10-Q 1 twtr-10q_20140930.htm 10-Q

 

 

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 September 30, 2014

OR

¨

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 001-36164

 

Twitter, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8913779

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1355 Market Street, Suite 900

San Francisco, California 94103

(Address of principal executive offices and Zip Code)

(415) 222-9670

(Registrant’s telephone number, including area code)

 

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

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

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 the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x (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

The number of shares of the registrant’s common stock outstanding as of October 31, 2014 was 634,511,461.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

5

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

5

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and September 30, 2013

 

6

 

 

Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and September 30, 2013

 

7

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013

 

8

 

 

Notes to Consolidated Financial Statements

 

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

38

Item 4.

 

Controls and Procedures

  

39

 

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal Proceedings

  

40

Item 1A.

 

Risk Factors

  

40

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

67

Item 6.

 

Exhibits

  

67

 

 

Signatures

  

68

 

 

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

·

our ability to attract and retain users and increase the level of engagement of our users;

·

our ability to develop or acquire new products and services, improve our existing products and services and increase the value of our products and services;

·

our business strategies, including our plans for growth;

·

our ability to attract advertisers to our platform and increase the amount that advertisers spend with us;

·

our expectations regarding our user growth rate and the usage of our mobile applications;

·

our ability to increase our revenue and our revenue growth rate;

·

our ability to improve user monetization, including advertising revenue per timeline view;

·

our future financial performance, including trends in cost per ad engagement, revenue, cost of revenue, operating expenses and income taxes;

·

our expectations regarding outstanding litigation;

·

the effects of seasonal trends on our results of operations;

·

the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements;

·

our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

·

our ability to successfully acquire and integrate companies and assets; and

·

our ability to successfully enter new markets and manage our international expansion.

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

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

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

 

 

 

3


NOTE REGARDING KEY METRICS

We review a number of metrics, including monthly active users, or MAUs, timeline views, timeline views per MAU and advertising revenue per timeline view, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of how we calculate MAUs, timeline views, timeline views per MAU and advertising revenue per timeline view.

The numbers of active users and timeline views presented in this Quarterly Report on Form 10-Q are based on internal company data. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. For example, there are a number of false or spam accounts in existence on our platform. We have performed an internal review of a sample of accounts and estimate that false or spam accounts represented less than 5% of our MAUs. In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users. For example, we made an improvement in our spam detection capabilities in the second quarter of 2013 and suspended a large number of accounts. Spam accounts that we have identified are not included in the active user numbers presented in this Quarterly Report on Form 10-Q. We treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of people or organizations using our platform.

Our metrics are also affected by third-party applications that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the users associated with such applications as active users on the day or days such contact occurs.  In the three months ended September 30, 2014, approximately 11.5% of all active users solely used third-party applications to access Twitter.  However, only up to approximately 8.5% of all active users used third-party applications that may have automatically contacted our servers for regular updates without any discernable additional user-initiated action.  The calculations of MAUs presented in this Quarterly Report on Form 10-Q may be affected as a result of automated activity.

In addition, our data regarding user geographic location for purposes of reporting the geographic location of our MAUs is based on the IP address associated with the account when a user initially registered the account on Twitter. The IP address may not always accurately reflect a user’s actual location at the time such user engaged with our platform.

We present and discuss timeline views in this Quarterly Report on Form 10-Q. We have estimated a small percentage of timeline views in the three months ended September 30, 2013 to account for certain timeline views that were logged incorrectly during the quarter as a result of a product update. We believe this estimate to be reasonable, but the actual numbers could differ from our estimate. We present and discuss our total audience based on both internal metrics and data from Google Analytics, which measures unique visitors to our properties.

We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology.

 

 

 

4


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

TWITTER, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,252,795

 

 

$

841,010

 

Short-term investments

 

 

1,394,887

 

 

 

1,393,044

 

Accounts receivable, net of allowance for doubtful accounts of $4,102 and $2,020 as of September 30, 2014 and December 31, 2013, respectively

 

 

324,731

 

 

 

247,328

 

Prepaid expenses and other current assets

 

 

201,472

 

 

 

93,297

 

Total current assets

 

 

4,173,885

 

 

 

2,574,679

 

Property and equipment, net

 

 

503,958

 

 

 

332,662

 

Intangible assets

 

 

115,346

 

 

 

77,627

 

Goodwill

 

 

622,638

 

 

 

363,477

 

Other assets

 

 

32,827

 

 

 

17,795

 

Total assets

 

$

5,448,654

 

 

$

3,366,240

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

30,619

 

 

$

27,994

 

Accrued and other current liabilities

 

 

301,330

 

 

 

110,310

 

Capital leases, short-term

 

 

110,527

 

 

 

87,126

 

Total current liabilities

 

 

442,476

 

 

 

225,430

 

Convertible notes

 

 

1,293,604

 

 

 

 

Capital leases, long-term

 

 

121,621

 

 

 

110,520

 

Deferred and other long-term tax liabilities, net

 

 

29,420

 

 

 

59,500

 

Other long-term liabilities

 

 

36,495

 

 

 

20,784

 

Total liabilities

 

 

1,923,616

 

 

 

416,234

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.000005 par value-- 5,000,000 shares authorized; 632,158 and 569,922 shares issued and outstanding as of September 30, 2014 and December  31, 2013, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

4,973,349

 

 

 

3,944,952

 

Accumulated other comprehensive loss

 

 

(1,220

)

 

 

(323

)

Accumulated deficit

 

 

(1,447,094

)

 

 

(994,626

)

Total stockholders' equity

 

 

3,525,038

 

 

 

2,950,006

 

Total liabilities and stockholders' equity

 

$

5,448,654

 

 

$

3,366,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

5


TWITTER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

Revenue

 

$

361,266

 

 

$

168,580

 

 

$

923,924

 

 

$

422,215

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

124,166

 

 

 

62,239

 

 

 

309,696

 

 

 

154,067

 

 

Research and development

 

 

183,342

 

 

 

87,307

 

 

 

509,828

 

 

 

199,144

 

 

Sales and marketing

 

 

164,015

 

 

 

61,214

 

 

 

410,511

 

 

 

138,911

 

 

General and administrative

 

 

51,174

 

 

 

21,152

 

 

 

134,602

 

 

 

56,248

 

 

Total costs and expenses

 

 

522,697

 

 

 

231,912

 

 

 

1,364,637

 

 

 

548,370

 

 

Loss from operations

 

 

(161,431

)

 

 

(63,332

)

 

 

(440,713

)

 

 

(126,155

)

 

Interest income (expense), net

 

 

(5,795

)

 

 

(1,727

)

 

 

(10,472

)

 

 

(4,473

)

 

Other income (expense), net

 

 

(8,079

)

 

 

818

 

 

 

(5,501

)

 

 

(1,730

)

 

Loss before income taxes

 

 

(175,305

)

 

 

(64,241

)

 

 

(456,686

)

 

 

(132,358

)

 

Provision (benefit) for income taxes

 

 

159

 

 

 

360

 

 

 

(4,218

)

 

 

1,494

 

 

Net loss

 

$

(175,464

)

 

$

(64,601

)

 

$

(452,468

)

 

$

(133,852

)

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.29

)

 

$

(0.48

)

 

$

(0.76

)

 

$

(1.02

)

 

Diluted

 

$

(0.29

)

 

$

(0.48

)

 

$

(0.76

)

 

$

(1.02

)

 

Weighted-average shares used to compute net loss

   per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

614,395

 

 

 

133,699

 

 

 

596,722

 

 

 

131,196

 

 

Diluted

 

 

614,395

 

 

 

133,699

 

 

 

596,722

 

 

 

131,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

6


TWITTER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(175,464

)

 

$

(64,601

)

 

$

(452,468

)

 

$

(133,852

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments in available-for-sale securities, net of tax

 

(153

)

 

 

42

 

 

 

(231

)

 

 

10

 

Foreign currency translation adjustment

 

(1,266

)

 

 

268

 

 

 

(666

)

 

 

304

 

Net change in accumulated other comprehensive loss

 

(1,419

)

 

 

310

 

 

 

(897

)

 

 

314

 

Comprehensive loss

$

(176,883

)

 

$

(64,291

)

 

$

(453,365

)

 

$

(133,538

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

7


TWITTER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(452,468

)

 

$

(133,852

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

145,737

 

 

 

77,670

 

Stock-based compensation expense

 

 

454,382

 

 

 

79,170

 

Provision for bad debt

 

 

2,944

 

 

 

758

 

Deferred income tax benefit

 

 

(9,737

)

 

 

(492

)

Non-cash acquisition-related costs

 

 

320

 

 

 

566

 

Amortization of investment premium and other

 

 

9,420

 

 

 

2,124

 

Amortization of discount on convertible notes

 

 

2,411

 

 

 

 

Changes in assets and liabilities, net of assets acquired and liabilities assumed from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(77,833

)

 

 

(34,262

)

Prepaid expenses and other assets

 

 

(140,710

)

 

 

(2,410

)

Accounts payable

 

 

5,298

 

 

 

(8,292

)

Accrued and other liabilities

 

 

98,714

 

 

 

23,286

 

Net cash provided by operating activities

 

 

38,478

 

 

 

4,266

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(132,839

)

 

 

(46,628

)

Purchases of marketable securities

 

 

(1,617,415

)

 

 

(281,574

)

Proceeds from maturities of marketable securities

 

 

1,522,582

 

 

 

300,167

 

Proceeds from sales of marketable securities

 

 

168,168

 

 

 

34,765

 

Restricted cash

 

 

(11,029

)

 

 

(7,541

)

Business combinations, net of cash acquired and purchases of intangible assets

 

 

(165,177

)

 

 

(8,072

)

Net cash used in investing activities

 

 

(235,710

)

 

 

(8,883

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes

 

 

1,800,000

 

 

 

 

Convertible notes initial issuance discount

 

 

(27,475

)

 

 

 

Purchases of convertible note hedges

 

 

(387,450

)

 

 

 

Proceeds from issuance of warrants

 

 

275,130

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(16,168

)

 

 

 

Repayments of capital lease obligations

 

 

(75,076

)

 

 

(49,242

)

Proceeds from exercise of stock options, net of repurchase

 

 

25,027

 

 

 

6,937

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

21,224

 

 

 

 

Other financing activities

 

 

(2,662

)

 

 

(1,125

)

Net cash provided by (used in) financing activities

 

 

1,612,550

 

 

 

(43,430

)

Net increase (decrease) in cash and cash equivalents

 

 

1,415,318

 

 

 

(48,047

)

Foreign exchange effect on cash and cash equivalents

 

 

(3,533

)

 

 

423

 

Cash and cash equivalents at beginning of period

 

 

841,010

 

 

 

203,328

 

Cash and cash equivalents at end of period

 

$

2,252,795

 

 

$

155,704

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common and convertible preferred stock issued in connection with acquisitions

 

$

147,958

 

 

$

112,945

 

Equipment purchases under capital leases

 

$

110,409

 

 

$

95,500

 

Changes in accrued equipment purchases

 

$

14,345

 

 

$

16,522

 

Unpaid deferred offering costs

 

$

 

 

$

2,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

8


TWITTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Description of Business and Summary of Significant Accounting Policies

Twitter, Inc. (“Twitter” or the “Company”) was incorporated in Delaware in April 2007, and is headquartered in San Francisco, California. Twitter is a public platform where any user can create a Tweet and any user can follow other users. Each Tweet is limited to 140 characters of text, but can also contain rich media, including photos, videos and applications.

Convertible Notes Offering

In September 2014, the Company issued $900.0 million principal amount of 0.25% convertible senior notes due 2019 (the “2019 Notes”) and $900.0 million principal amount of 1.00% convertible senior notes due 2021 (the “2021 Notes” and together with the 2019 Notes, the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule144A under the Securities Act of 1933, as amended. The total net proceeds from this offering, after deducting initial purchasers’ discount and debt issuance costs, were approximately $1.77 billion.

 

Concurrently with the issuance of the 2019 Notes and 2021 Notes, the Company entered into convertible note hedge transactions for which it paid $387.5 million. In addition, the Company sold warrants for which it received $275.1 million.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect, in management’s opinion, all adjustments of a normal, recurring nature that are necessary for the fair statement of the Company’s financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results expected for the full fiscal year or any other period.

The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis. Actual results could differ materially from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax position is disallowed. The Company adopted this guidance prospectively for unrecognized tax benefits as of January 1, 2014. The application of this guidance resulted in a $15.8 million decrease in net deferred tax assets and the related liability for unrecognized tax benefits upon adoption.

9


In May 2014, the FASB issued a new accounting standard update on revenue recognition from contracts with customers. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance.  According to the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

In June 2014, the FASB issued a new accounting standard update on stock-based compensation when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. Adoption of this new accounting standard update is expected to have no impact to the Company’s financial statements.

 

Note 2. Cash, Cash Equivalents and Short-term Investments

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

1,626,946

 

 

$

164,135

 

Money market funds

 

 

330,849

 

 

 

229,529

 

U.S. government and agency securities including treasury bills

 

 

141,549

 

 

 

251,593

 

Corporate notes and commercial paper

 

 

153,451

 

 

 

195,753

 

Total cash and cash equivalents

 

$

2,252,795

 

 

$

841,010

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities including treasury bills

 

$

652,936

 

 

$

785,536

 

Corporate notes, certificates of deposit and commercial paper

 

 

741,951

 

 

 

607,508

 

Total short-term investments

 

$

1,394,887

 

 

$

1,393,044

 

 

The following tables summarize unrealized gains and losses related to available-for-sale securities classified as short-term investments on the Company’s consolidated balance sheets (in thousands):

 

 

 

September 30, 2014

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Government and agency securities including

   treasury bills

 

$

652,908

 

 

$

50

 

 

$

(22

)

 

$

652,936

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

742,290

 

 

 

27

 

 

 

(366

)

 

 

741,951

 

Total available-for-sale securities classified as

   short-term investments

 

$

1,395,198

 

 

$

77

 

 

$

(388

)

 

$

1,394,887

 

 

 

10


 

 

 

December 31, 2013

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Government and agency securities including

   treasury bills

 

$

785,535

 

 

$

22

 

 

$

(21

)

 

$

785,536

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

607,590

 

 

 

11

 

 

 

(93

)

 

 

607,508

 

Total available-for-sale securities classified as

   short-term investments

 

$

1,393,125

 

 

$

33

 

 

$

(114

)

 

$

1,393,044

 

 

The securities classified as cash and cash equivalents on the consolidated balance sheets are not included in the tables above as the gross unrealized gains and losses were immaterial for each period and the carrying value approximates fair value because of the short maturity period of these instruments.

 

The following tables show all short-term investments in an unrealized loss position for which other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

 

 

September 30, 2014

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

U.S. Government and agency securities

   including treasury bills

 

$

219,392

 

 

$

(22

)

 

$

 

 

$

 

 

$

219,392

 

 

$

(22

)

Corporate notes, certificates of deposit

   and commercial paper

 

 

445,403

 

 

 

(366

)

 

 

 

 

 

 

 

 

445,403

 

 

 

(366

)

Total short-term investments in an

   unrealized loss position

 

$

664,795

 

 

$

(388

)

 

$

 

 

$

 

 

$

664,795

 

 

$

(388

)

 

 

 

 

 

December 31, 2013

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

U.S. Government and agency securities

   including treasury bills

 

$

230,478

 

 

$

(21

)

 

$

 

 

$

 

 

$

230,478

 

 

$

(21

)

Corporate notes, certificates of deposit

   and commercial paper

 

 

171,894

 

 

 

(93

)

 

 

 

 

 

 

 

 

171,894

 

 

 

(93

)

Total short-term investments in an

   unrealized loss position

 

$

402,372

 

 

$

(114

)

 

$

 

 

$

 

 

$

402,372

 

 

$

(114

)

 

Investments are reviewed periodically to identify possible other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables above as the Company believes that the decrease in fair value of these securities is temporary and expects to recover up to (or beyond) the initial cost of investment for these securities.

 

11


Note 3. Fair Value Measurements

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 based on the three-tier fair value hierarchy (in thousands):

 

 

September 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

330,849

 

 

$

 

 

$

 

 

$

330,849

 

Treasury bills

 

141,549

 

 

 

 

 

 

 

 

 

141,549

 

Commercial paper

 

 

 

 

153,451

 

 

 

 

 

 

153,451

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

68,474

 

 

 

 

 

 

 

 

 

68,474

 

Commercial paper

 

 

 

 

164,033

 

 

 

 

 

 

164,033

 

Corporate notes

 

 

 

 

532,332

 

 

 

 

 

 

532,332

 

U.S. government securities

 

 

 

 

584,462

 

 

 

 

 

 

584,462

 

Certificates of deposit

 

 

 

 

45,586

 

 

 

 

 

 

45,586

 

Total

$

540,872

 

 

$

1,479,864

 

 

$

 

 

$

2,020,736

 

 

 

December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

229,529

 

 

$

 

 

$

 

 

$

229,529

 

Treasury bills

 

244,048

 

 

 

 

 

 

 

 

 

244,048

 

Commercial paper

 

 

 

 

194,742

 

 

 

 

 

 

194,742

 

U.S. government securities

 

 

 

 

7,545

 

 

 

 

 

 

7,545

 

Corporate notes

 

 

 

 

1,011

 

 

 

 

 

 

1,011

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

265,878

 

 

 

 

 

 

 

 

 

265,878

 

Agency securities

 

 

 

 

18,286

 

 

 

 

 

 

18,286

 

Commercial paper

 

 

 

 

272,617

 

 

 

 

 

 

272,617

 

Corporate notes

 

 

 

 

255,546

 

 

 

 

 

 

255,546

 

U.S. government securities

 

 

 

 

501,372

 

 

 

 

 

 

501,372

 

Certificates of deposit

 

 

 

 

79,345

 

 

 

 

 

 

79,345

 

Total

$

739,455

 

 

$

1,330,464

 

 

$

 

 

$

2,069,919

 

 

The fair value of the Company’s Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of the Company’s Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including the readily-available pricing sources for the identical underlying security that may not be actively traded.

 

The estimated fair value of our 2019 Notes and 2021 Notes based on a market approach was approximately $879.9 million and $882.3 million respectively, which represents a Level 2 valuation.  The estimated fair value was determined based on the quoted closing price of the Notes in an over-the-counter market on September 30, 2014.

 

12


Note 4. Property and Equipment, Net

The following table presents the detail of property and equipment, net for the periods presented (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Property and equipment, net

 

 

 

 

 

 

 

 

Equipment

 

$

535,092

 

 

$

367,949

 

Furniture and leasehold improvements

 

 

113,069

 

 

 

54,965

 

Capitalized software

 

 

78,436

 

 

 

47,290

 

Construction in progress

 

 

61,743

 

 

 

29,523

 

Total

 

 

788,340

 

 

 

499,727

 

Less: Accumulated depreciation and amortization

 

 

(284,382

)

 

 

(167,065

)

Property and equipment, net

 

$

503,958

 

 

$

332,662

 

  

 

Note 5. Goodwill and Other Intangible Assets

The following table presents the goodwill activities for the periods presented (in thousands):

 

Goodwill

 

 

 

 

Balance as of December 31, 2013

 

$

363,477

 

Gnip acquisition

 

 

104,747

 

Other acquisitions

 

 

155,054

 

Foreign currency translation adjustment

 

 

(640

)

Balance as of September 30, 2014

 

$

622,638

 

 

 

 

 

 

 

For each of the period presented, gross goodwill balance equaled the net balance since no impairment charges have been recorded.

The following table presents the detail of other intangible assets for the periods presented (in thousands):

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Value

 

 

Amortization

 

 

Value

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

153,497

 

 

$

(64,170

)

 

$

89,327

 

Publisher and advertiser relationships

 

 

32,000

 

 

 

(7,439

)

 

 

24,561

 

Assembled workforce

 

 

1,960

 

 

 

(1,092

)

 

 

868

 

Other intangible assets

 

 

1,100

 

 

 

(510

)

 

 

590

 

Total

 

$

188,557

 

 

$

(73,211

)

 

$

115,346

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

100,553

 

 

$

(45,440

)

 

$

55,113

 

Publisher and advertiser relationships

 

 

21,100

 

 

 

(1,248

)

 

 

19,852

 

Assembled workforce

 

 

1,960

 

 

 

(300

)

 

 

1,660

 

Other intangible assets

 

 

1,100

 

 

 

(98

)