0001564590-18-010080.txt : 20180502 0001564590-18-010080.hdr.sgml : 20180502 20180501185655 ACCESSION NUMBER: 0001564590-18-010080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 72 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180502 DATE AS OF CHANGE: 20180501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Snap Inc CENTRAL INDEX KEY: 0001564408 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 455452795 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38017 FILM NUMBER: 18797059 BUSINESS ADDRESS: STREET 1: 63 MARKET STREET CITY: VENICE STATE: CA ZIP: 90291 BUSINESS PHONE: (310) 399-3339 MAIL ADDRESS: STREET 1: 63 MARKET STREET CITY: VENICE STATE: CA ZIP: 90291 FORMER COMPANY: FORMER CONFORMED NAME: Snapchat Inc DATE OF NAME CHANGE: 20121211 10-Q 1 snap-10q_20180331.htm 10-Q snap-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

or

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

For the transition period from                 to                

Commission File Number: 001-38017

 

SNAP INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-5452795

(State or other jurisdiction of

incorporation or organizations)

 

(I.R.S. Employer

Identification Number)

 

63 Market Street, Venice, California 90291

(Address of principal executive offices, including zip code)

(310) 399-3339

(Registrant's telephone, 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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

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  

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, $0.00001 par value

 

944,614,706 shares outstanding as of April 27, 2018

Class B common stock, $0.00001 par value

 

95,321,185 shares outstanding as of April 27, 2018

Class C common stock, $0.00001 par value

 

218,235,221 shares outstanding as of April 27, 2018

 

 

 

 

 


 

SNAP INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

Note Regarding Forward-Looking Statements

 

3

Note Regarding User Metrics and Other Data

 

4

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.

 

Consolidated Financial Statements (unaudited)

 

5

 

 

Consolidated Balance Sheets

 

5

 

 

Consolidated Statements of Operations

 

6

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

7

 

 

Consolidated Statements of Cash Flows

 

8

 

 

Notes to Consolidated Financial Statements

 

9

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

35

Item 1A.

 

Risk Factors

 

35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 3.

 

Defaults Upon Senior Securities

 

62

Item 4.

 

Mine Safety Disclosures

 

62

Item 5.

 

Other Information

 

62

Item 6.

 

Exhibits

 

64

Signatures

 

 

 

65

 

Snap Inc., “Snapchat,” and our other registered and common-law trade names, trademarks, and service marks appearing in this Quarterly Report on Form 10-Q are the property of Snap Inc. or our subsidiaries.

 

 

2


 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including among other things:

 

our financial performance, including our revenues, cost of revenues, operating expenses, and our ability to attain and sustain profitability;

 

our ability to attract and retain users;

 

our ability to attract and retain advertisers;

 

our ability to compete effectively with existing competitors and new market entrants;

 

our ability to successfully expand in our existing markets and penetrate new markets;

 

our ability to effectively manage our growth and future expenses;

 

our ability to maintain, protect, and enhance our intellectual property;

 

our ability to comply with modified or new laws and regulations applying to our business;

 

our ability to attract and retain qualified employees and key personnel; and

 

future acquisitions of or investments in complementary companies, products, services, or technologies.

Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

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

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (investor.snap.com), filings with the Securities and Exchange Commission, or the SEC, webcasts, press releases, and conference calls. We use these mediums, including Snapchat and our website, to communicate with our members and the public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

3


 

NOTE REGARDING USER METRICS AND OTHER DATA

We define a Daily Active User, or DAU, as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. We measure average Daily Active Users for a particular quarter by calculating the average Daily Active Users for that quarter. We also break out Daily Active Users by geography because certain markets have a greater revenue opportunity and lower bandwidth costs. We define average revenue per user, or ARPU, as quarterly revenue divided by the average Daily Active Users. For purposes of calculating ARPU, revenue by user geography is apportioned to each region based on our determination of the geographic location in which advertising impressions are delivered, as this approximates revenue based on user activity. This allocation differs from our components of revenue disclosure in the notes to our consolidated financial statements, where revenue is based on the billing address of the advertising customer. For information concerning these metrics as measured by us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Unless otherwise stated, statistical information regarding our users and their activities is determined by calculating the daily average of the selected activity for the most recently completed quarter included in this report.

While these metrics are determined 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 how our products are used across large populations globally. For example, there may be individuals who have multiple Snapchat accounts, even though we forbid that in our Terms of Service and implement measures to detect and suppress that behavior. We have not determined the number of such multiple accounts. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our Snapchat application when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such account. Changes in our products, mobile operating systems, or metric tracking system, or the introduction of new products, may impact our ability to accurately determine Daily Active Users or other metrics and we may not determine such inaccuracies promptly. We believe that we don’t capture all data regarding all our Daily Active Users. For example, technical issues may result in data not being recorded from every user’s application. While we believe this underreporting is generally immaterial, we are unable to precisely determine the level of underreporting and for some periods the underreporting may be material. We continually seek to address these technical issues and improve our accuracy, but given the complexity of the systems involved and the rapidly changing nature of mobile devices and systems, we expect underreporting to continue. We do not adjust our reported metrics to reflect this underreporting.

Some of our demographic data may be incomplete or inaccurate. For example, because users self-report their dates of birth, our age-demographic data may differ from our users’ actual ages. And because users who signed up for Snapchat before June 2013 were not asked to supply their date of birth, we exclude those users and estimate their ages based on a sample of the self-reported ages we do have. If our Daily Active Users provide us with incorrect or incomplete information regarding their age or other attributes, then our estimates may prove inaccurate and fail to meet investor expectations.

In the past we have relied on third-party analytics providers to calculate our metrics, but today we rely primarily on our analytics platform that we developed and operate. For example, before June 2015, we used a third party that counted a Daily Active User when the application was opened or a notification was received via the application on any device. We now use an analytics platform that we developed and operate and we count a Daily Active User only when a user opens the application and only once per user per day. We believe this methodology more accurately measures our user engagement. We have multiple pipelines of user data that we use to determine whether a user has opened the application during a particular day, and thus is a Daily Active User. This provides redundancy in the event one pipeline of data were to become unavailable for technical reasons, and also gives us redundant data to help measure how users interact with our application.

Additionally, to align our pre-June 2015 Daily Active Users with this new methodology, we reduced our pre-June 2015 Daily Active Users by 4.8%, the amount by which we estimated the data generated by the third party was overstated. As a result, our metrics may not be comparable to prior periods.

If we fail to maintain an effective analytics platform, our metrics calculations may be inaccurate. We regularly review, have adjusted in the past, and are likely in the future to adjust our processes for calculating our internal metrics to improve their accuracy. As a result of such adjustments, our Daily Active Users or other metrics may not be comparable to those in prior periods. Our measures of Daily Active Users may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology or data used.

 

 

 

4


 

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Snap Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

March 31,

2018

 

 

December 31,

2017

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

466,323

 

 

$

334,063

 

Marketable securities

 

1,355,030

 

 

 

1,708,976

 

Accounts receivable, net of allowance

 

231,409

 

 

 

279,473

 

Prepaid expenses and other current assets

 

58,469

 

 

 

44,282

 

Total current assets

 

2,111,231

 

 

 

2,366,794

 

Property and equipment, net

 

191,043

 

 

 

166,762

 

Intangible assets, net

 

156,525

 

 

 

166,473

 

Goodwill

 

645,707

 

 

 

639,882

 

Other assets

 

77,524

 

 

 

81,655

 

Total assets

$

3,182,030

 

 

$

3,421,566

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

28,562

 

 

$

71,194

 

Accrued expenses and other current liabilities

 

272,795

 

 

 

275,062

 

Total current liabilities

 

301,357

 

 

 

346,256

 

Other liabilities

 

88,825

 

 

 

82,983

 

Total liabilities

 

390,182

 

 

 

429,239

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Class A non-voting common stock, $0.00001 par value. 3,000,000 shares

   authorized, 939,248 shares issued and outstanding at March 31, 2018,

   and 3,000,000 shares authorized, 883,022 shares issued and outstanding

   at December 31, 2017.

 

9

 

 

 

9

 

Class B voting common stock, $0.00001 par value. 700,000 shares

   authorized, 96,956 shares issued and outstanding at March 31, 2018,

   and 700,000 shares authorized, 122,564 shares issued and outstanding

   at December 31, 2017.

 

1

 

 

 

1

 

Class C voting common stock, $0.00001 par value. 260,888 shares

   authorized, 218,235 shares issued and outstanding at March 31, 2018,

   and 260,888 shares authorized and 216,616 shares issued and outstanding

   at December 31, 2017.

 

2

 

 

 

2

 

Additional paid-in capital

 

7,813,325

 

 

 

7,634,825

 

Accumulated other comprehensive income (loss)

 

20,963

 

 

 

14,157

 

Accumulated deficit

 

(5,042,452

)

 

 

(4,656,667

)

Total stockholders’ equity

 

2,791,848

 

 

 

2,992,327

 

Total liabilities and stockholders’ equity

$

3,182,030

 

 

$

3,421,566

 

 

See Notes to Consolidated Financial Statements.

5


 

Snap Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Revenue

$

230,666

 

 

$

149,648

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

 

196,798

 

 

 

163,358

 

Research and development

 

200,986

 

 

 

805,848

 

Sales and marketing

 

102,113

 

 

 

219,733

 

General and administrative

 

123,299

 

 

 

1,174,476

 

Total costs and expenses

 

623,196

 

 

 

2,363,415

 

Loss from operations

 

(392,530

)

 

 

(2,213,767

)

Interest income

 

6,104

 

 

 

2,424

 

Interest expense

 

(934

)

 

 

(695

)

Other income (expense), net

 

3,153

 

 

 

187

 

Loss before income taxes

 

(384,207

)

 

 

(2,211,851

)

Income tax benefit (expense)

 

(1,578

)

 

 

3,014

 

Net loss

$

(385,785

)

 

$

(2,208,837

)

Net loss per share attributable to Class A, Class B, and Class C common

   stockholders (Note 3):

 

 

 

 

 

 

 

Basic

$

(0.30

)

 

$

(2.31

)

Diluted

$

(0.30

)

 

$

(2.31

)

 

See Notes to Consolidated Financial Statements.

6


 

Snap Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Net loss

$

(385,785

)

 

$

(2,208,837

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

43

 

 

 

(124

)

Foreign currency translation

 

6,763

 

 

 

546

 

Total other comprehensive income (loss), net of tax

 

6,806

 

 

 

422

 

Total comprehensive income (loss)

$

(378,979

)

 

$

(2,208,415

)

 

See Notes to Consolidated Financial Statements.

7


 

Snap Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(385,785

)

 

$

(2,208,837

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

21,553

 

 

 

12,450

 

Stock-based compensation

 

133,258

 

 

 

1,992,121

 

Deferred income taxes

 

236

 

 

 

(1,488

)

Other

 

(3,392

)

 

 

1,892

 

Change in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

48,697

 

 

 

13,444

 

Prepaid expenses and other current assets

 

(10,439

)

 

 

(43,436

)

Other assets

 

4,204

 

 

 

2,715

 

Accounts payable

 

(37,069

)

 

 

5,619

 

Accrued expenses and other current liabilities

 

(10,149

)

 

 

69,204

 

Other liabilities

 

6,905

 

 

 

1,319

 

Net cash used in operating activities

 

(231,981

)

 

 

(154,997

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(36,315

)

 

 

(17,993

)

Purchases of intangible assets

 

(60

)

 

 

 

Non-marketable investments

 

 

 

 

(625

)

Cash paid for acquisitions, net of cash acquired

 

 

 

 

(18,013

)

Purchases of marketable securities

 

(477,213

)

 

 

(1,423,214

)

Sales of marketable securities

 

45,007

 

 

 

 

Maturities of marketable securities

 

787,828

 

 

 

445,047

 

Net cash provided by (used in) investing activities

 

319,247

 

 

 

(1,014,798

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

45,809

 

 

 

594

 

Stock repurchases from employees for tax withholdings

 

(551

)

 

 

(206,579

)

Proceeds from issuance of Class A common stock in initial public

   offering, net of underwriting commissions

 

 

 

 

2,657,797

 

Payments of initial public offering issuance costs

 

 

 

 

(5,024

)

Net cash provided by financing activities

 

45,258

 

 

 

2,446,788

 

Change in cash, cash equivalents, and restricted cash

 

132,524

 

 

 

1,276,993

 

Cash, cash equivalents, and restricted cash, beginning of period

 

337,007

 

 

 

163,336

 

Cash, cash equivalents, and restricted cash, end of period

$

469,531

 

 

$

1,440,329

 

Supplemental disclosures

 

 

 

 

 

 

 

Cash paid for income taxes

$

991

 

 

$

3,545

 

Supplemental disclosures of non-cash activities

 

 

 

 

 

 

 

Purchase consideration liabilities related to acquisitions

$

 

 

$

1,901

 

Construction in progress related to financing lease obligations

$

425

 

 

$

257

 

Net change in accounts payable and accrued expenses and other

   current liabilities related to property and equipment additions

$

445

 

 

$

(4,355

)

 

See Notes to Consolidated Financial Statements.

 

8


 

Snap Inc.

Notes to Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies

Snap Inc. is a camera company.

Snap Inc. (“we,” “our,” or “us”) was formed as Future Freshman, LLC, a California limited liability company, in 2010. We changed our name to Toyopa Group, LLC in 2011, incorporated as Snapchat, Inc., a Delaware corporation, in 2012, and changed our name to Snap Inc. in 2016. Snap Inc. is headquartered in Venice, California. Our flagship product, Snapchat, is a camera application that was created to help people communicate through short videos and images called “Snaps.”

Basis of Presentation

The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Our consolidated financial statements include the accounts of Snap Inc. and our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC on February 22, 2018 (the “Annual Report”).

In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position, results of operations, and cash flows. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

Other than described below, there have been no changes to our significant accounting policies described in our Annual Report that have had a material impact on our consolidated financial statements and related notes.

Use of Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management’s estimates are based on historical information available as of the date of the consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates.

Key estimates relate primarily to determining the fair value of assets and liabilities assumed in business combinations, evaluation of contingencies, uncertain tax positions, excess inventory reserves, and the fair value of stock-based awards. On an ongoing basis, management evaluates our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date, with early adoption permitted. We adopted ASU 2017-01 effective January 1, 2018.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We adopted ASU 2016-18 effective January 1, 2018. The adoption did not have a material impact on our consolidated financial statements. Our restricted cash balance in any period presented is not material.

9


 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We adopted ASU 2016-15 effective January 1, 2018. The adoption did not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. We are in the process of evaluating the impact of this accounting standards update on our consolidated financial statements, which will consist primarily of including lease assets and lease liabilities on our consolidated balance sheet. We will adopt ASU 2016-02 during the first quarter of 2019.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. We adopted ASU 2016-01 effective January 1, 2018. The adoption did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in ASU Topic 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method.

Effective January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

As a result of adopting Topic 606, we recorded no adjustment to the opening retained earnings as of January 1, 2018. The impact to revenues and related deferred revenue balances as a result of applying Topic 606 was not material as of and for the three months ended March 31, 2018. See Note 2 for additional information.

The most significant aspect of our evaluation of Topic 606 related to ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This implementation guidance discusses principal versus agent considerations and gross versus net revenue reporting, including specific indicators to assist in the determination of whether we control a specified good or service before it is transferred to the customer. Through our evaluation, we have concluded Snap-sold revenue will be reported on a gross basis and partner-sold revenue will be reported on a net basis, which is consistent with our current revenue recognition policies. We concluded that we control the Snap-sold advertising campaign before it is transferred to the customer because we provide the advertising campaign on Snapchat and have discretion in establishing the price of the advertisements. We concluded that the partner controls significant aspects of the partner-sold advertising campaign before it is transferred to the customer and the partner has discretion in establishing price with the advertiser.

2. Revenue

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine collectability by performing ongoing credit evaluations and monitoring customer accounts receivable balances. Sales tax is excluded from reported revenue.

10


 

Advertising Revenues

We generate substantially all of our revenues by offering various advertising products on Snapchat, including Snap Ads, Sponsored Creative Tools, and measurement services, referred to as advertising revenue. Sponsored Geofilters allow users to interact with an advertiser’s brand by enabling stylized brand artwork to be overlaid on a Snap. Sponsored Lenses allow users to interact with an advertiser’s brand by enabling branded interactive experiences.

The majority of advertising revenue is generated from the display of advertisements on Snapchat through contractual agreements, that are either on a fixed fee basis over a period of time or based on the number of advertising impressions delivered. Revenue related to agreements based on the number of impressions delivered is recognized when the advertisement is displayed. Revenue related to fixed fee arrangements is recognized ratably over the service period, typically less than 30 days in duration, and such arrangements do not contain minimum impression guarantees. In determining whether an arrangement exists, we ensure that an agreement, such as an insertion order, has been fully executed.

We sell advertising directly to advertisers (“Snap-sold” revenue) and certain partners that provide content on Snapchat (“content partners”) also sell directly to advertisers (“partner-sold” revenue). Snap Ads may be subject to revenue sharing agreements between us and our content partners. Our Sponsored Creative Tools and measurement services are only Snap-sold and are not subject to revenue sharing arrangements. Snap-sold revenue is recognized based on the gross amount that we charge the advertiser. Partner-sold revenue is recognized based on the net amount of revenue received from the content partners.

We report Snap-sold revenue on a gross basis predominately because we are the primary obligor responsible for fulfilling advertisement delivery, including the acceptability of the services delivered. For Snap-sold advertising, we enter into contractual arrangements directly with advertisers. We are directly responsible for the fulfillment of the contractual terms and any remedy for issues with such fulfillment. For Snap-sold revenue, we also have latitude in establishing the selling price with the advertiser, as we sell advertisements at a rate determined at our sole discretion.

We report revenue related to transactions sold by our content partners on a net basis predominately because the content partner, and not Snap, is the primary obligor responsible for fulfillment, including the acceptability of the services delivered. In partner-sold advertising arrangements, the content partner has a direct contractual relationship with the advertiser. There is no contractual relationship between us and the advertiser for partner-sold transactions. When a content partner sells advertisements, the content partner is responsible for fulfilling the advertisements, and accordingly, we have determined the content partner is the primary obligor. Additionally, we do not have any latitude in establishing the price with the advertiser for partner-sold advertising. The content partner may sell advertisements at a rate determined at its sole discretion.

Other Revenue

Other revenue primarily consists of revenue from sales of our hardware product, Spectacles. For the periods presented, revenue from the sales of Spectacles was not material.

Components of Revenue

The following table presents our revenue disaggregated by revenue source:

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

 

(in thousands)

 

Snap-sold (1)

$

222,535

 

 

$

128,969

 

Partner-sold

 

6,627

 

 

 

12,260

 

Advertising revenue

 

229,162

 

 

 

141,229

 

Other revenue

 

1,504

 

 

 

8,419

 

Total revenue

$

230,666

 

 

$

149,648

 

(1)

Snap-sold revenue includes advertisements displayed on both our content and content contributed by our users and partners, as well as Sponsored Creative Tools and measurement services.

11


 

The following table represents our revenue disaggregated by geography based on the billing address of the advertising customer:

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

North America (1) (2)

$

166,939

 

 

$

126,286

 

Europe (3)

 

30,825

 

 

 

17,015

 

Rest of world

 

32,902

 

 

 

6,347

 

Total revenue

$

230,666

 

 

$

149,648

 

 

(1)

North America includes Mexico and the Caribbean.

(2)

United States revenue was $161.0 million and $123.8 million for the three months ended March 31, 2018 and 2017, respectively.

(3)

Europe includes Russia and Turkey.

3. Net Loss per Share

We compute net loss per share using the two-class method required for multiple classes of common stock and participating securities. Our participating securities include any shares issued on the early exercise of stock options subject to repurchase because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock.

In March 2017, we completed our initial public offering (“IPO”) in which we issued and sold 160.3 million shares of Class A common stock, inclusive of the over-allotment, at an initial public offering price of $17.00 per share and excluding shares sold in the IPO by certain of our existing stockholders. We received net proceeds of $2.6 billion after deducting underwriting discounts and commissions of $68.1 million and other offering expenses of $14.7 million. On the closing of the IPO, all shares of our then-outstanding convertible preferred stock other than Series FP preferred stock automatically converted into an aggregate of 246.8 million shares of Class B common stock and all outstanding shares of Series FP preferred stock automatically converted into 215.9 million shares of Class C common stock. Following the IPO, we have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock.

Before the IPO, our participating securities also included Series D, E, F, and FP preferred stock and Series A, A-1, B, and C convertible preferred stock. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock, and the Series D, E, F, and FP preferred stock were substantially identical, other than voting rights. Accordingly, the Class A common stock, Class B common stock, and the Series D, E, F, and FP preferred stock shared equally in our net losses. The holders of early exercised shares subject to repurchase and the holders of Series A, A-1, B, and C convertible preferred stock did not have a contractual obligation to share in our losses, and as a result our net losses were not allocated to these participating securities.

In connection with our IPO, our Series D, E, and F preferred stock converted on a one-to-one basis into Class B common stock, and our Series FP preferred stock converted on a one-to-one basis into Class C common stock. The liquidation and dividend rights of the aforementioned preferred series are substantially identical to the rights of the common classes into which they converted. Accordingly, we have presented the Series D, E, and F preferred stock outstanding before the IPO together with the Class B common stock, and the Series FP preferred stock outstanding before the IPO together with the Class C common stock for purposes of calculating net loss per share. The prior period presentation has been adjusted to conform to our current period presentation.

Also in connection with our IPO, our Series A, A-1, B, and C preferred stock converted on a one-to-one basis into Class B common stock. The shares of Class B common stock that resulted from the conversion of the Series A, A-1, B, and C preferred stock are weighted in the denominator of net loss per share for Class B common stock for the portion of the time outstanding subsequent to our IPO.

Basic net loss per share is computed by dividing net loss attributable to each class of stockholders by the weighted-average number of shares of such class of stock outstanding during the period. Vested RSUs that have not been settled, including the vested equity award granted to our CEO (“CEO award”), have been included in the appropriate common share class used to calculate basic net loss per share.

12


 

For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. Diluted net loss per share attributable to common stockholders is computed by dividing the resulting net loss attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding. For the three months ended March 31, 2018, our potentially dilutive shares relating to stock options, RSUs, and common stock subject to repurchase, and, for the prior year period, shares of Series A, A-1, B, and C convertible preferred stock were not included in the computation of diluted net loss per share as the effect of including these shares in the calculation would have been anti-dilutive.

The numerators and denominators of the basic and diluted net loss per share computations for our common stock are calculated as follows for the three months ended March 31, 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except per share data)

 

 

 

Class A

Common

 

 

Class B

Common

 

 

Class C

Common

 

 

Class A

Common

 

 

Class B

Common

 

 

Class C

Common

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(276,790

)

 

$

(32,989

)

 

$

(76,006

)

 

$

(1,309,062

)

 

$

(376,386

)

 

$

(523,389

)

Net loss attributable to common stockholders

 

$

(276,790

)

 

$

(32,989

)

 

$

(76,006

)

 

$

(1,309,062

)

 

$

(376,386

)

 

$

(523,389

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Basic

 

 

911,906

 

 

 

108,683

 

 

 

250,409

 

 

 

565,980

 

 

 

162,733

 

 

 

226,290

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Diluted

 

 

911,906

 

 

 

108,683

 

 

 

250,409

 

 

 

565,980

 

 

 

162,733

 

 

 

226,290

 

Net loss per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.30

)

 

$

(0.30

)

 

$

(0.30

)

 

$

(2.31

)

 

$

(2.31

)

 

$

(2.31

)

Diluted

 

$

(0.30

)

 

$

(0.30

)

 

$

(0.30

)

 

$

(2.31

)

 

$

(2.31

)

 

$

(2.31

)

 

The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Stock options

 

 

16,486

 

 

 

40,554

 

Unvested RSUs

 

 

152,987

 

 

 

175,298

 

Shares subject to repurchase

 

 

 

 

 

38

 

 

4. Stockholders’ Equity

We maintain three share-based employee compensation plans: the 2017 Equity Incentive Plan (“2017 Plan”), the 2014 Equity Incentive Plan (“2014 Plan”), and the 2012 Equity Incentive Plan (“2012 Plan”, and collectively with the 2017 Plan and the 2014 Plan, the “Stock Plans”). In January 2017, our board of directors adopted the 2017 Plan, and in February 2017 our stockholders approved the 2017 Plan, effective on March 1, 2017, which serves as the successor to the 2014 Plan and 2012 Plan and provides for the grant of incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our affiliates.

13


 

The following table summarizes the restricted stock activity during the three months ended March 31, 2018:

 

 

 

Class A

Outstanding

Restricted Stock

 

 

Class B

Outstanding

Restricted Stock

 

 

Weighted-

Average

Grant Date

Fair Value

per Restricted Stock

 

 

 

(in thousands, except per share data)

 

Unvested at December 31, 2017

 

 

156,005

 

 

 

7,791

 

 

$

15.89

 

Granted

 

 

15,153

 

 

 

 

 

$

17.77

 

Vested

 

 

(11,828

)

 

 

(2,326

)

 

$

15.73

 

Forfeited

 

 

(11,289

)

 

 

(519

)

 

$

15.42

 

Unvested at March 31, 2018

 

 

148,041

 

 

 

4,946

 

 

$

16.13

 

 

Restricted stock units (“RSUs”) granted to employees before January 1, 2017 (“Pre-2017 RSUs”) included both service-based and performance conditions to vest in the underlying common stock. The performance condition related to these awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred in March 2017. Total unrecognized compensation cost related to Pre-2017 RSUs was $453.3 million as of March 31, 2018 and is expected to be recognized over a weighted-average period of 2.3 years.

All RSUs granted after December 31, 2016 vest on the satisfaction of only a service-based condition (“Post-2017 RSUs”). Total unrecognized compensation cost related to Post-2017 RSUs was $914.4 million as of March 31, 2018 and is expected to be recognized over a weighted-average period of 4.0 years. The service condition for RSUs granted prior to February 2018 is generally satisfied over four years, 10% after the first year of service, 20% over the second year, 30% over the third year, and 40% over the fourth year. In limited instances, we have issued Post-2017 RSUs with vesting periods in excess of four years. The service condition for RSUs granted after February 2018 is generally satisfied in equal monthly installments over four years.

The following table summarizes the stock option award activity under the Stock Plans during the three months ended March 31, 2018:

 

 

 

Class A

Number

of Shares

 

 

Class B

Number

of Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic

Value(1)

 

 

 

(in thousands, except per share data)

 

Outstanding at December 31, 2017

 

 

20,807

 

 

 

11,790

 

 

$

4.10

 

 

 

4.99

 

 

$

343,110

 

Granted

 

 

1,301

 

 

 

 

 

$

17.15

 

 

 

 

 

$

 

Exercised

 

 

(9,618

)

 

 

(7,708

)

 

$

2.64

 

 

 

 

 

$

 

Forfeited

 

 

(53

)

 

 

(32

)

 

$

6.55

 

 

 

 

 

$

 

Outstanding at March 31, 2018

 

 

12,437

 

 

 

4,050

 

 

$

6.66

 

 

 

6.29

 

 

$

153,498

 

 

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of our Class A common stock as of December 31, 2017 and March 31, 2018, respectively.

 

Total unrecognized compensation cost related to stock options granted and assumed was $39.9 million as of March 31, 2018 and is expected to be recognized over a weighted-average period of 2.6 years.

14


 

Stock-Based Compensation Expense by Function

Total stock-based compensation expense by function was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Cost of revenue

 

 

 

 

 

 

 

$

276

 

 

$

19,708

 

 

Research and development

 

 

 

 

 

 

 

 

77,815

 

 

 

718,080

 

 

Sales and marketing

 

 

 

 

 

 

 

 

16,185

 

 

 

159,726

 

 

General and administrative

 

 

 

 

 

 

 

 

38,982

 

 

 

1,094,607

 

 

Total

 

 

 

 

 

 

 

$

133,258

 

 

$

1,992,121

 

 

 

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2018 are as follows:

 

 

 

Goodwill

 

 

 

(in thousands)

 

Balance as of December 31, 2017

 

$

639,882

 

Foreign currency translation

 

 

5,825

 

Balance as of March 31, 2018

 

$

645,707

 

 

Intangible assets consisted of the following:

 

 

 

March 31, 2018

 

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

 

(in thousands except years)

 

Domain names

 

 

2.1

 

 

$

5,418

 

 

$

3,480

 

 

$

1,938

 

Trademarks

 

 

2.1

 

 

 

5,772

 

 

 

3,042

 

 

 

2,730

 

Acquired developed technology

 

 

4.4

 

 

 

181,309

 

 

 

53,958

 

 

 

127,351

 

Customer relationships

 

 

2.4

 

 

 

15,572

 

 

 

4,833

 

 

 

10,739

 

Patents

 

 

7.5

 

 

 

17,210

 

 

 

3,443

 

 

 

13,767

 

 

 

 

 

 

 

$

225,281

 

 

$

68,756

 

 

$

156,525

 

 

 

 

December 31, 2017

 

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

 

(in thousands except years)

 

Domain names

 

 

2.1

 

 

$

5,418

 

 

$

3,210

 

 

$

2,208

 

Trademarks

 

 

2.3

 

 

 

5,772

 

 

 

2,701

 

 

 

3,071

 

Acquired developed technology

 

 

4.7

 

 

 

180,396

 

 

 

45,435

 

 

 

134,961

 

Customer relationships

 

 

2.6

 

 

 

15,558

 

 

 

3,506

 

 

 

12,052

 

Patents

 

 

7.8

 

 

 

17,150

 

 

 

2,969

 

 

 

14,181

 

 

 

 

 

 

 

$

224,294

 

 

$

57,821

 

 

$

166,473

 

 

Amortization of intangible assets was $10.8 million and $5.4 million for the three months ended March 31, 2018 and 2017, respectively.

15


 

As of March 31, 2018, the estimated intangible asset amortization expense for the next five years and thereafter is as follows:

 

 

 

Estimated

Amortization

 

 

 

(in thousands)

 

Remainder of 2018

 

$

31,766

 

2019

 

 

38,675

 

2020

 

 

32,191

 

2021

 

 

25,142

 

2022

 

 

15,250

 

Thereafter

 

 

13,501

 

Total

 

$

156,525

 

 

6. Commitments and Contingencies

Commitments

Leases

We entered into various non-cancelable lease agreements for certain of our offices with original lease periods expiring between 2018 and 2027. Certain of the arrangements have free rent periods or escalating rent payment provisions. We recognize rent expense under such arrangements on a straight-line basis.

Our future minimum lease payments required under these non-cancelable operating lease obligations as of March 31, 2018, are as follows:

 

 

Operating Leases

 

 

(in thousands)

 

Remainder of 2018

$

43,480

 

2019

 

60,268

 

2020

 

60,269

 

2021

 

58,565

 

2022

 

47,101

 

Thereafter

 

144,436

 

Total minimum lease payments

$

414,119

 

 

Operating lease expenses for the three months ended March 31, 2018 and 2017 were $15.8 million and $12.9 million, respectively.

We have several lease agreements where we are deemed the owner under build-to-suit lease accounting. The fair value of the leased property and corresponding financing obligations are included in property and equipment, net and other liabilities, respectively, on our consolidated balance sheets as of March 31, 2018. Our future minimum lease payments required under non-cancelable financing lease obligations, which exclusively relate to our build-to-suit leases, as of March 31, 2018, are as follows:

 

 

Financing Leases

 

 

(in thousands)

 

Remainder of 2018

$

3,556

 

2019

 

4,796

 

2020

 

4,947

 

2021

 

5,092

 

2022

 

5,167

 

Thereafter

 

20,785

 

Total minimum lease payments

$

44,343

 

 

16


 

We recognize an increase in the fair value of the asset as additional building costs are incurred during the construction period and a corresponding increase in the lease financing obligation for any construction costs to be reimbursed by the landlord. As of March 31, 2018, $16.2 million of lease financing obligations are included in other liabilities on our consolidated balance sheets.

Contractual Commitments

We have non-cancelable contractual agreements related to the hosting of our data storage processing, storage, and other computing services.

In January 2017, we entered into the Google Cloud Platform License Agreement, which was amended in September 2017, December 2017, and again in January 2018. Under the agreement, we were granted a license to access and use certain cloud services. The agreement has an initial term of five years and we are required to purchase at least $400.0 million of cloud services in each year of the agreement. For each of the first four years, up to 15% of this amount may be moved to a subsequent year. If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference.

In March 2016, we entered into the AWS Enterprise Agreement for the use of cloud services from Amazon Web Services, Inc. (“AWS”) which was amended in March 2016, and again in February 2017. The agreement will continue indefinitely until terminated by either party. Under the February 2017 addendum to the agreement, we committed to spend $1.0 billion between January 2017 and December 2021 on AWS services ($50.0 million in 2017, $125.0 million in 2018, $200.0 million in 2019, $275.0 million in 2020, and $350.0 million in 2021). If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference. Any such payment may be applied to future use of AWS services during the addendum term, although it will not count towards meeting the future minimum purchase commitments under the addendum.

The future minimum contractual commitment including commitments less than one year, as of March 31, 2018 for each of the next five years are as follows:

 

 

Minimum Commitment

 

 

(in thousands)

 

Remainder of 2018

$

444,208

 

2019

 

603,251

 

2020

 

675,055

 

2021

 

750,080

 

2022

 

33,333

 

Thereafter

 

 

Total minimum commitments

$

2,505,927

 

 

Contingencies

We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many legal and tax contingencies can take years to be resolved.

Pending Matters

Beginning in May 2017, we, certain of our officers and directors, and the underwriters for our IPO were named as defendants in securities class actions purportedly brought on behalf of purchasers of our Class A common stock, alleging violation of securities laws in connection with our IPO. Management believes these lawsuits are without merit and intend to vigorously defend them. Based on the preliminary nature of the proceedings in this case, the outcome of this matter remains uncertain.

On April 3, 2018, BlackBerry Limited filed a lawsuit against us alleging that we infringe six of its patents. We are currently investigating BlackBerry’s allegations, and management believes we have meritorious defenses. Based on the preliminary nature of the proceedings, the outcome of this matter remains uncertain.

17


 

In 2017, Vaporstream, Inc. filed a lawsuit against us alleging that we infringe a number of its patents. We filed a motion to dismiss, which the court denied without prejudice to re-file after further factual development. Later in 2017, we filed a motion for summary judgment. On February 27, 2018, the court issued an order denying our motion for summary judgment. Trial is scheduled for August 2018. While management believes we have meritorious defenses to Vaporstream's claims, the outcome of this matter remains uncertain.

The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and cash flows for a particular period. For the pending matters described above, it is not possible to estimate the reasonably possible loss or range of loss.

We are subject to various other legal proceedings and claims in the ordinary course of business, including certain patent, trademark, and privacy matters. Although occasional adverse decisions or settlements may occur, we do not believe that the final disposition of any of our other pending matters will seriously harm our business, financial condition, results of operations, and cash flows.

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. We have not incurred material costs to defend lawsuits or settle claims related to these indemnifications as of March 31, 2018. We believe the fair value of these liabilities is immaterial and accordingly have no liabilities recorded for these agreements at March 31, 2018.

7. Fair Value Measurements

We determine the fair value of our marketable securities using quoted market prices. The following table sets forth our financial assets as of March 31, 2018 and December 31, 2017 that are measured at fair value on a recurring basis during the period:

 

 

Fair Value

 

 

March 31,

2018

 

 

December 31,

2017

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

Cash

$

370,379

 

 

$

267,715

 

U.S. government securities

 

78,225

 

 

 

25,861

 

U.S. government agency securities

 

17,719

 

 

 

40,487

 

Total cash and cash equivalents

$

466,323

 

 

$

334,063

 

Marketable securities

 

 

 

 

 

 

 

U.S. government securities

$

1,032,622

 

 

$

1,350,581

 

U.S. government agency securities

 

322,408

 

 

 

358,395

 

Total marketable securities

$

1,355,030

 

 

$

1,708,976

 

 

The amortized cost of U.S. government securities with maturities less than one year was $1.0 billion and $1.4 billion as of March 31, 2018 and December 31, 2017, respectively. The amortized cost of U.S. government agency securities with maturities of less than a year was $322.7 million and $358.6 million as of March 31, 2018 and December 31, 2017, respectively.

8. 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. Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on our deferred tax assets as it is more likely than not that some or all of our deferred tax assets will not be realized.

18


 

Income tax expense was $1.6 million for the three months ended March 31, 2018, compared to a tax benefit of $3.0 million for the three months ended March 31, 2017. The income tax benefit in the prior period was primarily from the partial release of a valuation allowance against our net deferred tax assets that was not in the current period. The valuation allowance release was the result of net deferred tax liabilities originating from acquisitions that were an available source of income to realize a portion of our deferred tax assets.

The Tax Cuts and Jobs Act introduced the global intangible low-taxed income (“GILTI”) provisions that impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We recognize the tax on GILTI as an expense in the period the tax is incurred. We have not provided deferred taxes related to temporary differences that on their reversal will affect the amount of income subject to GILTI in the period.

9. Accumulated Other Comprehensive Income (Loss)

The table below presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component and the reclassifications out of AOCI:

 

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component

 

 

Marketable

Securities

 

 

Foreign Currency

Translation

 

 

Total

 

 

(in thousands)

 

Balance at December 31, 2017

$

(1,078

)

 

$

15,235

 

 

$

14,157

 

OCI before reclassifications (1)

 

44

 

 

 

6,763

 

 

 

6,807

 

Amounts reclassified from AOCI (2)

 

(1

)

 

 

 

 

 

(1

)

Net current period OCI

 

43

 

 

 

6,763

 

 

 

6,806

 

Balance at March 31, 2018

$

(1,035

)

 

$

21,998

 

 

$

20,963

 

 

(1)

The associated income tax effects for gains / losses on marketable securities were not material.

(2)

Realized gains and losses on marketable securities are reclassified from AOCI into other income (expense), net in the consolidated statements of operations. 

 

10. Property and Equipment, Net

The following table lists property and equipment, net by geographic area:

 

 

As of

March 31, 2018

 

 

As of

December 31, 2017

 

 

(in thousands)

 

Property and equipment, net:

 

 

 

 

 

 

 

United States

$

168,090

 

 

$

146,862

 

Rest of world (1)

 

22,953

 

 

 

19,900

 

Total property and equipment, net

$

191,043

 

 

$

166,762

 

 

(1)

No individual country exceeded 10% of our total property and equipment, net for any period presented.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report.

Executive Overview of First Quarter Results

Our key user metrics and financial results for the first quarter of 2018 are as follows:

User Metrics

 

Daily Active Users, or DAUs, were 191 million in the first quarter of 2018, compared to 166 million in the first quarter of 2017, an increase of 24.9 million, or 15%, year-over-year.

 

Average revenue per user, or ARPU, was $1.21 in the first quarter of 2018, compared to $0.90 in the first quarter of 2017, an increase of 34% year-over-year.

Financial Results

 

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