingconsolidatedstatementsofoperations.

ThefollowingtablesummarizesthecontractualmaturitiesofmarketablesecuritiesasofDecember31,2018and2017(inthousands):

TheCompanyentersintoreversesecuritiesrepurchaseagreements,primarilyforshort-terminvestmentswithmaturitiesof90daysorless.AsofDecember31,2018,theCompanywaspartytoreverserepurchaseagreementstotaling$35.0million,whichwerereportedincashandequivalentsintheaccompanyingconsolidatedbalancesheet.Underthesereversesecuritiesrepurchaseagreements,theCompanytypicallylendsavailablecashataspecifiedrateofinterestandholdsU.S.governmentsecuritiesascollateralduringthetermoftheagreement.Collateralvalueisinexcessoftheamountsloanedundertheseagreements.

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AsofDecember31,2018 AsofDecember31,2017

Amortized

Cost AggregateFairValue

AmortizedCost

AggregateFairValue

FinancialAssets: Lessthanoneyear $ 261,468 $ 261,128 $ 108,584 $ 108,360Onetotwoyears — — 67,601 67,227Total $ 261,468 $ 261,128 $ 176,185 $ 175,587

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NotestoConsolidatedFinancialStatements(Continued)

4.PropertyandEquipment

Propertyandequipmentconsistedofthefollowing(inthousands):

Depreciationandamortizationexpensewas$18.9million,$13.1millionand$7.4millionfortheyearsendedDecember31,2018,2017and2016,respectively.

TheCompanycapitalized$25.3million,$21.5millionand$13.5millionininternal-usesoftwaredevelopmentcostsintheyearsendedDecember31,2018,2017and2016,respectively,ofwhich$5.7million,$4.2millionand$2.0million,respectively,wasstock-basedcompensationexpense.Amortizationofcapitalizedsoftwaredevelopmentcostswas$13.0million,$8.4millionand$5.5millionintheyearsendedDecember31,2018,2017and2016,respectively.Theamortizationexpensewasallocatedasfollows(inthousands):

5.BusinessCombinations

Fiscal2018Acquisitions

VAI Technologies, LLC

InNovember2018,theCompanyacquiredcertainassetsfromVAITechnologies,LLC,aDelawarecorporationandadeveloperofanaturallanguageprocessingplatform.Thepurchasepriceconsistedof$1.2millionincash,ofwhich$0.3waswithheldbytheCompanyforaperiodfrom18monthsto4yearsandcanbeextendedundercertaincircumstances.

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AsofDecember31, 2018 2017 Capitalizedinternal-usesoftwaredevelopmentcosts $ 72,647 $ 49,177Leaseholdimprovements 15,293 14,246Officeequipment 13,563 9,652Furnitureandfixtures 2,440 1,976Assetsundercapitallease(1) 2,478 —Software 1,849 1,675Totalpropertyandequipment 108,270 76,726

Less:accumulateddepreciationandamortization (44,736) (26,185)Totalpropertyandequipment,net $ 63,534 $ 50,541

(1) Assetsundercapitalleaserelatetoasub-leaseagreementthatcommencedinthefourthquarterof2018,asfurtherdescribedinNote11(a),andconsistprimarilyoffurniturethatwillbeacquiredatabargainpurchaseoptionattheendoftheleaseterm.

YearEndedDecember31, 2018 2017 2016 Costofrevenue $ 6,898 $ 4,788 $ 3,304Researchanddevelopment 5,437 3,619 2,182Generalandadministrative 689 — —Total $ 13,024 $ 8,407 $ 5,486

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NotestoConsolidatedFinancialStatements(Continued)

5.BusinessCombinations(Continued)

Theacquisitionwasaccountedforasabusinesscombinationand,accordingly,thetotalpurchasepricewasallocatedtotheidentifiableintangiblesassetsacquiredbasedontheirrespectivefairvaluesontheacquisitiondate.Theexcessofthepurchasepriceoverthefairvaluesoftheidentifiableassetsacquiredwasrecordedasgoodwill.TheestimatedfairvalueoftheintangibleassetsacquiredwasdeterminedbytheCompany.

ThefollowingtablepresentsthefinalpurchasepriceallocationrecordedintheCompany'sconsolidatedbalancesheet(inthousands):

TheCompanyincurredcostrelatedtothisacquisitionof$0.1millionthatwereexpensedasincurredandhavebeenrecordedingeneralandadministrativeexpensesintheaccompanyingconsolidatedstatementofoperations.

Ytica.com a.s.

InSeptember2018,theCompanyacquiredalloutstandingsharesofYtica.coma.s.("Ytica"),adeveloperandproviderofacontactcenterreportingandanalyticsbasedintheCzechRepublic,foratotalpurchasepriceof$21.8million,paidincash,ofwhich$3.2millionwasheldinescrowwithatermof18months.

Additionally,theCompanygranted47,574restrictedstockunitsoftheCompany'sClassAcommonstocktoaformershareholderofYticathathadavalueof$3.6millionandissubjecttovestingoveraperiodofthreeyears.TheCompanyisrecordingstock-basedcompensationexpenseasthesharesarevesting.

Theacquisitionwasaccountedforasabusinesscombinationandthetotalpurchasepricewasallocatedtothenettangibleandintangibleassetsandliabilitiesbasedontheirfairvaluesontheacquisitiondateandtheexcesswasrecordedasgoodwill.Theacquiredentity'sresultsofoperationshavebeenincludedintheconsolidatedfinancialstatementsoftheCompanyfromthedateofacquisition.

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Total

Intangibleassets(1) $ 517Goodwill(2) 683Totalpurchaseprice $ 1,200

(1) Theintangibleassetsconsistofdevelopedtechnologywiththeestimatedusefullifeof4yearsonthedateofacquisition.

(2) Thegoodwillinthistransactionisprimarilyattributabletothefuturecashflowstoberealizedfromtheacquiredtechnologyandthefuturedevelopmentinitiativesoftheacquiredworkforce.TheCompanyintendstofileelectionsthatmakethegoodwilldeductibleforU.S.taxpurposes.

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NotestoConsolidatedFinancialStatements(Continued)

5.BusinessCombinations(Continued)

ThefollowingtablepresentsthepreliminarypurchasepriceallocationrecordedintheCompany'sconsolidatedbalancesheetasofDecember31,2018(inthousands):

TheCompanyacquiredanetdeferredtaxliabilityof$1.7millioninthisbusinesscombinationthatisincludedinlong-termliabilitiesintheaccompanyingconsolidatedbalancesheet.

TheestimatedfairvalueoftheintangibleassetsacquiredwasdeterminedbytheCompany,andtheCompanyconsideredorreliedinpartuponavaluationreportofathird-partyexpert.TheCompanyusedanincomeapproachtoestimatethefairvaluesoftheidentifiableintangibleassets.

TheCompanyincurredcostsrelatedtothisacquisitionof$0.6millionthatwereexpensedasincurredandrecordedingeneralandadministrativeexpensesintheaccompanyingconsolidatedstatementofoperation.

ProformaresultsofoperationsforthisacquisitionarenotpresentedasthefinancialimpacttotheCompany'sconsolidatedfinancialstatementsisimmaterial.

Core Network Dynamics GmbH

InAugust2018,theCompanyacquiredalloutstandingsharesofCoreNetworkDynamicsGmbH("CND"),adeveloperandproviderofacompletesoftwaremobilenetworkinfrastructurebasedinGermany,foratotalpurchasepriceof$11.1million,paidincash,ofwhich$2.0millionwaswithheldbytheCompanyforatermof18monthsandisrecordedinotherlong-termliabilitiesintheaccompanyingconsolidatedbalancesheet.

Additionally,theCompanygranted35,950restrictedstockunitsoftheCompany'sClassAcommonstocktoaformershareholderofCNDthathadavalueof$2.2millionandissubjectto

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Total Nettangibleassets $ (1,538)Intangibleassets(1) 9,920Goodwill(2) 13,375Totalpurchaseprice $ 21,757

(1) Identifiablefinite-livedintangibleassetswerecomprisedofthefollowing(inthousands):

Total

Estimatedlife

(inyears)Developedtechnology $ 9,090 4Customerrelationships 830 2

Totalintangibleassetsacquired $ 9,920

(2) Thegoodwillisprimarilyattributabletothefuturecashflowstoberealizedfromtheacquiredtechnologyplatformaswellasoperationalsynergies.TheCompanyintendstofileelectionsthatmakethegoodwilldeductibleforU.S.taxpurposes.

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NotestoConsolidatedFinancialStatements(Continued)

5.BusinessCombinations(Continued)

vestingoveraperiodofthreeyears.TheCompanyisrecordingastock-basedcompensationexpenseasthesharesarevesting.

Theacquisitionwasaccountedforasabusinesscombinationandthetotalpurchasepricewasallocatedtothenettangibleandintangibleassetsandliabilitiesbasedontheirfairvaluesontheacquisitiondateandtheexcesswasrecordedasgoodwill.Theacquiredentity'sresultsofoperationshavebeenincludedintheconsolidatedfinancialstatementsoftheCompanyfromthedateofacquisition.

ThefollowingtablepresentsthepreliminarypurchasepriceallocationrecordedintheCompany'sconsolidatedbalancesheetasofDecember31,2018(inthousands):

TheCompanyacquiredanetdeferredtaxliabilityof$1.2millioninthisbusinesscombinationthatisincludedinlong-termliabilitiesintheaccompanyingconsolidatedbalancesheet.

TheestimatedfairvalueoftheintangibleassetsacquiredwasdeterminedbytheCompany,andtheCompanyconsideredorreliedinpartuponavaluationreportofathird-partyexpert.TheCompanyusedareplacementcostapproachtoestimatethefairvaluesoftheidentifiableintangibleassets.

TheCompanyincurredcostsrelatedtothisacquisitionof$0.8millionthatwereexpensedasincurredandhavebeenrecordedingeneralandadministrativeexpensesintheaccompanyingconsolidatedstatementofoperation.

ProformaresultsofoperationsforthisacquisitionarenotpresentedasthefinancialimpacttotheCompany'sconsolidatedfinancialstatementsisimmaterial.

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Total Nettangibleassets $ (313)Intangibleassets(1) 4,500Goodwill(2) 6,869Totalpurchaseprice $ 11,056

(1) Identifiablefinite-livedintangibleassetswerecomprisedofthefollowing(inthousands):

Total

Estimatedlife

(inyears)Developedtechnology $ 3,910 4Customerrelationships 590 0.5

Totalintangibleassetsacquired $ 4,500

(2) ThegoodwillisprimarilyattributabletothefuturecashflowstoberealizedfromtheoperatingsynergiesbetweentheacquiredtechnologyplatformandtheCompany'sProgrammableWirelessproducts.TheCompanyintendstofileelectionsthatmakethegoodwilldeductibleforU.S.taxpurposes.

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NotestoConsolidatedFinancialStatements(Continued)

5.BusinessCombinations(Continued)

Fiscal2017Acquisitions

Beepsend,AB

InFebruary2017,theCompanycompleteditsacquisitionofBeepsendAB,amessagingproviderbasedinSweden,specializinginmessagingandSMSsolutions,foratotalpurchasepriceof$23.0million,paidincash,ofwhich$5.0millionwasheldinescrowwithatermof18monthsandwasfullyreleasedattheescrowexpirationdate.

Additionally,theCompanydeposited$2.0millionintoaseparateescrowaccountthatwassubjecttocertainserviceconditionsandwasreleasedtocertainemployeesonthefirstandsecondanniversariesoftheclosingdateastheconditionsweremet.Thisamountwasrecordedasprepaidcompensationintheaccompanyingconsolidatedbalancesheetandwasamortizedintoexpenseastheserviceswererendered.

Theacquisitionwasaccountedforasabusinesscombinationand,accordingly,thetotalpurchasepricewasallocatedtothepreliminarynettangibleandintangibleassetsandliabilitiesbasedontheirpreliminaryfairvaluesontheacquisitiondate.Theprepaidcompensationsubjecttoserviceconditionswasaccountedforasapost-acquisitioncompensationexpenseandrecordedasresearchanddevelopmentexpenseintheaccompanyingconsolidatedstatementsofoperations.

Theacquiredentity'sresultsofoperationswereincludedintheconsolidatedfinancialstatementsoftheCompanyfromthedateofacquisition.

Thefollowingtablepresentsthepurchasepriceallocation,asadjusted,recordedintheCompany'sconsolidatedbalancesheet(inthousands):

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Total Nettangibleliabilities $ (3,575)Intangibleassets(1) 13,700Goodwill(2) 12,837Totalpurchaseprice $ 22,962

(1) Identifiablefinite-livedintangibleassetswerecomprisedofthefollowing:

Total

Estimatedlife

(inyears)Developedtechnology $ 5,000 4Customerrelationships 6,100 7-8Supplierrelationships 2,600 5

Totalintangibleassetsacquired $ 13,700

(2) Goodwillrepresentstheexcessofpurchasepriceoverthefairvalueofidentifiabletangibleandintangibleassetsacquiredandliabilitiesassumed.Thegoodwillinthistransactionisprimarilyattributabletothefuturecashflowstoberealizedfromthe

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NotestoConsolidatedFinancialStatements(Continued)

5.BusinessCombinations(Continued)

TheCompanyacquiredanetdeferredtaxliabilityof$2.6millioninthisbusinesscombinationthatisincludedinthelong-termliabilitiesintheaccompanyingconsolidatedbalancesheet.

TheestimatedfairvalueoftheintangibleassetsacquiredwasdeterminedbytheCompany,andtheCompanyconsideredorreliedinpartuponavaluationreportofathird-partyexpert.TheCompanyusedincomeapproachestoestimatethefairvaluesoftheidentifiableintangibleassets.Specifically,thedevelopedtechnologyassetclasswasvaluedusingthe-relief-fromroyaltymethod,whilethecustomerrelationshipsassetclasswasvaluedusingamulti-periodexcessearningsmethodandthesupplierrelationshipsassetclasswasvaluedusinganincrementalcashflowmethod.

TheCompanyincurredcostsrelatedtothisacquisitionof$0.7million,ofwhich$0.3millionand$0.4millionwereincurredduringfiscalyears2017and2016,respectively.Allacquisitionrelatedcostswereexpensedasincurredandhavebeenrecordedingeneralandadministrativeexpensesintheaccompanyingconsolidatedstatementsofoperations.

ProformaresultsofoperationsforthisacquisitionarenotpresentedasthefinancialimpacttotheCompany'sconsolidatedfinancialstatementsisimmaterial.

KurentoOpenSourceProject

InNovember2016,theCompanyacquiredcertainassetsfromTikalTechnologiesS.L.,aSpanishcorporation,behindtheKurentoOpenSourceProject.Theacquiredassetsconsistedof(a)proprietaryWebRTCmediaprocessingtechnologies,(b)certainlicenses,patentsandtrademarksand(c)certainemployeerelationshipsbehindtheWebRTCtechnology.Thepurchasepriceconsistedof$8.5millionincash,ofwhich$1.5millionwasplacedintoescrowtoindemnifytheCompanyagainstbreachesofgeneralrepresentations,warranties,claimsandtaxcompliancematters.Theescrowiseffectivefor24monthsand10daysfromtheacquisitiondateandmaybeextendedundercertaincircumstances.

Theacquisitionwasaccountedforasabusinesscombinationand,accordingly,thetotalpurchasepricewasallocatedtotheidentifiableintangiblesassetsacquiredbasedontheirrespectivefairvaluesontheacquisitiondate.Theexcessofthepurchasepriceoverthefairvaluesoftheidentifiableassetsacquiredwasrecordedasgoodwill.TheCompanyconsideredorreliedinpartuponavaluationreportofathird-partyexpert.

ThefollowingtablepresentsthefinalpurchasepriceallocationrecordedintheCompany'sconsolidatedbalancesheet(inthousands):

115

acquiredtechnologyplatform,existingcustomerandsupplierrelationshipsaswellasoperationalsynergies.Goodwillisdeductiblefortaxpurposes.

Total

Intangibleassets(1) $ 8,100Goodwill(2) 400Totalpurchaseprice $ 8,500

(1) Theintangibleassetsconsistofdevelopedtechnologywiththeestimatedusefullifeof3yearsonthedateofacquisition.

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

5.BusinessCombinations(Continued)

TheCompanyincurredcostrelatedtothisacquisitionof$0.1millionthatwereexpensedasincurredandhavebeenrecordedingeneralandadministrativeexpensesintheaccompanyingconsolidatedstatementofoperations.

6.GoodwillandIntangibleAssets

Goodwill

GoodwillbalanceasofDecember31,2018and2017wasasfollows(inthousands):

Intangibleassets

Intangibleassetsconsistedofthefollowing(inthousands):

116

(2) Thegoodwillinthistransactionisprimarilyattributabletothefuturecashflowstoberealizedfromtheacquiredtechnologyandthefuturedevelopmentinitiativesoftheacquiredworkforce.Thegoodwillisdeductiblefortaxpurposes.

Total BalanceasofDecember31,2016 $ 3,565Goodwillrecordedinconnectionwith2017acquisition 12,688Measurementperiodadjustment 149Effectofexchangerate 1,449

BalanceasofDecember31,2017 $ 17,851Goodwillrecordedinconnectionwith2018acquisitions 20,356Measurementperiodadjustment 571Effectofexchangerate (613)

BalanceasofDecember31,2018 $ 38,165

AsofDecember31,2018

Gross AccumulatedAmortization Net

Amortizableintangibleassets: Developedtechnology $ 28,209 $ (10,497) $ 17,712Customerrelationships 8,153 (2,411) 5,742Supplierrelationships 2,696 (973) 1,723Tradename 60 (60) —Patent 2,264 (178) 2,086Totalamortizableintangibleassets 41,382 (14,119) 27,263

Non-amortizableintangibleassets: Domainnames 32 — 32Trademarks 263 — 263Total $ 41,677 $ (14,119) $ 27,558

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

6.GoodwillandIntangibleAssets(Continued)

Amortizationexpensewas$7.2million,$5.7millionand$0.9millionfortheyearsendedDecember31,2018,2017and2016,respectively.

Totalestimatedfutureamortizationexpensewasasfollows(inthousands):

117

AsofDecember31,2017

Gross AccumulatedAmortization Net

Amortizableintangibleassets: Developedtechnology $ 14,941 $ (5,476) $ 9,465Customerrelationships 7,159 (1,006) 6,153Supplierrelationships 2,881 (500) 2,381Tradename 60 (60) —Patent 1,878 (108) 1,770Totalamortizableintangibleassets 26,919 (7,150) 19,769

Non-amortizableintangibleassets: Domainnames 32 — 32Trademarks 263 — 263Total $ 27,214 $ (7,150) $ 20,064

AsofDecember31,

2018 2019 $ 9,7242020 6,3372021 4,9222022 3,1982023 892Thereafter 2,190Total $ 27,263

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

7.AccruedExpensesandOtherLiabilities

Accruedexpensesandothercurrentliabilitiesconsistedofthefollowing(inthousands):

Otherlong-termliabilitiesconsistedofthefollowing(inthousands):

8.ConvertibleSeniorNotesandCappedCallTransactions

InMay2018,theCompanyissued$550.0millionaggregateprincipalamountof0.25%convertibleseniornotesdue2023inaprivateplacement,including$75.0millionaggregateprincipalamountofsuchNotespursuanttotheexerciseinfulloftheover-allotmentoptionsoftheinitialpurchasers(collectively,the"Notes").TheinterestontheNotesispayablesemi-annuallyinarrearsonJune1andDecember1ofeachyear,beginningonDecember1,2018.

TheNotesmaybearspecialinterestunderspecifiedcircumstancesrelatingtotheCompany'sfailuretocomplywithitsreportingobligationsundertheindenturerelatingtotheissuanceofNotes(the"indenture")oriftheNotesarenotfreelytradeableasrequiredbytheindenture.TheNoteswillmatureonJune1,2023,unlessearlierrepurchasedorredeemedbytheCompanyorconvertedpursuanttotheirterms.Thetotalnetproceedsfromthedebtoffering,afterdeductinginitialpurchaserdiscountsanddebtissuancecosts,paidorpayablebyus,wereapproximately$537.0million.

Each$1,000principalamountoftheNotesisinitiallyconvertibleinto14.1040sharesoftheCompany'sClassAcommonstockparvalue$0.001,whichisequivalenttoaninitialconversionpriceofapproximately$70.90pershare.Theconversionrateissubjecttoadjustmentupontheoccurrenceof

118

Asof

December31, 2018 2017 Accruedpayrollandrelated $ 9,886 $ 4,898Accruedbonusandcommission 8,564 4,777Accruedcostofrevenue 29,901 10,876Salesandothertaxespayable 23,631 20,877ESPPcontributions 2,672 1,338Deferredrent 1,418 1,048Nonrefundabledeposits 3,415 162VATliability 2,217 2,515Accruedotherexpense 18,054 7,123Totalaccruedexpensesandothercurrentliabilities $ 99,758 $ 53,614

Asof

December31, 2018 2017 Deferredrent $ 7,569 $ 8,480Deferredtaxliability 5,181 2,452Acquisitionholdback 2,290 —Capitalleaseobligation 2,170 —Accruedotherexpense 959 477Totalotherlong-termliabilities $ 18,169 $ 11,409

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

8.ConvertibleSeniorNotesandCappedCallTransactions(Continued)

certainspecifiedeventsbutwillnotbeadjustedforanyaccruedandunpaidspecialinterest.Inaddition,upontheoccurrenceofamake-wholefundamentalchange,asdefinedintheindenture,theCompanywill,incertaincircumstances,increasetheconversionratebyanumberofadditionalsharesforaholderthatelectstoconvertitsNotesinconnectionwithsuchmake-wholefundamentalchangeorduringtherelevantredemptionperiod.

PriortothecloseofbusinessonthebusinessdayimmediatelyprecedingMarch1,2023,theNotesmaybeconvertibleattheoptionoftheholdersonlyunderthefollowingcircumstances:

(1)duringanycalendarquartercommencingafterSeptember30,2018,andonlyduringsuchcalendarquarter,ifthelastreportedsalepriceoftheClassAcommonstockforatleast20tradingdays(whetherornotconsecutive)inaperiodof30consecutivetradingdaysendingon,andincluding,thelasttradingdayoftheimmediatelyprecedingcalendarquarterismorethanorequalto130%oftheconversionpriceoneachapplicabletradingday;

(2)duringthefivebusinessdaysperiodafteranyfiveconsecutivetradingdayperiodinwhich,foreachtradingdayofthatperiod,thetradingpriceper$1,000principalamountofNotesforsuchtradingdaywaslessthan98%oftheproductofthelastreportedsalepriceoftheClassAcommonstockandtheconversionrateoneachsuchtradingday;

(3)upontheCompany'snoticethatitisredeeminganyoralloftheNotes;or

(4)upontheoccurrenceofspecifiedcorporateevents.

OnorafterMarch1,2023,untilthecloseofbusinessonthesecondscheduledtradingdayimmediatelyprecedingthematuritydate,holdersoftheNotesmay,attheiroption,convertalloraportionoftheirNotesregardlessoftheforegoingconditions.

Uponconversion,theCompanywillpayordeliver,asthecasemaybe,cash,sharesofClassAcommonstock,oracombinationofcashandsharesofClassACommonStock,attheCompany'selection.ItistheCompany'scurrentintenttosettletheprincipalamountoftheNoteswithcash.

DuringtheyearendedDecember31,2018,theconditionsallowingholdersoftheNotestoconvertwerenotmet.TheCompanymayredeemtheNotes,inwholeorinpart,atitsoption,onorafterJune1,2021butbeforethe35thscheduledtradingdaybeforethematuritydate,atacashredemptionpriceequalto100%oftheprincipalamountoftheNotestoberedeemed,plusaccruedandunpaidinterest,ifany,ifthelastreportedsalepriceoftheClassACommonStockhasbeenatleast130%oftheconversionpricethenineffectforatleast20tradingdays(whetherornotconsecutive)duringany30consecutivetradingdaysendingon,andincluding,thetradingdayimmediatelybeforethedatetheredemptionnoticesweresent;andthetradingdayimmediatelybeforesuchnoticesweresent.

NosinkingfundisprovidedfortheNotes.Upontheoccurrenceofafundamentalchange(asdefinedintheindenture)priortothematuritydate,holdersmayrequiretheCompanytorepurchasealloraportionoftheNotesforcashatapriceequalto100%oftheprincipalamountoftheNotestoberepurchased,plusanyaccruedandunpaidinterestto,butexcluding,thefundamentalchangerepurchasedate.

TheNotesareseniorunsecuredobligationsandwillrankseniorinrightofpaymenttoanyoftheCompany'sindebtednessthatisexpresslysubordinatedinrightofpaymenttotheNotes;equalinrightofpaymentwiththeCompany'sexistingandfutureliabilitiesthatarenotsosubordinated;effectively

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

8.ConvertibleSeniorNotesandCappedCallTransactions(Continued)

subordinatedtoanyoftheCompany'ssecuredindebtednesstotheextentofthevalueoftheassetssecuringsuchindebtedness;andstructurallyjuniortoallindebtednessandotherliabilities(includingtradepayables)ofcurrentorfuturesubsidiariesoftheCompany.

Theforegoingdescriptionisqualifiedinitsentiretybyreferencetothetextoftheindentureandtheformof0.25%convertibleseniornotesdue2023,whichwerefiledasexhibitstotheCompany'sQuarterlyReportonForm10-QforthequarterendedJune30,2018andareincorporatedhereinbyreference.

InaccountingfortheissuanceoftheNotes,theCompanyseparatedtheNotesintoliabilityandequitycomponents.Thecarryingamountoftheliabilitycomponentwascalculatedbymeasuringthefairvalueofasimilardebtinstrumentthatdoesnothaveanassociatedconvertiblefeature.Thecarryingamountoftheequitycomponentrepresentingtheconversionoptionwas$119.4millionandwasdeterminedbydeductingthefairvalueoftheliabilitycomponentfromtheparvalueoftheNotes.Theequitycomponentisnotremeasuredaslongasitcontinuestomeettheconditionsforequityclassification.Theexcessoftheprincipalamountoftheliabilitycomponentoveritscarryingamount,orthedebtdiscount,isamortizedtointerestexpenseatanannualeffectiveinterestrateof5.7%overthecontractualtermsoftheNotes.

InaccountingforthetransactioncostsrelatedtotheNotes,theCompanyallocatedthetotalamountincurredtotheliabilityandequitycomponentsoftheNotesbasedontheproportionoftheproceedsallocatedtothedebtandequitycomponents.Issuancecostsattributabletotheliabilitycomponentwereapproximately$10.2million,wererecordedasanadditionaldebtdiscountandareamortizedtointerestexpenseusingtheeffectiveinterestmethodoverthecontractualtermsoftheNotes.Issuancecostsattributabletotheequitycomponentwerenettedwiththeequitycomponentinstockholders'equity.

ThenetcarryingamountoftheliabilitycomponentoftheNoteswasasfollows(inthousands):

ThenetcarryingamountoftheequitycomponentoftheNoteswasasfollows(inthousands):

120

AsofDecember31,

2018 Principal $ 550,000Unamortizeddiscount (106,484)Unamortizedissuancecosts (9,020)Netcarryingamount $ 434,496

AsofDecember31,

2018 Proceedsallocatedtotheconversionoptions(debtdiscount) $ 119,435Issuancecosts (2,819)Netcarryingamount $ 116,616

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

8.ConvertibleSeniorNotesandCappedCallTransactions(Continued)

ThefollowingtablesetsforththeinterestexpenserecognizedrelatedtotheNotes(inthousands):

InconnectionwiththeofferingoftheNotes,theCompanyenteredintoprivately-negotiatedcappedcalltransactionswithcertaincounterparties(the"cappedcalls").Thecappedcallseachhaveaninitialstrikepriceofapproximately$70.90pershare,subjecttocertainadjustments,whichcorrespondstotheinitialconversionpriceoftheNotes.Thecappedcallshaveinitialcappricesof$105.04pershare,subjecttocertainadjustments.Thecappedcallscover,subjecttoanti-dilutionadjustments,approximately7,757,200sharesofClassACommonStock.ThecappedcallsaregenerallyintendedtoreduceoroffsetthepotentialdilutiontotheClassACommonStockuponanyconversionoftheNoteswithsuchreductionoroffset,asthecasemaybe,subjecttoacapbasedonthecapprice.Thecappedcallsexpireontheearlierof(i)thelastdayonwhichanyconvertiblesecuritiesremainoutstandingand(ii)June1,2023,subjecttoearlierexercise.ThecappedcallsaresubjecttoeitheradjustmentorterminationupontheoccurrenceofspecifiedextraordinaryeventsaffectingtheCompany,includingamergerevent,atenderoffer,andanationalization,insolvencyordelistinginvolvingtheCompany.Inaddition,thecappedcallsaresubjecttocertainspecifiedadditionaldisruptioneventsthatmaygiverisetoaterminationofthecappedcalls,includingchangesinlaw,insolvencyfilings,andhedgingdisruptions.Thecappedcalltransactionsarerecordedinstockholders'equityandarenotaccountedforasderivatives.Thenetcostof$58.5millionincurredtopurchasethecappedcalltransactionswasrecordedasareductiontoadditionalpaid-incapitalintheaccompanyingconsolidatedbalancesheet.

9.SupplementalBalanceSheetInformation

Aroll-forwardoftheCompany'sreservesfortheyearsendedDecember31,2018,2017and2016isasfollows(inthousands):

(a)Allowancefordoubtfulaccounts:

121

YearEndedDecember31,

2018 Contractualinterestexpense $ 852Amortizationofdebtissuancecosts 1,102Amortizationofdebtdiscount 12,951TotalinterestexpenserelatedtotheNotes $ 14,905

YearEndedDecember31, 2018 2017 2016 Balance,beginningofperiod $ 1,033 $ 1,076 $ 486Additions 4,085 580 1,145Write-offs (173) (623) (555)Balance,endofperiod $ 4,945 $ 1,033 $ 1,076

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

9.SupplementalBalanceSheetInformation(Continued)

(b)Salescreditreserve:

10.RevenuebyGeographicArea

RevenuebygeographicareaisbasedontheIPaddressatthetimeofregistration.Thefollowingtablesetsforthrevenuebygeographicarea(inthousands):

Long-livedassetsoutsidetheUnitedStateswerenotsignificant.

11.CommitmentsandContingencies

(a)LeaseCommitments

TheCompanyenteredintovariousnon-cancelableoperatingleaseagreementsforitsfacilitiesthatexpireoverthenexttenyears.Certainoperatingleasescontainprovisionsunderwhichmonthlyrentescalatesovertime.Whenleaseagreementscontainescalatingrentclausesorfreerentperiods,theCompanyrecognizesrentexpenseonastraight-linebasisoverthetermofthelease.

InSeptember2018,theCompanyenteredintoasub-leaseagreement("Sub-lease")foratotalof259,416rentablesquarefeetofofficespaceat101SpearStreetinSanFrancisco,California.TheSub-leasecoversseveralfloorsforwhichthetermscommenceonDecember1,2018andApril1,2020,andwillbeexpiringatvariousdatesbetweenMarch2025andJune2028.TheCompanysecureditsleaseobligationwitha$14.7millionletterofcredit,whichitdesignatedasrestrictedcashonitsbalancesheetasofDecember31,2018.TheCompanyintendsforthislocationtobecomeitsheadquartersatsometimein2019.Thetotalleasepaymentsrangefrom$0.8millionpermonthto$2.2millionpermonth.TheSub-leasecontainsabargainpurchaseoptionfortheCompanytoacquiretheexistingfurnitureintheleasedspacefor$1attheendoftheleaseterm.ThisoptionwastreatedasacapitalleaseunderASC840—"Leases" andasofDecember31,2018,$2.5millionwasrecordedasassetsundercapitalleasewithintheproperty,plantandequipmentbalanceintheaccompanying

122

YearEndedDecember31, 2018 2017 2016 Balance,beginningofperiod $ 1,761 $ 544 $ 714Additions 5,560 2,531 1,348Deductionsagainstreserve (4,306) (1,314) (1,518)Balance,endofperiod $ 3,015 $ 1,761 $ 544

YearEndedDecember31, 2018 2017 2016 Revenuebygeographicarea: UnitedStates $ 484,809 $ 308,612 $ 233,922International 165,258 90,408 43,413Total $ 650,067 $ 399,020 $ 277,335

Percentageofrevenuebygeographicarea: UnitedStates 75% 77% 84%International 25% 23% 16%

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

11.CommitmentsandContingencies(Continued)

consolidatedbalancesheet.Thecorrespondingcapitalleaseobligationwasrecordedascurrentandlong-termliabilities.

InJanuary2016,theCompanyenteredintoaleaseagreement("Lease"),assubsequentlyamended,forapproximately90,000squarefeetofnewofficespaceat375BealeStreetinSanFrancisco,California,thathousesitsprincipalexecutiveoffice.ThetermoftheLeaseisapproximately96monthsfollowingthecommencementinOctober2016,andtheleasepaymentsrangefrom$0.4millionpermonthinthefirst60monthsto$0.5millionpermonththereafter.TheLeaseincludedatenantimprovementallowancetocoverconstructionofcertainleaseholdimprovementsforupto$8.3million.AllapplicableamountswerecollectedfromthelandlordasofDecember31,2017.BasedonthetermsofthelandlordincentiveandinvolvementoftheCompanyintheconstructionprocess,theleaseholdimprovementsweredeterminedtobepropertyoftheCompany.TheCompanyinitiallysecureditsleaseobligationwitha$7.4millionletterofcredit,whichwasdesignatedasrestrictedcashonitsbalancesheetasofDecember31,2016.Thisamountisperiodicallyreducedasstipulatedintheleaseagreement.

Rentexpensewas$10.3million,$8.1millionand$7.3millionfortheyearsendedDecember31,2018,2017and2016,respectively.

Futureminimumleasepaymentsundernon-cancelableoperatingleaseswereasfollows(inthousands):

Futureminimumleasepaymentsunderthecapitalleasewereasfollows(inthousands):

123

YearEndingDecember31:

AsofDecember31,

2018 2019 $ 24,1282020 29,5272021 30,8982022 30,4922023 30,122Thereafter 81,316Totalminimumleasepayments $ 226,483

YearEndingDecember31:

AsofDecember31,

2018 2019 $ 3062020 5122021 5732022 5902023 608Thereafter 1,939Totalminimumleasepayments $ 4,528

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

11.CommitmentsandContingencies(Continued)

Additionally,theCompanyhasnoncancellablecontractualcommitmentswithitscloudinfrastructureprovider,networkserviceprovidersandothervendorsthatarenon-cancellableandexpirewithinonetofouryears.Futureminimumpaymentsunderthesenoncancellablepurchasecommitmentswereasfollows(inthousands).Unrecognizedtaxbenefitsarenotincludedintheseamountsbecauseanyamountsexpectedtobesettledincasharenotmaterial:

(b)LegalMatters

OnApril30,2015andMarch28,2016,TelesignCorporation("Telesign")filedlawsuits(whichweresubsequentlyconsolidated)againsttheCompanyintheUnitedStatesDistrictCourt,CentralDistrictofCalifornia("TelesignI/II").TelesignallegesinTelesignI/IIthattheCompanyisinfringingfourU.S.patentsthatitholds:U.S.PatentNo.7,945,034("034"),U.S.PatentNo.8,462,920("920"),U.S.PatentNo.8,687,038("038")andU.S.PatentNo.9,300,792("792").TheconsolidatedTelesignI/IIactionshavebeentransferredtotheUnitedStatesDistrictCourt,NorthernDistrict.ThepatentinfringementallegationsinthelawsuitrelatetotheCompany'stwo-factorauthenticationusecase,Authy,andanAPItooltofindinformationaboutaphonenumber.Telesignseeks,amongotherthings,toenjoinusfromallegedlyinfringingthepatents,alongwithdamagesforlostprofits.

OnMarch8,2017,inresponsetoapetitionbytheCompany,theU.S.PatentandTrademarkOfficer("PTO")issuedanorderinstitutinganinterpartesreviewforthe'792patent.OnMarch6,2018,thePTOfoundallclaimschallengedbytheCompanyintheinterpartesreviewunpatentable.OnOctober19,2018,thedistrictcourtgrantedtheCompany'smotionthatallassertedclaimsoftheassertedpatentsareinvalidunder35U.S.C.§101andenteredjudgmentintheCompany'sfavor.OnNovember8,2018,TelesignappealedthejudgmenttotheUnitedStatesCourtofAppealsfortheFederalCircuitwherethecaseisnowpending.Basedon,amongotherthings,finaljudgmentbeingenteredbythedistrictcourtintheCompany'sfavor,theCompanydoesnotbelievealossisreasonablypossibleorestimable.

OnDecember1,2016,theCompamyfiledapatentinfringementlawsuitagainstTelesignintheUnitedStatesDistrictCourt,NorthernDistrictofCalifornia("TelesignIII"),allegingindirectinfringementofUnitedStatesPatentNo.8,306,021("021"),UnitedStatesPatentNo.8,837,465("465"),UnitedStatesPatentNo.8,755,376("376"),UnitedStatesPatentNo.8,736,051("051"),UnitedStatesPatentNo.8,737,962("962"),UnitedStatesPatentNo.9,270,833("833"),andUnitedStatesPatentNo.9,226,217("217").TelesignfiledamotiontodismissthecomplaintonJanuary25,2017.Intwoorders,issuedonMarch31,2017andApril17,2017,thecourtgrantedTelesign'smotiontodismisswithrespecttothe'962,'833,'051and'217patents,butdeniedTelesign'smotiontodismiss

124

YearEndingDecember31:

AsofDecember31,

2018 2019 $ 37,6232020 2,3372021 1,0232022 2,0002023 5,000Totalpayments $ 47,983

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

11.CommitmentsandContingencies(Continued)

astothe'021,'465and'376patents.OnAugust23,2017,TelesignpetitionedthePTOforinterpartesreviewofthe'021,'465,and'376patents.OnMarch9,2018,thePTOdeniedTelesign'spetitionforinterpartesreviewofthe'021patentandgrantedTelesign'spetitionsforinterpartesreviewofthe'465and'376patents.TelesignIIIiscurrentlystayedpendingresolutionoftheinterpartesreviewsofthe'465and'376patents.TheCompanyisseekingajudgmentofinfringement,ajudgmentofwillfulinfringement,monetaryandinjunctiverelief,enhanceddamages,andanawardofcostsandexpensesagainstTelesign.

OnFebruary18,2016,aputativeclassactioncomplaintwasfiledintheAlamedaCountySuperiorCourtinCalifornia,entitledAngelaFlowersv.TwilioInc.ThecomplaintallegesthattheCompany'sproductspermittheinterception,recordinganddisclosureofcommunicationsatacustomer'srequestandareinviolationoftheCaliforniaInvasionofPrivacyAct.Thecomplaintseeksinjunctivereliefaswellasmonetarydamages.OnJanuary2,2018,thecourtissuedanordergrantinginpartanddenyinginparttheplaintiff'sclasscertificationmotion.Thecourtcertifiedtwoclassesofindividualswho,duringspecifiedtimeperiods,allegedlysentorreceivedcertaincommunicationsinvolvingtheaccountsofthreeoftheCompany'scustomersthatwererecorded.Followingmediation,onJanuary7,2019,thepartiessignedalong-formsettlementagreement,providingforapaymentof$10millionintoacommonfundandinjunctivereliefinvolvingcertainupdatestoTwilio'sAcceptableUsePolicyandcustomerdocumentation.OnJanuary15,2019,thecourtenteredanordergrantingpreliminaryapprovalofthesettlement,andthepartiessignedanamendedsettlementagreementtoconformtothecourt'sorder.AfinalapprovalhearingisscheduledforJune11,2019.Giveninsurancecoverage,theCompanycurrentlyestimatesitspotentialliabilityintheFlowersmattertobe$1.7millionandreservedthisamountinitsconsolidatedbalancesheetasofDecember31,2018,presentedelsewhereinthisAnnualReportonForm10-K.

OnSeptember1,2015,TwiliowasnamedasadefendantinaFirstAmendedComplaintinaputativeclassactioncaptionedJeremyBaumanv.DavidSaxe,etal.pendingintheUnitedStatesDistrictCourt,DistrictofNevadarelatingtotheallegedsendingofunsolicitedtextmessagestotheplaintiffsandputativeclassmembers.TheCompanyfiledamotiontodismiss,whichwasgranted,andonSeptember20,2016theplaintifffiledaSecondAmendedComplaintwithadditionalallegationsthattheCompanyviolatedtheTelephoneConsumerProtectionAct("TCPA"),andtheNevadaDeceptiveTradePracticesAct("NDTPA"),NRS41.600(2)(e).OnJanuary10,2019,thecourtgrantedPlaintiffs'motionforclasscertificationundertheTCPAanddeniedplaintiff'srequesttocertifyaclassundertheNDTPA.OnFebruary13,2019,thecourtissuedanorderdenyingtheCompany'smotiontodismissastoPlaintiffs'TCPAclaimandgrantingdismissalastoPlaintiffs'NDTPAclaim.TheCompanyintendstovigorouslydefenditselfagainstandbelievesithasmeritoriousdefensestothislawsuit.Itistooearlyinthesematterstoreasonablypredicttheprobabilityoftheoutcomesortoestimatetherangeofpossibleloss,ifany.

SendGridStockholderLitigation

OnDecember5,2018,purportedstockholdersofSendGridfiledputativeclassactioncomplaintsintheUnitedStatesDistrictCourtfortheDistrictofDelaware,Rosenblattv.SendGrid,Inc.,etal.,CaseNo.1:18-cv-01931-UNA(the"RosenblattComplaint"),andintheUnitedStatesDistrictCourtfortheDistrictofColorado,Chenv.SendGrid,Inc.,etal.,CaseNo.1:18-cv-03131-MEH(the"ChenComplaint"),againstSendGrid,theindividualmembersoftheSendGridboardofdirectors(the"IndividualDefendants"),TwilioandTopazMergerSubsidiary,Inc.Thereafter,onDecember19,2018

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NotestoConsolidatedFinancialStatements(Continued)

11.CommitmentsandContingencies(Continued)

andJanuary3,2019,purportedstockholdersofSendGridfiledputativeclassactioncomplaintsagainstSendGridandtheIndividualDefendantsintheUnitedStatesDistrictCourtfortheDistrictofColorado,respectively,Bushanskyv.SendGrid,Inc.,etal.,1:18-cv-03260-SKC(the"BushanskyComplaint"),andConnerv.SendGrid,Inc.,etal.,1:19-cv-00016-PAB-SKC(the"ConnerComplaint").AsofFebruary11,2019,allfourcomplaintshavebeenvoluntarilydismissed.

Amongotherthings,theRosenblattComplaintallegesthatSendGridandtheIndividualDefendantsmisrepresentedand/oromittedmaterialinformationinaregistrationstatementonFormS-4,renderingitfalseandmisleadingandinviolationoftheExchangeActandrelatedregulations.Inaddition,theRosenblattComplaintallegesthattheIndividualDefendantsandTwilioactedascontrollingpersonswithinthemeaningandinviolationofSection20(a)oftheExchangeActtoinfluenceandcontrolthedisseminationoftheallegedlydefectiveregistrationstatementonFormS-4.TheRosenblattComplaintseeks,amongotherthings,rescissionofthemergerorrescissorydamages,anorderdirectingtheSendGridboardofdirectorstofilearegistrationstatementonFormS-4thatdoesnotcontainanyuntruestatementsofmaterialfactandstatesallmaterialfacts,adeclarationthatthedefendantsviolatedSections14(a)and/or20(a)oftheExchangeActandRule14a-9promulgatedthereunderandanawardofplaintiffcosts,includingreasonableattorneys'andexperts'fees.OnFebruary11,2019,theRosenblattComplaintwasvoluntarilydismissed.

Amongotherthings,theChenComplaintallegesthatthedefendantsmisrepresentedand/oromittedmaterialinformationinaregistrationstatementonFormS-4,renderingitfalseandmisleadingandinviolationoftheExchangeActandrelatedregulations.Inaddition,theChenComplaintallegesthattheIndividualDefendantsactedascontrollingpersonswithinthemeaningandinviolationofSection20(a)oftheExchangeActtoinfluenceandcontrolthedisseminationoftheallegedlydefectiveFormS-4.TheChenComplaintalsoallegesthattheIndividualDefendantsbreachedtheirfiduciarydutiestoSendGridstockholders,andthattheotherdefendantsaidedandabettedsuchbreaches,byseekingtosellSendGridthroughanallegedlyunfairprocessandforanunfairpriceandonunfairterms,andbyfailingtodiscloseallmaterialinformation.TheChenComplaintseeks,amongotherthings,rescissionofthemergerorrescissorydamages,anorderdirectingtheSendGridboardofdirectorstocommenceanewsaleprocess,adeclarationthatthemergeragreementwasagreedtoinbreachoftheIndividualDefendants'fiduciarydutiesandisthereforeunlawfulandunenforceable,anorderdirectingthedefendantstoaccounttotheputativeclassfordamagesallegedlysustained,andanawardofplaintiffcosts,includingreasonableattorneys'andexperts'fees.OnFebruary4,2019,theChenComplaintwasvoluntarilydismissed.

Amongotherthings,theBushanskyandConnerComplaintsallegethatSendGridandtheIndividualDefendantsmisrepresentedand/oromittedmaterialinformationinaSchedule14ADefinitiveProxyStatement,renderingitfalseandmisleadingandinviolationoftheExchangeActandrelatedregulations.Inaddition,theBushanskyandConnerComplaintsallegethattheIndividualDefendantsactedascontrollingpersonswithinthemeaningandinviolationofSection20(a)oftheExchangeActtoinfluenceandcontrolthedisseminationoftheallegedlydefectiveSchedule14ADefinitiveProxyStatement.TheBushanskyandConnerComplaintsseek,amongotherthings,rescissionofthemergerorrescissorydamages,andanawardofplaintiffcosts,includingreasonableattorneys'andexperts'fees.OnFebruary4,2019,theBushanskyComplaintwasvoluntarilydismissed.OnFebruary11,2019,theConnerComplaintwasvoluntarilydismissed.

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11.CommitmentsandContingencies(Continued)

Inadditiontothelitigationmattersdiscussedabove,fromtimetotime,theCompanyisapartytolegalactionandsubjecttoclaimsthatariseintheordinarycourseofbusiness.Theclaimsareinvestigatedastheyariseandlossestimatesareaccrued,whenprobableandreasonablyestimable.Whileitisnotfeasibletopredictordeterminetheultimateoutcomeofthesematters,theCompanybelievesthattheselegalproceedingswillnothaveamaterialadverseeffectonitsfinancialpositionorresultsofoperations.

Legalfeesandothercostsrelatedtolitigationandotherlegalproceedingsareexpensedasincurredandareincludedingeneralandadministrativeexpensesintheaccompanyingconsolidatedstatementsofoperations.

(c)IndemnificationAgreements

TheCompanyhassignedindemnificationagreementswithallofitsboardmembersandexecutiveofficers.TheagreementsindemnifytheboardmembersandexecutiveofficersfromclaimsandexpensesonactionsbroughtagainsttheindividualsseparatelyorjointlywiththeCompanyforcertainindemnifiableevents.IndemnifiableEventsgenerallymeananyeventoroccurrencerelatedtothefactthattheboardmemberortheexecutiveofficerwasorisactinginhisorhercapacityasaboardmemberoranexecutiveofficerfortheCompanyorwasorisactingorrepresentingtheinterestsoftheCompany.

Intheordinarycourseofbusiness,theCompanyentersintocontractualarrangementsunderwhichitagreestoprovideindemnificationofvaryingscopeandtermstobusinesspartnersandotherpartieswithrespecttocertainmatters,including,butnotlimitedto,lossesarisingoutofthebreachofsuchagreements,intellectualpropertyinfringementclaimsmadebythirdpartiesandotherliabilitiesrelatingtoorarisingfromtheCompany'svariousproducts,oritsactsoromissions.Inthesecircumstances,paymentmaybeconditionalontheotherpartymakingaclaimpursuanttotheproceduresspecifiedintheparticularcontract.Further,theCompany'sobligationsundertheseagreementsmaybelimitedintermsoftimeand/oramount,andinsomeinstances,theCompanymayhaverecourseagainstthirdpartiesforcertainpayments.Thetermsofsuchobligationsmayvary.

AsofDecember31,2018and2017,noamountswereaccrued.

(d)OtherTaxes

TheCompanyconductsoperationsinmanytaxjurisdictionsthroughouttheUnitedStates.Inmanyofthesejurisdictions,non-income-basedtaxes,suchassalesanduseandtelecommunicationstaxesareassessedontheCompany'soperations.PriortoMarch2017,theCompanyhadnotbillednorcollectedthesetaxesfromitscustomersand,inaccordancewithU.S.GAAP,recordedaprovisionforitstaxexposureinthesejurisdictionswhenitwasbothprobablethataliabilityhadbeenincurredandtheamountoftheexposurecouldbereasonablyestimated.Theseestimatesincludedseveralkeyassumptionsincluding,butnotlimitedto,thetaxabilityoftheCompany'sservices,thejurisdictionsinwhichitsmanagementbelievesithasnexus,andthesourcingofrevenuestothosejurisdictions.StartinginMarch2017,theCompanybegancollectingthesetaxesfromcustomersincertainjurisdictions,andsincethen,hasexpandedthenumberofjurisdictionswherethesetaxesarebeingcollected.EffectiveJanuary2018,theCompanybegantocollecttaxesinoneadditionaljurisdictionandaccordingly,fromJanuary2018,theCompanyisnotrecordinganadditionalprovisionforitsexposurefornewactivitiesinthatjurisdiction.TheCompanyexpectstocontinuetoexpandthenumberofjurisdictionswhere

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11.CommitmentsandContingencies(Continued)

thesetaxeswillbecollectedinthefuture.Simultaneously,theCompanywasandcontinuestobeindiscussionswithcertainstatesregardingitspriorstatesalesandothertaxes,ifany,thattheCompanymayowe.

During2017,theCompanyreviseditsestimatesofitstaxexposurebasedonsettlementsreachedwithvariousstatesindicatingthatcertainrevisionstothekeyassumptionsincluding,butnotlimitedto,thesourcingofrevenueandthetaxabilityoftheCompany'sserviceswereappropriateinthecurrentperiod.IntheyearendedDecember31,2017,thetotalimpactofthesechangesonthenetlossattributabletocommonstockholderswasareductionof$13.4million.AsofDecember31,2018and2017,theliabilityrecordedforthesetaxeswas$22.6millionand$20.9million,respectively.

Intheeventotherjurisdictionschallengemanagement'sassumptionsandanalysis,theactualexposurecoulddiffermateriallyfromthecurrentestimates.

12.Stockholders'Equity

(a)PreferredStock

AsofDecember31,2018and2017,theCompanyhadauthorized100,000,000sharesofpreferredstock,parvalue$0.001,ofwhichnoshareswereissuedandoutstanding.

(b)CommonStock

InJune2016,theCompanycompletedaninitialpublicoffering("IPO")inwhichtheCompanysold11,500,000sharesofitsnewlyauthorizedClassAcommonstock,whichincluded1,500,000sharessoldpursuanttotheexercisebytheunderwritersofanoptiontopurchaseadditionalshares,atthepublicofferingpriceof$15.00pershare.TheCompanyreceivednetproceedsof$155.5million,afterdeductingunderwritingdiscountsandofferingexpensespaidbytheCompany,fromthesaleofitssharesintheIPO.ImmediatelypriortothecompletionoftheIPO,allsharesofcommonstockthenoutstandingwerereclassifiedassharesofClassBcommonstockandallsharesofconvertiblepreferredstockthenoutstandingwereconvertedinto54,508,441sharesofcommonstockonaone-to-onebasis,andthenreclassifiedassharesofClassBcommonstock.

InOctober2016,theCompanycompletedafollow-onpublicoffering("FPO")inwhichtheCompanysold1,691,222sharesofitsClassAcommonstock,whichincluded1,050,000sharessoldpursuanttotheexercisebytheunderwritersofanoptiontopurchaseadditionalshares,atapublicofferingpriceof$40.00pershare.Inaddition,another6,358,778sharesoftheCompany'sClassAcommonstockweresoldbythesellingstockholdersoftheCompany,whichincluded906,364sharessoldpursuanttotheexerciseofemployeestockoptionsbycertainsellingstockholders.TheCompanyreceivedaggregateproceedsof$64.4million,afterdeductingunderwritingdiscountsandofferingexpensespaidandpayablebytheCompany.TheCompanydidnotreceiveanyofthenetproceedsfromthesalesofsharesbythesellingstockholders.

AsofDecember31,2018and2017,theCompanyhadauthorized1,000,000,000sharesofClassAcommonstockand100,000,000sharesofClassBcommonstock,eachparvalue$0.001pershare.AsofDecember31,2018,80,769,763sharesofClassAcommonstockand19,310,465sharesofClassBcommonstockwereissuedandoutstanding.AsofDecember31,2017,69,906,550sharesofClassAcommonstockand24,063,246sharesofClassBcommonstockwereissuedandoutstanding.HoldersofClassAandClassBcommonstockareentitledtoonevotepershareand10votespershare,

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12.Stockholders'Equity(Continued)

respectively,andthesharesofClassAcommonstockandClassBcommonstockareidentical,exceptforvotingandconversionrights.TheoutstandingClassBcommonstockasoftheyearendedDecember31,2017included180,000sharesrelatedtotheAuthyacquisitionwhichwasreleasedfromescrowduring2018.

TheCompanyhadreservedsharesofcommonstockforissuanceasfollows:

(c)Twilio.org

InSeptember2015,theCompany'sboardofdirectorsapprovedtheestablishmentofTwilio.organdcommitted1%oftheCompany'soutstandingcapitalstocktofundTwilio.org'sactivities.ThroughTwilio.org,whichisapartoftheCompanyandnotaseparatelegalentity,theCompanydonatesanddiscountsitsproductstononprofits,whousetheCompany'sproductstoengagetheiraudience,expandtheirreachandfocusonmakingameaningfulchangeintheworld.IntheyearsendedDecember31,2018and2017,Twilio.orgdonated$7.1millionand$1.2milliontothequalifiedrecipientsconsistentwithitsphilanthropicmission.AsofDecember31,2018,theCompanyhad572,676sharesreservedforTwilio.orgactivities.

13.Stock-BasedCompensation

2008StockOptionPlan

TheCompanymaintainedastockplan,the2008StockOptionPlan,asamendedandrestated(the"2008Plan"),whichallowedtheCompanytograntincentive("ISO"),non-statutory("NSO")stockoptionsandrestrictedstockunits("RSU")toitsemployees,directorsandconsultantstoparticipateintheCompany'sfutureperformancethroughstock-basedawardsatthediscretionoftheboardofdirectors.Underthe2008Plan,optionstopurchasetheCompany'scommonstockcouldnotbegrantedatapricelessthanfairvalueinthecaseofISOsandNSOs.Fairvaluewasdeterminedbytheboardofdirectors,ingoodfaith,withinputfromvaluationconsultants.OnJune22,2016,theplanwasterminatedinconnectionwiththeCompany'sIPO.Accordingly,nosharesareavailableforfutureissuanceunderthe2008Plan.The2008Plancontinuestogovernoutstandingequityawardsgrantedthereunder.TheCompany'srightoffirstrefusalforoutstandingequityawardsgrantedunderthe2008PlanterminateduponcompletionoftheIPO.Optionsgrantedincludeprovisionsforearlyexercisability.

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AsofDecember31,

2018

AsofDecember31,

2017 Stockoptionsissuedandoutstanding 7,978,369 10,710,427Nonvestedrestrictedstockunitsissuedandoutstanding 8,262,902 5,665,459ClassAcommonstockreservedforTwilio.org 572,676 635,014Stock-basedawardsavailableforgrantunder2016Plan 9,313,354 10,200,189Stock-basedawardsavailableforgrantunder2016ESPP 3,092,779 2,478,343ClassAcommonstockreservedfortheconvertibleseniornotes 10,472,165 —Total 39,692,245 29,689,432

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NotestoConsolidatedFinancialStatements(Continued)

13.Stock-BasedCompensation(Continued)

2016StockOptionPlan

TheCompany's2016StockOptionandIncentivePlan(the"2016Plan")becameeffectiveonJune21,2016.The2016PlanprovidesforthegrantofISOs,NSOs,restrictedstock,RSUs,stockappreciationrights,unrestrictedstockawards,performanceshareawards,dividendequivalentrightsandcash-basedawardstoemployees,directorsandconsultantsoftheCompany.Atotalof11,500,000sharesoftheCompany'sClassAcommonstockwereinitiallyreservedforissuanceunderthe2016Plan.TheseavailablesharesautomaticallyincreaseeachJanuary1,beginningonJanuary1,2017,by5%ofthenumberofsharesoftheCompany'sClassAandClassBcommonstockoutstandingontheimmediatelyprecedingDecember31,orsuchlessernumberofsharesasdeterminedbytheCompany'scompensationcommittee.OnJanuary1,2018and2017,thesharesavailableforgrantunderthe2016Planwereautomaticallyincreasedby4,698,490sharesand4,362,427shares,respectively.

Underthe2016Plan,thestockoptionsaregrantedatapricepersharenotlessthan100%ofthefairmarketvaluepershareoftheunderlyingcommonstockonthedateofgrant.Underbothplans,stockoptionsgenerallyexpire10yearsfromthedateofgrantandvestoverperiodsdeterminedbytheboardofdirectors.Thevestingperiodfornew-hireoptionsandrestrictedstockunitsisgenerallyafour-yeartermfromthedateofgrant,atarateof25%afteroneyear,thenmonthlyorquarterly,respectively,onastraight-linebasisthereafter.InJuly2017,theCompanybegangrantingrestrictedstockunitstoexistingemployeesthatvestinequalquarterlyinstallmentsoverafouryearserviceperiod.

2016EmployeeStockPurchasePlan

TheCompany'sEmployeeStockPurchasePlan("2016ESPP")becameeffectiveonJune21,2016.Atotalof2,400,000sharesoftheCompany'sClassAcommonstockwereinitiallyreservedforissuanceunderthe2016ESPP.TheseavailableshareswillautomaticallyincreaseeachJanuary1,beginningonJanuary1,2017,bythelesserof1,800,000sharesofthecommonstock,1%ofthenumberofsharesoftheCompany'sClassAandClassBcommonstockoutstandingontheimmediatelyprecedingDecember31orsuchlessernumberofsharesasdeterminedbytheCompany'scompensationcommittee.OnJanuary1,2018and2017,thesharesavailableforgrantunderthe2016Planwereautomaticallyincreasedby939,698and872,485shares,respectively.

The2016ESPPallowseligibleemployeestopurchasesharesoftheCompany'sClassAcommonstockatadiscountofupto15%throughpayrolldeductionsoftheireligiblecompensation,subjecttoanyplanlimitations.Exceptfortheinitialofferingperiod,the2016ESPPprovidesforseparatesix-monthofferingperiodsbeginninginMayandNovemberofeachfiscalyear,startinginMay2017.

Oneachpurchasedate,eligibleemployeeswillpurchasetheCompany'sstockatapricepershareequalto85%ofthelesserof(i)thefairmarketvalueoftheCompany'sClassAcommonstockontheofferingdateor(ii)thefairmarketvalueoftheCompany'sClassAcommonstockonthepurchasedate.

IntheyearsendedDecember31,2018and2017,325,262sharesand794,142sharesofClassAcommonstockwerepurchasedunderthe2016ESPPand113,312sharesareexpectedtobepurchasedinthesecondquarterof2019.AsofDecember31,2018,totalunrecognizedcompensationcostrelatedtothe2016ESPPwas$2.2million,whichwillbeamortizedoveraweighted-averageperiodof0.4years.

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13.Stock-BasedCompensation(Continued)

Stockoptionsactivityunderthe2008Planand2016Planwasasfollows:

StockOptions

AggregateintrinsicvaluerepresentsthedifferencebetweentheCompany'sestimatedfairvalueofitscommonstockandtheexercisepriceofoutstanding"in-the-money"options.PriortotheIPO,thefairvalueoftheCompany'scommonstockwasestimatedbytheCompany'sboardofdirectors.AftertheIPO,thefairvalueoftheCompany'scommonstockistheCompany'sClassAcommonstockpriceasreportedontheNewYorkStockExchange.Theaggregateintrinsicvalueofstockoptionsexercisedwas$178.5million,$132.0millionand$54.4millionduringtheyearsendedDecember31,2018,2017and2016,respectively.

Thetotalestimatedgrantdatefairvalueofoptionsvestedwas$21.8million,$15.8millionand$15.3millionduringtheyearsendedDecember31,2018,2017and2016,respectively.Theweighted-averagegrant-datefairvalueofoptionsgrantedwas$18.40,$13.33and$5.52duringtheyearsendedDecember31,2018,2017and2016,respectively.

OnFebruary28,2017,theCompanygrantedatotalof555,000sharesofperformance-basedstockoptionsinthreedistinctawardstoanemployeewithgrantdatefairvaluesof$13.48,$10.26and$8.41pershareforatotalgrantvalueof$5.9million.Thefirsthalfofeachawardvestsuponsatisfactionofaperformanceconditionandtheremainderveststhereafterinequalmonthlyinstallmentsovera24-monthperiod.Theachievementwindowexpiresafter4.3yearsfromthedateofgrantandthestockoptionsexpiresevenyearsafterthedateofgrant.Thestockoptionsareamortizedoveraderivedserviceperiod,asadjusted,of3.1years,3.9yearsand4.6years,respectively.Thestockoptionsvalue

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Numberofoptions

outstanding

Weighted-averageexerciseprice

(pershare)

Weighted-averageremainingcontractual

term(inyears)

Aggregateintrinsicvalue

(inthousands) OutstandingoptionsasofDecember31,2017 10,155,427 $ 10.31 7.12 $ 145,763Granted 1,330,118 39.77 Exercised (3,628,032) 8.20 Forfeitedandcancelled (434,144) 19.70

OutstandingoptionsasofDecember31,2018 7,423,369 $ 16.07 6.80 $ 543,640OptionsvestedandexercisableasofDecember31,2018 4,529,504 $ 9.38 5.96 $ 362,017

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NotestoConsolidatedFinancialStatements(Continued)

13.Stock-BasedCompensation(Continued)

andthederivedserviceperiodwereestimatedusingtheMonte-Carlosimulationmodel.Thefollowingtablesummarizesthedetailsoftheperformanceoptions:

AsofDecember31,2018,totalunrecognizedcompensationcostrelatedtononvestedstockoptionswas$35.4million,whichwillbeamortizedonaratablebasisoveraweighted-averageperiodof2.02years.

RestrictedStockUnits

PriortothecompletionoftheCompany'sIPO,theCompanygrantedRSUs("Pre-IPORSUs")underits2008Plantoitsemployeesthatvesteduponthesatisfactionofbothatime-basedserviceconditionandaliquiditycondition.Thetime-basedserviceconditionforthemajorityoftheseawardswillbesatisfiedoveraperiodoffouryears.TheliquidityconditionwassatisfieduponoccurrenceoftheCompany'sIPOinJune2016.RSUsgrantedonorafterthecompletionoftheCompany'sIPO("Post-IPORSUs")aregrantedunderthe2016Planandaresubjecttoatime-basedvestingconditiononly.ThecompensationexpenserelatedtothesegrantsisbasedonthegrantdatefairvalueoftheRSUsandisrecognizedonastraight-linebasisovertheapplicableserviceperiod.ThePost-IPORSUsaregenerallyearnedoveraserviceperiodoffouryears.

AsofDecember31,2018,totalunrecognizedcompensationcostrelatedtononvestedRSUswas$325.3million,whichwillbeamortizedoveraweighted-averageperiodof3.03years.

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Numberofoptions

outstanding

Weighted-averageexerciseprice

(pershare)

Weighted-averageremainingcontractual

term(inyears)

Aggregateintrinsicvalue

(inthousands) OutstandingoptionsasofDecember31,2017 555,000 $ 31.72 6.0 $ —Granted — — Exercised — — Forfeitedandcancelled — —

OutstandingoptionsasofDecember31,2018 555,000 $ 31.72 6.0 $ —OptionsvestedandexercisableasofDecember31,2018 185,000 $ 31.72 5.16 $ 10,652

Numberofoptions

outstanding

Weighted-averagegrantdatefairvalue(pershare)

Aggregateintrinsicvalue

(inthousands) NonvestedRSUsasofDecember31,2017 5,665,459 $ 29.29 $ 133,648Granted 5,556,817 49.70 Vested (2,142,776) 29.50 Forfeitedandcancelled (816,598) 31.96

NonvestedRSUsasofDecember31,2018 8,262,902 $ 42.70 $ 729,373

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NotestoConsolidatedFinancialStatements(Continued)

13.Stock-BasedCompensation(Continued)

ValuationAssumptions

ThefairvalueofemployeestockoptionswasestimatedonthedateofgrantusingthefollowingassumptionsintheBlack-Scholesoptionpricingmodel:

ThefollowingassumptionswereusedintheMonteCarlosimulationmodeltoestimatethefairvalueandthederivedserviceperiodoftheperformanceoptions:

Stock-BasedCompensationExpense

TheCompanyrecordedthetotalstock-basedcompensationexpenseasfollows(inthousands):

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YearEndedDecember31, 2018 2017 2016EmployeeStockOptions Fairvalueofcommonstock $33.01-$76.63 $23.60-$31.96 $10.09-$15.00Expectedterm(inyears) 1-6.08 6.08 6.08Expectedvolatility 38.6%-44.2% 44.3%-47.6% 51.4%-53.0%Risk-freeinterestrate 2.9%-3.0% 1.9%-2.3% 1.3%-1.5%Dividendrate 0% 0% 0%EmployeeStockPurchasePlan Expectedterm(inyears) 0.5 0.5 0.90Expectedvolatility 39.8%-47.5% 33.2%-33.9% 52%Risk-freeinterestrate 2.1%-2.5% 1.1%-1.4% 0.6%Dividendrate 0% 0% 0%

Assetvolatility 40%Equityvolatility 45%Discountrate 14%Stockpriceatgrantdate $ 31.72

YearEndedDecember31, 2018 2017 2016 Costofrevenue $ 1,126 $ 650 $ 291Researchanddevelopment 42,277 22,808 12,946Salesandmarketing 23,616 9,822 4,972Generalandadministrative 26,254 16,339 6,016Total $ 93,273 $ 49,619 $ 24,225

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NotestoConsolidatedFinancialStatements(Continued)

14.NetLossPerShareAttributabletoCommonStockholders

Thefollowingtablesetsforththecalculationofbasicanddilutednetlosspershareattributabletocommonstockholdersduringtheperiodspresented(inthousands,exceptpersharedata):

Thefollowingoutstandingsharesofcommonstockequivalentswereexcludedfromthecalculationofthedilutednetlosspershareattributabletocommonstockholdersbecausetheireffectwouldhavebeenanti-dilutive:

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YearEndedDecember31, 2018 2017 2016 Netlossattributabletocommonstockholders $ (121,949) $ (63,708) $ (41,324)Weighted-averagesharesusedtocomputenetlosspershareattributabletocommonstockholders,basicanddiluted 97,130,339 91,224,607 53,116,675

Netlosspershareattributabletocommonstockholders,basicanddiluted $ (1.26) $ (0.70) $ (0.78)

YearEndedDecember31, 2018 2017 2016 Stockoptionsissuedandoutstanding 7,978,369 10,710,427 14,649,276Nonvestedrestrictedstockunitsissuedandoutstanding 8,262,902 5,665,459 2,034,217ClassAcommonstockreservedforTwilio.org 572,676 635,014 680,397ClassAcommonstockcommittedunder2016ESPP 113,312 235,372 597,038Conversionspread* 233 — —Unvestedsharessubjecttorepurchase 1,250 5,214 49,580Total 16,829,742 17,251,486 18,010,508

* SincetheCompanyexpectstosettletheprincipalamountofitsoutstandingconvertibleseniornotesincashandanyexcessinsharesoftheCompany'sClassAcommonstock,theCompanyusesthetreasurystockmethodforcalculatinganypotentialdilutiveeffectoftheconversionspreadondilutednetincomepershare,ifapplicable.TheconversionspreadwillhaveadilutiveimpactondilutednetincomepershareofClassAcommonstockwhentheaveragemarketpriceoftheCompany'sClassAcommonstockforagivenperiodexceedstheconversionpriceof$70.90persharefortheNotes.TheconversionspreadiscalculatedusingtheaveragemarketpriceofClassAcommonstockduringtheperiod,consistentwiththetreasurystockmethod.

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NotestoConsolidatedFinancialStatements(Continued)

15.IncomeTaxes

Thefollowingtablepresentsdomesticandforeigncomponentsoflossbeforeincometaxesfortheperiodspresented(inthousands):

Provisionforincometaxesconsistsofthefollowing(inthousands):

ThefollowingtablepresentsareconciliationofthestatutoryfederaltaxrateandtheCompany'seffectivetaxratefortheyearsendedDecember31,2018,2017and2016:

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YearEndedDecember31, 2018 2017 2016 UnitedStates $ (96,448) $ (46,737) $ (14,002)International (24,710) (16,266) (26,996)Lossbeforeprovisionforincometaxes $ (121,158) $ (63,003) $ (40,998)

YearEndedDecember31, 2018 2017 2016 Current: Federal $ — $ 99 $ —State 139 78 83Foreign 881 823 214Total 1,020 1,000 297

Deferred: Federal 29 28 2State 19 10 —Foreign (277) (333) 27Total (229) (295) 29Provisionforincometaxes $ 791 $ 705 $ 326

YearEndedDecember31,

2018 2017 2016 Taxbenefitatfederalstatutoryrate 21% 34% 34%Statetax,netoffederalbenefit 15 10 11Stock-basedcompensation 31 47 23Credits 8 8 2Foreignratedifferential (4) (8) (23)Reserveforuncertaintaxpositions — — (12)Changeinvaluationallowance (68) (46) (34)Changeinfederalstatutoryrate — (45) —Other (3) (1) (2)Effectivetaxrate 0% (1)% (1)%

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NotestoConsolidatedFinancialStatements(Continued)

15.IncomeTaxes(Continued)

Deferredincometaxesreflectthenettaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforincometaxpurposes.ThefollowingtablepresentsthesignificantcomponentsoftheCompany'sdeferredtaxassetsandliabilities(inthousands):

AsofDecember31,2018,theCompanyhadapproximately$452.7millioninfederalnetoperatinglosscarryforwardsand$26.7millioninfederaltaxcredits.Ifnotutilized,thefederalnetoperatinglossandtaxcreditcarryforwardswillexpireatvariousdatesbeginningin2029.

AsofDecember31,2018,theCompanyhadapproximately$347.1millioninstatenetoperatinglosscarryforwardsand$19.9millioninstatetaxcredits.Ifnotutilized,thestatenetoperatinglosscarryforwardswillexpireatvariousdatesbeginningin2026TheCaliforniastatetaxcreditscanbecarriedforwardindefinitely.

AsofDecember31,2018,theCompanyhadforeignnetoperatinglosscarryoversof$8.1million.Theforeignnetoperatinglosscarryoverscanbecarriedforwardindefinitely.

Alimitationmayapplytotheuseofthenetoperatinglossandcreditcarryforwards,underprovisionsoftheInternalRevenueCodeof1986,asamended,andsimilarstatetaxprovisionsthatareapplicableiftheCompanyexperiencesan"ownershipchange."Anownershipchangemayoccur,forexample,asaresultofissuanceofnewequity.Shouldtheselimitationsapply,thecarryforwardswould

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AsofDecember31, 2018 2017 2016 Deferredtaxassets: Netoperatinglosscarryforwards $ 116,190 $ 56,138 $ 31,090Accruedandprepaidexpenses 11,594 9,140 16,698Stock-basedcompensation 11,147 7,131 5,368Researchanddevelopmentcredits 32,206 16,212 7,807Charitablecontributions 3,100 1,233 1,458Cappedcall 13,175 — —Debtissuancecost 638 — —Other 194 472 —Grossdeferredtaxassets 188,244 90,326 62,421

Valuationallowance (147,354) (78,900) (49,601)Netdeferredtaxassets 40,890 11,426 12,820

Deferredtaxliabilities: Capitalizedsoftware (10,686) (7,664) (7,086)Prepaidexpenses (838) (1,015) (452)Acquiredintangibles (2,997) (2,101) (152)Propertyandequipment (1,990) (2,380) (4,931)Convertibledebt (27,164) — —Deferredcommissions (2,396) (718) (201)Netdeferredtaxasset(liability) $ (5,181) $ (2,452) $ (2)

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NotestoConsolidatedFinancialStatements(Continued)

15.IncomeTaxes(Continued)

besubjecttoanannuallimitation,resultinginapotentialreductioninthegrossdeferredtaxassetsbeforeconsideringthevaluationallowance.

TheCompany'saccountingfordeferredtaxesinvolvestheevaluationofanumberoffactorsconcerningtherealizabilityofitsnetdeferredtaxassets.TheCompanyprimarilyconsideredsuchfactorsasitshistoryofoperatinglosses,thenatureoftheCompany'sdeferredtaxassets,andthetiming,likelihoodandamount,ifany,offuturetaxableincomeduringtheperiodsinwhichthosetemporarydifferencesandcarryforwardsbecomedeductible.Atpresent,theCompanydoesnotbelievethatitismorelikelythannotthatthenetdeferredtaxassetswillberealized,accordingly,afullvaluationallowancehasbeenestablished.Thevaluationallowanceincreasedbyapproximately$68.5millionand$29.3millionduringtheyearsendedDecember31,2018and2017,respectively.

Areconciliationofthebeginningandendingamountofunrecognizedtaxbenefitsisasfollows(inthousands):

AsofDecember31,2018,theCompanyhadapproximately$15.6millionofunrecognizedtaxbenefits.Ifthe$15.6millionisrecognized,$0.9millionwouldaffecttheeffectivetaxrate.Theremainingamountwouldbeoffsetbythereversalofrelateddeferredtaxassetswhicharesubjecttoafullvaluationallowance.

TheCompanyrecognizesinterestandpenalties,ifany,relatedtouncertaintaxpositionsinitsincometaxprovision.AsofDecember31,2018,theCompanyhasaccumulated$0.1millioninbothinterestandpenaltiesrelatedtouncertaintaxpositions.

TheCompanydoesnotanticipateanysignificantchangeswithin12monthsofDecember31,2018,initsuncertaintaxpositionsthatwouldbematerialtotheconsolidatedfinancialstatementstakenasawholebecausenearlyalloftheunrecognizedtaxbenefithasbeenoffsetbyadeferredtaxasset,whichhasbeenreducedbyavaluationallowance.

TheCompanyfilesU.S.federalincometaxreturnsaswellasincometaxreturnsinmanyU.S.statesandforeignjurisdictions.AsofDecember31,2018,thetaxyears2008throughthecurrentperiodremainopentoexaminationbythemajorjurisdictionsinwhichtheCompanyissubjecttotax.Fiscalyearsoutsidethenormalstatuteoflimitationremainopentoauditbytaxauthoritiesduetotaxattributesgeneratedinthoseearlyyears,whichhavebeencarriedforwardandmaybeauditedinsubsequentyearswhenutilized.TheCompanyisnotcurrentlysubjecttoU.S.federal,stateandlocal,ornon-U.S.incometaxexaminationsbyanytaxauthorities.

OnDecember22,2017,theU.S.governmentenactedcomprehensivetaxlegislationcommonlyreferredtoastheTaxCutsandJobsAct(TaxAct).TheTaxActreducestheU.S.statutorycorporatetaxrateto21%,effectiveJanuary1,2018.Consequently,werecordedadecreasetotheCompany's

137

YearEndedDecember31, 2018 2017 2016 Unrecognizedtaxbenefit,beginningofyear $ 9,445 $ 12,275 $ 1,679Grossincreasesfortaxpositionsofprioryears 1,233 493 1,996Grossdecreasefortaxpositionsofprioryears (4) (6,331) —Grossincreasesfortaxpositionsofcurrentyears 4,961 3,008 8,600Unrecognizedtaxbenefit,endofyear $ 15,635 $ 9,445 $ 12,275

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TWILIOINC.

NotestoConsolidatedFinancialStatements(Continued)

15.IncomeTaxes(Continued)

federaldeferredtaxassetsof$28.0million,whichwasfullyoffsetbyareductionintheCompany'svaluationallowancefortheyearendedDecember31,2017.TheotherprovisionsoftheTaxAct,includingtheone-timetransitiontaxonthemandatorydeemedrepatriationofcumulativeforeignearnings,didnothaveamaterialimpactontheCompany'sfinancialstatementsasofDecember31,2018.

InDecember2017,theSECstaffissuedStaffAccountingBulletinNo.118,IncomeTaxAccountingImplicationsoftheTaxCutsandJobsAct(SAB118),whichallowedcompaniestorecordprovisionalamounts.duringameasurementperiodnottoextendbeyondoneyearoftheenactmentdate.TheCompany'saccountingfortheTaxActiscompleteandwedidnothaveanysignificationadjustmentstoprovisionalamountsrecordedasofDecember31,2017.

TheTaxActcreatesanewrequirementthatcertainincome(i.e.,GILTI)earnedbycontrolledforeigncorporations(CFCs)mustbeincludedcurrentlyinthegrossincomeoftheCFCs'U.S.shareholder.UnderU.S.GAAP,theCompanyisallowedtomakeanaccountingpolicychoiceofeither(1)treatingtaxesdueonfutureU.S.inclusionsintaxableincomerelatedtoGILTIasacurrent-periodexpensewhenincurred(the"periodcostmethod")or(2)factoringsuchamountsintothemeasurementofitsdeferredtaxes(the"deferredmethod").TheCompanyselectedtheperiodcostmethod.

16.SubsequentEvents

OnFebruary1,2019,theCompanyacquiredalloutstandingsharesofcapitalstockofSendGrid,theleadingemailAPIplatform,byissuing23.4millionsharesofitsClassAcommonstockforatotalvalueof$2.6billion.PursuanttotheAgreementandPlanofMergerandReorganization,asamended,eachoutstandingshareofSendGridcommonstockwasconvertedinto0.485ofashareoftheCompany'sClassAcommonstock.

Pursuanttotheacquisitionmethodofaccounting,thepurchasepricethatwaspaidforSendGridwillbeallocatedtotheunderlyingSendGridtangibleandintangibleassetsacquiredandliabilitiesassumedbasedontheirrespectivefairmarketvalueswithanyexcesspurchasepriceallocatedtogoodwill.Theacquisitionmethodofaccountingisdependentuponcertainvaluationsandotherstudiesthathavenotyetbeencompleted.

DuringtheyearendedDecember31,2018,theCompanyincurred$3.6millioninexpensesrelatedtothistransaction.

***********

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Item9.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure

None.

Item9A.ControlsandProcedures

(a)EvaluationofDisclosureControlsandProcedures

Ourmanagement,withtheparticipationofourChiefExecutiveOfficerandChiefFinancialOfficer,hasevaluatedtheeffectivenessofourdisclosurecontrolsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)undertheExchangeAct),asoftheendoftheperiodcoveredbythisAnnualReportonForm10-K.

Basedonthisevaluation,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthat,asofDecember31,2018,ourdisclosurecontrolsandprocedureswereeffectivetoprovidereasonableassurancethatinformationwearerequiredtodiscloseinreportsthatwefileorsubmitundertheExchangeActisrecorded,processed,summarized,andreportedwithinthetimeperiodsspecifiedintheSEC'srulesandforms,andthatsuchinformationisaccumulatedandcommunicatedtoourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,asappropriate,toallowtimelydecisionsregardingrequireddisclosures.

(b)Management'sAnnualReportonInternalControlOverFinancialReporting

OurmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingandfortheassessmentoftheeffectivenessofinternalcontroloverfinancialreportingasdefinedinRule13a-15(f)and15d-15(f)undertheExchangeAct.Internalcontroloverfinancialreportingisaprocessdesignedunderthesupervisionandwiththeparticipationofourmanagement,includingourChiefExecutiveOfficerandourChiefFinancialOfficer,toprovidereasonableassuranceregardingthereliabilityoffinancingreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.

UnderthesupervisionandwiththeparticipationofourChiefExecutiveOfficerandourChiefFinancialOfficerandoversightoftheboardofdirectors,ourmanagementconductedanevaluationoftheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31,2018,basedonthecriteriasetforthinInternal Control-Integrated Framework issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(2013framework).Basedonthisevaluation,managementconcludedthatourinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2018.

TheeffectivenessofourinternalcontroloverfinancialreportingasofDecember31,2018hasbeenauditedbyKPMGLLP,anindependentregisteredpublicaccountingfirm,asstatedintheirreportwhichisincludedinPartII,Item8,"FinancialStatementsandSupplementaryData",ofthisAnnualReportonForm10-K.

RemediationofMaterialWeaknessDisclosedinFiscalYear2017AnnualReportonForm10-K

AspreviouslydisclosedinItem9AofPartIIofourAnnualReportonForm10-KandfortheyearendedDecember31,2017,ourmanagementdeterminedthatourinternalcontroloverfinancialreportingwasnoteffectiveasofDecember31,2017duetoamaterialweaknessincontrolsrelatedtotheaccountingforcapitalizedsoftwarewhereaswedidnotobtainorgeneratesufficientrelevantqualityinformationtosupportthedesignandfunctioningofcontrolactivitiesovertheaccountingforcapitalizedsoftwaredevelopmentcosts.Specifically,ourprocesslevelcontroloverinternalusesoftwaredevelopmentcostsdidnoteffectivelytrackandcategorizesoftwaredevelopmentcostsincurredduringtheapplicationdevelopmentstagetoquantifyamountsthatshouldbecapitalizedasalong-livedasset,ratherthanexpensedasresearchanddevelopmentexpenses.Additionally,thereviewcontrolofthe

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capitalizedsoftwaredevelopmentcostswasnotoperatingatasufficientlevelofprecisiontoidentifypotentialmaterialmisstatements.

ToremediatethematerialweaknessinourinternalcontroloverfinancialreportingdescribedinItem9AofPartIIofourAnnualReportonForm10-KfortheyearendedDecember31,2017,we:

• Designedandimplementedanenhancedinternalprocessandprocesslevelcontrolstoeffectivelycapture,trackandcategorizerelevantdatarelatedtocapitalizablesoftwaredevelopmentcostsincurredduringtheapplicationdevelopmentstage;

• Enhancedmanagementreviewcontrolsovercapitalizedsoftwaredevelopmentcostswithincreasedprecisiontoidentifypotentialmaterialmisstatements;and

• Documentedguidelinesandprovidedtrainingstopersonnelthatareaccountableforinternalcontroloverthecapitalizablesoftwaredevelopmentcosts.

ManagementhasdeterminedthattheremediationactionsdiscussedabovewereeffectivelydesignedanddemonstratedtobeoperatingeffectivelyforasufficientperiodoftimetoenableustoconcludethatthematerialweaknessregardinginternalcontrolactivitieshavebeenremediatedasofDecember31,2018.

(c)ChangesinInternalControl

Otherthantheactiondescribedunder"Remediation of Material Weakness Disclosed in Fiscal Year 2017 Annual Report on Form 10-K" fortheadditionalinternalcontrolimplementedtoremediatethematerialweaknessdescribedabove,therewerenootherchangesinourinternalcontroloverfinancialreportinginconnectionwiththeevaluationrequiredbyRules13a-15(d)and15d-15(d)oftheExchangeActthatoccurredduringthequarterendedDecember31,2018thatmateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.

(d)InherentLimitationsonEffectivenessofControls

Ourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,doesnotexpectthatourdisclosurecontrolsandproceduresorourinternalcontroloverfinancialreportingwillpreventordetectallerrorsandallfraud.Acontrolsystem,nomatterhowwellconceivedandoperated,canprovideonlyreasonable,notabsolute,assurancethattheobjectivesofthecontrolsystemaremet.Becauseoftheinherentlimitationsinallcontrolsystems,noevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,ifany,withintheCompanyhavebeendetected.Thedesignofanysystemofcontrolsalsoisbasedinpartuponcertainassumptionsaboutthelikelihoodoffutureevents,andtherecanbenoassurancethatanydesignwillsucceedinachievingitsstatedgoalsunderallpotentialfutureconditions.Overtime,controlsmaybecomeinadequatebecauseofchangesinconditions,orthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Becauseoftheinherentlimitationsinacost-effectivecontrolsystem,misstatementsduetoerrororfraudmayoccurandnotbedetected.

Item9B.OtherInformation

Notapplicable.

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PartIII

Item10.Directors,ExecutiveOfficersandCorporateGovernance

TheinformationrequiredbythisitemisincorporatedbyreferencetoourProxyStatementrelatingtoour2019AnnualMeetingofStockholders.TheProxyStatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysofthefiscalyearendedDecember31,2018.

CodesofBusinessConductandEthics

OurboardofdirectorshasadoptedaCodeofBusinessConductandEthicsthatappliestoallofficers,directorsandemployees,whichisavailableonourwebsiteat(investors.twilio.com)under"GovernanceDocuments".WeintendtosatisfythedisclosurerequirementunderItem5.05ofForm8-Kregardingamendmentsto,orwaiverfrom,aprovisionofourCodeofBusinessConductandEthicsandbypostingsuchinformationonthewebsiteaddressandlocationspecifiedabove.

Item11.ExecutiveCompensation

TheinformationrequiredbythisitemisincorporatedbyreferencetoourProxyStatementrelatingtoour2019AnnualMeetingofStockholders.TheProxyStatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysofthefiscalyearendedDecember31,2018.

Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters

TheinformationrequiredbythisitemisincorporatedbyreferencetoourProxyStatementrelatingtoour2019AnnualMeetingofStockholders.TheProxyStatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysofthefiscalyearendedDecember31,2018.

Item13.CertainRelationshipsandRelatedTransactionsandDirectorIndependence

TheinformationrequiredbythisitemisincorporatedbyreferencetoourProxyStatementrelatingtoour2019AnnualMeetingofStockholders.TheProxyStatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysofthefiscalyearendedDecember31,2018.

Item14.PrincipalAccountantFeesandServices

TheinformationrequiredbythisitemisincorporatedbyreferencetoourProxyStatementrelatingtoour2019AnnualMeetingofStockholders.TheProxyStatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysofthefiscalyearendedDecember31,2018.

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PartIV

Item15.ExhibitsandFinancialStatementSchedules

(a) Thefollowingdocumentsarefiledaspartofthisreport:

1. FinancialStatements

SeeIndextoFinancialStatementsatItem8herein.

2. FinancialStatementSchedules

Schedulesnotlistedabovehavebeenomittedbecausetheyarenotrequired,notapplicable,ortherequiredinformationisotherwiseincluded.

3. Exhibits

TheexhibitslistedbelowarefiledaspartofthisAnnualReportonForm10-Korareincorporatedhereinbyreference,ineachcaseasindicatedbelow.

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EXHIBITINDEX

143

IncorporatedbyReferenceExhibit

Number Description Form FileNo. Exhibit FilingDate

2.1+ AgreementandPlanofMergerandReorganization,datedOctober15,2018,byandamongTwilioInc.,aDelawarecorporation,SendGrid,Inc.,aDelawarecorporation,andTopazMergerSubsidiary,Inc.,aDelawarecorporation

8-K 011-37806 2.1 October16,2018

2.2 FirstAmendmenttoAgreementandPlanofMergerandReorganization,datedDecember13,2018,byandamongTwilioInc.,aDelawarecorporation,SendGrid,Inc.,aDelawarecorporation,andTopazMergerSubsidiary,Inc.,aDelawarecorporation

Filedherewith

3.1 AmendedandRestatedCertificateofIncorporationofTwilioInc.

S-1A 333-211634 3.1 June13,2016

3.2 AmendedandRestatedBylawsofTwilioInc. S-1A 333-211634 3.3 June13,2016

4.1 FormofClassAcommonstockcertificateofTwilioInc. S-1 333-211634 4.1 May26,2016

4.2 AmendedandRestatedInvestors'RightsAgreement,datedApril24,2015,betweenTwilioInc.andcertainofitsstockholders

S-1 333-211634 4.2 May26,2016

4.3 Indenture,datedasofMay17,2018,betweenTwilioInc.andWilmingtonTrust,NationalAssociation,astrustee

8-K 001-37806 4.1 May18,2018

4.4 Formof0.25%ConvertibleSeniorNotesdue2023(includedinExhibit4.3)

8-K 001-37806 4.2 May18,2018

10.1* FormofIndemnificationAgreement S-1A 333-211634 10.1 June13,2016

10.2* TwilioInc.2008StockOptionPlan,asamendedandrestated,andformsofStockOptionsAgreementandformofStockOptionGrantNotice

S-1 333-211634 10.2 May26,2016

10.3* TwilioInc2016StockOptionandIncentivePlan,andformsofAgreementsthereunder

S-1 333-211634 10.3 May26,2016

10.4 OfficeLease,datedJanuary8,2016,asamendedJanuary8,2016,betweenTwilioInc.andBayAreaHeadquartersAuthority

S-1 333-211634 10.6 May26,2016

144

IncorporatedbyReferenceExhibit

Number Description Form FileNo. Exhibit FilingDate

10.5 Sublease,datedasofAugust30,2018,byandbetweenSalesforce.com,Inc.andTwilioInc.

10-Q 001-37806 10.1 November8,2018

10.6 ConsenttoSubleaseAgreement,datedasofSeptember25,2018,byandamongHudsonRinconCenter,LLC,Salesforce.comInc.andTwilioInc.

10-Q 001-37806 10.2 November8,2018

10.7* TwilioInc.2016EmployeeStockPurchasePlan S-1 333-211634 10.8 May26,2016

10.8* OfferletterwithGeorgeHu,datedFebruary28,2017 8-K 001-37806 10.1 March3,2017

10.9* OfferletterwithKhozemaShipchandler,datedAugust20,2018

8-K 001-37806 10.1 October25,2018

10.10* ChiefExecutiveOfficerSeverancePlandatedMarch28,2018andformofparticipationletter

10-Q 001-37806 10.1 May10,2018

10.11* KeyExecutiveSeverancePlan,datedMarch28,2018andformofparticipationletter

10-Q 001-37806 10.2 May10,2018

10.12 FormofCappedCallConfirmation 8-K 001-37806 10.1 May18,2018

10.13 FormofVotingAgreement,datedOctober15,2018,byandbetweenSendGrid,Inc.andcertainholdersofClassACommonStockandClassBCommonStockofTwilioInc.

8-K 001-37806 10.1 October16,2018

10.14 FormofVotingAgreement,datedOctober15,2018,byandbetweenSendGrid,Inc.andcertainholdersofClassACommonStockofTwilioInc.

8-K 001-37806 10.2 October16,2018

10.15 FormofVotingAgreement,datedOctober15,2018,byandbetweenTwilioInc.andcertaindirectorsandofficersofSendGrid,Inc.

8-K 001-37806 10.3 October16,2018

10.16 FormofVotingAgreement,datedOctober15,2018,byandbetweenTwilioInc.andastockholderofSendGrid,Inc.anditsaffiliatedentities.

8-K 001-37806 10.4 October16,2018

21.1 ListofsubsidiariesoftheRegistrant Filedherewith

23.1 ConsentofKPMG,LLP,IndependentRegisteredPublicAccountingFirm

Filedherewith

Item16.Form10-KSummary

None.

145

IncorporatedbyReferenceExhibit

Number Description Form FileNo. Exhibit FilingDate

31.1 CertificationoftheChiefExecutiveOfficerpursuanttoExchangeActRules13a-14(a)and15d-14(a),asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002

Filedherewith

31.2 CertificationoftheChiefFinancialOfficerpursuanttoExchangeActRules13a-14(a)and15d-14(a),asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002

Filedherewith

32.1**CertificationoftheChiefExecutiveOfficerandChiefFinancialOfficerpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002

Furnishedherewith

101.INS XBRLInstanceDocument. Filedherewith

101.SCH XBRLTaxonomyExtensionSchemaDocument. Filedherewith

101.CAL XBRLTaxonomyExtensionCalculationLinkbaseDocument.

Filedherewith

101.DEF XBRLTaxonomyExtensionDefinitionLinkbaseDocument.

Filedherewith

101.LAB XBRLTaxonomyExtensionLabelLinkbaseDocument. Filedherewith

101.PRE XBRLTaxonomyExtensionPresentationLinkbaseDocument.

Filedherewith

+ SchedulesandothersimilarattachmentshavebeenomittedpursuanttoItem601(b)(2)ofRegulationS-K.TheregistrantherebyundertakestofurnishsupplementallycopiesofanyoftheomittedschedulesandothersimilarattachmentsuponrequestbytheSecuritiesandExchangeCommission.

* Indicatesamanagementcontractorcompensatoryplanorarrangement.

** ThecertificationsfurnishedinExhibit32.1heretoaredeemedtoaccompanythisAnnualReportonForm10-Kandwillnotbedeemed"filed"forpurposesofSection18oftheSecuritiesExchangeActof1934,asamended,excepttotheextentthattheregistrantspecificallyincorporatesitbyreference.

TableofContents

SIGNATURES

PursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,asamended,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersignedthereuntodulyauthorized.

146

TwilioInc.Date:February28,2019 /s/JEFFREYLAWSON

JeffreyLawsonDirector and Chief Executive Officer (Principal Executive Officer)

Date:February28,2019 /s/KHOZEMASHIPCHANDLER

KhozemaShipchandlerChief Financial Officer (Principal Accounting and Financial

Officer)

Date:February28,2019 /s/RICHARDDALZELL

RichardDalzellDirector

Date:February28,2019 /s/BYRONDEETER

ByronDeeterDirector

Date:February28,2019 /s/ELENADONIO

ElenaDonioDirector

Date:February28,2019 /s/DONNAL.DUBINSKY

DonnaL.DubinskyDirector

Date:February28,2019 /s/ERIKAROTTENBERG

ErikaRottenbergDirector

Date:February28,2019 /s/JEFFEPSTEIN

JeffEpsteinDirector

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Exhibit2.2

FIRSTAMENDMENTTOAGREEMENTANDPLANOFMERGERANDREORGANIZATION

ThisFIRSTAMENDMENTTOTHEAGREEMENTANDPLANOFMERGERANDREORGANIZATION(this"Amendment "),datedasofDecember13,2018isenteredintobyandamongTwilioInc.,aDelawarecorporation("Twilio ");TopazMergerSubsidiary,Inc.,aDelawarecorporationandawhollyownedsubsidiaryofTwilio("Merger Sub ");andSendGrid,Inc.,aDelawarecorporation("SendGrid "andcollectivelywithTwilioandMergerSub,the"Parties ,"andeacha"Party ").CapitalizedtermsusedhereinandnototherwisedefinedshallhavethesamemeaningsassetforthintheAgreementandPlanofMergerandReorganization,datedasofOctober15,2018,byandamongtheParties(the"Merger Agreement ").

WHEREAS,thePartiesdesiretoamendthedefinitionofCompanyUKOptionandSection2.4(b)oftheMergerAgreementassetforthherein.

NOW,THEREFORE,inconsiderationofthemutualcovenantsandagreementscontainedhereinandforgoodandvaluableconsideration,thereceiptandsufficiencyofwhichareherebyacknowledged,thePartiesagreeasfollows:

1. Amendment to Section 8.12(n). ThedefinitionofCompanyUKOptioninSection8.12(n)oftheMergerAgreementshallbeamendedandrestatedinitsentiretyandshallreadasfollows:

"CompanyUKOption"meansaCompanyOptiongrantedunderaCompanyUKSub-PlanorotherwiseheldbyaUKresidentasagreedtobyParentandtheCompany."

2. Amendment to Section 2.4(b). Section2.4(b)oftheMergerAgreementshallbeamendedandrestatedinitsentiretyandshallreadasfollows:

"(b)AttheEffectiveTime,eachCompanyUKOptionthatisoutstandingandunexercisedimmediatelypriortotheEffectiveTime(whetherornotvested)(otherthanaCompanyUKOptioncoveredbySection 2.4(c) )shall,providedtheholderthereofhassoagreedonorpriortotheBusinessDaypriortotheClosingDate(absentwhichagreement,suchCompanyUKOptionshalllapseasofimmediatelypriortotheEffectiveTime),becancelledandconvertedintoarighttoreceivethenumberofsharesofParentClassACommonStockequalto(A)theresultof(i)thenumberofSharessubjecttotheCompanyUKOptionimmediatelypriortotheEffectiveTimemultipliedbytheexcess,ifany,of(x)theCompanyShareValueover(y)thepershareexercisepriceforSharessubjecttothecorrespondingCompanyUKOptionimmediatelypriortotheEffectiveTime,divided by(ii)theCompanyShareValuemultiplied by(B)theExchangeRatio,withanyfractionalsharesroundeddowntothenearestwholeshare."

3. Full Force and Effect. Exceptasexpresslyamendedhereby,eachterm,provision,ExhibitandScheduleoftheMergerAgreementshallanddoesremaininfullforceandeffect.

4. References. EachreferenceintheMergerAgreementto"thisAgreement,""hereof,""herein"and"hereunder"andwordsofsimilarimportreferringtotheMergerAgreementshallmeanandbeareferencetotheMergerAgreementasamendedbythisAmendment.Notwithstandinganythingtothecontraryherein,allreferencesintheMergerAgreement,theCompanyDisclosureLetterandtheParentDisclosureLetterto"thedatehereof"or"thedateofthisAgreement"shallrefertoOctober15,2018.

5. Headings. TheheadingscontainedinthisAmendmentareforreferencepurposesonlyandshallnotaffectinanywaythemeaningorinterpretationofthisAmendment.

6. Miscellaneous .TheprovisionsofSections8.2(ModificationorAmendment),8.4(Counterparts;Effectiveness;.pdfSignature),8.5(GoverningLawandVenue;WaiverofJuryTrial),8.6(Notices),8.7(EntireAgreement),8.8(NoThirdPartyBeneficiaries),8.10(Severability),8.11(Interpretation)and8.13(Assignment)oftheMergerAgreementshallapplytothisAmendmentmutatis mutandis .

INWITNESSWHEREOF,thePartieshavecausedthisAmendmenttobedulyexecutedanddeliveredasofthedatefirstwrittenabovebytheirrespectiveofficersthereuntodulyauthorized.

TWILIOINC.,aDelawarecorporation

/s/JEFFREYLAWSON

JeffreyLawsonDirector and Chief Executive Officer (Principal ExecutiveOfficer)

By:/s/JEFFLAWSON

Name: JeffLawson Title: Chief Executive Officer

TOPAZMERGERSUBSIDIARY,INC.,aDelawarecorporation

By:/s/JEFFLAWSON

Name: JeffLawson Title: Chief Executive Officer

SENDGRID,INC.,aDelawarecorporation

By:/s/SAMEERDHOLAKIA

Name: SameerDholakia

Title: President, Chief Executive Officer, Director and

Chairman

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Exhibit2.2

FIRSTAMENDMENTTOAGREEMENTANDPLANOFMERGERANDREORGANIZATION

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Exhibit21.1

ListofSubsidiariesofTwilioInc.

TwilioUKLimited(EnglandandWales)

TwilioEstoniaOÜ(Estonia)

AquariusSurvivorLLC(Delaware,UnitedStates)

TwilioColombiaS.A.S.(Colombia)

TwilioIPHoldingLimited(Ireland)

TwilioIrelandLimited(Ireland)

TwilioGermanyGmbH(Germany)

TwilioHongKongLimited(HongKong)

TwilioSingaporePte.Ltd.(Singapore)

TwilioSpain,S.L.(Spain)

BurgundyAcquisitionLLC(Delaware,UnitedStates)

TwilioSwedenAB(Sweden)

BeepsendInvestAB(Sweden)

TwilioAustraliaPtyLtd(Australia)

TwilioBerlinGmbH(Germany)

TwilioInternational(Delaware)

TwilioCzechia(Czechia)

TwilioJapanGK(Japan)

TwilioNetherlandBV(TheNetherlands)

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Exhibit21.1

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Exhibit23.1

ConsentofIndependentRegisteredPublicAccountingFirm

TheBoardofDirectorsTwilioInc.:

Weconsenttotheincorporationbyreferenceintheregistrationstatement(Nos.333-212191,333-224812and333-229580)onFormS-8ofTwilioInc.ofourreportsdatedFebruary28,2019,withrespecttotheconsolidatedbalancesheetsofTwilioInc.asofDecember31,2018and2017,therelatedconsolidatedstatementsofoperations,comprehensiveloss,stockholders'equity,andcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2018,andtherelatednotes(collectively,theconsolidatedfinancialstatements),andtheeffectivenessofinternalcontroloverfinancialreportingasofDecember31,2018,whichreportsappearintheDecember31,2018annualreportonForm10-KofTwilioInc.

/s/KPMGLLP

SanFrancisco,CaliforniaFebruary28,2019

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Exhibit23.1

ConsentofIndependentRegisteredPublicAccountingFirm

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Exhibit31.1

CERTIFICATIONPURSUANTTORULE13a-14(a)OR15d-14(a)OFTHESECURITIESEXCHANGEACTOF1934,ASADOPTEDPURSUANTTOSECTION302OF

THESARBANES-OXLEYACTOF2002

I,JeffreyLawson,certifythat:

1.IhavereviewedthisAnnualReportonForm10-KofTwilioInc.;

2.Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;

3.Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;

4.Theregistrant'sothercertifyingofficer(s)andIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:

(a)Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;

(b)Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;

(c)Evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and

(d)Disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and

5.Theregistrant'sothercertifyingofficer(s)andIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):

(a)Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and

(b)Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.

Date:February28,2019

/s/JEFFREYLAWSON

JeffreyLawsonChief Executive Officer (Principal Executive Officer)

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Exhibit31.1

CERTIFICATIONPURSUANTTORULE13a-14(a)OR15d-14(a)OFTHESECURITIESEXCHANGEACTOF1934,ASADOPTEDPURSUANTTOSECTION302OFTHESARBANES-OXLEYACTOF2002

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Exhibit31.2

CERTIFICATIONPURSUANTTORULE13a-14(a)OR15d-14(a)OFTHESECURITIESEXCHANGEACTOF1934,ASADOPTEDPURSUANTTOSECTION302OF

THESARBANES-OXLEYACTOF2002

I,KhozemaShipchandlercertifythat:

1.IhavereviewedthisAnnualReportonForm10-KofTwilioInc.;

2.Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;

3.Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;

4.Theregistrant'sothercertifyingofficer(s)andIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:

(a)Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;

(b)Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;

(c)Evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and

(d)Disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and

5.Theregistrant'sothercertifyingofficer(s)andIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):

(a)Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and

(b)Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.

Date:February28,2019

/s/KHOZEMASHIPCHANDLER

KhozemaShipchandlerChief Financial Officer (Principal Accounting and FinancialOfficer)

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Exhibit31.2

CERTIFICATIONPURSUANTTORULE13a-14(a)OR15d-14(a)OFTHESECURITIESEXCHANGEACTOF1934,ASADOPTEDPURSUANTTOSECTION302OFTHESARBANES-OXLEYACTOF2002

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Exhibit32.1

CERTIFICATIONOFCHIEFEXECUTIVEOFFICERANDCHIEFFINANCIALOFFICERPURSUANTTO

18U.S.C.SECTION1350,ASADOPTEDPURSUANTTO

SECTION906OFTHESARBANES-OXLEYACTOF2002

PursuanttotherequirementsetforthinRule13a-14(b)oftheSecuritiesExchangeActof1934,asamended,(the"ExchangeAct")andSection1350ofChapter63ofTitle18oftheUnitedStatesCode(18U.S.C.§1350),JeffreyLawson,ChiefExecutiveOfficerofTwilioInc.(the"Company"),andKhozemaShipchandler,ChiefFinancialOfficeroftheCompany,eachherebycertifiesthat,tothebestofhisknowledge:

1. TheCompany'sAnnualReportonForm10-KfortheyearendedDecember31,2018,towhichthisCertificationisattachedasExhibit32.1(the"PeriodicReport"),fullycomplieswiththerequirementsofSection13(a)orSection15(d)oftheExchangeAct;and

2. TheinformationcontainedinthePeriodicReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.

Date:February28,2019

/s/JEFFREYLAWSON

JeffreyLawsonChief Executive Officer (Principal Executive Officer)

/s/KHOZEMASHIPCHANDLER

KhozemaShipchandlerChief Financial Officer (Principal Accounting and FinancialOfficer)

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Exhibit32.1

CERTIFICATIONOFCHIEFEXECUTIVEOFFICERANDCHIEFFINANCIALOFFICERPURSUANTTO18U.S.C.SECTION1350,ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002