10-Q 1 snap-10q_20190331.htm 10-Q snap-10q_20190331.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, 2019

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)

 

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions 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

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

 

1,064,993,070 shares outstanding as of April 18, 2019

Class B common stock, $0.00001 par value

 

48,784,023 shares outstanding as of April 18, 2019

Class C common stock, $0.00001 par value

 

226,286,909 shares outstanding as of April 18, 2019

 

 

 

 


 

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

 

 

Consolidated Statements of Stockholders’ Equity

 

9

 

 

Notes to Consolidated Financial Statements

 

10

Item 2.

 

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

 

22

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

 

62

Item 3.

 

Defaults Upon Senior Securities

 

62

Item 4.

 

Mine Safety Disclosures

 

62

Item 5.

 

Other Information

 

62

Item 6.

 

Exhibits

 

63

Signatures

 

 

 

64

 

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, user growth and engagement, product initiatives, 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,” “going to”, “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 effectively manage our growth and future expenses;

 

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

 

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

 

our ability to successfully expand in our existing market segments and penetrate new market segments;

 

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 U.S. Securities and Exchange Commission, or 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 March 31,

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(310,407

)

 

$

(385,785

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

23,319

 

 

 

21,553

 

Stock-based compensation

 

162,556

 

 

 

133,258

 

Deferred income taxes

 

(266

)

 

 

236

 

Other

 

(1,917

)

 

 

(3,392

)

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

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

71,870

 

 

 

48,697

 

Prepaid expenses and other current assets

 

271

 

 

 

(10,439

)

Operating lease right-of-use asset

 

9,812

 

 

 

 

Other assets

 

(368

)

 

 

4,204

 

Accounts payable

 

3,090

 

 

 

(37,069

)

Accrued expenses and other current liabilities

 

(14,323

)

 

 

(10,149

)

Operating lease liabilities

 

(10,470

)

 

 

 

Other liabilities

 

655

 

 

 

6,905

 

Net cash used in operating activities

 

(66,178

)

 

 

(231,981

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(11,814

)

 

 

(36,315

)

Sales of property and equipment

 

29

 

 

 

 

Purchases of intangible assets

 

 

 

 

(60

)

Non-marketable investments

 

(2,250

)

 

 

 

Purchases of marketable securities

 

(525,520

)

 

 

(477,213

)

Sales of marketable securities

 

 

 

 

45,007

 

Maturities of marketable securities

 

458,627

 

 

 

787,828

 

Net cash provided by (used in) investing activities

 

(80,928

)

 

 

319,247

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

5,596

 

 

 

45,809

 

Stock repurchases from employees for tax withholdings

 

 

 

 

(551

)

Net cash provided by financing activities

 

5,596

 

 

 

45,258

 

Change in cash, cash equivalents, and restricted cash

 

(141,510

)

 

 

132,524

 

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

 

388,974

 

 

 

337,007

 

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

$

247,464

 

 

$

469,531

 

Supplemental disclosures

 

 

 

 

 

 

 

Cash paid for income taxes

$

320

 

 

$

991

 

 

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,

 

 

2019

 

 

2018

 

Revenue

$

320,426

 

 

$

230,666

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

 

203,767

 

 

 

196,798

 

Research and development

 

216,185

 

 

 

200,986

 

Sales and marketing

 

97,882

 

 

 

102,113

 

General and administrative

 

118,653

 

 

 

123,299

 

Total costs and expenses

 

636,487

 

 

 

623,196

 

Operating loss

 

(316,061

)

 

 

(392,530

)

Interest income

 

7,816

 

 

 

6,104

 

Interest expense

 

(756

)

 

 

(934

)

Other income (expense), net

 

(1,127

)

 

 

3,153

 

Loss before income taxes

 

(310,128

)

 

 

(384,207

)

Income tax benefit (expense)

 

(279

)

 

 

(1,578

)

Net loss

$

(310,407

)

 

$

(385,785

)

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

   common stockholders (Note 3):

 

 

 

 

 

 

 

Basic

$

(0.23

)

 

$

(0.30

)

Diluted

$

(0.23

)

 

$

(0.30

)

Weighted average shares used in computation of net loss per share:

 

 

 

 

 

 

 

Basic

 

1,340,615

 

 

 

1,270,998

 

Diluted

 

1,340,615

 

 

 

1,270,998

 

 

See Notes to Consolidated Financial Statements.

6


 

Snap Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Net loss

$

(310,407

)

 

$

(385,785

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

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

 

309

 

 

 

43

 

Foreign currency translation

 

(3,524

)

 

 

6,763

 

Total other comprehensive income (loss), net of tax

 

(3,215

)

 

 

6,806

 

Total comprehensive income (loss)

$

(313,622

)

 

$

(378,979

)

 

See Notes to Consolidated Financial Statements.

7


 

Snap Inc.

Consolidated Balance Sheets

(in thousands, except par value)

 

 

March 31,

2019

 

 

December 31,

2018

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

245,639

 

 

$

387,149

 

Marketable securities

 

963,093

 

 

 

891,914

 

Accounts receivable, net of allowance

 

282,407

 

 

 

354,965

 

Prepaid expenses and other current assets

 

41,701

 

 

 

41,900

 

Total current assets

 

1,532,840

 

 

 

1,675,928

 

Property and equipment, net

 

195,302

 

 

 

212,560

 

Operating lease right-of-use assets

 

284,486

 

 

 

 

Intangible assets, net

 

115,386

 

 

 

126,054

 

Goodwill

 

629,596

 

 

 

632,370

 

Other assets

 

68,133

 

 

 

67,194

 

Total assets

$

2,825,743

 

 

$

2,714,106

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

31,827

 

 

$

30,876

 

Operating lease liabilities

 

46,078

 

 

 

 

Accrued expenses and other current liabilities

 

244,999

 

 

 

261,815

 

Total current liabilities

 

322,904

 

 

 

292,691

 

Operating lease liabilities, noncurrent

 

329,293

 

 

 

 

Other liabilities

 

7,669

 

 

 

110,416

 

Total liabilities

 

659,866

 

 

 

403,107

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

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

   authorized, 999,304 shares issued and outstanding at December 31, 2018, and

   3,000,000 shares authorized, 1,057,135 shares issued and outstanding

   at March 31, 2019.

 

11

 

 

 

10

 

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

   93,846 shares issued and outstanding at December 31, 2018, and 700,000 shares

   authorized, 51,510 shares issued and outstanding at March 31, 2019.

 

1

 

 

 

1

 

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

   224,611 shares issued and outstanding at December 31, 2018, and 260,888 shares

   authorized, 226,287 shares issued and outstanding at March 31, 2019.

 

2

 

 

 

2

 

Additional paid-in capital

 

8,388,608

 

 

 

8,220,417

 

Accumulated other comprehensive income

 

(68

)

 

 

3,147

 

Accumulated deficit

 

(6,222,677

)

 

 

(5,912,578

)

Total stockholders’ equity

 

2,165,877

 

 

 

2,310,999

 

Total liabilities and stockholders’ equity

$

2,825,743

 

 

$

2,714,106

 

 

See Notes to Consolidated Financial Statements.

 

8


 

Snap Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Class A non-voting common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

999,304

 

 

$

10

 

 

 

883,022

 

 

$

9

 

Shares issued in connection with exercise of stock options

   under stock-based compensation plans

 

1,260

 

 

 

 

 

 

14,447

 

 

 

 

Issuance of Class A non-voting common stock for vesting of

   restricted stock units and restricted stock awards, net

 

13,382

 

 

 

 

 

 

12,109

 

 

 

 

Conversion of Class B voting common stock to Class A non-

   voting common stock

 

43,189

 

 

 

1

 

 

 

29,669

 

 

 

 

Balance, end of period

 

1,057,135

 

 

 

11

 

 

 

939,247

 

 

 

9

 

Class B voting common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

93,846

 

 

 

1

 

 

 

122,564

 

 

 

1

 

Shares issued in connection with exercise of stock options under

   stock-based compensation plans

 

650

 

 

 

 

 

 

2,882

 

 

 

 

Issuance of Class B voting common stock for vesting of restricted

   stock units, net

 

203

 

 

 

 

 

 

1,180

 

 

 

 

Conversion of Class B voting common stock to Class A non-

   voting common stock

 

(43,189

)

 

 

(0

)

 

 

(29,669

)

 

 

 

Balance, end of period

 

51,510

 

 

 

1

 

 

 

96,957

 

 

 

1

 

Class C voting common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

224,611

 

 

 

2

 

 

 

216,616

 

 

 

2

 

Issuance of Class C voting common stock for settlement of restricted

   stock units, net

 

1,676

 

 

 

 

 

 

1,619

 

 

 

 

Balance, end of period

 

226,287

 

 

 

2

 

 

 

218,235

 

 

 

2

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

8,220,417

 

 

 

 

 

 

7,634,825

 

Stock-based compensation expense

 

 

 

 

162,556

 

 

 

 

 

 

133,258

 

Shares issued in connection with exercise of stock options under

   stock-based compensation plans

 

 

 

 

5,635

 

 

 

 

 

 

45,793

 

Stock repurchases from employees for tax withholdings

 

 

 

 

 

 

 

 

 

 

(551

)

Balance, end of period

 

 

 

 

8,388,608

 

 

 

 

 

 

7,813,325

 

Accumulated deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

(5,912,578

)

 

 

 

 

 

(4,656,667

)

Cumulative-effect adjustment from accounting changes

 

 

 

 

308

 

 

 

 

 

 

 

Net loss

 

 

 

 

(310,407

)

 

 

 

 

 

(385,785

)

Balance, end of period

 

 

 

 

(6,222,677

)

 

 

 

 

 

(5,042,452

)

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

3,147

 

 

 

 

 

 

14,157

 

Other comprehensive income (loss)

 

 

 

 

(3,215

)

 

 

 

 

 

6,806

 

Balance, end of period

 

 

 

 

(68

)

 

 

 

 

 

20,963

 

Total stockholders’ equity

 

1,334,932

 

 

$

2,165,877

 

 

 

1,254,439

 

 

$

2,791,848

 

 

See Notes to Consolidated Financial Statements.

9


 

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, 2018, as filed with the SEC on February 6, 2019 (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, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.

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, lease exit charges, forfeiture rate, 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. We do not expect the new standard will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective

10


 

approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. We will adopt ASU 2016-13 effective January 1, 2020. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems, but do not expect the standard will 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components. Adoption of the new standard resulted in recording operating lease right-of-use assets and operating lease liabilities of approximately $284.5 million and $375.4 million, respectively, on our consolidated balance sheets as of March 31, 2019. The impact of the adoption was recorded as an adjustment to accumulated deficit as of January 1, 2019 and was not material. The standard did not have a material impact on our consolidated statements of operations or cash flows.

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.

We generate substantially all of our revenues by offering various advertising products on Snapchat, which include Snap Ads and 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 augmented reality experiences.

The substantial 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 or self-serve terms, have been fully executed or accepted electronically.

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 recognize Snap-sold revenue on a gross basis predominantly 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 recognize partner-sold revenue on a net basis predominantly 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.

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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. For the periods presented, partner-sold revenue was not material.

We also generate revenue from sales of our hardware product, Spectacles. For the periods presented, revenue from the sales of Spectacles was not material.

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

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

North America (1) (2)

$

195,958

 

 

$

166,939

 

Europe (3)

 

56,581

 

 

 

30,825

 

Rest of world

 

67,887

 

 

 

32,902

 

Total revenue

$

320,426

 

 

$

230,666

 

 

(1)

North America includes Mexico, the Caribbean, and Central America.

(2)

United States revenue was $188.8 million and $161.0 million for the three months ended March 31, 2019 and 2018, 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. 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. In addition, on the closing of the IPO, our Chief Executive Officer (“CEO”) received an RSU award (“CEO award”) for 37.4 million shares of Series FP preferred stock, which was fully vested on grant and automatically converted into an equivalent number of shares of Class C common stock on the closing of the IPO. Following the IPO, we have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock.

Basic net loss per share is computed by dividing net loss attributable to each class of stockholders by the weighted-average number of such class of shares of stock outstanding during the period. Vested restricted stock units (“RSUs”) that have not been settled, including the vested CEO award, and restricted stock awards (“RSAs”) for which the risk of forfeiture has lapsed have been included in the appropriate common share class used to calculate basic net loss per share.

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, 2019 and 2018, our potentially dilutive shares relating to stock options, RSUs, RSAs, and common stock subject to repurchase, 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.

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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, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(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

 

$

(239,860

)

 

$

(13,601

)

 

$

(56,946

)

 

$

(276,790

)

 

$

(32,989

)

 

$

(76,006

)

Net loss attributable to common

   stockholders

 

$

(239,860

)

 

$

(13,601

)

 

$

(56,946

)

 

$

(276,790

)

 

$

(32,989

)

 

$

(76,006

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common

   shares - Basic

 

 

1,035,932

 

 

 

58,741

 

 

 

245,942

 

 

 

911,906

 

 

 

108,683

 

 

 

250,409

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common

   shares - Diluted

 

 

1,035,932

 

 

 

58,741

 

 

 

245,942

 

 

 

911,906

 

 

 

108,683

 

 

 

250,409

 

Net loss per share attributable to

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.23

)

 

$

(0.23

)

 

$

(0.23

)

 

$

(0.30

)

 

$

(0.30

)

 

$

(0.30

)

Diluted

 

$

(0.23

)

 

$

(0.23

)

 

$

(0.23

)

 

$

(0.30

)

 

$

(0.30

)

 

$

(0.30

)

 

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,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Stock options

 

 

13,382

 

 

 

16,486

 

Unvested RSUs and RSAs not subject to a performance condition

 

 

181,321

 

 

 

152,987

 

 

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, RSAs, RSUs, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our affiliates.

Restricted Stock Units

The following table summarizes the RSU activity during the three months ended March 31, 2019:

 

  

 

Class A

Outstanding

RSUs

 

 

Class B

Outstanding

RSUs

 

 

Weighted-

Average

Grant Date

Fair Value

per RSU

 

 

 

(in thousands, except per share data)

 

Unvested at December 31, 2018

 

 

149,638

 

 

 

492

 

 

$

13.34

 

Granted

 

 

50,941

 

 

 

 

 

$

8.50

 

Vested

 

 

(14,343

)

 

 

(382

)

 

$

13.93

 

Forfeited

 

 

(11,496

)

 

 

(1

)

 

$

13.32

 

Unvested at March 31, 2019

 

 

174,740

 

 

 

109

 

 

$

11.89

 

 

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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 Pre-2017 RSUs 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 $140.0 million as of March 31, 2019 and is expected to be recognized over a weighted-average period of 1.5 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 $1.4 billion as of March 31, 2019 and is expected to be recognized over a weighted-average period of 3.1 years. The service condition for Post-2017 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 Post-2017 RSUs granted after February 2018 is generally satisfied in equal monthly installments over four years.

Additionally, we have 20.8 million and 22.4 million RSUs that are vested but have not yet settled as of March 31, 2019 and December 31, 2018, respectively. These RSUs are primarily related to the CEO award.

Restricted Stock Awards

The following table summarizes the RSA activity during the three months ended March 31, 2019:

 

  

 

 

 

Class A

Outstanding

RSAs

 

 

Weighted-

Average

Grant Date

Fair Value

per RSA

 

 

 

 

 

(in thousands, except per share data)

 

Unvested at December 31, 2018

 

 

 

 

8,134

 

 

$

7.51

 

Granted

 

 

 

 

 

 

$

 

Vested

 

 

 

 

(546

)

 

$

8.44

 

Forfeited

 

 

 

 

(1,115

)

 

$

5.58

 

Unvested at March 31, 2019

 

 

 

 

6,473

 

 

$

7.77

 

 

The total fair value of RSAs vested during the three months ended March 31, 2019 and 2018 was $4.6 million and $1.6 million, respectively.

 

Total unrecognized compensation cost related to RSAs was $48.4 million as of March 31, 2019 and is expected to be recognized over a weighted-average period of 3.3 years.

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Stock Options

The following table summarizes the stock option award activity under the Stock Plans during the three months ended March 31, 2019:

 

 

 

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, 2018

 

 

13,322

 

 

 

2,969

 

 

$

7.83

 

 

 

6.41

 

 

$

34,567

 

Granted

 

 

 

 

 

 

 

$

 

 

 

 

 

$

 

Exercised

 

 

(1,260

)

 

 

(651

)

 

$

2.93

 

 

 

 

 

$

 

Forfeited

 

 

(969

)

 

 

(29

)

 

$

13.58

 

 

 

 

 

$

 

Outstanding at March 31, 2019

 

 

11,093

 

 

 

2,289

 

 

$

8.10

 

 

 

5.98

 

 

$

61,054

 

 

(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, 2018 and March 31, 2019, respectively.

 

Total unrecognized compensation cost related to unvested stock options granted was $32.3 million as of March 31, 2019 and is expected to be recognized over a weighted-average period of 2.3 years.

Stock-Based Compensation Expense by Function

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

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

(in thousands)

 

Cost of revenue

$

1,849

 

 

$

276

 

Research and development

 

112,242

 

 

 

77,815

 

Sales and marketing

 

17,760

 

 

 

16,185

 

General and administrative

 

30,705

 

 

 

38,982

 

Total

$

162,556

 

 

$

133,258

 

 

 

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2019 were as follows:

 

 

Goodwill

 

 

(in thousands)

 

Balance as of December 31, 2018

$

632,370

 

Foreign currency translation

 

(2,774

)

Balance as of March 31, 2019

$

629,596

 

 

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Intangible assets consisted of the following:

 

 

March 31, 2019

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

(in thousands, except years)

 

Domain names

 

1.5

 

 

$

5,414

 

 

$

4,554

 

 

$

860

 

Trademarks

 

1.2

 

 

 

5,772

 

 

 

4,407

 

 

 

1,365

 

Acquired developed technology

 

3.6

 

 

 

179,330

 

 

 

86,899

 

 

 

92,431

 

Customer relationships

 

2.0

 

 

 

15,572

 

 

 

8,893

 

 

 

6,679

 

Patents

 

6.6

 

 

 

19,710

 

 

 

5,659

 

 

 

14,051

 

 

 

 

 

 

$

225,798

 

 

$

110,412

 

 

$

115,386

 

 

 

December 31, 2018

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

(in thousands except years)

 

Domain names

 

1.6

 

 

 

5,414

 

 

$

4,283

 

 

$

1,131

 

Trademarks

 

1.4

 

 

 

5,772

 

 

 

4,076

 

 

 

1,696

 

Acquired developed technology

 

3.8

 

 

 

179,791

 

 

 

78,729