The MUSCLE Method ®
Legal Docs - Mining the IPO Prospectus
This is the most time-consuming step in the MUSCLE Method. That is why it's nearly at the end. Don't waste time by diving into the prospectus without quickly going through the first four steps - that's the point of the MUSCLE method! To help you filter out the bad IPOs, so you only put the work of reading the prospectus into high potential deals.
One of the beauties of investing in IPOs is that you have at your hand the single best, most informative material on a company that you will ever get - the preliminary prospectus.
When a company IPOs, the SEC forces it to offer more disclosure of operations, strategy, finances, management compensation and insider transactions than it will ever have to provide in the future.
This document combines the disclosures required by the SEC with the company's own marketing pitch. Ignore it at your own peril.
You can find all of the legal filings for free on the SEC website. To make it easy, we link directly to the S-1 from every profile on IPO Pro.
Now, the SEC filing is a daunting document. Instead of going through every section, let's focus on the most important three: the prospectus summary, management's discussion and analysis (MD&A) and the company risk factors.
The Prospectus Summary - a basic description of the company's operations, its hopes and dreams, how it fits into the industry, its achievements and its strategy for growth.
The Front Cover
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-211634
10,000,000 Shares
Twilio Inc.
Class A Common Stock
This is an initial public offering of shares of Class A common stock of Twilio Inc.
Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price per share is $15.00. Our Class A common stock has been approved for listing on the New York Stock Exchange under the symbol "TWLO".
We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to 10 votes and is convertible at any time into one share of Class A common stock. The holders of our outstanding Class B common stock will hold approximately 98.6% of the voting power of our outstanding capital stock following this offering, with our directors, executive officers and significant stockholders holding approximately 66.2%.
We are an "emerging growth company" as defined under the federal securities laws and, as such, we have elected to comply with reduced reporting requirements for this prospectus and may elect to do so in future filings.
See "Risk Factors" beginning on page 16 to read about factors you should consider before buying shares of the Class A common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price |
$15.00 | $150,000,000 | |||
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Underwriting discount (1) |
$1.05 | $10,500,000 | |||
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Proceeds, before expenses, to Twilio |
$13.95 | $139,500,000 |
- (1)
- See the section titled "Underwriting" for additional information regarding compensation payable to the underwriters.
To the extent that the underwriters sell more than 10,000,000 shares of Class A common stock, the underwriters have the option to purchase up to an additional 1,500,000 shares from Twilio at the initial public offering price less the underwriting discount.
Entities advised by T. Rowe Price Associates, Inc., certain of which are existing holders of shares of our capital stock, have indicated an interest in purchasing up to 1,500,000 shares of our Class A common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, such entities could determine to purchase more, less or no shares in this offering, or the underwriters could determine to sell more, less or no shares to such entities. The underwriters will receive the same discount on any shares of our Class A common stock purchased by such entities as they will from any other shares of Class A common stock sold to the public in this offering.
The underwriters expect to deliver the shares against payment in New York, New York on June 28, 2016.
| Goldman, Sachs & Co. | J.P. Morgan | |||
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Allen & Company LLC |
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Pacific Crest Securities a division of KeyBanc Capital Markets |
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JMP Securities |
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William Blair |
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Canaccord Genuity |
Past the cover page (see above) you will find the Prospectus Summary. This is where you can find a basic description of the company, a list of its top customers and recent accomplishments. See the first page of the summary below.
Prospectus Summary
This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms "Twilio," "the company," "we," "us" and "our" in this prospectus refer to Twilio Inc. and its consolidated subsidiaries.
Software developers are reinventing nearly every aspect of business today. Yet as developers, we repeatedly encountered an area where we could not innovate — communications. Because communication is a fundamental human activity and vital to building great businesses, we wanted to incorporate communications into our software applications, but the barriers to innovation were too high. Twilio was started to solve this problem.
We believe the future of communications will be written in software, by the developers of the world — our customers. By empowering them, our mission is to fuel the future of communications.
Cloud platforms are a new category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure. These platforms have arisen to enable a fast pace of innovation across a range of categories, such as computing and storage. We are the leader in the Cloud Communications Platform category. We enable developers to build, scale and operate real-time communications within software applications.
Our developer-first platform approach consists of three things: our Programmable Communications Cloud, Super Network and Business Model for Innovators. Our Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via our simple-to-use Application Programming Interfaces, or APIs. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. The Super Network is our software layer that allows our customers' software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. Our Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging experimentation and enabling developers to grow as customers as their ideas succeed.
We had over 28,000 Active Customer Accounts as of March 31, 2016, representing organizations big and small, old and young, across nearly every industry, with one thing in common: they are competing by using the power of software to build differentiation through communications. With our platform, our customers are disrupting existing industries and creating new ones. For example, our customers have reinvented hired transportation by connecting riders and drivers, with communications as a critical part of each transaction. Our customers' software applications use our platform to notify a diner when a table is ready, a traveler when a flight is delayed or a shopper when a package has shipped. The range of applications that developers build with the Twilio platform has proven to be nearly limitless.
The prospectus gives you an opportunity to study an IPO’s initial strategy, and may offer clues to about future expansion. One trick that prospectus writers use is explaining the business the company wants to be in, and then glossing over what the company actually does. To figure that out, refer to the MD&A.
Management’s Discussion and Analysis is the heart of the prospectus.
This is where management must tell you where its revenue comes from and where it goes. You should read it alongside the financial table that immediately precedes it. This section provides you with a reality check on how the IPO presented itself initially.
MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and in other parts of this prospectus. Our fiscal year ends on December 31.
Cloud platforms are a new category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure. These platforms have arisen to enable a fast pace of innovation across a range of categories, such as computing and storage. We are the leader in the Cloud Communications Platform category. We enable developers to build, scale and operate real-time communications within software applications.
Our developer-first platform approach consists of three things: our Programmable Communications Cloud, Super Network and Business Model for Innovators. Our Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via our simple-to-use Application Programming Interfaces, or APIs. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. The Super Network is our software layer that allows our customers' software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. Our Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed.
We launched our platform and began selling our first product—Programmable Voice—in 2008. Programmable Voice enables developers to easily build software-enabled voice communications into their applications. Since that time, we have continued to add new capabilities to our platform. In 2010, we added Programmable Messaging, which enables developers to add text-based communications to their applications for various use cases, such as alerts, notifications and anonymous communications. We introduced IP Voice in 2011, which connects our customers' voice applications to IP-enabled devices and allows them to build contextual communications directly into their software, such as for customer relationship management or call center applications. In 2013, we launched Twilio MMS, allowing our customers to exchange messages with pictures and attachments. With the acquisition of Authy, Inc. in February 2015, we added Programmable Authentication, which reduces the time required for developers to build two-factor authentication into their applications. In 2015, we launched Programmable Video, which enables developers to add rich multi-party media experiences into their applications.
While extending the products on, and the functionality of, our platform, we have continued to increase the reach and the global scale of our platform. Since our inception, we have built relationships with network service providers globally to enable our platform to deliver excellent quality at reasonable cost to our customers. When we initially launched Programmable Voice, we enabled developers to build applications with voice communications so that customers could reach landline and mobile phone numbers in the United States and Canada. In 2009, we extended the global reach of Programmable Voice by allowing developers to incorporate our products into their applications to call nearly any country worldwide. In 2011, we launched local telephone numbers in
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The first thing that experienced analysts look for is revenue recognition - what does the company record as sales and when does it do so?
The prospectus will also describe for each of the past two or three years its results of operations. That includes why revenues went up or down, how gross profits have trended, and what operating income it produces. When reading the revenue section, focus on the source of revenue growth. Is it from new products or services? Increases in same-store sales? Or is growth coming from acquisitions? When buying an IPO it is important to zero in on why a company is growing and whether or not it is sustainable.
The numbers don’t lie. Revenue gives you the real scoop on what a company actually does. Once you’ve analyzed the sources of revenue, move on to the discussion of what it costs the company to produce its products.
First, the IPO will describe the basic direct costs. Look for gross profit to rise as fast as or faster than revenue. While gross margins can fluctuate with supply costs, a company will ideally get volume discounts as it grows, and be able to raise its prices without losing customers.
Ultimately, a business needs to be able to show a profit. Operating income reveals what is left after the core back-end costs of running the business. Primary expenses include Sales & Marketing, Research & Development, General and Administrative. It’s great if revenue grew 25%, but not when a company had to spend 50% more on advertising to get there.
Next, head over to the Index to Financial Statements and take a look at the Balance Sheet and Statement of Cash Flows. On the balance sheet, has debt exploded? Are current assets sufficient to meet current liabilities? Relative to the change in revenue, big swings in inventory, accounts payable and accounts receivable can each be warnings signs.
One last point on the MD&A. Look for three full years of financial results, as well as a breakdown of recent quarters. IPOs should disclose that info, but don’t always. If they don’t, this is a yellow flag.
There is no single line of the MD&A or financial statements that qualifies or disqualifies an IPO. Either heavy debt or extended losses can be fine on their own, but combined they form a dangerous mixture. Here it’s worth repeating what we looked for in step #4 of MUSCLE: Fast growth, high profitability and a clean balance sheet all signal a strong IPO. Find out the full story in the MD&A.
Risk Factors is the scariest part of the prospectus.
The majority of IPO investors are seeking to outperform the broader market, and that comes with extra risk.
The lawyers want to enumerate every potential problem with the company, the industry and the offering itself. It’s like an insurance against getting sued by irate shareholders in the future. If anything goes wrong, they’ll say: “It was in the prospectus!” So they list everything. Sometimes it’s a boilerplate warning. Sometimes it’s the one sentence that convinces you to stay away.
Risk Factors
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. The risks and uncertainties described below may not be the only ones we face. If any of 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, and you could lose part or all of your investment.
Risks Related to Our Business and Our Industry
The market for our products and platform is new and unproven, may decline or experience limited growth and is dependent in part on developers continuing to adopt our platform and use our products.
We were founded in 2008, and have been developing and providing a cloud-based platform that enables developers and organizations to integrate voice, messaging and video communications capabilities into their software applications. This market is relatively new and unproven and is subject to a number of risks and uncertainties. We believe that our revenue currently constitutes a significant portion of the total revenue in this market, and therefore, we believe that our future success will depend in large part on the growth, if any, of this market. The utilization of APIs by developers and organizations to build communications functionality into their applications is still relatively new, and developers and organizations may not recognize the need for, or benefits of, our products and platform. Moreover, if they do not recognize the need for and benefits of our products and platform, they may decide to adopt alternative products and services to satisfy some portion of their business needs. In order to grow our business and extend our market position, we intend to focus on educating developers and other potential customers about the benefits of our products and platform, expanding the functionality of our products and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our products and platform address depends upon a number of factors, including the cost, performance and perceived value associated with such products and platform. The market for our products and platform could fail to grow significantly or there could be a reduction in demand for our products as a result of a lack of developer acceptance, technological challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth or demand for our products decreases, then our business, results of operations and financial condition could be adversely affected.
We have a history of losses and we are uncertain about our future profitability.
We have incurred net losses in each year since our inception, including net losses of $26.9 million, $26.8 million, $35.5 million and $6.5 million in 2013, 2014 and 2015 and the three months ended March 31, 2016, respectively. We had an accumulated deficit of $151.9 million as of March 31, 2016. We expect to continue to expend substantial financial and other resources on, among other things:
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investments in our engineering team, the development of new products, features and functionality and enhancements
to our platform;
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- sales and marketing, including expanding our direct sales organization and marketing programs, especially for enterprises and for organizations outside of the United States, and
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So what are the real risks?
Here is a list of some of the most important risks.
Accumulated deficit - how much money has a company lost since it started business? IPOs with huge deficits have gotten used to spending money. They are likely to burn through their IPO proceeds quickly.
Limited operating history – the management team behind a recent startup has little track record to show investors. Can they manage the business in a down cycle?
Ongoing losses - “We have a history of losses, we expect to incur losses in the future, and we may not achieve or maintain profitability.” This is the mantra of many tech companies, and doesn’t provide much insight into future profitability. However, it’s a good reminder that any business can lose money – invest in one that can eventually get its costs under control.
Customer concentration - a very important risk is having just a handful of large, but key, customers. First, they have bargaining power over prices. And if one of them cuts ties altogether, the stock price can drop like a rock.
Lengthy sales cycle - needing a lot of time to sell a product raises the risk that a company falls short and has a disappointing quarter.
Product acceptance - if a product is new, the company cannot be sure if customers will buy it.
Operational or financial control issues (“material weakness”) - if an IPO discloses that is has internal control problems, that it’s been hacked, or that its information systems are outdated, those are serious problems. Look out when an auditor identifies a “material weakness” in internal controls over financial reporting. That means that by one measure it is unprepared to be public company.
Rapid Growth - small companies have finite resources. Even if that makes them nimble, growing from 10 employees to 200 in a year can be a challenge.
Customization - software and systems companies have high margins because their products are right off the shelf. If an IPO has to employ costly consultants to install, customize and test the product, margins fall.
Sole-source contract manufacturers - if an IPO outsources production to a single manufacturer, any disruption to the supply chain can turn into a massive headache.
Geographic concentration - if an IPO has all of its operations in a narrow geographic area, it is prone to economic downturns and adverse weather (literally).
Insider transactions - if a company discloses any loans, leases or sales of property relating to insiders, these transactions are usually glaring and should be studied further.
Litigation - any lawsuits mentioned must be examined thoroughly. To warrant mention in this section the potential implications must be serious.
Other industry-specific disclosure - an example is same-store sales for retailers. If same-store sales have been particularly strong, the prospectus will warn of their unsustainability.