10-Q 1 twtr-10q_20150930.htm 10-Q twtr-10q_20150930.htm

 

 

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, 2015

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

 

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

The number of shares of the registrant’s common stock outstanding as of October 26, 2015 was 682,946,653.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

5

 

 

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

 

5

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and September 30, 2014

 

6

 

 

Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and September 30, 2014

 

7

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and September 30, 2014

 

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

  

36

Item 4.

 

Controls and Procedures

  

37

 

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal Proceedings

  

38

Item 1A.

 

Risk Factors

  

38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

64

Item 6.

 

Exhibits

  

64

 

 

Signatures

  

65

 

 

 

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, including ad engagement, of our users;

 

·

our ability to develop or acquire new products, product features 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 platforms, products and services and increase the amount that advertisers spend with us;

 

·

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

 

·

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

 

·

our ability to improve user monetization, including of our logged out and syndicated audiences;

 

·

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, including our ability to operate in those countries.

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, operating results, cash flows or 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 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, changes in ad engagements and changes in cost per ad engagement, 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, changes in ad engagements and changes in cost per ad engagement.

The numbers of active users 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 as of December 31, 2014. 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, and in the past have made improvements in our spam detection capabilities that have resulted in the suspension of 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 applications that automatically contact our servers for regular updates with no discernable 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 December 31, 2014, approximately 8.5% of users used third-party applications that may have automatically contacted our servers for regular updates without any discernable additional user-initiated action. As such, the calculations of MAUs presented in this Quarterly Report on Form 10-Q may be affected as a result of this 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 or phone number associated with the account when a user initially registered the account on Twitter. The IP address or phone number may not always accurately reflect a user’s actual location at the time such user engaged with our platform.

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. We present and discuss our total audience based on both internal metrics and data from Google Analytics, which measures unique visitors to our properties.

 

 

 

4


PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

TWITTER, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

876,432

 

 

$

1,510,724

 

Short-term investments

 

 

2,612,762

 

 

 

2,111,154

 

Accounts receivable, net of allowance for doubtful accounts of $4,575 and $5,507

   as of September 30, 2015 and December 31, 2014, respectively

 

 

536,788

 

 

 

418,454

 

Prepaid expenses and other current assets

 

 

237,577

 

 

 

215,521

 

Total current assets

 

 

4,263,559

 

 

 

4,255,853

 

Property and equipment, net

 

 

699,502

 

 

 

557,019

 

Intangible assets

 

 

147,286

 

 

 

105,011

 

Goodwill

 

 

1,123,121

 

 

 

622,570

 

Other assets

 

 

55,596

 

 

 

42,629

 

Total assets

 

$

6,289,064

 

 

$

5,583,082

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

40,100

 

 

$

53,241

 

Accrued and other current liabilities

 

 

294,057

 

 

 

228,233

 

Capital leases, short-term

 

 

93,621

 

 

 

112,320

 

Total current liabilities

 

 

427,778

 

 

 

393,794

 

Convertible notes

 

 

1,434,968

 

 

 

1,376,020

 

Capital leases, long-term

 

 

73,525

 

 

 

118,950

 

Deferred and other long-term tax liabilities, net

 

 

32,958

 

 

 

24,706

 

Other long-term liabilities

 

 

45,672

 

 

 

43,209

 

Total liabilities

 

 

2,014,901

 

 

 

1,956,679

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.000005 par value-- 200,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Common stock, $0.000005 par value-- 5,000,000 shares authorized; 681,409 and 642,385 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

6,311,697

 

 

 

5,208,870

 

Accumulated other comprehensive loss

 

 

(34,296

)

 

 

(10,024

)

Accumulated deficit

 

 

(2,003,241

)

 

 

(1,572,446

)

Total stockholders' equity

 

 

4,274,163

 

 

 

3,626,403

 

Total liabilities and stockholders' equity

 

$

6,289,064

 

 

$

5,583,082

 

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue

 

$

569,237

 

 

$

361,266

 

 

$

1,507,559

 

 

$

923,924

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

200,195

 

 

 

124,166

 

 

 

511,293

 

 

 

309,696

 

Research and development

 

 

207,937

 

 

 

183,342

 

 

 

596,590

 

 

 

509,828

 

Sales and marketing

 

 

208,797

 

 

 

164,015

 

 

 

594,302

 

 

 

410,511

 

General and administrative

 

 

57,545

 

 

 

51,174

 

 

 

188,231

 

 

 

134,602

 

Total costs and expenses

 

 

674,474

 

 

 

522,697

 

 

 

1,890,416

 

 

 

1,364,637

 

Loss from operations

 

 

(105,237

)

 

 

(161,431

)

 

 

(382,857

)

 

 

(440,713

)

Interest expense

 

 

(25,239

)

 

 

(6,079

)

 

 

(73,995

)

 

 

(11,835

)

Other income (expense), net

 

 

1,948

 

 

 

(7,795

)

 

 

10,378

 

 

 

(4,138

)

Loss before income taxes

 

 

(128,528

)

 

 

(175,305

)

 

 

(446,474

)

 

 

(456,686

)

Provision (benefit) for income taxes

 

 

3,162

 

 

 

159

 

 

 

(15,679

)

 

 

(4,218

)

Net loss

 

$

(131,690

)

 

$

(175,464

)

 

$

(430,795

)

 

$

(452,468

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.20

)

 

$

(0.29

)

 

$

(0.66

)

 

$

(0.76

)

Diluted

 

$

(0.20

)

 

$

(0.29

)

 

$

(0.66

)

 

$

(0.76

)

Weighted-average shares used to compute net loss

   per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

670,604

 

 

 

614,395

 

 

 

655,721

 

 

 

596,722

 

Diluted

 

 

670,604

 

 

 

614,395

 

 

 

655,721

 

 

 

596,722

 

 

 

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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

 

$

(131,690

)

 

$

(175,464

)

 

$

(430,795

)

 

$

(452,468

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

866

 

 

 

(153

)

 

 

921

 

 

 

(231

)

Foreign currency translation adjustment

 

 

(2,328

)

 

 

(1,266

)

 

 

(25,193

)

 

 

(666

)

Net change in accumulated other comprehensive loss

 

 

(1,462

)

 

 

(1,419

)

 

 

(24,272

)

 

 

(897

)

Comprehensive loss

 

$

(133,152

)

 

$

(176,883

)

 

$

(455,067

)

 

$

(453,365

)

 

 

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,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(430,795

)

 

$

(452,468

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

225,377

 

 

 

145,737

 

Stock-based compensation expense

 

 

523,869

 

 

 

454,382

 

Amortization of discount on convertible notes

 

 

51,139

 

 

 

2,411

 

Provision for bad debt

 

 

360

 

 

 

2,944

 

Deferred income tax benefit

 

 

(24,220

)

 

 

(9,737

)

Other adjustments

 

 

5,327

 

 

 

9,740

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(105,486

)

 

 

(77,833

)

Prepaid expenses and other assets

 

 

(12,684

)

 

 

(140,710

)

Accounts payable

 

 

(9,511

)

 

 

5,298

 

Accrued and other liabilities

 

 

60,452

 

 

 

98,714

 

Net cash provided by operating activities

 

 

283,828

 

 

 

38,478

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(266,816

)

 

 

(132,839

)

Purchases of marketable securities

 

 

(3,086,004

)

 

 

(1,617,415

)

Proceeds from maturities of marketable securities

 

 

2,225,255

 

 

 

1,522,582

 

Proceeds from sales of marketable securities

 

 

359,817

 

 

 

168,168

 

Changes in restricted cash

 

 

(2,840

)

 

 

(11,029

)

Business combinations, net of cash acquired

 

 

(51,644

)

 

 

(163,477

)

Purchases of cost method investments and other

 

 

(12,430

)

 

 

(1,700

)

Net cash used in investing activities

 

 

(834,662

)

 

 

(235,710

)

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

 

 

(8,878

)

 

 

(16,168

)

Repayments of capital lease obligations

 

 

(91,365

)

 

 

(75,076

)

Proceeds from exercise of stock options

 

 

8,450

 

 

 

25,027

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

21,600

 

 

 

21,224

 

Other financing activities

 

 

1,983

 

 

 

(2,662

)

Net cash provided by (used in) financing activities

 

 

(68,210

)

 

 

1,612,550

 

Net increase (decrease) in cash and cash equivalents

 

 

(619,044

)

 

 

1,415,318

 

Foreign exchange effect on cash and cash equivalents

 

 

(15,248

)

 

 

(3,533

)

Cash and cash equivalents at beginning of period

 

 

1,510,724

 

 

 

841,010

 

Cash and cash equivalents at end of period

 

$

876,432

 

 

$

2,252,795

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisitions

 

$

516,538

 

 

$

147,958

 

Equipment purchases under capital leases

 

$

24,236

 

 

$

110,409

 

Changes in accrued equipment purchases

 

$

(4,380

)

 

$

14,345

 

 

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 offers products and services for users, advertisers, developers and platform and data partners.

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. Certain prior period amounts have been reclassified to conform to the current period presentation.

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, 2014.

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 May 2014, the Financial Accounting Standards Board (“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 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. In July 2015, the FASB decided to delay the effective date of the guidance by one year and permit early adoption for annual and interim periods beginning after December 15, 2016.  As a result of the revision, the guidance will be effective for fiscal years, and interim periods with those fiscal years, beginning after December 15, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. 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.

9


In February 2015, the FASB issued a new accounting standard update on consolidation analysis. The new guidance amends the current consolidation guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, but the guidance must be applied as of the beginning of the fiscal year containing the adoption date. Adoption of this new accounting standard update is not expected to have a material impact on the Company’s financial statements.

In April 2015, the FASB issued a new accounting standard update on the presentation of debt issuance costs. The new guidance requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Adoption of this new accounting standard update is not expected to have a material impact on the Company’s financial statements.

In September 2015, the FASB issued a new accounting standard update on simplifying the accounting for measurement-period adjustments in business combinations. The new guidance requires that the adjustments to provisional amounts that are identified during the measurement period be recognized in the reporting period when the adjustments are determined. In addition, the effect on earnings of changes as a result of the change to the provisional amounts is required to be recorded in the same period’s financial statements. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Adoption of this new accounting standard update is not expected to have a material impact on 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,

 

 

 

2015

 

 

2014

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

210,399

 

 

$

147,848

 

Money market funds

 

 

337,045

 

 

 

882,443

 

U.S. government and agency securities including treasury bills

 

 

 

 

 

271,418

 

Corporate notes, certificates of deposit and commercial paper

 

 

328,988

 

 

 

209,015

 

Total cash and cash equivalents

 

$

876,432

 

 

$

1,510,724

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities including treasury bills

 

$

1,160,104

 

 

$

1,009,541

 

Corporate notes, certificates of deposit and commercial paper

 

 

1,452,658

 

 

 

1,101,613

 

Total short-term investments

 

$

2,612,762

 

 

$

2,111,154

 

 

Marketable securities are classified as available-for-sale for use in current operations and are presented as short-term investments in the consolidated balance sheets. The contractual maturities of securities classified as available-for-sale as of September 30, 2015 were as follows (in thousands):

 

 

 

September 30,

 

 

 

2015

 

Due within one year

 

$

1,946,341

 

Due after one year through two years

 

 

666,421

 

Total

 

$

2,612,762

 

 

10


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, 2015

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including

   treasury bills

 

$

1,159,601

 

 

$

535

 

 

$

(32

)

 

$

1,160,104

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

1,453,198

 

 

 

175

 

 

 

(715

)

 

 

1,452,658

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,612,799

 

 

$

710

 

 

$

(747

)

 

$

2,612,762

 

 

 

 

December 31, 2014

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including

   treasury bills

 

$

1,009,827

 

 

$

8

 

 

$

(294

)

 

$

1,009,541

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

1,102,275

 

 

 

4

 

 

 

(666

)

 

 

1,101,613

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,112,102

 

 

$

12

 

 

$

(960

)

 

$

2,111,154

 

 

There were no securities in a continuous loss position for 12 months or longer as of September 30, 2015 and December 31, 2014.

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 Company measures its cash equivalents, short-term investments and derivative financial instruments at fair value. The Company classifies its cash equivalents, short-term investments and derivative financial instruments within Level 1 or Level 2 because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. 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 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, 2015 and December 31, 2014 based on the three-tier fair value hierarchy (in thousands):

 

 

September 30, 2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

337,045

 

 

$

 

 

$

 

 

$

337,045

 

Commercial paper

 

 

 

 

328,988

 

 

 

 

 

 

328,988

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

38,074

 

 

 

 

 

 

 

 

 

38,074

 

U.S. government securities

 

 

 

 

531,520

 

 

 

 

 

 

531,520

 

Agency securities

 

 

 

 

590,510

 

 

 

 

 

 

590,510

 

Corporate notes

 

 

 

 

647,449

 

 

 

 

 

 

647,449

 

Commercial paper

 

 

 

 

301,465

 

 

 

 

 

 

301,465

 

Certificates of deposit

 

 

 

 

503,744

 

 

 

 

 

 

503,744

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

413

 

 

 

 

 

 

413

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

(533

)

 

 

 

 

 

(533

)

Total

$

375,119

 

 

$

2,903,556

 

 

$

 

 

$

3,278,675

 

 

 

December 31, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

882,443

 

 

$

 

 

$

 

 

$

882,443

 

Treasury bills

 

73,525

 

 

 

 

 

 

 

 

 

73,525

 

U.S. government securities

 

 

 

 

157,895

 

 

 

 

 

 

157,895

 

Agency securities

 

 

 

 

39,998

 

 

 

 

 

 

39,998

 

Corporate notes

 

 

 

 

13,684

 

 

 

 

 

 

13,684

 

Commercial paper

 

 

 

 

185,321

 

 

 

 

 

 

185,321

 

Certificates of deposit

 

 

 

 

10,010

 

 

 

 

 

 

10,010

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

167,575

 

 

 

 

 

 

 

 

 

167,575

 

U.S. government securities

 

 

 

 

746,128

 

 

 

 

 

 

746,128

 

Agency securities

 

 

 

 

95,838

 

 

 

 

 

 

95,838

 

Corporate notes

 

 

 

 

551,604

 

 

 

 

 

 

551,604

 

Commercial paper

 

 

 

 

300,589

 

 

 

 

 

 

300,589

 

Certificates of deposit

 

 

 

 

249,420

 

 

 

 

 

 

249,420

 

Total

$

1,123,543

 

 

$

2,350,487

 

 

$

 

 

$

3,474,030

 

  

12


In 2014, the Company issued $935.0 million principal amount of 0.25% convertible senior notes due in 2019 (the “2019 Notes”) and $954.0 million principal amount of 1.00% convertible senior notes due in 2021 (the “2021 Notes” and together with the 2019 Notes, the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Refer to Note 8 – Convertible Senior Notes for further details on the Notes. The estimated fair value of the 2019 Notes and 2021 Notes based on a market approach as of September 30, 2015 was approximately $822.5 million and $815.2 million respectively, which represents a Level 2 valuation. The estimated fair value was determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market on September 30, 2015.

 

Derivative Financial Instruments

The Company enters into foreign currency forward contracts with financial institutions to reduce the risk that its earnings may be adversely affected by the impact of exchange rate fluctuations on monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. These contracts do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the hedged foreign currency denominated assets and liabilities. These foreign currency forward contracts are not designated as hedging instruments.

The Company recognizes these derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value based on a Level 2 valuation. The Company records changes in the fair value (i.e., gains or losses) of the derivatives as other income (expense), net in the consolidated statements of operations. The notional principal of foreign currency forward contracts outstanding was equivalent to $299.3 million at September 30, 2015. There were no outstanding foreign currency forward contracts as of December 31, 2014.

The fair values of outstanding derivative instruments for the periods presented on a gross basis are as follows (in thousands):

 

 

 

 

 

September 30,

 

 

 

Balance Sheet Location

 

2015

 

Assets

 

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments

 

Other current assets

 

$

413

 

Liabilities

 

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments

 

Other current liabilities

 

 

533

 

Total

 

 

 

$

(120

)

 

The Company recognized $3.7 million gains on the foreign currency contracts in both the three and nine months ended September 30, 2015. The Company did not have any derivative financial instruments in the three and nine months ended September 30, 2014.

 

 

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,

 

 

 

2015

 

 

2014

 

Property and equipment, net

 

 

 

 

 

 

 

 

Equipment

 

$

675,559

 

 

$

584,561

 

Furniture and leasehold improvements

 

 

241,981

 

 

 

131,851

 

Capitalized software

 

 

196,783

 

 

 

82,052

 

Construction in progress

 

 

95,509

 

 

 

89,806

 

Total

 

 

1,209,832

 

 

 

888,270

 

Less: Accumulated depreciation and amortization

 

 

(510,330

)

 

 

(331,251

)

Property and equipment, net

 

$

699,502

 

 

$

557,019

 

 

 

13


Note 5. Goodwill and Intangible Assets

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

 

Goodwill

 

 

 

 

Balance as of December 31, 2014

 

$

622,570

 

TellApart acquisition

 

 

394,989

 

Other acquisitions

 

 

106,198

 

Foreign currency translation adjustment

 

 

(636

)

Balance as of September 30, 2015

 

$

1,123,121

 

 

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

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

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Value

 

 

Amortization

 

 

Value

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

141,169

 

 

$

(51,270

)

 

$

89,899

 

Publisher and advertiser relationships

 

 

75,300

 

 

 

(19,606

)

 

 

55,694

 

Assembled workforce

 

 

1,960

 

 

 

(1,650

)

 

 

310

 

Other intangible assets

 

 

3,200

 

 

 

(1,817

)

 

 

1,383

 

Total

 

$

221,629

 

 

$

(74,343

)

 

$

147,286

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

105,052

 

 

$

(23,165

)

 

$

81,887

 

Publisher and advertiser relationships

 

 

32,000

 

 

 

(9,831

)

 

 

22,169

 

Assembled workforce

 

 

1,960

 

 

 

(1,457

)

 

 

503

 

Other intangible assets

 

 

1,100

 

 

 

(648

)

 

 

452

 

Total

 

$

140,112

 

 

$

(35,101

)

 

$

105,011

 

 

 

Amortization expense associated with intangible assets for the three months ended September 30, 2015 and 2014 was $14.5 million and $11.8 million, respectively, and for the nine months ended September 30, 2015 and 2014 was $39.2 million and $26.1 million, respectively.

Estimated future amortization expense as of September 30, 2015 is as follows (in thousands):

 

Remainder of 2015

 

$

13,541

 

2016

 

 

43,877

 

2017

 

 

27,872

 

2018

 

 

21,239

 

2019

 

 

13,644

 

Thereafter

 

 

27,113

 

Total

 

$

147,286