10-Q 1 fb-09302017x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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, smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
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
2,384,798,040 shares outstanding as of October 30, 2017
Class B Common Stock $0.000006 par value
521,010,708 shares outstanding as of October 30, 2017



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


2


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

3


LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, which include our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU), 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. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology.
We regularly evaluate these metrics to estimate the number of "duplicate" and "false" accounts among our MAUs. A duplicate account is one that a user maintains in addition to his or her principal account. We divide "false" accounts 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. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as similar IP addresses or user names, and to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Our estimates may change as our methodologies evolve, including through the application of new data signals or technologies, which may allow us to identify previously undetected duplicate or false accounts and may improve our ability to evaluate a broader population of our users. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. In particular, duplicate accounts are very difficult to measure at our scale, and it is possible that the actual number of duplicate accounts may vary significantly from our estimates.
In the third quarter of 2017, we calculated these estimates using a new methodology for duplicate accounts that included improvements to the data signals we rely on to help identify such accounts. As a result, we estimate that duplicate accounts may have represented approximately 10% of our worldwide MAUs. We believe the increase in this estimate from our prior estimate of duplicate accounts is primarily due to implementation of this new methodology. We also believe the percentage of duplicate accounts is meaningfully higher in developing markets such as India, Indonesia, and the Philippines, as compared to more developed markets. In the third quarter of 2017, we estimate that user-misclassified and undesirable accounts may have represented approximately 2-3% of our worldwide MAUs. Our estimation of false accounts can vary as a result of episodic spikes in the creation of such accounts, which we observed in the third quarter of 2017 and which we have seen originate more frequently in specific countries such as Indonesia and Vietnam. 
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.
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 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. For example, in late 2015, we discovered an error in the algorithm we used to attribute our revenue by user geography. While this issue did not affect our overall worldwide revenue, it did affect our attribution of revenue to different geographic regions. The fourth quarter of 2015 revenue by user geography and ARPU amounts were adjusted to reflect this reclassification.
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.
The numbers of DAUs and MAUs discussed in this Quarterly Report on Form 10-Q, as well as ARPU, do not include Instagram, WhatsApp, or Oculus users 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, WhatsApp, or Oculus 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,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,201

 
$
8,903

Marketable securities
31,088

 
20,546

Accounts receivable, net of allowances for doubtful accounts of $103 and $94 as of September 30, 2017 and December 31, 2016, respectively
4,424

 
3,993

Prepaid expenses and other current assets
1,490

 
959

Total current assets
44,203

 
34,401

Property and equipment, net
12,158

 
8,591

Intangible assets, net
2,050

 
2,535

Goodwill
18,213

 
18,122

Other assets
2,374

 
1,312

Total assets
$
78,998

 
$
64,961

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
383

 
$
302

Partners payable
314

 
280

Accrued expenses and other current liabilities
2,503

 
2,203

Deferred revenue and deposits
105

 
90

Total current liabilities
3,305

 
2,875

Other liabilities
4,485

 
2,892

Total liabilities
7,790

 
5,767

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,385 million and 2,354 million shares issued and outstanding, including 1 million and 4 million outstanding shares subject to repurchase, as of September 30, 2017 and December 31, 2016, respectively; 4,141 million Class B shares authorized, 521 million and 538 million shares issued and outstanding, including 1 million and 2 million outstanding shares subject to repurchase, as of September 30, 2017 and December 31, 2016, respectively

 

Additional paid-in capital
40,199

 
38,227

Accumulated other comprehensive loss
(200
)
 
(703
)
Retained earnings
31,209

 
21,670

Total stockholders' equity
71,208

 
59,194

Total liabilities and stockholders' equity
$
78,998

 
$
64,961

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,
 
2017
 
2016
 
2017
 
2016
Revenue
$
10,328

 
$
7,011

 
$
27,681

 
$
18,829

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
1,448

 
987

 
3,843

 
2,742

Research and development
2,052

 
1,542

 
5,805

 
4,356

Marketing and sales
1,170

 
926

 
3,351

 
2,654

General and administrative
536

 
439

 
1,831

 
1,217

Total costs and expenses
5,206

 
3,894

 
14,830

 
10,969

Income from operations
5,122

 
3,117

 
12,851

 
7,860

Interest and other income, net
114

 
47

 
281

 
125

Income before provision for income taxes
5,236

 
3,164

 
13,132

 
7,985

Provision for income taxes
529

 
537

 
1,467

 
1,337

Net income
$
4,707

 
$
2,627

 
$
11,665

 
$
6,648

Less: Net income attributable to participating securities
3

 
7

 
13

 
20

Net income attributable to Class A and Class B common stockholders
$
4,704

 
$
2,620

 
$
11,652

 
$
6,628

Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
$
1.62

 
$
0.91

 
$
4.02

 
$
2.32

Diluted
$
1.59

 
$
0.90

 
$
3.95

 
$
2.28

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
2,904

 
2,871

 
2,898

 
2,857

Diluted
2,956

 
2,931

 
2,954

 
2,918

Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
47

 
$
30

 
$
128

 
$
81

Research and development
776

 
636

 
2,233

 
1,853

Marketing and sales
114

 
95

 
330

 
272

General and administrative
73

 
63

 
218

 
181

Total share-based compensation expense
$
1,010

 
$
824

 
$
2,909

 
$
2,387

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,
 
2017
 
2016
 
2017
 
2016
Net income
$
4,707

 
$
2,627

 
$
11,665

 
$
6,648

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax
174

 
35

 
480

 
55

Change in unrealized gain/loss on available-for-sale investments and other, net of tax
(4
)
 
(33
)
 
23

 
28

Comprehensive income
$
4,877

 
$
2,629

 
$
12,168

 
$
6,731

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,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
11,665

 
$
6,648

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,172

 
1,728

Share-based compensation
2,909

 
2,387

Deferred income taxes
(152
)
 
(201
)
Other
18

 
23

Changes in assets and liabilities:
 
 
 
Accounts receivable
(235
)
 
(478
)
Prepaid expenses and other current assets
(634
)
 
(314
)
Other assets
130

 
46

Accounts payable
(7
)
 
(21
)
Partners payable
22

 
20

Accrued expenses and other current liabilities
95

 
642

Deferred revenue and deposits
12

 
21

Other liabilities
550

 
677

Net cash provided by operating activities
16,545

 
11,178

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(4,470
)
 
(3,222
)
Purchases of marketable securities
(20,410
)
 
(17,368
)
Sales of marketable securities
7,649

 
9,791

Maturities of marketable securities
2,228

 
1,034

Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(106
)
 
(81
)
Change in restricted cash and deposits
64

 
82

Net cash used in investing activities
(15,045
)
 
(9,764
)
Cash flows from financing activities
 
 
 
Taxes paid related to net share settlement of equity awards
(2,360
)
 
(6
)
Principal payments on capital lease and other financing obligations

 
(312
)
Repurchases of Class A common stock
(1,018
)
 

Other financing activities, net
(14
)
 
4

Net cash used in financing activities
(3,392
)
 
(314
)
Effect of exchange rate changes on cash and cash equivalents
190

 
31

Net (decrease) increase in cash and cash equivalents
(1,702
)
 
1,131

Cash and cash equivalents at beginning of period
8,903

 
4,907

Cash and cash equivalents at end of period
$
7,201

 
$
6,038


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,
 
2017
 
2016
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$

 
$
11

Income taxes, net
$
1,793

 
$
764

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
$
441

 
$
319

Settlement of acquisition-related contingent consideration liability
$
102

 
$
33

Change in unsettled repurchases of Class A common stock
$
20

 
$

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, 2016.
The condensed consolidated balance sheet as of December 31, 2016 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, 2017.
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, 2016 that have had a material impact on our condensed consolidated financial statements and related notes.
In the fourth quarter of 2016, we elected to early adopt Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting (ASU 2016-09). We were required to reflect any adoption adjustments as of January 1, 2016, the beginning of the annual period that included the interim period of adoption. As such, our condensed consolidated statements of income and statements of comprehensive income for the three and nine months ended September 30, 2016 and statements of cash flows for the nine months ended September 30, 2016 had been adjusted to reflect the impact of ASU 2016-09 adoption. See "Note 1—Summary of Significant Accounting Policies" in the notes to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for detailed adoption information.
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, loss contingencies, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, leases, 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.
Recently Issued Accounting Pronouncements
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. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new standard further requires new disclosures about contracts with customers, including the significant judgments the registrant has made when applying the guidance. We will be adopting the new standard effective January 1, 2018. The new

10


standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting the standard using the modified retrospective method. We are in the process of finalizing our analysis of the impact this guidance will have on our consolidated financial statements, related disclosures, and our internal controls over financial reporting. We do not expect the impact of adoption to be material.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. We currently anticipate adopting the new standard effective January 1, 2019. While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases, as disclosed in Note 8 — Commitments and Contingencies, will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
Note 2.
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, such as awards under our equity compensation plans and inducement awards under separate non-plan restricted stock unit (RSU) award agreements. 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.
Certain RSUs were excluded from the EPS calculation because the impact would be anti-dilutive. These excluded RSUs were not material for the three and nine months ended September 30, 2017 and 2016, respectively.
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,
 
2017
 
2016
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
3,853

 
$
854

 
$
2,126

 
$
501

 
$
9,523

 
$
2,142

 
$
5,375

 
$
1,273

Less: Net income attributable to participating securities
3

 

 
6

 
1

 
11

 
2

 
16

 
4

Net income attributable to common stockholders
$
3,850

 
$
854

 
$
2,120

 
$
500

 
$
9,512

 
$
2,140

 
$
5,359

 
$
1,269

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
2,378

 
528

 
2,328

 
550

 
2,368

 
533

 
2,316

 
549

Less: Shares subject to repurchase
1

 
1

 
5

 
2

 
2

 
1

 
6

 
2

Number of shares used for basic EPS computation
2,377

 
527

 
2,323

 
548

 
2,366

 
532

 
2,310

 
547

Basic EPS
$
1.62

 
$
1.62

 
$
0.91

 
$
0.91

 
$
4.02

 
$
4.02

 
$
2.32

 
$
2.32

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
3,850

 
$
854

 
$
2,120

 
$
500

 
$
9,512

 
$
2,140

 
$
5,359

 
$
1,269

Reallocation of net income attributable to participating securities
3

 

 
7

 

 
13

 

 
20

 

Reallocation of net income as a result of conversion of Class B to Class A common stock
854

 

 
500

 

 
2,140

 

 
1,269

 

Reallocation of net income to Class B common stock

 
(5
)
 

 
3

 

 
(6
)
 

 
13

Net income attributable to common stockholders for diluted EPS
$
4,707

 
$
849

 
$
2,627

 
$
503

 
$
11,665

 
$
2,134

 
$
6,648

 
$
1,282

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
2,377

 
527

 
2,323

 
548

 
2,366

 
532

 
2,310

 
547

Conversion of Class B to Class A common stock
527

 

 
548

 

 
532

 

 
547

 

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock options
3

 
3

 
6

 
6

 
4

 
4

 
7

 
7

RSUs
47

 
2

 
49

 
5

 
49

 
3

 
48

 
7

Shares subject to repurchase
2

 
1

 
4

 
1

 
3

 
1

 
5

 
1

Earn-out shares

 

 
1

 
1

 

 

 
1

 
1

Number of shares used for diluted EPS computation
2,956

 
533

 
2,931

 
561

 
2,954

 
540

 
2,918

 
563

Diluted EPS
$
1.59

 
$
1.59

 
$
0.90

 
$
0.90

 
$
3.95

 
$
3.95

 
$
2.28

 
$
2.28


12


Note 3.
Cash and Cash Equivalents, and Marketable Securities
The following table sets forth the cash and cash equivalents, and marketable securities (in millions):
 
September 30, 2017
 
December 31, 2016
Cash and cash equivalents:
 
 
 
Cash
$
1,629

 
$
1,364

Money market funds
4,698

 
5,409

U.S. government securities
125

 
1,463

U.S. government agency securities
150

 
667

Certificate of deposits and time deposits
599

 

Total cash and cash equivalents
7,201

 
8,903

Marketable securities:
 
 
 
U.S. government securities
12,134

 
7,130

U.S. government agency securities
9,815

 
7,411

Corporate debt securities
9,139

 
6,005

Total marketable securities
31,088

 
20,546

Total cash and cash equivalents, and marketable securities
$
38,289

 
$
29,449

The gross unrealized gains or losses on our marketable securities as of September 30, 2017 and December 31, 2016 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, 2017 and December 31, 2016. As of September 30, 2017, 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, 2017
Due in one year
$
7,502

Due in one to five years
23,586

Total
$
31,088


13


Note 4.
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, 2017
 
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
 
$
4,698

 
$
4,698

 
$

 
$

U.S. government securities
 
125

 
125

 

 

U.S. government agency securities
 
150

 
150

 

 

Certificate of deposits and time deposits
 
599

 

 
599

 

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
12,134

 
12,134

 

 

U.S. government agency securities
 
9,815

 
9,815

 

 

Corporate debt securities
 
9,139

 

 
9,139

 

Total cash equivalents and marketable securities
 
$
36,660

 
$
26,922

 
$
9,738

 
$

 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
 
December 31, 2016
 
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
 
$
5,409

 
$
5,409

 
$

 
$

U.S. government securities
 
1,463

 
1,463

 

 

U.S. government agency securities
 
667

 
667

 

 

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
7,130

 
7,130

 

 

U.S. government agency securities
 
7,411

 
7,411

 

 

Corporate debt securities
 
6,005

 

 
6,005

 

Total cash equivalents and marketable securities
 
$
28,085

 
$
22,080

 
$
6,005

 
$

 
 
 
 
 
 
 
 
 
Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
242

 
$

 
$
242

 
$

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. In July 2017, we settled our Level 2 contingent consideration liability that was outstanding as of December 31, 2016.

14


Note 5.
Property and Equipment
Property and equipment consists of the following (in millions): 
 
September 30,
2017
 
December 31,
2016
Land
$
770

 
$
696

Buildings
4,623

 
3,109

Leasehold improvements
818

 
531

Network equipment
7,249

 
5,179

Computer software, office equipment and other
568

 
398

Construction in progress
2,418

 
1,890

Total
16,446

 
11,803

Less: Accumulated depreciation
(4,288
)
 
(3,212
)
Property and equipment, net
$
12,158

 
$
8,591

Construction in progress includes costs related to construction of data centers, office buildings, 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, 2017 and 2016.
Note 6.
Goodwill and Intangible Assets

During the nine months ended September 30, 2017, we completed several business acquisitions that 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, 2017 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.

Goodwill generated from the business acquisitions completed during the nine months ended September 30, 2017 was primarily attributable to expected synergies from future growth and potential monetization opportunities. The amount of goodwill generated during this period that was deductible for tax purposes was not material.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 are as follows (in millions): 
Balance as of December 31, 2016
$
18,122

Goodwill acquired
85

Effect of currency translation adjustment
6

Balance as of September 30, 2017
$
18,213

Intangible assets consist of the following (in millions):
 
 
 
September 30, 2017
 
December 31, 2016
 
Weighted-Average Remaining Useful Lives (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Acquired users
4.0
 
$
2,056

 
$
(898
)
 
$
1,158

 
$
2,056

 
$
(678
)
 
$
1,378

Acquired technology
1.9
 
968

 
(664
)
 
304

 
931

 
(518
)
 
413

Acquired patents
5.9
 
785

 
(481
)
 
304

 
785

 
(420
)
 
365

Trade names
2.5
 
629

 
(378
)
 
251

 
629

 
(293
)
 
336

Other
2.8
 
162

 
(129
)
 
33

 
162

 
(119
)
 
43

Total intangible assets
3.8
 
$
4,600

 
$
(2,550
)
 
$
2,050

 
$
4,563

 
$
(2,028
)
 
$
2,535



15


Amortization expense of intangible assets was $173 million and $522 million for the three and nine months ended September 30, 2017, respectively, and $195 million and $568 million for the three and nine months ended September 30, 2016, respectively.
As of September 30, 2017, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2017
$
170

2018
631

2019
539

2020
364

2021
265

Thereafter
81

Total
$
2,050

Note 7.
Long-term Debt
In May 2016, we entered into a five-year senior unsecured revolving credit facility that allows us to borrow up to $2.0 billion. Any amounts outstanding under this facility will be due and payable on May 20, 2021. As of September 30, 2017, no amounts had been drawn down, and we were in compliance with the covenants under this facility.
Note 8.
Commitments and Contingencies
Commitments
Leases
During the nine months ended September 30, 2017, we entered into additional non-cancelable operating lease agreements, mostly related to office buildings. Our various non-cancelable operating lease agreements for certain of our offices, land, and data centers have original lease periods expiring between 2017 and 2038 and our total future minimum payments related to these operating leases as of September 30, 2017 was $3.60 billion. 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 $91 million and $247 million for the three and nine months ended September 30, 2017, respectively, and $70 million and $199 million for the three and nine months ended September 30, 2016, respectively.
Contingencies
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our initial public offering (IPO) and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. The vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the U.S. District Court for the Southern District of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the derivative actions against our directors and certain of our officers. On July 24, 2015, the court of appeals affirmed the dismissal of the derivative actions. On December 11, 2015, the court granted plaintiffs' motion for class certification in the consolidated securities action. On April 14, 2017, we filed a motion for summary judgment. Trial is scheduled to begin on February 26, 2018.
On April 27, 2016, we announced a proposal to create a new class of non-voting capital stock (Class C capital stock) and our intention to declare and pay a dividend of two shares of Class C capital stock for each outstanding share of Class A and Class B common stock (the Reclassification). Following our announcement of the Reclassification, beginning on April 29, 2016, multiple purported class action lawsuits were filed on behalf of our stockholders in the Delaware Court of Chancery against us, certain of our board of directors, and Mark Zuckerberg. The lawsuits were consolidated under the caption In re Facebook, Inc. Class C Reclassification Litig., C.A. No. 12286-VCL, and the consolidated complaint generally alleged that the defendants breached their fiduciary duties in connection with the Reclassification. On September 21, 2017, our board of directors decided to abandon the Reclassification, and on September 25, 2017, the court dismissed the action as moot.

16


We are also party to various legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these matters, we evaluate the developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated.
We believe that the amount or estimable range of reasonably possible or probable 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 these matters is inherently uncertain. Therefore, if one or more of these 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 in which any such outcome becomes probable and estimable, could be materially adversely affected.
For information regarding income tax contingencies, see Note 10 — Income Taxes.
Note 9.
Stockholders' Equity
Abandonment of the Reclassification
In September 2017, our board of directors decided to abandon the Reclassification, and determined not to proceed with the filing of our amended and restated certificate of incorporation that was approved by our stockholders on June 20, 2016. As a result, we will not proceed with the issuance of the dividend of Class C capital stock.
Share Repurchase Program
In November 2016, our board of directors authorized a $6.0 billion share repurchase program of our Class A common stock, which commenced in 2017 and does not have an expiration date. The timing and actual number of shares repurchased depend on a variety of factors, including price, general business and market conditions, and other investment opportunities, and shares may be repurchased through open market purchases or privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2017, we repurchased and subsequently retired approximately 7 million shares of our Class A common stock for an aggregate amount of approximately $1.04 billion.
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. Our board of directors approved the amendment and restatement of our 2012 Plan (the Amended 2012 Plan), which was approved by our stockholders and adopted by us in June 2016.
We initially reserved 25 million shares of our Class A common stock for issuance under our 2012 Plan. The number of shares reserved for issuance under our Amended 2012 Plan increases automatically on January 1 of each of the calendar years during the term of the Amended 2012 Plan, which will continue through and including April 2026 unless terminated earlier by our board of directors or a committee thereof, by a number of shares of Class A common stock equal to the lesser of (i) 2.5% of the total issued and outstanding shares of our Class A common stock as of the immediately preceding December 31st or (ii) a number of shares determined by our board of directors. Our board of directors elected not to increase the number of shares reserved for issuance in 2017.
The following table summarizes the activities of stock option awards under the Stock Plans for the nine months ended September 30, 2017: 
 
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, 2016
5,687

 
$
7.78

 
 
 
 
Stock options exercised
(2,410
)
 
5.28

 
 
 
 
Balance as of September 30, 2017
3,277

 
$
9.63

 
2.6
 
$
528

Stock options exercisable as of September 30, 2017
2,728

 
$
8.55

 
2.5
 
$
443


17


(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 of $170.87, as reported on the NASDAQ Global Select Market on September 30, 2017.
The following table summarizes the activities for our unvested RSUs for the nine months ended September 30, 2017:
 
Unvested RSUs(1)
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2016
98,586

 
$
82.99

Granted
32,549

 
143.38

Vested
(32,968
)
 
82.23

Forfeited
(4,913
)
 
100.02

Unvested at September 30, 2017
93,254

 
$
103.43

(1)
Unvested shares include inducement awards issued in connection with the WhatsApp acquisition in 2014 and are subject to the terms, restrictions, and conditions of separate non-plan RSU award agreements.
The fair value as of the respective vesting dates of RSUs that vested during the three and nine months ended September 30, 2017 was $1.73 billion and $4.94 billion, respectively, and $1.21 billion and $3.84 billion during the three and nine months ended September 30, 2016, respectively.
As of September 30, 2017, there was $8.30 billion of unrecognized share-based compensation expense, substantially all of which was related to RSUs. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years based on vesting under the award service conditions. Included in this unrecognized share-based compensation expense are 16.2 million unvested shares as of September 30, 2017, related to RSU inducement awards granted to two employees in connection with the WhatsApp acquisition in 2014. These awards are subject to acceleration if the recipient's employment is terminated without "cause" or if the recipient resigns for "good reason".
Note 10.
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 effective 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 the proportion of our income (loss) before provision for income taxes in multiple jurisdictions, the tax effects of our share-based compensation, and the effects of acquisitions and the integration of those acquisitions.
Our 2017 effective tax rate differs from the U.S. statutory rate primarily due to a portion of our income before provision for income taxes being earned in jurisdictions with tax rates lower than the U.S. statutory rate where we plan to indefinitely reinvest a certain portion of those earnings, as well as the recognition of excess tax benefits from share-based compensation.
Our gross unrecognized tax benefits were $3.68 billion and $3.31 billion as of September 30, 2017 and December 31, 2016, respectively. If the gross unrecognized tax benefits as of September 30, 2017 were realized in a subsequent period, this would result in a tax benefit of $2.88 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. 
In July 2016, we received a Statutory Notice of Deficiency (Notice) from the Internal Revenue Service (IRS) related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position to tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated, aggregate amount of approximately $3.0 billion to $5.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted. We do not agree with the position of the IRS and have filed a petition in the United States Tax Court challenging the Notice. We have previously accrued an estimated unrecognized tax benefit consistent with the guidance in ASC 740 that is lower than the potential additional federal tax liability of $3.0 billion to $5.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and penalties. If the IRS prevails in the assessment of additional tax due based on its position, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations, or cash flows. As of September 30, 2017, we have not resolved this matter and proceedings continue in the United States Tax Court.

18


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 IRS for our 2011 through 2013 tax years. Our 2014 and subsequent years remain open to examination by the IRS. Our 2012 and subsequent years remain open to examination in Ireland.
We believe that adequate amounts have been reserved for any adjustments to the provision for income taxes or other tax items that may ultimately result from these examinations. 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. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. However, we do not anticipate a significant impact to such amounts within the next 12 months.
Note 11.
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,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
United States
$
4,482

 
$
3,184

 
$
12,057

 
$
8,545

Rest of the world (1)
5,846

 
3,827

 
15,624

 
10,284

Total revenue
$
10,328

 
$
7,011

 
$
27,681

 
$
18,829

 
(1)
No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented.
 
September 30,
2017
 
December 31,
2016
Property and equipment, net:
 
 
 
United States
$
9,248

 
$
6,793

Rest of the world (1)
2,910

 
1,798

Total property and equipment, net
$
12,158

 
$
8,591

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

19


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our 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, 2016, as filed with the Securities and Exchange Commission. In addition to our 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, 2017 and 2016—RevenueForeign 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, 2017 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, enables 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 2017 are as follows:
User growth:
Daily active users (DAUs) were 1.37 billion on average for September 2017, an increase of 16% year-over-year.
Monthly active users (MAUs) were 2.07 billion as of September 30, 2017, an increase of 16% year-over-year.
Financial results:
Revenue was $10.33 billion, up 47% year-over-year, and ad revenue was $10.14 billion, up 49% year-over-year.
Total costs and expenses were $5.21 billion.
Income from operations was $5.12 billion.
Net income was $4.71 billion with diluted earnings per share of $1.59.
Capital expenditures were $1.76 billion.
Effective tax rate was 10%.
Cash and cash equivalents and marketable securities were $38.29 billion as of September 30, 2017.
Headcount was 23,165 as of September 30, 2017, an increase of 47% year-over-year.
In the third quarter of 2017, we continued to focus on our three main revenue growth priorities: (i) helping businesses expand their use of our mobile products, (ii) developing innovative ad products that help businesses get the most of their ad campaigns, and (iii) making our ads more relevant and effective through our targeting capabilities and outcome-based measurement.
We continued to invest, based on our roadmap, in: (i) our most developed ecosystem, the Facebook app and platform, as well as video, (ii) driving growth and building ecosystems around our products and features that already have significant user bases, such as Instagram, Messenger, and WhatsApp, and (iii) long-term technology initiatives, such as artificial intelligence, connectivity, and virtual and augmented reality, that we believe will further our mission to give people the power to build community and bring the world closer together. We intend to continue to invest based on this roadmap, and we anticipate that additional investments in the following areas will drive significant year-over-year expense growth in 2018: (i) increased investments in security, video content, and our long-term technology initiatives, and (ii) scaling our headcount and expanding our data center capacity and office facilities to support our growth.

20


Trends in Our User Metrics
The numbers for our key metrics, our DAUs, MAUs, and average revenue per user (ARPU), do not include Instagram, WhatsApp, or Oculus 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, WhatsApp, or Oculus 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. Substantially all of our daily and monthly active users (as defined below) access Facebook on mobile devices.
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 application (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.
daugraphworkivaa03.jpg
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes all users in Africa, Latin America, and the Middle East.

21


Worldwide DAUs increased 16% to 1.37 billion on average during September 2017 from 1.18 billion during September 2016. Users in India, Indonesia, and Brazil represented key sources of growth in DAUs during September 2017, relative to the same period in 2016.
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 application (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.
maugraphsworkiva.jpg
As of September 30, 2017, we had 2.07 billion MAUs, an increase of 16% from September 30, 2016. Users in India, Indonesia, and Vietnam represented key sources of growth in the third quarter of 2017, relative to the same period in 2016.

22


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, virtual and digital goods are purchased, or virtual reality platform devices are shipped. 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. While ARPU includes all sources of revenue, the number of MAUs used in this calculation only includes users of Facebook and Messenger as described in the definition of MAU above. Revenue from users who are not also Facebook or Messenger MAUs was not material. 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 2017 in the United States & Canada region was more than nine times higher than in the Asia-Pacific region.
revenuegraphworkivaa01.jpg
revandarpu06302017.jpg
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. In late 2015, we discovered an error in the algorithm we used to attribute our revenue by user geography. While this issue did not affect our overall worldwide revenue, it did affect our attribution of revenue to different geographic regions. The fourth quarter of 2015 revenue by user geography and ARPU amounts for all regions were adjusted to reflect this reclassification.

23


During the third quarter of 2017, worldwide ARPU was $5.07, an increase of 26% from the third quarter of 2016. Over this period, ARPU increased by 45% in Europe, 35% in United States & Canada, 31% in Rest of World, and 20% in Asia-Pacific. 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 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.

24


Components of Results of Operations
Revenue
Advertising. We generate substantially all of our revenue from advertising. Our advertising revenue is generated by displaying ad products on Facebook, Instagram, 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. For advertising revenue arrangements where we are not the primary obligor, we recognize revenue on a net basis.
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 the delivery of virtual reality platform devices and related platform sales.
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, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including content acquisition costs, credit card and other transaction fees related to processing customer transactions, cost of virtual reality platform device inventory sold, and amortization of intangible assets.
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, share-based compensation, and benefits 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. The majority of our general and administrative expenses consist 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 legal-related costs and professional services.

25


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,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Revenue
$
10,328

 
$
7,011

 
$
27,681

 
$
18,829

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
1,448

 
987

 
3,843

 
2,742

Research and development
2,052

 
1,542

 
5,805

 
4,356

Marketing and sales
1,170

 
926

 
3,351

 
2,654

General and administrative
536

 
439

 
1,831

 
1,217

Total costs and expenses
5,206

 
3,894

 
14,830

 
10,969

Income from operations
5,122

 
3,117

 
12,851

 
7,860

Interest and other income, net
114

 
47

 
281

 
125

Income before provision for income taxes
5,236

 
3,164

 
13,132

 
7,985

Provision for income taxes
529

 
537

 
1,467

 
1,337

Net income
$
4,707

 
$
2,627

 
$
11,665

 
$
6,648

Share-based compensation expense included in costs and expenses:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Cost of revenue
$
47

 
$
30

 
$
128

 
$
81

Research and development
776

 
636

 
2,233

 
1,853

Marketing and sales
114

 
95

 
330

 
272

General and administrative
73

 
63

 
218

 
181

Total share-based compensation expense
$
1,010

 
$
824

 
$
2,909

 
$
2,387



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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,
 
2017
 
2016
 
2017
 
2016
Revenue
100
%
 
100
%
 
100
%
 
100
%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
14

 
14

 
14

 
15

Research and development
20

 
22

 
21

 
23

Marketing and sales
11

 
13

 
12

 
14

General and administrative
5

 
6

 
7

 
6

Total costs and expenses
50

 
56

 
54

 
58

Income from operations
50

 
44

 
46

 
42

Interest and other income, net
1

 
1

 
1

 
1

Income before provision for income taxes
51

 
45

 
47

 
42

Provision for income taxes
5

 
8

 
5

 
7

Net income
46
%
 
37
%
 
42
%
 
35
%
Share-based compensation expense included in costs and expenses (as a percentage of revenue): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
%
 
%
 
%
 
%
Research and development
8

 
9

 
8

 
10

Marketing and sales
1

 
1

 
1

 
1

General and administrative
1

 
1

 
1

 
1

Total share-based compensation expense
10
%
 
12
%
 
11
%
 
13
%


Three and Nine Months Ended September 30, 2017 and 2016
Revenue 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
Advertising
$
10,142

 
$
6,816

 
49
 %
 
$
27,163

 
$
18,256

 
49
 %
Payments and other fees
186

 
195

 
(5
)%
 
518

 
573

 
(10
)%
Total revenue
$
10,328

 
$
7,011

 
47
 %
 
$
27,681

 
$
18,829

 
47
 %
Revenue in the third quarter and the first nine months of 2017 increased $3.32 billion, or 47%, and $8.85 billion, or 47%, respectively, compared to the same periods in 2016. The increases were due to increases in advertising revenue.
The most important factor driving advertising revenue growth was an increase in revenue from ads on mobile devices. For the third quarter and the first nine months of 2017, we estimate that mobile advertising revenue represented approximately 88% and 87%, respectively, of total advertising revenue, as compared with approximately 84% and 83%, respectively, in the same periods in 2016. Factors that influenced our advertising revenue growth in the third quarter and the first nine months of 2017 included (i) an increase in average price per ad, (ii) an increase in users and their engagement, and (iii) an increase in the number and frequency of ads displayed on mobile devices. However, we anticipate increases in the number and frequency of ads displayed in News Feed will be a less significant driver of our revenue growth in the future.

27


During the third quarter and first nine months of 2017, the average price per ad increased by 35% and 25%, respectively, as compared with approximately 6% and 7%, respectively in the same periods in 2016, and the number of ads delivered increased by 10% and 20%, respectively, as compared with approximately 50% for both periods in 2016. The increase in average price per ad was driven by an increase in demand for our ad inventory; factors contributing to this include an increase in spend from existing marketers and an increase in the number of marketers actively advertising on our platform as well as the quality, relevance, and performance of those ads. The increase in the ads delivered was driven by an increase in users and their engagement and an increase in the number and frequency of ads displayed on News Feed, partially offset by increasing user engagement with video content and other product changes.
Payments and other fees revenue in the third quarter and the first nine months of 2017 decreased $9 million, or 5%, and $55 million, or 10%, respectively, compared to the same periods in 2016. The decreases in Payments and other fees revenue were mostly due to decreased Payments revenue from games played on personal computers. We anticipate revenue from Payments will continue to decline, and such decline will be offset, in part or in whole, by the revenue from the delivery of virtual reality platform devices and related platform sales.
Foreign Exchange Impact on Revenue
The general weakening of the U.S. dollar relative to certain foreign currencies in the third quarter of 2017 compared to the same period in 2016 had a favorable impact on revenue. If we had translated revenue for the third quarter ended September 30, 2017 using the prior year's monthly exchange rates for our settlement currencies other than the U.S. dollar, our total revenue and advertising revenue would have been $10.20 billion and $10.01 billion, respectively. Using these constant rates, both total revenue and advertising revenue would have been $128 million lower than actual total revenue and advertising revenue for the third quarter of 2017.
The foreign exchange impact on our revenue and advertising revenue in the first nine months of 2017 compared to the same period in 2016 was not material.
Cost of revenue
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
Cost of revenue
$
1,448

 
$
987

 
47
%
 
$
3,843

 
$
2,742

 
40
%
Percentage of revenue
14
%
 
14
%
 
 
 
14
%
 
15
%
 
 
Cost of revenue in the third quarter and the first nine months of 2017 increased $461 million, or 47%, and $1.10 billion, or 40%, respectively, compared to the same periods in 2016. The majority of the increases in both periods were due to increases in operational expenses related to our data centers and technical infrastructure and, to a lesser extent, higher costs associated with partnership arrangements, including content acquisition costs, and ads payment processing.
Research and development 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
Research and development
$
2,052

 
$
1,542

 
33
%
 
$
5,805

 
$
4,356

 
33
%
Percentage of revenue
20
%
 
22
%
 
 
 
21
%
 
23
%
 
 
Research and development expenses in the third quarter and the first nine months of 2017 increased $510 million, or 33%, and $1.45 billion, or 33%, respectively, compared to the same periods in 2016. The increases in both periods were primarily due to increases in payroll and benefits as a result of a 51% increase in employee headcount from September 30, 2016 to September 30, 2017 in engineering and other technical functions.

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Marketing and sales
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
Marketing and sales
$
1,170

 
$
926

 
26
%
 
$
3,351

 
$
2,654

 
26
%
Percentage of revenue
11
%
 
13
%
 
 
 
12
%
 
14
%
 
 
Marketing and sales expenses in the third quarter and the first nine months of 2017 increased $244 million, or 26%, and $697 million, or 26%, respectively, compared to the same periods in 2016. The increases in both periods in 2017 were partially due to increases in payroll and benefits expenses as a result of a 34% increase in employee headcount from September 30, 2016 to September 30, 2017 in our marketing and sales functions. Additionally, in the third quarter and the first nine months of 2017, our marketing expenses increased $66 million and $190 million, respectively, and our professional services expense increased $54 million and $168 million, respectively, due to higher consulting and other professional service fees, compared to the same periods in 2016.
General and administrative 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
General and administrative
$
536

 
$
439

 
22
%
 
$
1,831

 
$
1,217

 
50
%
Percentage of revenue
5
%
 
6
%
 
 
 
7
%
 
6
%
 
 
General and administrative expenses in the third quarter and the first nine months of 2017 increased $97 million, or 22%, and $614 million, or 50%, respectively, compared to the same periods in 2016. The majority of the increases in both periods were due to payroll and benefit expenses as a result of a 57% increase in employee headcount from September 30, 2016 to September 30, 2017 in our general and administrative functions. In addition, for the first nine months of 2017, the increase was also partially due to legal-related costs compared to the same period in 2016.
Interest and other income, net
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
Interest income, net
$
108

 
$
50

 
116
%
 
$
266

 
$
110

 
142
%
Other income (expense), net
6

 
(3
)
 
300
%
 
15

 
15

 
%
Interest and other income, net
$
114

 
$
47

 
143
%
 
$
281

 
$
125

 
125
%
Interest and other income, net in the third quarter and the first nine months of 2017 increased $67 million and $156 million, respectively, compared to the same periods in 2016. The increases in both periods were due to increases in interest income driven by higher invested cash balances and interest rates. In addition, foreign exchange impact resulting from the periodic re-measurement of our foreign currency monetary assets and liabilities also contributed to the increase in the third quarter of 2017.

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Provision for income taxes
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% change
 
2017
 
2016
 
% change
 
(in millions, except for percentages)
Provision for income taxes
$
529

 
$
537

 
(1
)%
 
$
1,467

 
$
1,337

 
10
%
Effective tax rate
10
%
 
17
%
 
 
 
11
%
 
17
%
 
 
Our provision for income taxes in the third quarter of 2017 decreased $8 million, or 1%, and in the first nine months of 2017 increased $130 million, or 10%, compared to the same periods in 2016. The decrease in the third quarter of 2017 was due to an increase in the proportion of income before provision for income taxes being earned in jurisdictions with a tax rate lower than that of the U.S. statutory rate where we plan to indefinitely reinvest a certain portion of those earnings and an increase in excess tax benefits recognized from share-based compensation, partially offset by an increase in income before provision for income taxes. The increase in the first nine months of 2017 was primarily due to an increase in income before provision for income taxes, partially offset by an increase in the proportion of income before provision for income taxes being earned in jurisdictions with a tax rate lower than that of the U.S. statutory rate where we plan to indefinitely reinvest a certain portion of those earnings and an increase in excess tax benefits recognized from share-based compensation.
Our effective tax rates in the third quarter and the first nine months of 2017 decreased compared to the same periods in 2016, primarily due to increases in income before provision for income taxes being earned in jurisdictions with a tax rate lower than that of the U.S. statutory rate where we plan to indefinitely reinvest a certain portion of those earnings, partially offset by decreases in the tax rate benefit from share-based compensation. In the third quarter and the first nine months of 2017, excess tax benefits recognized from share-based compensation decreased our provision for income taxes by $317 million and $894 million, respectively, and our effective tax rates by six and seven percentage points, respectively, as compared to the tax rate without such benefits. For comparison, in the third quarter and the first nine months of 2016, excess tax benefits recognized from share-based compensation decreased our provision for income taxes by $243 million and $706 million, respectively, and our effective tax rates by eight and nine percentage points, respectively, as compared to the tax rate without such benefits.
Effective Tax Rate Items. Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes earned in the United States and in jurisdictions with a tax rate lower than the U.S. statutory rate where we plan to indefinitely reinvest a certain portion of those earnings, as well as a number of other factors, including tax benefits from share-based compensation, tax effects of integrating intellectual property from acquisitions, settlement of tax contingency items, the impact of new legislation, and the amount of discrete items.
The portion of our income before provision for income taxes earned in jurisdictions with a tax rate lower than the U.S. statutory rate will depend upon the proportion of revenue and costs associated with the respective jurisdictions. Our ability to indefinitely reinvest those future earnings will depend upon the amount, location, and cost of deploying those earnings to where they are needed by the business.
Integrating intellectual property from acquisitions into our business generally involves intercompany transactions that have the impact of increasing our provision for income taxes. Consequently, our provision for income taxes and our effective tax rate may initially increase following an acquisition and integration. The magnitude of this impact will depend upon the specific type, size, and taxing jurisdictions of the intellectual property as well as the relative contributions to income in subsequent periods.
The tax effects of the accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return which depends upon the stock price at the time of employee award vesting.
We recognize excess tax benefits on a discrete basis and we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period. If our stock price remains constant to the October 30, 2017 price, we expect our fourth quarter and full year 2017 rates will be slightly higher than the rate in the third quarter, and our full year 2018 rate will be higher than our full year 2017 rate.
Unrecognized Tax Benefits. As of September 30, 2017, our net unrecognized tax benefits, which were accrued as current liabilities of $25 million and other liabilities of $2.84 billion, were predominantly accrued for uncertainties related to transfer pricing with our foreign subsidiaries, which includes licensing of intellectual property, providing services, and other transactions, as well as for uncertainties with our research tax credits. The ultimate settlement of the liabilities will depend upon resolution of tax audits, litigation, or events that would otherwise change the assessment of such items. Based upon the status of litigation

30


described below and the current status of tax audits in various jurisdictions, we do not anticipate a significant impact to such amounts within the next 12 months.
In July 2016, we received a Statutory Notice of Deficiency (Notice) from the Internal Revenue Service (IRS) related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated aggregated amount of approximately $3.0 billion to $5.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted. We do not agree with the position of the IRS and have filed a petition in the United States Tax Court challenging the Notice. We have previously accrued an estimated unrecognized tax benefit consistent with the guidance in ASC 740 that is lower than the potential additional federal tax liability of $3.0 billion to $5.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and penalties. If the IRS prevails in the assessment of additional tax due based on its position, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, or cash flows. As of September 30, 2017, we have not resolved this matter and proceedings continue in the United States Tax Court. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations.
We expect to continue to accrue unrecognized tax benefits for certain recurring tax positions and anticipate that the amount for future quarters accrued will be similar to amounts accrued in 2017. Absent any unanticipated event, we do not expect our unrecognized tax benefits will have a significant impact on our effective tax rate in 2017.

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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 mostly 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 $38.29 billion as of September 30, 2017, an increase of $8.84 billion from December 31, 2016, mostly due to $16.55 billion of cash generated from operations, partially offset by $4.47 billion for purchases of property and equipment, $2.36 billion of taxes paid related to net share settlement of equity awards, and $1.02 billion for repurchases of our Class A common stock.
Cash paid for income taxes (net of refunds) was $1.79 billion for the first nine months of 2017. As of September 30, 2017, our federal net operating loss carryforward was $4.15 billion, and we anticipate that none of this amount will be utilized to offset our federal taxable income in 2017. As of September 30, 2017, we had $131 million of federal tax credits, of which none will be available to offset our federal tax liabilities in 2017.
In May 2016, we entered into a five-year senior unsecured revolving credit facility that allows us to borrow up to $2.0 billion. Any amounts outstanding under this facility will be due and payable on May 20, 2021. As of September 30, 2017, no amounts had been drawn down and we were in compliance with the covenants under this credit facility.
In November 2016, our board of directors authorized a $6.0 billion share repurchase program of our Class A common stock that commenced in 2017 and does not have an expiration date. The timing and actual number of shares repurchased depend on a variety of factors, including price, general business and market conditions, and other investment opportunities, and shares may be repurchased through open market purchases or privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2017, we repurchased and subsequently retired approximately 7 million shares of our Class A common stock for an aggregate amount of approximately $1.04 billion.
In January 2017, we began funding withholding taxes due on employee equity awards by net share settlement, rather than our previous approach of requiring employees to sell shares of our common stock to cover taxes upon vesting of such awards. In the first nine months of 2017, we paid $2.36 billion of taxes related to the net share settlement of equity awards.
As of September 30, 2017, $12.89 billion of the $38.29 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. We have provided residual taxes for the portion of earnings in jurisdictions where we do not intend to indefinitely reinvest such earnings of the local subsidiary.
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 2017 mostly consisted of net income, adjusted for certain non-cash items, such as share-based compensation expense of $2.91 billion and total depreciation and amortization of $2.17 billion. The increase in cash flow from operating activities during the first nine months of 2017, compared to the same period in 2016, was mostly due to an increase in net income, as adjusted for share-based compensation expense and depreciation and amortization.
Cash Used in Investing Activities
Cash used in investing activities was $15.05 billion for the first nine months of 2017, mostly due to $10.53 billion for net purchases of marketable securities, and $4.47 billion for capital expenditures as we continued to invest in servers, data centers, office buildings, and network infrastructure. The increase in cash used in investing activities during the first nine months of 2017, compared to the same period in 2016, was mostly due to increases in net purchases of marketable securities and capital expenditures.
We anticipate making capital expenditures in 2017 of approximately $7.0 billion.
Cash Used in Financing Activities
Cash used in financing activities during the first nine months of 2017 mostly consisted of $2.36 billion of taxes paid related to net share settlement of equity awards, and $1.02 billion for repurchases of our Class A common stock. The increase in cash used in financing activities during the first nine months of 2017, compared to the same period in 2016, was mostly due to taxes paid related to net share settlement of equity awards and repurchases of our Class A common stock that commenced in 2017, partially offset by the reduction in payments on capital lease and other financing obligations.

32


Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2017.
Contractual Obligations
Except as disclosed in Note 8 — Commitments and Contingencies in the notes to the condensed consolidated financial statements included in Part I, Item 1, 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, 2016.
Contingencies
We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations. 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 matters 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 8 — Commitments and Contingencies and Note 10 — Income Taxes 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 contingencies.
Recently Issued Accounting Pronouncements
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. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new standard further requires new disclosures about contracts with customers, including the significant judgments the registrant has made when applying the guidance. We will be adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting the standard using the modified retrospective method. We are in the process of finalizing our analysis of the impact this guidance will have on our consolidated financial statements, related disclosures, and our internal controls over financial reporting. We do not expect the impact of adoption to be material.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. We currently anticipate adopting the new standard effective January 1, 2019. While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases, as disclosed in Note 8 — Commitments and Contingencies in the notes to the condensed consolidated financial statements included in Part I, Item 1, will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance will be

33


effective for us in the first quarter of 2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
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 income taxes, 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, 2016.

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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 in the past, and may in the future, negatively affect 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. The impact of the foreign currency gains or losses recognized in the three and nine months ended September 30, 2017 and 2016 were not material.
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 $583 million and $403 million in the market value of our available-for-sale debt securities as of September 30, 2017 and December 31, 2016, 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, 2017, 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 December 11, 2015, the court granted plaintiffs' motion for class certification in the consolidated securities action. On April 13, 2017, we filed a motion for summary judgment. Trial is scheduled to begin on February 26, 2018.
On April 27, 2016, we announced a proposal to create a new class of non-voting capital stock (Class C capital stock) and our intention to declare and pay a dividend of two shares of Class C capital stock for each outstanding share of Class A and Class B common stock (the Reclassification). Following our announcement of the Reclassification, beginning on April 29, 2016, multiple purported class action lawsuits were filed on behalf of our stockholders in the Delaware Court of Chancery against us, certain of our board of directors, and Mark Zuckerberg. The lawsuits were consolidated under the caption In re Facebook, Inc. Class C Reclassification Litig., C.A. No. 12286-VCL, and the consolidated complaint generally alleged that the defendants breached their fiduciary duties in connection with the Reclassification. On September 21, 2017, our board of directors decided to abandon the Reclassification, and on September 25, 2017, the court dismissed the action as moot.
We are also involved in other legal proceedings, claims, and regulatory, tax or government inquiries and investigations arising from the ordinary course of our business, and we may in the future be subject to additional lawsuits and disputes.

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Item 1A.
Risk Factors
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users of our products, particularly for Facebook and Instagram. We anticipate that our active user growth rate will continue to decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
users increasingly engage with other competitive products or services;
we fail to introduce new products or services that users find engaging or if we introduce new products or services, or make changes to existing products and services, that are not favorably received;
users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size, and quality of ads that we display;
users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;
user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;
we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
there are decreases in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
we are unable to manage and prioritize information to ensure users are presented with content that is appropriate, interesting, useful, and relevant to them;
we are unable to obtain or attract engaging third-party content;
users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;
there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation;
there is decreased engagement or acceptance of product features on our service, or decreased acceptance of our terms of service, as part of changes that may be implemented in connection with the General Data Protection Regulation (GDPR) in Europe;
technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content;

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we adopt terms, policies, or procedures related to areas such as sharing, content, user data, or advertising that are perceived negatively by our users or the general public;
we elect to focus our product decisions and user growth and engagement efforts more on longer-term initiatives, or if initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties, or otherwise;
we fail to provide adequate customer service to users, marketers, developers, or other partners;
we, developers whose products are integrated with our products, or other partners and companies in our industry are the subject of adverse media reports or other negative publicity; or
our current or future products, such as our development tools and application programming interfaces that enable developers to build, grow, and monetize mobile and web applications, reduce user activity on our products by making it easier for our users to interact and share on third-party mobile and web applications.
If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely affected. Any decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth.
We generate substantially all of our revenue from advertising. The loss of marketers, or reduction in spending by marketers, could seriously harm our business.
Substantially all of our revenue is currently generated from third parties advertising on Facebook and Instagram. For the first nine months of 2017 and 2016, advertising accounted for 98% and 97%, respectively, of our revenue. As is common in the industry, our marketers do not have long-term advertising commitments with us. Many of our marketers spend only a relatively small portion of their overall advertising budget with us. Marketers will not continue to do business with us, or they will reduce the budgets they are willing to commit to us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives. In addition, our advertising revenue growth has become increasingly dependent upon increased pricing of our ads. If we are unable to provide ma