10-Q 1 fb-6302015x10q.htm 10-Q FB-6.30.2015-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 001-35551
____________________________________________ 
FACEBOOK, INC.
(Exact name of registrant as specified in its charter)
____________________________________________ 
Delaware
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant's telephone number, including area code)
 ____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
Class
Number of Shares Outstanding
Class A Common Stock $0.000006 par value
2,259,736,529 shares outstanding as of July 27, 2015
Class B Common Stock $0.000006 par value
557,808,963 shares outstanding as of July 27, 2015



FACEBOOK, INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


2


NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms "Facebook," "company," "we," "us," and "our" in this document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Facebook" may also refer to our products, regardless of the manner in which they are accessed. For references to accessing Facebook on the "web" or via a "website," such terms refer to accessing Facebook on personal computers. For references to accessing Facebook on "mobile," such term refers to accessing Facebook via a mobile application or via a mobile-optimized version of our website such as m.facebook.com, whether on a mobile phone or tablet.

3


LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, which include our daily active users (DAUs), mobile DAUs, monthly active users (MAUs), mobile MAUs, and average revenue per user (ARPU), as well as certain other metrics such as mobile-only DAUs and mobile-only MAUs, are calculated using internal company data based on the activity of user accounts. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world.
For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service. We estimate, for example, that "duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have represented less than 5% of our worldwide MAUs in 2014. We also seek to identify "false" accounts, which we divide into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. In 2014, for example, we estimate user-misclassified and undesirable accounts may have represented less than 2% of our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or United Kingdom and higher in developing markets such as India and Turkey. However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates may change due to improvements or changes in our methodology.
Our data limitations may affect our understanding of certain details of our business. For example, while user-provided data indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users register with an inaccurate age. Accordingly, our understanding of usage by age group may not be complete.
Some of our metrics have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. The impact of this automatic activity on our metrics varies by geography because mobile usage varies in different regions of the world. In addition, our data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a mobile-only user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure user metrics may also be susceptible to algorithm or other technical errors. Our estimates for revenue by user location and revenue by user device are also affected by these factors. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated. In addition, our DAU and MAU estimates will differ from estimates published by third parties due to differences in methodology. For example, some third parties are not able to accurately measure mobile users or do not count mobile users for certain user groups or at all in their analyses.
The numbers of DAUs, mobile DAUs, MAUs, mobile MAUs, mobile-only DAUs, and mobile-only MAUs discussed in this Quarterly Report on Form 10-Q, as well as ARPU, do not include users of Instagram or WhatsApp unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics included herein do not include Instagram or WhatsApp unless otherwise specifically stated.

4


PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
FACEBOOK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for number of shares and par value)
(Unaudited)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,123

 
$
4,315

Marketable securities
9,002

 
6,884

Accounts receivable, net of allowances for doubtful accounts of $47 and $39 as of June 30, 2015 and December 31, 2014, respectively
1,815

 
1,678

Prepaid expenses and other current assets
1,011

 
793

Total current assets
16,951

 
13,670

Property and equipment, net
4,955

 
3,967

Intangible assets, net
3,605

 
3,929

Goodwill
18,025

 
17,981

Other assets
594

 
637

Total assets
$
44,130

 
$
40,184

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
139

 
$
176

Partners payable
182

 
202

Accrued expenses and other current liabilities
1,472

 
866

Deferred revenue and deposits
49

 
66

Current portion of capital lease obligations
39

 
114

Total current liabilities
1,881

 
1,424

Capital lease obligations, less current portion
110

 
119

Other liabilities
2,687

 
2,545

Total liabilities
4,678

 
4,088

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,256 million and 2,234 million shares issued and outstanding, including 10 million and 13 million outstanding shares subject to repurchase, as of June 30, 2015 and December 31, 2014, respectively; 4,141 million Class B shares authorized, 558 million and 563 million shares issued and outstanding, including 4 million and 6 million outstanding shares subject to repurchase, as of June 30, 2015 and December 31, 2014, respectively

 

Additional paid-in capital
32,479

 
30,225

Accumulated other comprehensive loss
(357
)
 
(228
)
Retained earnings
7,330

 
6,099

Total stockholders' equity
39,452

 
36,096

Total liabilities and stockholders' equity
$
44,130

 
$
40,184

See Accompanying Notes to Condensed Consolidated Financial Statements.

5



FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
4,042

 
$
2,910

 
$
7,586

 
$
5,412

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
668

 
473

 
1,323

 
936

Research and development
1,170

 
492

 
2,231

 
947

Marketing and sales
626

 
358

 
1,247

 
681

General and administrative
305

 
197

 
579

 
384

Total costs and expenses
2,769

 
1,520

 
5,380

 
2,948

Income from operations
1,273

 
1,390

 
2,206

 
2,464

Interest and other income/(expense), net

 
(4
)
 
(1
)
 
(4
)
Income before provision for income taxes
1,273

 
1,386

 
2,205

 
2,460

Provision for income taxes
554

 
595

 
974

 
1,027

Net income
$
719

 
$
791

 
$
1,231

 
$
1,433

Less: Net income attributable to participating securities
4

 
3

 
7

 
6

Net income attributable to Class A and Class B common stockholders
$
715

 
$
788

 
$
1,224

 
$
1,427

Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
$
0.26

 
$
0.31

 
$
0.44

 
$
0.56

Diluted
$
0.25

 
$
0.30

 
$
0.43

 
$
0.55

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
2,796

 
2,560

 
2,790

 
2,552

Diluted
2,850

 
2,615

 
2,844

 
2,609

Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
21

 
$
16

 
$
38

 
$
28

Research and development
603

 
219

 
1,169

 
400

Marketing and sales
82

 
50

 
154

 
93

General and administrative
57

 
29

 
105

 
67

Total share-based compensation expense
$
763

 
$
314

 
$
1,466

 
$
588

See Accompanying Notes to Condensed Consolidated Financial Statements.


6


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
719

 
$
791

 
$
1,231

 
$
1,433

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax
91

 
(20
)
 
(132
)
 
(21
)
Change in unrealized gain/loss on available-for-sale investments, net of tax
(1
)
 

 
3

 
2

Comprehensive income
$
809

 
$
771

 
$
1,102

 
$
1,414

See Accompanying Notes to Condensed Consolidated Financial Statements.

7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
1,231

 
$
1,433

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
916

 
521

Share-based compensation
1,457

 
588

Deferred income taxes
(289
)
 
(34
)
Tax benefit from share-based award activity
809

 
875

Excess tax benefit from share-based award activity
(809
)
 
(883
)
Other
7

 
(23
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(198
)
 
(82
)
Prepaid expenses and other current assets
(90
)
 
10

Other assets
(25
)
 
18

Accounts payable
16

 
69

Partners payable
(19
)
 
(5
)
Accrued expenses and other current liabilities
241

 
75

Deferred revenue and deposits
(17
)
 
15

Other liabilities
350

 
49

Net cash provided by operating activities
3,580

 
2,626

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(1,051
)
 
(832
)
Purchases of marketable securities
(5,560
)
 
(4,482
)
Sales of marketable securities
2,726

 
1,968

Maturities of marketable securities
715

 
1,074

Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(282
)
 
(19
)
Change in restricted cash and deposits
44

 
(2
)
Other investing activities, net

 
(1
)
Net cash used in investing activities
(3,408
)
 
(2,294
)
Cash flows from financing activities
 
 
 
Taxes paid related to net share settlement
(12
)
 
(3
)
Proceeds from exercise of stock options

 
2

Principal payments on capital lease obligations
(84
)
 
(150
)
Excess tax benefit from share-based award activity
809

 
883

Net cash provided by financing activities
713

 
732

Effect of exchange rate changes on cash and cash equivalents
(77
)
 
(3
)
Net increase in cash and cash equivalents
808

 
1,061

Cash and cash equivalents at beginning of period
4,315

 
3,323

Cash and cash equivalents at end of period
$
5,123

 
$
4,384

See Accompanying Notes to Condensed Consolidated Financial Statements.

8


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
5

 
$
8

Income taxes, net
$
159

 
$
59

Non-cash investing and financing activities:
 
 
 
Net change in accounts payable and accrued expenses and other current liabilities related to property and equipment additions
$
194

 
$
18

Promissory note payable issued in connection with an acquisition
$
198

 
$

See Accompanying Notes to Condensed Consolidated Financial Statements.

9


FACEBOOK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The condensed consolidated balance sheet as of December 31, 2014 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed consolidated financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015.
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 that have had a material impact on our condensed consolidated financial statements and related notes.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
Recent Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We are still evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
Note 2.
Acquisitions
In the six months ended June 30, 2015, we completed several business acquisitions for total consideration of $469 million, the substantial majority of which is related to a business combination involving land and buildings adjacent to our headquarters in Menlo Park. Included in this amount is a $198 million promissory note payable issued in connection with this particular acquisition. This promissory note payable is classified under accrued expenses and other current liabilities in our condensed consolidated balance sheets. These acquisitions were not material to our condensed consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma historical results of operations related to these business acquisitions during the six months ended June 30, 2015 have not been presented. We have included the financial results of these business acquisitions in our condensed consolidated financial statements from their respective dates of acquisition.

10


The following table summarizes the allocation of the total consideration transferred during the six months ended June 30, 2015, including the related useful lives, where applicable:
 
(in millions)
 
Useful lives (in years)
Finite-lived intangible assets:
 
 
 
Acquired technology
$
25

 
3
Other
5

 
3
Land acquired
379

 
 
Other net tangible assets acquired
12

 
 
Deferred tax assets, net
6

 
 
Net assets acquired
$
427

 
 
Goodwill
42

 
 
Total fair value consideration
$
469

 
 
Goodwill generated from all business acquisitions completed during the six months ended June 30, 2015 is primarily attributable to expected synergies from future growth and potential monetization opportunities. The amount of goodwill generated during this period that is deductible for tax purposes is not material.
Note 3.
Earnings per Share
We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. We consider restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares.
Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. Basic EPS is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase.
For the calculation of diluted EPS, net income attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plans and inducement awards under a separate non-plan RSU award agreement. In addition, the computation of the diluted EPS of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares to Class A common stock. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.
Basic and dilutive securities in our basic and diluted EPS calculation for the three and six months ended June 30, 2015 do not include contingent earn-out shares. Issuance of these earn-out shares is dependent upon the completion of certain milestones. These milestones were not met as of June 30, 2015 and accordingly, these shares are excluded from the effect of basic and dilutive securities.
The restricted stock units (RSUs) excluded from the EPS calculation were not material for the three and six months ended June 30, 2015. There were 18 million and 10 million RSUs excluded from the calculation for the three and six months ended June 30, 2014, respectively, because the impact would be anti-dilutive.
Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.

11


The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per share amounts): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
576

 
$
143

 
$
617

 
$
174

 
$
987

 
$
244

 
$
1,116

 
$
317

Less: Net income attributable to participating securities
3

 
1

 
2

 
1

 
6

 
1

 
5

 
1

Net income attributable to common stockholders
$
573

 
$
142

 
$
615

 
$
173

 
$
981

 
$
243

 
$
1,111

 
$
316

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
2,252

 
559

 
2,002

 
568

 
2,247

 
560

 
1,992

 
571

Less: Shares subject to repurchase
10

 
5

 
5

 
5

 
11

 
6

 
5

 
6

Number of shares used for basic EPS computation
2,242

 
554

 
1,997

 
563

 
2,236

 
554

 
1,987

 
565

Basic EPS
$
0.26

 
$
0.26

 
$
0.31

 
$
0.31

 
$
0.44

 
$
0.44

 
$
0.56

 
$
0.56

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
573

 
$
142

 
$
615

 
$
173

 
$
981

 
$
243

 
$
1,111

 
$
316

Reallocation of net income attributable to participating securities
4

 

 
3

 

 
7

 

 
6

 

Reallocation of net income as a result of conversion of Class B to Class A common stock
142

 

 
173

 

 
243

 

 
316

 

Reallocation of net income to Class B common stock

 
3

 

 
7

 

 
7

 

 
14

Net income attributable to common stockholders for diluted EPS
$
719

 
$
145

 
$
791

 
$
180

 
$
1,231

 
$
250

 
$
1,433

 
$
330

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
2,242

 
554

 
1,997

 
563

 
2,236

 
554

 
1,987

 
565

Conversion of Class B to Class A common stock
554

 

 
563

 

 
554

 

 
565

 

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock options
8

 
8

 
13

 
13

 
9

 
9

 
14

 
14

RSUs
40

 
11

 
36

 
17

 
39

 
11

 
36

 
17

Shares subject to repurchase
6

 
2

 
6

 
4

 
6

 
3

 
7

 
4

Number of shares used for diluted EPS computation
2,850

 
575

 
2,615

 
597

 
2,844

 
577

 
2,609

 
600

Diluted EPS
$
0.25

 
$
0.25

 
$
0.30

 
$
0.30

 
$
0.43

 
$
0.43

 
$
0.55

 
$
0.55


12


Note 4.
Cash and Cash Equivalents, and Marketable Securities
The following table sets forth the cash and cash equivalents, and marketable securities (in millions):
 
June 30, 2015
 
December 31, 2014
Cash and cash equivalents:
 
 
 
Cash
$
2,300

 
$
2,162

Money market funds
2,823

 
2,153

Total cash and cash equivalents
5,123

 
4,315

Marketable securities:
 
 
 
U.S. government securities
3,981

 
2,830

U.S. government agency securities
3,248

 
2,710

Corporate debt securities
1,773

 
1,344

Total marketable securities
9,002

 
6,884

Total cash and cash equivalents, and marketable securities
$
14,125

 
$
11,199

The gross unrealized gains or losses on our marketable securities as of June 30, 2015 and December 31, 2014 were not significant. In addition, there were no securities in a continuous loss position for 12 months or longer as of June 30, 2015 and December 31, 2014.
The following table classifies our marketable securities by contractual maturities (in millions):
 
June 30, 2015
Due in one year
$
5,244

Due in one to two years
3,758

Total
$
9,002


13


Note 5.
Fair Value Measurement
The following table summarizes, for assets or liabilities measured at fair value, the respective fair value and the classification by level of input within the fair value hierarchy (in millions): 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
June 30, 2015
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
2,823

 
$
2,823

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
3,981

 
3,981

 

 

U.S. government agency securities
3,248

 
3,248

 

 

Corporate debt securities
1,773

 

 
1,773

 

Total cash equivalents and marketable securities
$
11,825

 
$
10,052

 
$
1,773

 
$

 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$
213

 
$

 
$

 
$
213

 
 
 
Fair Value Measurement at
Reporting Date Using
Description
December 31, 2014
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
2,153

 
$
2,153

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
2,830

 
2,830

 

 

U.S. government agency securities
2,710

 
2,710

 

 

Corporate debt securities
1,344

 

 
1,344

 

Total cash equivalents and marketable securities
$
9,037

 
$
7,693

 
$
1,344

 
$

 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$
191

 
$

 
$

 
$
191

We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.
We classify our contingent consideration liability in connection with an acquisition in 2014 within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of our contingent consideration liability based on the present value of probability-weighted future cash flows related to the contingent earn-out criteria and the fair value of our common stock on each reporting date. Changes in the fair value of the contingent consideration liability subsequent to the acquisition date, such as changes in the probability assessment and the fair value of our common stock, are recognized in earnings in the period when the change in the estimated fair value occurs. During the three and six months ended June 30, 2015, we recognized increases in the fair value of our contingent consideration liability of $11 million and $22 million, respectively, in research and development expense in our condensed consolidated statements of income primarily due to an increase in the fair value of our common stock.

14


Note 6.
Property and Equipment
Property and equipment consists of the following (in millions): 
 
June 30,
2015
 
December 31,
2014
Land
$
583

 
$
153

Buildings
2,159

 
1,420

Leasehold improvements
348

 
304

Network equipment
3,279

 
3,020

Computer software, office equipment and other
199

 
149

Construction in progress
348

 
738

Total
6,916

 
5,784

Less: Accumulated depreciation
(1,961
)
 
(1,817
)
Property and equipment, net
$
4,955

 
$
3,967

Construction in progress includes costs primarily related to server network infrastructure and construction of data centers to support our infrastructure around the world. No interest was capitalized during the three and six months ended June 30, 2015 and 2014.
Note 7.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2015 are as follows (in millions): 
Balance as of December 31, 2014
$
17,981

Goodwill acquired
42

Effect of currency translation adjustment
2

Balance as of June 30, 2015
$
18,025

Intangible assets consist of the following (in millions):
 
 
 
June 30, 2015
 
December 31, 2014
 
Useful lives from date of acquisitions (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired users
3 - 7
 
$
2,056

 
$
(234
)
 
$
1,822

 
$
2,056

 
$
(85
)
 
$
1,971

Acquired technology
2 - 10
 
838

 
(229
)
 
609

 
813

 
(144
)
 
669

Acquired patents
2 - 18
 
778

 
(286
)
 
492

 
773

 
(239
)
 
534

Trade names
2 - 7
 
632

 
(105
)
 
527

 
632

 
(46
)
 
586

Other
2 - 10
 
169

 
(74
)
 
95

 
164

 
(55
)
 
109

Total finite-lived intangible assets
 
 
$
4,473

 
$
(928
)
 
$
3,545

 
$
4,438

 
$
(569
)
 
$
3,869

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
In-process research and development (IPR&D)
 
 
$
60

 
$

 
$
60

 
$
60

 
$

 
$
60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets
 
 
$
4,533

 
$
(928
)
 
$
3,605

 
$
4,498

 
$
(569
)
 
$
3,929


As of June 30, 2015, technological feasibility has not been established for our IPR&D intangible assets. They have no alternative future use and, as such, continue to be accounted for as indefinite-lived intangible assets.

15


Amortization expense of intangible assets was $180 million and $359 million for the three and six months ended June 30, 2015, respectively, and $41 million and $82 million for the three and six months ended June 30, 2014, respectively.
As of June 30, 2015, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2015
$
360

2016
702

2017
658

2018
602

2019
519

Thereafter
704

Total
$
3,545

Note 8.
Long-term Debt
In August 2013, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that allows us to borrow up to $6.5 billion to fund working capital and general corporate purposes with interest payable on the borrowed amounts set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We paid origination fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility. Any amounts outstanding under this facility will be due and payable on August 15, 2018. As of June 30, 2015, no amounts had been drawn down, and we were in compliance with the covenants under this facility.
Note 9.
Commitments and Contingencies
Commitments
Leases
We entered into various capital lease arrangements to obtain property and equipment for our operations. Additionally, on occasion we have purchased property and equipment for which we have subsequently obtained capital financing under sale-leaseback transactions. These agreements are typically for three years, except for a building lease which is for 15 years, with interest rates ranging from 1% to 13%. The leases are secured by the underlying leased buildings, leasehold improvements, and equipment. We have also entered into various non-cancelable operating lease agreements for certain of our offices, equipment, land, and data centers with original lease periods expiring between 2015 and 2030. We are committed to pay a portion of the related actual operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.
Operating lease expense was $41 million and $79 million for the three and six months ended June 30, 2015, respectively, and $33 million and $63 million for the three and six months ended June 30, 2014, respectively.
Contingencies
Legal Matters
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our initial public offering (IPO) and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. The vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the U.S. District Court for the Southern District of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the derivative actions against our directors and certain of our officers. On July 24, 2015, the court of appeals affirmed the dismissal of the derivative actions. On December 23, 2014, the plaintiffs in the consolidated securities class action filed their motion for class certification. On April 10, 2015, we filed our opposition to class certification. In addition, the events surrounding our IPO became the subject of various state and federal government inquiries. In May 2014, the Securities and Exchange Commission (SEC) notified us that it had terminated its inquiry and that no enforcement action had been recommended by the SEC.

16


We are also party to various legal proceedings and claims that arise in the ordinary course of business. With respect to our outstanding legal matters, we believe that the amount or estimable range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of litigation is inherently uncertain. Therefore, if one or more of these legal matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period, could be materially adversely affected.
Note 10.
Stockholders' Equity
Share-based Compensation Plans
We maintain two share-based employee compensation plans: the 2012 Equity Incentive Plan (2012 Plan) and the 2005 Stock Plan (collectively, Stock Plans). Our 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses to qualified employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan.
We initially reserved 25,000,000 shares of our Class A common stock for issuance under our 2012 Plan. The number of shares reserved for issuance under our 2012 Plan increase automatically on the first day of January of each of 2013 through 2022 by a number of shares of Class A common stock equal to the lesser of (i) 2.5% of the total outstanding shares of our common stock as of the immediately preceding December 31st or (ii) a number of shares determined by the board of directors. Our board of directors elected not to increase the number of shares reserved for issuance in 2015. In addition, shares available for grant under the 2005 Stock Plan, which were reserved but not issued, forfeited or repurchased at their original issue price, or subject to outstanding awards under the 2005 Stock Plan as of the effective date of our IPO, were added to the reserves of the 2012 Plan. The maximum term for stock options granted under the 2012 Plan may not exceed ten years from the date of grant. Our 2012 Plan will terminate ten years from the date of approval unless it is terminated earlier by our compensation committee.
The following table summarizes the activities of stock option awards under the Stock Plans for the six months ended June 30, 2015: 
 
Shares Subject to Options Outstanding
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value(1)
 
(in thousands)
 
 
 
(in years)
 
(in millions)
Balance as of December 31, 2014
12,984

 
$
4.78

 
 
 
 
Stock options exercised
(1,475
)
 
0.55

 
 
 
 
Balance as of June 30, 2015
11,509

 
$
5.33

 
3.42
 
$
926

Stock options vested and expected to vest as of June 30, 2015
11,506

 
$
5.32

 
3.42
 
$
926

Stock options exercisable as of June 30, 2015
8,845

 
$
3.25

 
2.89
 
$
730

(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the official closing price of our Class A common stock, as reported on the NASDAQ Global Select Market, of $85.76 on June 30, 2015.


17


The following table summarizes the activities for our unvested RSUs for the six months ended June 30, 2015:
 
Unvested RSUs(1)
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2014
138,055

 
$
55.89

Granted
24,844

 
78.18

Vested
(18,903
)
 
39.74

Forfeited
(4,201
)
 
47.30

Unvested at June 30, 2015
139,795

 
$
62.29

(1)
Unvested shares include inducement awards issued in connection with an acquisition in 2014 and are subject to the terms, restrictions, and conditions of a separate non-plan RSU award agreement.

The fair value as of the respective vesting dates of RSUs that vested during the three and six months ended June 30, 2015 was $668 million and $1.48 billion, respectively, and $589 million and $1.54 billion, respectively, during the three and six months ended June 30, 2014.
As of June 30, 2015, there was $8.23 billion of unrecognized share-based compensation expense, of which $7.48 billion is related to RSUs and $751 million is related to restricted shares, shares with performance conditions related to our contingent consideration liability, and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years.
Note 11.
Income Taxes
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter we update our estimate of the annual effective tax rate, and if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, are subject to significant volatility due to several factors, including our ability to accurately predict our income (loss) before provision for income taxes in multiple jurisdictions, including the portions of our share-based compensation that will not generate tax benefits, and the effects of acquisitions and the integration of those acquisitions. In addition, our effective tax rate can be more or less volatile based on the amount of income before provision for income taxes.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of the effect of non-deductible share-based compensation and the impact of acquiring intellectual property and integrating it into our business. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.
We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2008 through 2010 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Our 2011 and future years remain open to examination by the IRS. Our 2010 and future years remain open to examination in Ireland.
Our gross unrecognized tax benefits were $2.02 billion and $1.68 billion as of June 30, 2015 and December 31, 2014, respectively. If the gross unrecognized tax benefits as of June 30, 2015 were realized in a subsequent period, this would result in a tax benefit of $1.47 billion within our provision of income taxes at such time. Our existing tax positions will continue to generate an increase in unrecognized tax benefits in subsequent periods. 
Although the timing of the resolution, settlement, and closure of any audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

18


Note 12.
Geographical Information
Revenue by geography is based on the billing address of the advertiser or developer. The following tables set forth revenue and property and equipment, net by geographic area (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
United States
$
1,880

 
$
1,260

 
$
3,533

 
$
2,389

Rest of the world (1)
2,162

 
1,650

 
4,053

 
3,023

Total revenue
$
4,042

 
$
2,910

 
$
7,586

 
$
5,412

 
(1)
No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented.
 
June 30,
2015
 
December 31,
2014
Property and equipment, net:
 
 
 
United States
$
4,090

 
$
3,256

Sweden
605

 
514

Rest of the world
260

 
197

Total property and equipment, net
$
4,955

 
$
3,967

 


19


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. "Risk Factors." For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.

Certain revenue information in the section entitled "Three and Six Months Ended June 30, 2015 and 2014RevenueForeign Exchange Impact on Revenue" is presented on a constant currency basis. This information is a non-GAAP financial measure. To calculate revenue on a constant currency basis, we translated revenue for the three and six months ended June 30, 2015 using the prior year's monthly exchange rates for our settlement currencies other than the U.S. dollar. This non-GAAP financial measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We believe this non-GAAP financial measure provides investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allows for greater transparency with respect to key metrics used by management in operating our business.
Executive Overview of Second Quarter Results

Our key user metrics and financial results for the second quarter of 2015 are as follows:

User growth:
Daily active users (DAUs) were 968 million on average for June 2015, an increase of 17% year-over-year.
Mobile DAUs were 844 million on average for June 2015, an increase of 29% year-over-year.
Monthly active users (MAUs) were 1.49 billion as of June 30, 2015, an increase of 13% year-over-year.
Mobile MAUs were 1.31 billion as of June 30, 2015, an increase of 23% year-over-year.

Financial results:
Revenue was $4.04 billion, up 39% year-over-year (or 50% year-over-year on a constant currency basis), and ad revenue was $3.83 billion, up 43% year-over-year (or 55% year-over-year on a constant currency basis).
Total costs and expenses were $2.77 billion.
Income from operations was $1.27 billion.
Net income was $719 million with diluted earnings per share of $0.25.
Capital expenditures were $549 million.
Effective tax rate was 44%.
Cash and cash equivalents and marketable securities were $14.13 billion as of June 30, 2015.
Headcount increased to 10,955 as of June 30, 2015.
In the second quarter of 2015, we continued to focus on three main revenue growth priorities: (i) continuing to capitalize on the shift to mobile, (ii) growing the number of marketers using our ad products, especially small- and medium-sized businesses around the world, and (iii) making our ads more relevant and effective through new ad formats and tools for marketers.
In addition, we invested, and will continue to invest, across three priorities: (i) our current generation of services by improving the speed and reliability of our apps and building new infrastructure, such as the recently announced data center project in Texas, and connecting people with the content they want such as more engaging videos, (ii) our next generation of services, including new features on Messenger, WhatsApp and search, and (iii) our long-term innovation efforts such as Internet.org, which provides free basic Internet services in certain countries, and the consumer version of the Oculus Rift. We expect these investments and our increasingly global scale will continue to drive significant overall year-over-year expense growth compared to 2014, driven primarily by increased headcount-related expenses as well as our capital expenditures, which we expect to be between $2.5 billion to $3.0 billion for 2015.

20


Trends in Our User Metrics
The numbers for our key metrics, our daily active users (DAUs), mobile DAUs, MAUs, mobile MAUs, and average revenue per user (ARPU), and certain other metrics such as mobile-only DAUs and mobile-only MAUs, do not include Instagram or WhatsApp users unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics do not include Instagram or WhatsApp unless otherwise specifically stated.
Trends in the number of users affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, the volume of Payments transactions, as well as our expenses and capital expenditures.
Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, used our Messenger app (and is also a registered Facebook user), or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes all users in Africa, Latin America, and the Middle East.

21



Worldwide DAUs increased 17% to 968 million on average during June 2015 from 829 million during June 2014. We experienced growth in DAUs across major markets including India, the United States, and Brazil. Overall growth in DAUs was driven by increased mobile usage of Facebook, and the number of DAUs accessing Facebook on personal computers decreased in June 2015 compared to the same period in 2014. We believe that use of Facebook through personal computers will continue to decline in all regions.
Mobile DAUs. We define a mobile DAU as a user who accessed Facebook via a mobile application or via mobile versions of our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger app (and is also a registered Facebook user) on a given day. We define a mobile-only DAU as a user who accessed Facebook solely through mobile applications or mobile versions of our website on a given day, whereas a mobile DAU may have also accessed Facebook on a personal computer on that day.
Worldwide mobile DAUs increased 29% to 844 million on average during June 2015 from 654 million during June 2014. In all regions, an increasing number of our DAUs accessed Facebook through mobile devices on average during June 2015 as compared to the same period during 2014, with users in Brazil, India, and the United States representing key sources of mobile DAU growth on average during June 2015. On average during June 2015, there were 688 million mobile-only DAUs, increasing 41% from 488 million mobile-only DAUs during the same period in 2014. The remaining mobile DAUs accessed Facebook from both mobile devices and personal computers. We anticipate that growth in mobile users will continue to be the driver of our user growth for the foreseeable future.

22


Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, used our Messenger app (and is also a registered Facebook user), or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community.
    
As of June 30, 2015, we had 1.49 billion MAUs, an increase of 13% from June 30, 2014. Users in India, Thailand, and the United States represented key sources of growth in the second quarter of 2015 relative to the same period in 2014. Overall growth in MAUs was driven by increased mobile usage of Facebook, and the number of MAUs accessing Facebook on personal computers decreased in June 2015 compared to the same period in 2014. We believe that use of Facebook through personal computers will continue to decline in all regions.


23


Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile application or via mobile versions of our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger app (and is also a registered Facebook user) during the period of measurement. We define a mobile-only MAU as a user who accessed Facebook solely through mobile applications or mobile versions of our website during the period of measurement, whereas a mobile MAU may have also accessed Facebook on a personal computer during the period of measurement.
Worldwide mobile MAUs increased 23% to 1.31 billion as of June 30, 2015 from 1.07 billion as of June 30, 2014. In all regions, an increasing number of our MAUs accessed Facebook through mobile devices in the second quarter of 2015 as compared to the same period in 2014, with users in India, Brazil, and the United States representing key sources of mobile MAU growth in the second quarter of 2015. There were 655 million mobile-only MAUs as of June 30, 2015, increasing 64% from 399 million mobile-only MAUs during the same period in 2014. The remaining 659 million mobile MAUs accessed Facebook from both mobile devices and personal computers during June 2015. We anticipate that growth in mobile users will continue to be the driver of our user growth for the foreseeable future.

24


Trends in Our Monetization by User Geography
We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered or virtual and digital goods are purchased. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. The geography of our users affects our revenue and financial results because we currently monetize users in different geographies at different average rates. Our revenue and ARPU in regions such as United States & Canada and Europe are relatively higher due to the size and maturity of those advertising markets as well as our greater sales presence and the number of payment methods that we make available to marketers and users. For example, ARPU for an average user in the second quarter of 2015 in the United States & Canada region was more than seven times higher than for an average user in the Asia-Pacific region.
Note: Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue by geography disclosure in our condensed consolidated financial statements where revenue is geographically apportioned based on the location of the marketer or developer.

25


During the second quarter of 2015, worldwide ARPU was $2.76, an increase of 23% from the second quarter of 2014. Over this period, ARPU increased by 44% in United States & Canada, 19% in Asia-Pacific, 18% in Europe, and 5% in Rest of World. The general strengthening of the U.S. dollar relative to certain foreign currencies from the second quarter of 2014 to the same period in 2015 had an unfavorable impact on the growth rate of our ARPU outside the United States and Canada region. In addition, user growth was more rapid in geographies with relatively lower ARPU, such as Asia-Pacific and Rest of World. We expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such as Asia-Pacific and Rest of World, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.

26


Components of Results of Operations
Revenue
We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables people to purchase virtual and digital goods from our developers.
Advertising. Our advertising revenue is generated by displaying ad products on Facebook properties, including our mobile applications, and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by people, the number of actions taken by people, or the number of impressions delivered. We recognize revenue from the delivery of click-based ads in the period in which a person clicks on the content, and action-based ads in the period in which a person takes the action the marketer contracted for. We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to people. The number of ads we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. We calculate price per ad as total ad revenue divided by the number of ads delivered, representing the effective price paid per impression by a marketer regardless of their desired objective such as impression, click, or action.
Payments and other fees. We enable Payments from people to purchase virtual and digital goods from our developers. People can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards, or other methods. We receive a fee from developers when people make purchases in these applications using our Payments infrastructure. We recognize revenue net of amounts remitted to our developers. We have mandated the use of our Payments infrastructure for game applications on Facebook, and fees related to Payments are generated almost exclusively from games. Our other fees revenue, which has not been significant in recent periods, consists primarily of revenue from our ad serving and measurement products and the delivery of virtual reality platform devices.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers such as facility and server equipment depreciation, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions, amortization of intangible assets, and cost of virtual reality platform device inventory sold.
Research and development. Research and development expenses consist primarily of share-based compensation, salaries, and benefits for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense all of our research and development costs as they are incurred.
Marketing and sales. Our marketing and sales expenses consist of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include people-, marketer-, and developer-facing marketing and promotional expenditures, as well as amortization of intangible assets.
General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include professional and legal services. General and administrative expenses also include depreciation of property and equipment and amortization of intangible assets we have acquired.


27


Results of Operations
The following tables set forth our condensed consolidated statements of income data:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Revenue
$
4,042

 
$
2,910

 
$
7,586

 
$
5,412

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
668

 
473

 
1,323

 
936

Research and development
1,170

 
492

 
2,231

 
947

Marketing and sales
626

 
358

 
1,247

 
681

General and administrative
305

 
197

 
579

 
384

Total costs and expenses
2,769

 
1,520

 
5,380

 
2,948

Income from operations
1,273

 
1,390

 
2,206

 
2,464

Interest and other income/(expense), net

 
(4
)
 
(1
)
 
(4
)
Income before provision for income taxes
1,273

 
1,386

 
2,205

 
2,460

Provision for income taxes
554

 
595

 
974

 
1,027

Net income
$
719

 
$
791

 
$
1,231

 
$
1,433

Share-based compensation expense included in costs and expenses:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Cost of revenue
$
21

 
$
16

 
$
38

 
$
28

Research and development
603

 
219

 
1,169

 
400

Marketing and sales
82

 
50

 
154

 
93

General and administrative
57

 
29

 
105

 
67

Total share-based compensation expense
$
763

 
$
314

 
$
1,466

 
$
588



28


The following tables set forth our condensed consolidated statements of income data (as a percentage of revenue): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
100
%
 
100
%
 
100
%
 
100
%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
17

 
16

 
17

 
17

Research and development
29

 
17

 
29

 
17

Marketing and sales
15

 
12

 
16

 
13

General and administrative
8

 
7

 
8

 
7

Total costs and expenses
69

 
52

 
71

 
54

Income from operations
31

 
48

 
29

 
46

Interest and other income/(expense), net

 

 

 

Income before provision for income taxes
31

 
48

 
29

 
45

Provision for income taxes
14

 
20

 
13

 
19

Net income
18
%
 
27
%
 
16
%
 
26
%
Share-based compensation expense included in costs and expenses (as a percentage of revenue): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
1
%
 
1
%
 
1
%
 
1
%
Research and development
15

 
8

 
15

 
7

Marketing and sales
2

 
2

 
2

 
2

General and administrative
1

 
1

 
1

 
1

Total share-based compensation expense
19
%
 
11
%
 
19
%
 
11
%
Three and Six Months Ended June 30, 2015 and 2014
Revenue 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
Advertising
$
3,827

 
$
2,676

 
43
 %
 
$
7,144

 
$
4,941

 
45
 %
Payments and other fees
215

 
234

 
(8
)%
 
442

 
471

 
(6
)%
Total revenue
$
4,042

 
$
2,910

 
39
 %
 
$
7,586

 
$
5,412

 
40
 %
Revenue in the second quarter and the first six months of 2015 increased $1.13 billion or 39%, and $2.17 billion, or 40%, respectively, compared to the same periods in 2014. The increases were primarily due to increases in advertising revenue.
The most important factor driving advertising revenue growth was an increase in revenue from ads in News Feed on mobile devices. News Feed ads are displayed more prominently, have significantly higher levels of engagement, and a higher price per ad relative to our other ad placements. For the second quarter and the first six months of 2015, we estimate that mobile advertising revenue represented 76% and 74%, respectively, of total advertising revenue, as compared with 62% and 60% in the same periods in 2014.
Other factors that influenced our advertising revenue growth in the second quarter and the first six months of 2015 included (i) an increase in demand for our ad inventory, in part driven by an increase in the number of marketers actively advertising on Facebook, (ii) certain product changes to increase the value and performance of our ads, and (iii) an increase in user growth and engagement.
During the second quarter and the first six months of 2015, as compared to the same periods in 2014, the average price per ad increased by 220% and 251%, respectively, and the number of ads delivered decreased by 55% and 59%, respectively. The

29


increase in average price per ad was driven by a product change related to certain non-News Feed ads during the third quarter of 2014, which decreased the number of ads displayed but increased the prominence of each ad. Average price per ad was also driven by a mix shift towards a greater percentage of our ads being shown in News Feed. The reduction in ads delivered was driven by factors including the product change described above as well as the shift in usage towards mobile devices where people are shown fewer ads as compared to personal computers.
Payments and other fees revenue in the second quarter and the first six months of 2015 decreased $19 million, or 8%, and $29 million, or 6%, respectively, compared to the same periods in 2014. The decreases were primarily due to decreases in Payments revenue from games played on personal computers. Facebook usage on personal computers has been declining and will continue to decline in the future, resulting in a decline in our Payments revenue. These decreases were partially offset by increases in other fees revenue related to acquisitions closed in the second half of 2014.
Foreign Exchange Impact on Revenue

The general strengthening of the U.S. dollar relative to certain foreign currencies (primarily the Euro) from the second quarter and the first six months of 2014 to the same periods in 2015 had an unfavorable impact on our revenue. If we had translated revenue for the three and six months ended June 30, 2015 using the prior year's monthly exchange rates for our settlement currencies other than the U.S. dollar, our total revenue would have been $4.37 billion and $8.11 billion, respectively, and our advertising revenue would have been $4.16 billion and $7.66 billion, respectively, which are $332 million and $520 million higher than actual revenue and advertising revenue in the second quarter and the first six months of 2015, respectively.
Cost of revenue
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
Cost of revenue
$
668

 
$
473

 
41
%
 
$
1,323

 
$
936

 
41
%
Percentage of revenue
17
%
 
16
%
 
 
 
17
%
 
17
%
 
 
Cost of revenue in the second quarter and the first six months of 2015 increased $195 million, or 41%, and $387 million, or 41%, respectively, compared to the same periods in 2014. The increases in both periods were primarily due to increases in operational expenses related to our data centers and technical infrastructure of $118 million and $240 million in the second quarter and first six months of 2015, respectively, and to a lesser extent, increased amortization of our intangible assets of $36 million and $71 million in the second quarter and the first six months of 2015, respectively, compared to the same periods in 2014.
Research and development 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
Research and development
$
1,170

 
$
492

 
138
%
 
$
2,231

 
$
947

 
136
%
Percentage of revenue
29
%
 
17
%
 
 
 
29
%
 
17
%
 
 
Research and development expenses in the second quarter and the first six months of 2015 increased $678 million, or 138%, and $1.28 billion, or 136%, respectively, compared to the same periods in 2014. The increases in both periods were primarily due to increases in share-based compensation expenses of $384 million and $769 million in the second quarter and the first six months of 2015, respectively, compared to the same periods in 2014. In addition, other payroll and benefits expenses in both periods increased as a result of a 62% growth in employee headcount from June 30, 2014 to June 30, 2015 in engineering and other technical functions.

30


Marketing and sales
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
Marketing and sales
$
626

 
$
358

 
75
%
 
$
1,247

 
$
681

 
83
%
Percentage of revenue
15
%
 
12
%
 
 
 
16
%
 
13
%
 
 
Marketing and sales expenses in the second quarter and the first six months of 2015 increased $268 million or 75%, and $566 million, or 83%, respectively, compared to the same periods in 2014. The increases in both periods were due to increases of $101 million and $202 million in amortization of our intangible assets, and $38 million and $131 million in our people-, marketer-, and developer-facing marketing expenses in the second quarter and the first six months of 2015, respectively. Payroll and benefits expenses also increased as a result of a 41% increase in employee headcount from June 30, 2014 to June 30, 2015 to support global sales, business development, and customer service, including $32 million and $61 million increases in share-based compensation expenses in the second quarter and the first six months of 2015, respectively.
General and administrative 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
General and administrative
$
305

 
$
197

 
55
%
 
$
579

 
$
384

 
51
%
Percentage of revenue
8
%
 
7
%
 
 
 
8
%
 
7
%
 
 
General and administrative expenses in the second quarter and the first six months of 2015 increased $108 million, or 55%, and $195 million, or 51%, respectively, compared to the same periods in 2014. The increases in both periods were primarily due to increases in payroll and benefits expenses as a result of a 62% increase in employee headcount from June 30, 2014 to June 30, 2015, including $28 million and $38 million increases in share-based compensation expenses in the second quarter and the first six months of 2015, respectively. Additionally, professional services expense increased $22 million and $38 million in the second quarter and the first six months of 2015, respectively, compared to the same periods in 2014, primarily due to higher consulting and other professional service fees.
Interest and other income/(expense), net
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
Interest income/(expense), net
$
5

 
$

 
100
 %
 
$
7

 
$

 
100
 %
Other income/(expense), net
(5
)
 
(4
)
 
(25
)%
 
(8
)
 
(4
)
 
(100
)%
Interest and other income/(expense), net
$

 
$
(4
)
 
100
 %
 
$
(1
)
 
$
(4
)
 
75
 %
Interest and other income/(expense), net was not material in the second quarter and the first six months of 2015, compared to $4 million expenses in both periods presented in 2014. Interest income/(expense), net increased in both periods primarily due to increases in interest income driven by higher return on our marketable securities. This increase was partially offset by decreases in other income/(expense), net in both periods, primarily due to increases in foreign exchange losses resulting from the periodic re-measurement of our foreign currency balances.

31


Provision for income taxes
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
% change
 
2015
 
2014
 
% change
 
(in millions, except for percentages)
Provision for income taxes
$
554

 
$
595

 
(7
)%
 
$
974

 
$
1,027

 
(5
)%
Effective tax rate
44
%
 
43
%
 
 
 
44
%
 
42
%
 
 
Our provision for income taxes in the second quarter and the first six months of 2015 decreased $41 million and $53 million, respectively, compared to the same periods in 2014, primarily due to decreases in income before provision for income taxes. Our effective tax rate in the second quarter was flat, compared to the same period in 2014. Our effective tax rate increased in the first six months of 2015 compared, to the same period in 2014, primarily due to an increase in non-deductible share-based compensation related to acquisitions.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of the effect of non-deductible share-based compensation and the impact of acquiring intellectual property and integrating it into our business. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions. Our future effective tax rate will also be affected by the timing, size, and integration of any acquisitions we make.

32


Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist primarily of cash on deposit with banks, investments in money market funds, and investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. Cash and cash equivalents and marketable securities were $14.13 billion as of June 30, 2015, an increase of $2.93 billion from December 31, 2014, primarily due to $3.58 billion of cash generated from operations and $809 million in excess tax benefits from share-based award activity, partially offset by $1.05 billion for purchases of property and equipment and $282 million for acquisitions of businesses and other assets.
In August 2013, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that allows us to borrow up to $6.5 billion to fund working capital and general corporate purposes with interest payable on the borrowed amounts set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We paid origination fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility. Any amounts outstanding under this facility will be due and payable on August 15, 2018. As of June 30, 2015, no amounts had been drawn down and we were in compliance with the covenants under this credit facility.
As of June 30, 2015, $1.52 billion of the $14.13 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. Substantially all of these funds are in jurisdictions for which we are indefinitely reinvesting the earnings of the local subsidiary. These subsidiaries have historically incurred losses; as such, repatriating the funds will likely incur no residual tax liability. We have provided for residual taxes in jurisdictions where we do not intend to indefinitely reinvest the earnings of the local subsidiary, however the amount of taxes provided has been insignificant.
We currently anticipate that our available funds, credit facility, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.
Cash Provided by Operating Activities
Cash flow from operating activities during the first six months of 2015 primarily consisted of net income, adjusted for certain non-cash items, including share-based compensation expense of $1.46 billion and total depreciation and amortization of $916 million. The increase in cash flow from operating activities during the first six months of 2015 compared to the same period in 2014 was mostly due to an increase in net income as adjusted for certain non-cash items described above.
Cash Used in Investing Activities
Cash flow from investing activities during the first six months of 2015 primarily consisted of purchases, sales, and maturities of marketable securities, purchases of property and equipment, and acquisitions of businesses and purchases of intangible assets. The increase in cash used in investing activities during the first six months of 2015, compared to the same period in 2014 was primarily due to $679 million increase in net purchases of marketable securities, and to a lesser extent, an increase in acquisition of businesses and purchases of intangible assets. In addition, there was an increase in capital expenditures related to the purchase of server network infrastructure, data center construction, and office buildings.
We anticipate making capital expenditures in 2015 of approximately $2.5 billion to $3.0 billion.
Cash Provided by Financing Activities
Cash flow from financing activities during the first six months of 2015 primarily consisted of excess tax benefits from share-based award activity and principal payments on capital lease obligations. The decrease in cash provided by financing activities was mostly due to decreased excess tax benefit from stock award activities and $12 million of tax payments related to the net share settlement of WhatsApp's vested merger consideration, partially offset by lower principal payments related to our capital lease transactions.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2015.
Contractual Obligations
There were no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

33


Contingencies
We are involved in claims, lawsuits, government investigations, and other legal proceedings. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
See Note 9 in the notes to the condensed consolidated financial statements included in Part I, Item 1 and "Legal Proceedings" contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding these contingencies.
Recent Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We are still evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition for Payments and other fees, income taxes, share-based compensation, loss contingencies, and business combinations and valuation of goodwill and other acquired intangible assets have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

34


Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including changes to foreign currency exchange rates, interest rates, and inflation.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Euro. In general, we are a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, have negatively affected our revenue and other operating results as expressed in U.S. dollars.
We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. At this time we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized foreign currency losses of $7 million and $11 million in the three and six months ended June 30, 2015, respectively, and $4 million and $3 million in the three and six months ended June 30, 2014, respectively.
Interest Rate Sensitivity
Our exposure to changes in interest rates relates primarily to interest earned and market value on our cash and cash equivalents and marketable securities.
Our cash and cash equivalents and marketable securities consist of cash, certificates of deposit, time deposits, money market funds, U.S. government securities, U.S. government agency securities, and corporate debt securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and marketable securities and the market value of those securities. A hypothetical 100 basis point increase in interest rates would have resulted in a decrease of approximately $74 million and $63 million in the market value of our available-for-sale debt securities as of June 30, 2015 and December 31, 2014, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.

35


Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

36


PART II—OTHER INFORMATION
Item 1.
Legal Proceedings
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our initial public offering (IPO) and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. The vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the U.S. District Court for the Southern District of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the derivative actions against our directors and certain of our officers. On July 24, 2015, the court of appeals affirmed the dismissal of the derivative actions. On December 23, 2014, the plaintiffs in the consolidated securities class action filed their motion for class certification. On April 10, 2015, we filed our opposition to class certification. In addition, the events surrounding our IPO became the subject of various state and federal government inquiries. In May 2014, the Securities and Exchange Commission (SEC) notified us that it had terminated its inquiry and that no enforcement action had been recommended by the SEC.
In addition, we are also currently parties to multiple other lawsuits related to our products, including other intellectual property lawsuits as well as class action lawsuits brought by users and marketers, and we may in the future be subject to additional lawsuits and disputes. We are also involved in other claims, government investigations, and proceedings arising from the ordinary course of our business.


37


Item 1A.
Risk Factors
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading 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 Industry
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will continue to decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as users continue to engage increasingly via mobile devices and as we introduce new and different products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
users increasingly engage with other products or services;
we fail to introduce new products or services that users find engaging or if we introduce new products or services that are not favorably received;