10-Q 1 snap-10q_20180630.htm 10-Q snap-10q_20180630.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 June 30, 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)

 

2772 Donald Douglas Loop North, Santa Monica, California 90405

(Address of principal executive offices, including zip code)

(310) 399-3339

(Registrant's telephone, including area code)

63 Market Street, Venice, California 90291

(Former address of principal executive offices, including zip 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

 

962,983,090  shares outstanding as of July 31, 2018

Class B common stock, $0.00001 par value

 

94,479,066  shares outstanding as of July 31, 2018

Class C common stock, $0.00001 par value

 

219,890,702  shares outstanding as of July 31, 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 Statements of Cash Flows

 

5

 

 

Consolidated Statements of Operations

 

6

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

7

 

 

Consolidated Balance Sheets

 

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

 

34

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 3.

 

Defaults Upon Senior Securities

 

63

Item 4.

 

Mine Safety Disclosures

 

63

Item 5.

 

Other Information

 

63

Item 6.

 

Exhibits

 

65

Signatures

 

 

 

66

 

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 guidance, 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 generate and sustain positive cash flow;

 

our ability to attract and retain users and publishers;

 

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 calculate average Daily Active Users for a particular quarter by adding the number of DAUs on each day of that quarter and dividing that sum by the number of days in 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, infrastructure, mobile operating systems, or metric tracking system, or the introduction of new products, may impact our ability to accurately determine 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 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 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 Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(353,310

)

 

$

(443,093

)

 

$

(739,095

)

 

$

(2,651,930

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

22,514

 

 

 

12,585

 

 

 

44,068

 

 

 

25,035

 

Stock-based compensation

 

156,371

 

 

 

245,028

 

 

 

289,630

 

 

 

2,237,149

 

Deferred income taxes

 

17

 

 

 

(277

)

 

 

253

 

 

 

(1,765

)

Other

 

(5,893

)

 

 

(3,564

)

 

 

(9,287

)

 

 

(1,672

)

Change in operating assets and liabilities, net of effect of

   acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

(13,926

)

 

 

(21,653

)

 

 

34,771

 

 

 

(8,209

)

Prepaid expenses and other current assets

 

7,815

 

 

 

(4,399

)

 

 

(2,624

)

 

 

(47,835

)

Other assets

 

9,021

 

 

 

(12,823

)

 

 

13,225

 

 

 

(10,108

)

Accounts payable

 

(9,653

)

 

 

3,698

 

 

 

(46,722

)

 

 

9,317

 

Accrued expenses and other current liabilities

 

(19,356

)

 

 

12,986

 

 

 

(29,505

)

 

 

82,190

 

Other liabilities

 

7,054

 

 

 

1,938

 

 

 

13,959

 

 

 

3,257

 

Net cash used in operating activities

 

(199,346

)

 

 

(209,574

)

 

 

(431,327

)

 

 

(364,571

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(34,901

)

 

 

(19,365

)

 

 

(71,216

)

 

 

(37,358

)

Purchases of intangible assets

 

(2,505

)

 

 

(7,720

)

 

 

(2,565

)

 

 

(7,720

)

Non-marketable investments

 

(21,010

)

 

 

(6,905

)

 

 

(21,010

)

 

 

(7,530

)

Cash paid for acquisitions, net of cash acquired

 

 

 

 

(206,163

)

 

 

 

 

 

(224,176

)

Purchases of marketable securities

 

(396,885

)

 

 

(1,319,156

)

 

 

(874,098

)

 

 

(2,742,370

)

Sales of marketable securities

 

 

 

 

237,095

 

 

 

45,007

 

 

 

237,095

 

Maturities of marketable securities

 

578,509

 

 

 

602,432

 

 

 

1,366,337

 

 

 

1,047,479

 

Net cash provided by (used in) investing activities

 

123,208

 

 

 

(719,782

)

 

 

442,455

 

 

 

(1,734,580

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

1,914

 

 

 

189

 

 

 

47,723

 

 

 

783

 

Stock repurchases from employees for tax withholdings

 

 

 

 

(1,828

)

 

 

(551

)

 

 

(208,407

)

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

 

 

 

 

(4,341

)

 

 

 

 

 

(9,365

)

Net cash provided by (used in) financing activities

 

1,914

 

 

 

(5,980

)

 

 

47,172

 

 

 

2,440,808

 

Change in cash, cash equivalents, and restricted cash

 

(74,224

)

 

 

(935,336

)

 

 

58,300

 

 

 

341,657

 

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

 

469,531

 

 

 

1,440,329

 

 

 

337,007

 

 

 

163,336

 

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

$

395,307

 

 

$

504,993

 

 

$

395,307

 

 

$

504,993

 

Supplemental disclosures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

$

1,406

 

 

$

1,945

 

 

$

2,397

 

 

$

5,490

 

Supplemental disclosures of non-cash activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase consideration liabilities related to acquisitions

$

 

 

$

9,341

 

 

$

 

 

$

11,242

 

Construction in progress related to financing lease obligations

$

431

 

 

$

426

 

 

$

856

 

 

$

683

 

Net change in accounts payable and accrued expenses and other

   current liabilities related to property and equipment additions

$

143

 

 

$

612

 

 

$

588

 

 

$

(3,743

)

 

See Notes to Consolidated Financial Statements.

 

5


 

Snap Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

$

262,263

 

 

$

181,671

 

 

$

492,929

 

 

$

331,319

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

191,565

 

 

 

152,148

 

 

 

388,363

 

 

 

315,506

 

Research and development

 

203,246

 

 

 

255,735

 

 

 

404,232

 

 

 

1,061,583

 

Sales and marketing

 

101,685

 

 

 

90,903

 

 

 

203,798

 

 

 

310,636

 

General and administrative

 

123,609

 

 

 

131,903

 

 

 

246,908

 

 

 

1,306,379

 

Total costs and expenses

 

620,105

 

 

 

630,689

 

 

 

1,243,301

 

 

 

2,994,104

 

Loss from operations

 

(357,842

)

 

 

(449,018

)

 

 

(750,372

)

 

 

(2,662,785

)

Interest income

 

6,600

 

 

 

6,349

 

 

 

12,704

 

 

 

8,773

 

Interest expense

 

(930

)

 

 

(998

)

 

 

(1,864

)

 

 

(1,693

)

Other income (expense), net

 

(61

)

 

 

786

 

 

 

3,092

 

 

 

973

 

Loss before income taxes

 

(352,233

)

 

 

(442,881

)

 

 

(736,440

)

 

 

(2,654,732

)

Income tax benefit (expense)

 

(1,077

)

 

 

(212

)

 

 

(2,655

)

 

 

2,802

 

Net loss

$

(353,310

)

 

$

(443,093

)

 

$

(739,095

)

 

$

(2,651,930

)

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

   common stockholders (Note 3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.27

)

 

$

(0.36

)

 

$

(0.58

)

 

$

(2.43

)

Diluted

$

(0.27

)

 

$

(0.36

)

 

$

(0.58

)

 

$

(2.43

)

 

See Notes to Consolidated Financial Statements.

6


 

Snap Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(353,310

)

 

$

(443,093

)

 

$

(739,095

)

 

$

(2,651,930

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

450

 

 

 

(772

)

 

 

493

 

 

 

(896

)

Foreign currency translation

 

(13,206

)

 

 

5,997

 

 

 

(6,443

)

 

 

6,543

 

Total other comprehensive income (loss), net of tax

 

(12,756

)

 

 

5,225

 

 

 

(5,950

)

 

 

5,647

 

Total comprehensive income (loss)

$

(366,066

)

 

$

(437,868

)

 

$

(745,045

)

 

$

(2,646,283

)

 

See Notes to Consolidated Financial Statements.

7


 

Snap Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

June 30,

2018

 

 

December 31,

2017

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

393,183

 

 

$

334,063

 

Marketable securities

 

1,176,820

 

 

 

1,708,976

 

Accounts receivable, net of allowance

 

244,815

 

 

 

279,473

 

Prepaid expenses and other current assets

 

54,032

 

 

 

44,282

 

Total current assets

 

1,868,850

 

 

 

2,366,794

 

Property and equipment, net

 

214,230

 

 

 

166,762

 

Intangible assets, net

 

147,197

 

 

 

166,473

 

Goodwill

 

635,482

 

 

 

639,882

 

Other assets

 

84,954

 

 

 

81,655

 

Total assets

$

2,950,713

 

 

$

3,421,566

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

22,644

 

 

$

71,194

 

Accrued expenses and other current liabilities

 

256,698

 

 

 

275,062

 

Total current liabilities

 

279,342

 

 

 

346,256

 

Other liabilities

 

87,303

 

 

 

82,983

 

Total liabilities

 

366,645

 

 

 

429,239

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

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

   authorized, 958,801 shares issued and outstanding at June 30, 2018,

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

   at December 31, 2017.

 

10

 

 

 

9

 

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

   authorized, 94,471 shares issued and outstanding at June 30, 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, 219,891 shares issued and outstanding at June 30, 2018,

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

   at December 31, 2017.

 

2

 

 

 

2

 

Additional paid-in capital

 

7,971,610

 

 

 

7,634,825

 

Accumulated other comprehensive income (loss)

 

8,207

 

 

 

14,157

 

Accumulated deficit

 

(5,395,762

)

 

 

(4,656,667

)

Total stockholders’ equity

 

2,584,068

 

 

 

2,992,327

 

Total liabilities and stockholders’ equity

$

2,950,713

 

 

$

3,421,566

 

 

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 Santa Monica, 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 and six months ended June 30, 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 effective January 1, 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 and six months ended June 30, 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 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.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and nonemployees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. We early adopted ASU 2018-07. The adoption did not have a material impact on our consolidated financial statements.

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 Creative Tools include Sponsored Geofilters and Sponsored Lenses. 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 to be 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 June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(in thousands)

 

Snap-sold (1)

$

254,084

 

 

$

164,957

 

 

$

476,619

 

 

$

293,926

 

Partner-sold

 

6,378

 

 

 

11,320

 

 

 

13,005

 

 

 

23,580

 

Advertising revenue

 

260,462

 

 

 

176,277

 

 

 

489,624

 

 

 

317,506

 

Other revenue

 

1,801

 

 

 

5,394

 

 

 

3,305

 

 

 

13,813

 

Total revenue

$

262,263

 

 

$

181,671

 

 

$

492,929

 

 

$

331,319

 

(1)

Snap-sold revenue includes advertisements displayed on both our content and content contributed by our users and partners, 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 June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1) (2)

$

171,619

 

 

$

162,461

 

 

$

338,558

 

 

$

288,747

 

Europe (3)

 

40,506

 

 

 

12,021

 

 

 

71,331

 

 

 

29,036

 

Rest of world

 

50,138

 

 

 

7,189

 

 

 

83,040

 

 

 

13,536

 

Total revenue

$

262,263

 

 

$

181,671

 

 

$

492,929

 

 

$

331,319

 

 

(1)

North America includes Mexico and the Caribbean.

(2)

United States revenue was $165.9 million and $145.7 million for the three months ended June 30, 2018 and 2017, respectively, and $326.9 million and $269.4 million for the six months ended June 30, 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 restricted stock units (“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 and six months ended June 30, 2018 and 2017, 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 and six months ended June 30, 2018 and 2017:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

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

 

 

Class A

Common(1)

 

 

Class B

Common(2)

 

 

Class C

Common(3)

 

 

Class A

Common

 

 

Class B

Common(2)

 

 

Class C

Common(3)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(259,320

)

 

$

(26,064

)

 

$

(67,926

)

 

$

(248,613

)

 

$

(102,730

)

 

$

(91,750

)

 

$

(536,579

)

 

$

(58,763

)

 

$

(143,753

)

 

$

(1,524,926

)

 

$

(543,768

)

 

$

(583,236

)

Net loss attributable to common stockholders

 

$

(259,320

)

 

$

(26,064

)

 

$

(67,926

)

 

$

(248,613

)

 

$

(102,730

)

 

$

(91,750

)

 

$

(536,579

)

 

$

(58,763

)

 

$

(143,753

)

 

$

(1,524,926

)

 

$

(543,768

)

 

$

(583,236

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Basic

 

 

950,383

 

 

 

95,520

 

 

 

248,943

 

 

 

686,456

 

 

 

283,651

 

 

 

253,336

 

 

 

931,936

 

 

 

102,060

 

 

 

249,672

 

 

 

627,209

 

 

 

223,654

 

 

 

239,888

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Diluted

 

 

950,383

 

 

 

95,520

 

 

 

248,943

 

 

 

686,456

 

 

 

283,651

 

 

 

253,336

 

 

 

931,936

 

 

 

102,060

 

 

 

249,672

 

 

 

627,209

 

 

 

223,654

 

 

 

239,888

 

Net loss per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.27

)

 

$

(0.27

)

 

$

(0.27

)

 

$

(0.36

)

 

$

(0.36

)

 

$

(0.36

)

 

$

(0.58

)

 

$

(0.58

)

 

$

(0.58

)

 

$

(2.43

)

 

$

(2.43

)

 

$

(2.43

)

Diluted

 

$

(0.27

)

 

$

(0.27

)

 

$

(0.27

)

 

$

(0.36

)

 

$

(0.36

)

 

$

(0.36

)

 

$

(0.58

)

 

$

(0.58

)

 

$

(0.58

)

 

$

(2.43

)

 

$

(2.43

)

 

$

(2.43

)

 

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 and Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Stock options

 

 

16,963

 

 

 

39,496

 

Unvested RSUs

 

 

158,259

 

 

 

177,400

 

 

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.

The following table summarizes the restricted stock activity during the six months ended June 30, 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

 

 

45,036

 

 

 

 

 

$

14.60

 

Vested

 

 

(25,016

)

 

 

(3,941

)

 

$

15.77

 

Forfeited

 

 

(21,041

)

 

 

(575

)

 

$

16.56

 

Unvested at June 30, 2018

 

 

154,984

 

 

 

3,275

 

 

$

15.45

 

 

13


 

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 $380.0 million as of June 30, 2018 and is expected to be recognized over a weighted-average period of 2.0 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 $1.2 billion as of June 30, 2018 and is expected to be recognized over a weighted-average period of 3.8 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.

Additionally, we have 30.4 million and 34.4 million of RSUs that are vested but have not yet settled as of June 30, 2018 and December 31, 2017, respectively. These RSUs are primarily related to the CEO award.

The following table summarizes the stock option award activity under the Stock Plans during the six months ended June 30, 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

 

 

3,752