UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________ 

FORM 10-Q

____________________________________________ 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 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	2,270,457,461 shares outstanding as of November 2, 2015
Class B Common Stock $0.000006 par value	557,536,592 shares outstanding as of November 2, 2015

FACEBOOK, INC.

TABLE OF CONTENTS

		Page No.
Note About Forward-Looking Statements		3
Limitations of Key Metrics and Other Data		4
PART I—FINANCIAL INFORMATION		5
Item 1.	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets—September 30, 2015 and December 31, 2014	5
	Condensed Consolidated Statements of Income—for the three and nine months ended September 30, 2015 and 2014	6
	Condensed Consolidated Statements of Comprehensive Income—for the three and nine months ended September 30, 2015 and 2014	7
	Condensed Consolidated Statements of Cash Flows—for the nine months ended September 30, 2015 and 2014	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II—OTHER INFORMATION		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 6.	Exhibits	58
SIGNATURES		59

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)

	September 30, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	4,308		$	4,315
Marketable securities	11,526			6,884
Accounts receivable, net of allowances for doubtful accounts of $55 and $39 as of September 30, 2015 and December 31, 2014, respectively	2,010			1,678
Prepaid expenses and other current assets	1,295			793
Total current assets	19,139			13,670
Property and equipment, net	5,335			3,967
Intangible assets, net	3,437			3,929
Goodwill	18,024			17,981
Other assets	534			637
Total assets	$	46,469		$	40,184
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	149		$	176
Partners payable	241			202
Accrued expenses and other current liabilities	1,338			866
Deferred revenue and deposits	47			66
Current portion of capital lease obligations	17			114
Total current liabilities	1,792			1,424
Capital lease obligations, less current portion	109			119
Other liabilities	3,148			2,545
Total liabilities	5,049			4,088
Stockholders' equity:
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,268 million and 2,234 million shares issued and outstanding, including 9 million and 13 million outstanding shares subject to repurchase, as of September 30, 2015 and December 31, 2014, respectively; 4,141 million Class B shares authorized, 558 million and 563 million shares issued and outstanding, including 3 million and 6 million outstanding shares subject to repurchase, as of September 30, 2015 and December 31, 2014, respectively	—			—
Additional paid-in capital	33,574			30,225
Accumulated other comprehensive loss	(380		)	(228		)
Retained earnings	8,226			6,099
Total stockholders' equity	41,420			36,096
Total liabilities and stockholders' equity	$	46,469		$	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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenue	$	4,501		$	3,203		$	12,087		$	8,615
Costs and expenses:
Cost of revenue	720			565			2,043			1,501
Research and development	1,271			608			3,502			1,555
Marketing and sales	706			374			1,953			1,055
General and administrative	345			259			924			643
Total costs and expenses	3,042			1,806			8,422			4,754
Income from operations	1,459			1,397			3,665			3,861
Interest and other income/(expense), net	(27		)	(61		)	(28		)	(65		)
Income before provision for income taxes	1,432			1,336			3,637			3,796
Provision for income taxes	536			530			1,510			1,557
Net income	$	896		$	806		$	2,127		$	2,239
Less: Net income attributable to participating securities	5			4			12			10
Net income attributable to Class A and Class B common stockholders	$	891		$	802		$	2,115		$	2,229
Earnings per share attributable to Class A and Class B common stockholders:
Basic	$	0.32		$	0.31		$	0.76		$	0.87
Diluted	$	0.31		$	0.30		$	0.75		$	0.86
Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
Basic	2,808			2,587			2,796			2,565
Diluted	2,863			2,644			2,848			2,616
Share-based compensation expense included in costs and expenses:
Cost of revenue	$	21		$	16		$	59		$	44
Research and development	598			243			1,767			643
Marketing and sales	82			53			236			146
General and administrative	56			41			161			108
Total share-based compensation expense	$	757		$	353		$	2,223		$	941

See Accompanying Notes to Condensed Consolidated Financial Statements.

6

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	896		$	806		$	2,127		$	2,239
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax	(22		)	(102		)	(155		)	(123		)
Change in unrealized gain/loss on available-for-sale investments and other, net of tax	(1		)	(2		)	3			—
Comprehensive income	$	873		$	702		$	1,975		$	2,116

See Accompanying Notes to Condensed Consolidated Financial Statements.

7

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities
Net income	$	2,127		$	2,239
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,402			810
Share-based compensation	2,214			941
Deferred income taxes	(672		)	(30		)
Tax benefit from share-based award activity	1,155			1,354
Excess tax benefit from share-based award activity	(1,155		)	(1,365		)
Other	13			(26		)
Changes in assets and liabilities:
Accounts receivable	(405		)	(264		)
Prepaid expenses and other current assets	(145		)	(45		)
Other assets	4			(158		)
Accounts payable	7			12
Partners payable	40			(22		)
Accrued expenses and other current liabilities	291			198
Deferred revenue and deposits	(18		)	3
Other liabilities	914			227
Net cash provided by operating activities	5,772			3,874
Cash flows from investing activities
Purchases of property and equipment	(1,831		)	(1,314		)
Purchases of marketable securities	(10,333		)	(6,215		)
Sales of marketable securities	4,125			7,391
Maturities of marketable securities	1,563			1,710
Acquisitions of businesses, net of cash acquired, and purchases of intangible assets	(309		)	(754		)
Change in restricted cash and deposits	77			(113		)
Other investing activities, net	—			(2		)
Net cash (used in) provided by investing activities	(6,708		)	703
Cash flows from financing activities
Taxes paid related to net share settlement	(20		)	(3		)
Proceeds from exercise of stock options	—			7
Principal payments on capital lease obligations	(107		)	(199		)
Excess tax benefit from share-based award activity	1,155			1,365
Net cash provided by financing activities	1,028			1,170
Effect of exchange rate changes on cash and cash equivalents	(99		)	(71		)
Net (decrease) increase in cash and cash equivalents	(7		)	5,676
Cash and cash equivalents at beginning of period	4,315			3,323
Cash and cash equivalents at end of period	$	4,308		$	8,999

See Accompanying Notes to Condensed Consolidated Financial Statements.

8

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Nine Months Ended September 30,
	2015		2014
Supplemental cash flow data
Cash paid during the period for:
Interest	$	8	$	11
Income taxes, net	$	199	$	101
Non-cash investing and financing activities:
Net change in accounts payable, accrued expenses and other current liabilities, and other liabilities related to property and equipment additions	$	107	$	38
Fair value of shares issued related to acquisitions of businesses	$	—	$	1,368
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 August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays 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 nine months ended September 30, 2015, we completed several business acquisitions for total consideration of $488 million, primarily 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 nine months ended September 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 nine months ended September 30, 2015, including the related useful lives, where applicable:

	(in millions)		Useful lives (in years)
Finite-lived intangible assets:
Acquired technology	$	30	3
Other	5		3
Land acquired	379
Other net tangible assets acquired	12
Deferred tax assets, net	19
Net assets acquired	$	445
Goodwill	43
Total fair value consideration	$	488

Goodwill generated from all business acquisitions completed during the nine months ended September 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 nine months ended September 30, 2015 and 2014 do not include contingent earn-out shares. Issuance of these earn-out shares is dependent upon the completion of certain milestones. These milestones have not been met as of September 30, 2015 and accordingly, these shares have been 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 nine months ended September 30, 2015 and 2014.

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 September 30,								Nine Months Ended September 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	$	719	$	177	$	632	$	174	$	1,705	$	422	$	1,747	$	492
Less: Net income attributable to participating securities	4		1		3		1		9		3		8		2
Net income attributable to common stockholders	$	715	$	176	$	629	$	173	$	1,696	$	419	$	1,739	$	490
Denominator
Weighted average shares outstanding	2,264		558		2,032		567		2,253		559		2,006		570
Less: Shares subject to repurchase	10		4		4		8		11		5		5		6
Number of shares used for basic EPS computation	2,254		554		2,028		559		2,242		554		2,001		564
Basic EPS	$	0.32	$	0.32	$	0.31	$	0.31	$	0.76	$	0.76	$	0.87	$	0.87
Diluted EPS:
Numerator
Net income attributable to common stockholders	$	715	$	176	$	629	$	173	$	1,696	$	419	$	1,739	$	490
Reallocation of net income attributable to participating securities	5		—		4		—		12		—		10		—
Reallocation of net income as a result of conversion of Class B to Class A common stock	176		—		173		—		419		—		490		—
Reallocation of net income to Class B common stock	—		3		—		7		—		10		—		18
Net income attributable to common stockholders for diluted EPS	$	896	$	179	$	806	$	180	$	2,127	$	429	$	2,239	$	508
Denominator
Number of shares used for basic EPS computation	2,254		554		2,028		559		2,242		554		2,001		564
Conversion of Class B to Class A common stock	554		—		559		—		554		—		564		—
Weighted average effect of dilutive securities:
Employee stock options	7		7		13		13		8		8		13		13
RSUs	42		8		36		14		39		10		32		13
Shares subject to repurchase	6		2		8		5		5		2		6		3
Number of shares used for diluted EPS computation	2,863		571		2,644		591		2,848		574		2,616		593
Diluted EPS	$	0.31	$	0.31	$	0.30	$	0.30	$	0.75	$	0.75	$	0.86	$	0.86

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):

	September 30, 2015		December 31, 2014
Cash and cash equivalents:
Cash	$	2,687	$	2,162
Money market funds	1,621		2,153
Total cash and cash equivalents	4,308		4,315
Marketable securities:
U.S. government securities	4,924		2,830
U.S. government agency securities	4,389		2,710
Corporate debt securities	2,213		1,344
Total marketable securities	11,526		6,884
Total cash and cash equivalents, and marketable securities	$	15,834	$	11,199

The gross unrealized gains or losses on our marketable securities as of September 30, 2015 and December 31, 2014 were not significant. In addition, the gross unrealized loss that had been in a continuous loss position for 12 months or longer was not significant as of September 30, 2015. There was no such loss as of December 31, 2014. As of September 30, 2015, we considered the decreases in market value on our marketable securities to be temporary in nature and did not consider any of our investments to be other-than-temporarily impaired.

The following table classifies our marketable securities by contractual maturities (in millions):

	September 30, 2015
Due in one year	$	5,822
Due in one to two years	5,704
Total	$	11,526

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	September 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	$	1,621	$	1,621	$	—	$	—
Marketable securities:
U.S. government securities	4,924		4,924		—		—
U.S. government agency securities	4,389		4,389		—		—
Corporate debt securities	2,213		—		2,213		—
Total cash equivalents and marketable securities	$	13,147	$	10,934	$	2,213	$	—
Other liabilities:
Contingent consideration liability	$	225	$	—	$	—	$	225

			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 nine months ended September 30, 2015, we recognized an increase in the fair value of our contingent consideration liability of $12 million and $34 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.

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Note 6. Property and Equipment

Property and equipment consists of the following (in millions):

	September 30, 2015			December 31, 2014
Land	$	583		$	153
Buildings	2,184			1,420
Leasehold improvements	409			304
Network equipment	3,437			3,020
Computer software, office equipment and other	220			149
Construction in progress	537			738
Total	7,370			5,784
Less: Accumulated depreciation	(2,035		)	(1,817		)
Property and equipment, net	$	5,335		$	3,967

Construction in progress includes costs primarily related to construction of data centers and network equipment infrastructure to support our data centers around the world. No interest was capitalized during the three and nine months ended September 30, 2015 and 2014.

Note 7. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 are as follows (in millions):

Balance as of December 31, 2014	$	17,981
Goodwill acquired	43
Balance as of September 30, 2015	$	18,024

Intangible assets consist of the following (in millions):

		September 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	$	(308	)	$	1,748	$	2,056	$	(85	)	$	1,971
Acquired technology	2 - 10	843		(273		)	570		813		(144		)	669
Acquired patents	2 - 18	785		(309		)	476		773		(239		)	534
Trade names	2 - 7	632		(134		)	498		632		(46		)	586
Other	2 - 10	169		(84		)	85		164		(55		)	109
Total finite-lived intangible assets		$	4,485	$	(1,108	)	$	3,377	$	4,438	$	(569	)	$	3,869
Indefinite-lived intangible assets:
In-process research and development (IPR&D)		$	60	$	—		$	60	$	60	$	—		$	60
Total intangible assets		$	4,545	$	(1,108	)	$	3,437	$	4,498	$	(569	)	$	3,929

As of September 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.

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Amortization expense of intangible assets was $180 million and $539 million for the three and nine months ended September 30, 2015, respectively, and $59 million and $141 million for the three and nine months ended September 30, 2014, respectively.

As of September 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	$	180
2016	705
2017	661
2018	605
2019	521
Thereafter	705
Total	$	3,377

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 September 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 2032. 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 $47 million and $127 million for the three and nine months ended September 30, 2015, respectively, and $31 million and $94 million for the three and nine months ended September 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 October 7, 2015, the court heard argument on plaintiffs' motion for class certification in the consolidated securities action. 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.

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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 increases 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 board of directors or committee thereof.

The following table summarizes the activities of stock option awards under the Stock Plans for the nine months ended September 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	(3,512	)	0.50
Balance as of September 30, 2015	9,472		$	6.37	3.53	$	791
Stock options vested and expected to vest as of September 30, 2015	9,469		$	6.37	3.53	$	791
Stock options exercisable as of September 30, 2015	7,043		$	4.30	3.05	$	603

(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 $89.90 on September 30, 2015.

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The following table summarizes the activities for our unvested RSUs for the nine months ended September 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	28,164		79.85
Vested	(28,455	)	41.55
Forfeited	(5,625	)	49.50
Unvested at September 30, 2015	132,139		$	64.36

(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 nine months ended September 30, 2015 was $894 million and $2.38 billion, respectively, and $652 million and $2.19 billion, respectively, during the three and nine months ended September 30, 2014.

As of September 30, 2015, there was $7.70 billion of unrecognized share-based compensation expense, of which $7.06 billion is related to RSUs and $643 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 United States statutory rate primarily because of the impact of acquiring intellectual property and integrating it into our business and the effect of non-deductible share-based compensation. 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.

On July 27, 2015, the United States Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of share-based compensation expense in an intercompany cost-sharing arrangement. This opinion concluded that related parties in a cost-sharing arrangement are not required to share share-based compensation. A final decision has yet to be issued by the Tax Court, and this decision may be appealed by the Commissioner. The impact of the conclusions stated by the Tax Court in its opinion was not material to our condensed consolidated financial statements.

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 $2.58 billion and $1.68 billion as of September 30, 2015 and December 31, 2014, respectively. If the gross unrecognized tax benefits as of September 30, 2015 were realized in a subsequent period, this would result in a tax benefit of $2.01 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

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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.

Note 12. Geographical Information

Revenue by geography is based on the billing address of the marketer or developer. The following tables set forth revenue and property and equipment, net by geographic area (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenue:
United States	$	2,166	$	1,468	$	5,699	$	3,857
Rest of the world (1)	2,335		1,735		6,388		4,758
Total revenue	$	4,501	$	3,203	$	12,087	$	8,615

(1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented.

	September 30, 2015		December 31, 2014
Property and equipment, net:
United States	$	4,295	$	3,256
Sweden	660		514
Rest of the world	380		197
Total property and equipment, net	$	5,335	$	3,967

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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 Nine Months Ended September 30, 2015 and 2014—Revenue—Foreign 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 nine months ended September 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 Third Quarter Results

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

User growth:

• Daily active users (DAUs) were 1.01 billion on average for September2015, an increase of 17% year-over-year.

• Mobile DAUs were 894 million on average for September2015, an increase of 27% year-over-year.

• Monthly active users (MAUs) were 1.55 billion as of September 30, 2015, an increase of 14% year-over-year.

• Mobile MAUs were 1.39 billion as of September 30, 2015, an increase of 23% year-over-year.

Financial results:

• Revenue was $4.50 billion, up 41% year-over-year (or 51% year-over-year on a constant currency basis), and ad revenue was $4.30 billion, up 45% year-over-year (or 57% year-over-year on a constant currency basis).

• Total costs and expenses were $3.04 billion.

• Income from operations was $1.46 billion.

• Net income was $896 million with diluted earnings per share of $0.31.

• Capital expenditures were $780 million.

• Effective tax rate was 37%.

• Cash and cash equivalents and marketable securities were $15.83 billion as of September 30, 2015.

• Headcount increased to 11,996 as of September 30, 2015.

In the third quarter of 2015, we continued to make progress on our three main revenue growth priorities: (i) continuing to capitalize on the shift to mobile, including expanding ads on Instagram, (ii) growing the number of marketers using our ad products, especially video ads, and (iii) making our ads more relevant and effective through continued adoption of newer ad formats and tools for marketers.

In addition, we invested, and will continue to invest, across three priorities: (i) our core products and services to better serve our existing communities and businesses, (ii) our next generation of services, including Instagram, WhatsApp, and Messenger, and (iii) our long-term innovation efforts, such as Internet.org 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 $2.7 billion for 2015.

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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, or used our Messenger app (and is also a registered Facebook user), 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.

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Worldwide DAUs increased 17% to 1.01 billion on average during September2015 from 864 million during September2014. 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 September2015, 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 27% to 894 million on average during September2015 from 703 million during September2014. In all regions, an increasing number of our DAUs accessed Facebook through mobile devices on average during September2015, as compared to the same period during 2014, with users in India, Brazil, and the United States representing key sources of mobile DAU growth on average during September2015. On average during September2015, there were 738 million mobile-only DAUs, increasing 38% from 536 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.

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• 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, or used our Messenger app (and is also a registered Facebook user), 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 September 30, 2015, we had 1.55 billion MAUs, an increase of 14% from September 30, 2014. Users in India, the United States, and Brazil represented key sources of growth in the third 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 September2015, compared to the same period in 2014. We believe that use of Facebook through personal computers will continue to decline in all regions.

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• 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 1.39 billion as of September 30, 2015 from 1.12 billion as of September 30, 2014. In all regions, an increasing number of our MAUs accessed Facebook through mobile devices in the third 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 third quarter of 2015. There were 727 million mobile-only MAUs as of September 30, 2015, increasing 59% from 456 million mobile-only MAUs during the same period in 2014. The remaining 658 million mobile MAUs accessed Facebook from both mobile devices and personal computers during September2015. We anticipate that growth in mobile users will continue to be the driver of our user growth for the foreseeable future.

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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 primarily due to the size and maturity of those online and mobile advertising markets. For example, ARPU in the third quarter of 2015 in the United States & Canada region was more than seven times higher than 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.

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During the third quarter of 2015, worldwide ARPU was $2.97, an increase of 24% from the third quarter of 2014. Over this period, ARPU increased by 42% in United States & Canada, 21% in Europe, 18% in Asia-Pacific, and 11% in Rest of World. The general strengthening of the U.S. dollar relative to certain foreign currencies from the third 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.

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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 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 certain of 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.

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Results of Operations

The following tables set forth our condensed consolidated statements of income data:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(in millions)
Revenue	$	4,501		$	3,203		$	12,087		$	8,615
Costs and expenses:
Cost of revenue	720			565			2,043			1,501
Research and development	1,271			608			3,502			1,555
Marketing and sales	706			374			1,953			1,055
General and administrative	345			259			924			643
Total costs and expenses	3,042			1,806			8,422			4,754
Income from operations	1,459			1,397			3,665			3,861
Interest and other income/(expense), net	(27		)	(61		)	(28		)	(65		)
Income before provision for income taxes	1,432			1,336			3,637			3,796
Provision for income taxes	536			530			1,510			1,557
Net income	$	896		$	806		$	2,127		$	2,239

Share-based compensation expense included in costs and expenses:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in millions)
Cost of revenue	$	21	$	16	$	59	$	44
Research and development	598		243		1,767		643
Marketing and sales	82		53		236		146
General and administrative	56		41		161		108
Total share-based compensation expense	$	757	$	353	$	2,223	$	941

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The following tables set forth our condensed consolidated statements of income data (as a percentage of revenue):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenue	100	%	100	%	100	%	100	%
Costs and expenses:
Cost of revenue	16		18		17		17
Research and development	28		19		29		18
Marketing and sales	16		12		16		12
General and administrative	8		8		8		7
Total costs and expenses	68		56		70		55
Income from operations	32		44		30		45
Interest and other income/(expense), net	(1	)	(2	)	—		(1	)
Income before provision for income taxes	32		42		30		44
Provision for income taxes	12		17		12		18
Net income	20	%	25	%	18	%	26	%

Share-based compensation expense included in costs and expenses (as a percentage of revenue):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of revenue	—	%	—	%	—	%	1	%
Research and development	13		8		15		7
Marketing and sales	2		2		2		2
General and administrative	1		1		1		1
Total share-based compensation expense	17	%	11	%	18	%	11	%

Three and Nine Months Ended September 30,2015 and 2014

Revenue

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015		2014		% change		2015		2014		% change
	(in millions, except for percentages)
Advertising	$	4,299	$	2,957	45	%	$	11,442	$	7,898	45	%
Payments and other fees	202		246		(18	)%	645		717		(10	)%
Total revenue	$	4,501	$	3,203	41	%	$	12,087	$	8,615	40	%

Revenue in the third quarter and the first nine months of 2015 increased $1.30 billion, or 41%, and $3.47 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. For the third quarter and the first nine months of 2015, we estimate that mobile advertising revenue represented approximately 78% and 76%, respectively, of total advertising revenue, as compared with approximately 66% and 62% in the same periods in 2014. Factors that influenced our mobile advertising revenue growth in the third quarter and the first nine 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) an increase in mobile user growth and engagement, and (iii) an increase in the number and frequency of ads displayed in News Feed, as well as the quality, relevance, and performance of those ads.

During the third quarter and the first nine months of 2015, as compared to the same periods in 2014, the average price per ad increased by 61% and 184%, respectively, and the number of ads delivered decreased by 10% and 49%, respectively. The 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

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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 third quarter and the first nine months of 2015 decreased $44 million, or 18%, and $72 million, or 10%, 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. Additionally, the decrease in Payments revenue for the first nine months of 2015 was partially offset by an increase 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 third quarter and the first nine 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 nine months ended September 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 $4.84 billion and $12.95 billion, respectively, and our advertising revenue would have been $4.64 billion and $12.31 billion, respectively. Using these constant rates, both revenue and advertising revenue would have been $342 million and $863 million higher than actual revenue and advertising revenue in the third quarter and the first nine months of 2015, respectively.

Cost of revenue

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015			2014			% change		2015			2014			% change
	(in millions, except for percentages)
Cost of revenue	$	720		$	565		27	%	$	2,043		$	1,501		36	%
Percentage of revenue	16		%	18		%			17		%	17		%

Cost of revenue in the third quarter and the first nine months of 2015 increased $155 million, or 27%, and $542 million, or 36%, 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 $112 million and $352 million in the third quarter and first nine months of 2015, respectively, and to a lesser extent, increased amortization of our intangible assets of $18 million and $91 million in the third quarter and the first nine months of 2015, respectively, compared to the same periods in 2014.

Research and development

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015			2014			% change		2015			2014			% change
	(in millions, except for percentages)
Research and development	$	1,271		$	608		109	%	$	3,502		$	1,555		125	%
Percentage of revenue	28		%	19		%			29		%	18		%

Research and development expenses in the third quarter and the first nine months of 2015 increased $663 million, or 109%, and $1.95 billion, or 125%, respectively, compared to the same periods in 2014. The increases in both periods were primarily due to increases in share-based compensation expenses of $355 million and $1.12 billion in the third quarter and the first nine 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 52% growth in employee headcount from September 30, 2014 to September 30, 2015 in engineering and other technical functions.

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Marketing and sales

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015			2014			% change		2015			2014			% change
	(in millions, except for percentages)
Marketing and sales	$	706		$	374		89	%	$	1,953		$	1,055		85	%
Percentage of revenue	16		%	12		%			16		%	12		%

Marketing and sales expenses in the third quarter and the first nine months of 2015 increased $332 million or 89%, and $898 million, or 85%, respectively, compared to the same periods in 2014. The increases in both periods were due to increases of $101 million and $304 million in amortization of our intangible assets, and $86 million and $217 million in marketing expenses in the third quarter and the first nine months of 2015, respectively. Payroll and benefits expenses also increased as a result of a 35% increase in employee headcount from September 30, 2014 to September 30, 2015 to support global sales, business development, and customer service, including increases of $29 million and $90 million in share-based compensation expenses in the third quarter and the first nine months of 2015, respectively.

General and administrative

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015			2014			% change		2015			2014			% change
	(in millions, except for percentages)
General and administrative	$	345		$	259		33	%	$	924		$	643		44	%
Percentage of revenue	8		%	8		%			8		%	7		%

General and administrative expenses in the third quarter and the first nine months of 2015 increased $86 million, or 33%, and $281 million, or 44%, 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 47% increase in employee headcount from September 30, 2014 to September 30, 2015, including increases of $15 million and $53 million in share-based compensation expenses in the third quarter and the first nine months of 2015, respectively, and to a lesser extent, higher legal and other professional services fees.

Interest and other income/(expense), net

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015			2014			% change		2015			2014			% change
	(in millions, except for percentages)
Interest income/(expense), net	$	7		$	4		75	%	$	15		$	4		275	%
Other income/(expense), net	(34		)	(65		)	48	%	(43		)	(69		)	38	%
Interest and other income/(expense), net	$	(27	)	$	(61	)	56	%	$	(28	)	$	(65	)	57	%

Interest and other income/(expense), net in the third quarter and the first nine months of 2015 increased $34 million, or 56%, and $37 million, or 57%, respectively, compared to the same periods in 2014. Other income/(expense), net increased in both periods, primarily due to decreases in foreign exchange losses resulting from the periodic re-measurement of our foreign currency balances. In addition, interest income/(expense), net increased in both periods, primarily due to increases in interest income driven by higher invested cash balances.

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Provision for income taxes

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015			2014			% change		2015			2014			% change
	(in millions, except for percentages)
Provision for income taxes	$	536		$	530		1	%	$	1,510		$	1,557		(3	)%
Effective tax rate	37		%	40		%			42		%	41		%

The changes in our provision for income taxes in the third quarter and the first nine months of 2015, compared to the same periods in 2014, were not material. Our effective tax rate decreased in the third quarter of 2015, compared to the same period in 2014, primarily due to a change in the geographic mix of our income before provision for income taxes. Our effective tax rate in the first nine months of 2015 remained relatively flat, compared to the same period in 2014.

Our effective tax rate has exceeded the U.S. statutory rate primarily because of the impact of acquiring intellectual property and integrating it into our business and non-deductible share-based compensation. 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.

On July 27, 2015, the United States Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of share-based compensation expense in an intercompany cost-sharing arrangement. This opinion concluded that related parties in a cost-sharing arrangement are not required to share share-based compensation. A final decision has yet to be issued by the Tax Court, and this decision may be appealed by the Commissioner. The impact of the conclusions stated by the Tax Court in its opinion was not material to our condensed consolidated financial statements.

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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 $15.83 billion as of September 30, 2015, an increase of $4.64 billion from December 31, 2014, primarily due to $5.77 billion of cash generated from operations and $1.16 billion in excess tax benefits from share-based award activity, partially offset by $1.83 billion for purchases of property and equipment and $309 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 September 30, 2015, no amounts had been drawn down and we were in compliance with the covenants under this credit facility.

As of September 30, 2015, $1.80 billion of the $15.83 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. 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 nine months of 2015, primarily consisted of net income, adjusted for certain non-cash items, including share-based compensation expense of $2.21 billion and total depreciation and amortization of $1.40 billion. The increase in cash flow from operating activities during the first nine 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) Provided by Investing Activities

Cash used in investing activities was $6.71 billion for the first nine months of 2015, primarily due to $4.65 billion for net purchases of marketable securities and $1.83 billion for capital expenditures related to the purchase of servers, network infrastructure, and the construction of data centers and office buildings.

Cash provided by investing activities was $703 million for the first nine months of 2014, primarily due to $2.89 billion of net sales and maturities of marketable securities, partially offset by $1.31 billion for capital expenditures related to the purchase of servers, network infrastructure, and the construction of data centers and office buildings, and $754 million for acquisition of businesses.

We anticipate making capital expenditures in 2015 of approximately $2.5 billion to $2.7 billion.

Cash Provided by Financing Activities

Cash flow from financing activities during the first nine 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, 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 September 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.

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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 August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays 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.

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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 $36 million and $47 million in the three and nine months ended September 30, 2015, respectively, and $65 million and $68 million in the three and nine months ended September 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 $101 million and $63 million in the market value of our available-for-sale debt securities as of September 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.

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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 September 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.

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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 October 7, 2015, the court heard argument on plaintiffs' motion for class certification in the consolidated securities action. 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 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 and regulatory investigations, and proceedings arising from the ordinary course of our business.

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