What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-01 compared with 2022-02-04 · 168 added, 114 removed, 314 unchanged (47% of the section changed)

8 unchanged sentences

Our key user metrics and financial results for fiscal year 2022 are as follows:

Daily Active Users, or DAUs, increased to 319 million in Q4 2021, compared to 265 million in Q4 2020.

Average revenue per user, or ARPU, increased 18% to $4.06 in Q4 2021, compared to $3.44 in Q4 2020.

• Daily Active Users, or DAUs, increased 17% year-over-year to 375 million in Q4 2022.

• Average revenue per user, or ARPU, was $3.47 in Q4 2022, compared to $4.06 in Q4 2021.

Financial Results

Revenue increased 64% year-over-year to reach $4.1 billion in 2021.

Total costs and expenses excluding stock-based compensation and other payroll related tax expense, increased 42% to $3.6 billion in 2021.

Net loss improved by $456.9 million year-over-year to $(488.0) million in 2021.

Diluted net loss per share improved by 52% to $(0.31) in 2021, compared to $(0.65) in 2020.

Adjusted EBITDA improved by $571.5 million year-over-year to $616.7 million in 2021.

Cash provided by (used in) operating activities was $292.9 million in 2021, compared to $(167.6) million in 2020.

Capital expenditures were $69.9 million in 2021, compared to $57.8 million in 2020.

• Revenue increased 12% year-over-year to $4.6 billion in 2022.

• Total costs and expenses were $6.0 billion in 2022, compared to $4.8 billion in 2021.

• Net loss was $1.4 billion in 2022, compared to $488.0 million in 2021 .

• Diluted net loss per share was $(0.89) in 2022, compared to $(0.31) in 2021.

• Adjusted EBITDA was $377.6 million in 2022, compared to $616.7 million in 2021.

• Cash provided by operating activities was $184.6 million in 2022, compared to $292.9 million in 2021.

• Free Cash Flow was $55.3 million in 2022 , compared to $223.0 million in 2021 .

• Cash, cash equivalents, and marketable securities were $3.9 billion as of December 31, 2022.

Common shares outstanding plus shares underlying stock-based awards, including restricted stock units, restricted stock awards, and outstanding stock options, totaled 1,702 million at December 31, 2021, compared to 1,630 million one year ago.

is a camera company.

We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate.

We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together.

Our flagship product, Snapchat, is a camera application that helps people communicate visually with friends and family through short videos and images called Snaps.

• In the third quarter of 2022, we initiated a strategic reprioritization plan, which included a reduction of our global employee headcount by approximately 20%.

Total restructuring charges included in our consolidated statements of operations for the year ended December 31, 2022 were $188.9 million, consisting primarily of severance and related charges, stock-based compensation expense, lease exit and related charges, impairment charges, contract termination charges, and intangible asset amortization.

Business and Macroeconomic Conditions

In 2022 we realigned our priorities and we expect to continue to focus on our three strategic priorities:

growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth, and investing in the future of augmented reality.

We believe that we can be successful in our current operating environment, with various macroeconomic factors impacting our business, by rigorously prioritizing our investments and continuing to engage our community with our products while driving success for our advertising partners.

However, the impact of this strategic reprioritization is difficult to predict.

Macroeconomic factors such as labor shortages, supply chain disruptions, inflation, changes in interest and foreign currency exchange rates, and other risks and uncertainties, including the COVID-19 pandemic and the conflict in Ukraine, continue to cause logistical challenges, increased input costs, and inventory constraints for our advertisers, which in turn may cause our advertisers to halt or decrease advertising spending on our platform.

Such macroeconomic factors may also

negatively impact, in the short-term or long-term, the global economy, advertising ecosystem, our customers and their budgets with us, user engagement, other user metrics, and our business, financial condition, and results of operations.

In addition, competition for advertising dollars has increased and demand growth on our advertising platform has slowed.

We expect to continue to experience increased competition, which may result in reduced advertising demand, and could adversely affect our revenue growth, pricing, business, financial condition, and results of operations.

Our revenue, particularly in North America, has further been impacted by platform policy changes and restrictions that affected our targeting, measurement, and optimization capabilities, and in turn our ability to measure the effectiveness of advertisements on our services.

This has resulted in, and in the future is likely to continue to result in, reduced advertising revenue, especially if we are unable to mitigate these developments.

We compete with other companies in every aspect of our business.

We must compete effectively for users and advertisers to grow our business and increase our revenue.

These and other risks and uncertainties are further described in the sections titled "Competition" in Part I, Item 1.

Business, and “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Trends in User Metrics

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DAUs are broken out by geography because markets have different characteristics .

We had 319 million DAUs on average in the fourth quarter of 2021, compared to 306 million in the prior quarter and 265 million in the fourth quarter of 2020.

We had 375 million DAUs on average in the fourth quarter of 2022, an increase of 56 million, or 17%, from the fourth quarter of 2021.

Quarterly Average Daily Active Users

(in millions)

17% 20% 17% 18% 22% 22% 23% 23% 20% 18% 18% 19% 17%

North America (1)

9% 10% 9% 7% 6% 5% 6% 7% 6% 5% 4% 4% 3% 12% 14% 12% 10% 10% 9% 10% 11% 11% 10% 10% 11% 12%

(1) North America includes Mexico, the Caribbean, and Central America.

(2) Europe includes Russia and Turkey.

Rest of World

36 % 45 % 37 % 43 % 55 % 57 % 55 % 49 % 41 % 36 % 35 % 34 % 31 %

In the year ended December 31, 2022, we recorded revenue of $4.6 billion compared to revenue of $4.1 billion for the year ended December 31, 2021, an increase of 12% year-over-year.

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We measure our business using ARPU because it helps us understand the rate at which we are monetizing our daily user base.

ARPU was $4.06 in the fourth quarter of 2021, up from $3.49 in the third quarter of 2021 and $3.44 in the fourth quarter of 2020.

ARPU was $3.47 in the fourth quarter of 2022, compared to $4.06 in the fourth quarter of 2021.

For purposes of calculating ARPU, revenue by user geography is apportioned to each region based on a determination of the geographic location in which advertising impressions are delivered, as this approximates revenue based on user activity.

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Quarterly Average Revenue per User

North America (1)

(1) North America includes Mexico, the Caribbean, and Central America.

(2) Europe includes Russia and Turkey.

Effective March 2022, we halted advertising sales to Russian and Belarusian entities.

Rest of World

Results of Operations

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Snap Ads may be subject to revenue sharing arrangements between us and the media partner.

We also generate revenue from the sales of hardware products.

We also generate revenue from sales of hardware products.

This revenue is reported net of allowances for returns.

Cost of Revenue

Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs.

Cost of revenue also includes payments for content, developer, and advertiser partner costs.

In addition, cost of revenue includes third-party selling costs, personnel-related costs, including salaries, benefits, and stock-based compensation expenses.

Cost of revenue consists of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs, and payments for content, developer, and advertiser partner costs.

In addition, cost of revenue includes third-party selling costs and personnel-related costs, including salaries, benefits, and stock-based compensation expenses.

Cost of revenue also includes facilities and other supporting overhead costs, including depreciation and amortization, and inventory costs.

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Interest Expense

Interest expense consists primarily of interest expense associated with our senior convertible notes, or the Convertible Notes, and commitment fees related to our revolving credit facility.

Interest expense consists primarily of interest expense associated with convertible notes and commitment fees related to our revolving credit facility.

Other Income (Expense), Net

Other income (expense), net consists of realized and unrealized gains and losses on marketable securities, foreign currency transaction gains and losses, and gains and impairment on strategic investments.

Other income (expense), net primarily consists of gains and losses on strategic investments, marketable securities, and foreign currency transactions.

Income Tax Benefit (Expense)

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These foreign jurisdictions have different statutory tax rates than the United States.

Additionally, certain of our foreign earnings may also be taxable in the

United States.

Additionally, certain of our foreign earnings may also be taxable in the United States.

Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to domestic income, use of tax credits, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.

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stock-based compensation expense;

and payroll and other tax expense related to stock-based compensation;

payroll and other tax expense related to stock-based compensation;

and certain other non-cash or non-recurring items impacting net income (loss) from time to time.

We consider the exclusion of certain non-cash and non-recurring expenses in calculating Adjusted EBITDA to provide a useful measure for period-to-period comparisons of our business and for investors and others to evaluate our operating results in the same manner as does our management.

Additionally, we believe that Adjusted EBITDA is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities.

See “Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA.

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Year Ended December 31,

2022 2021 2020

(in thousands)

Consolidated Statements of Operations Data:

Revenue $ 4,601,847 $ 4,117,048 $ 2,506,626

Costs and expenses (1) (2) :

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Income tax benefit (expense) (28,956) (13,584) (18,654)

Net loss $ (1,429,653) $ (487,955) $ (944,839)

Adjusted EBITDA (3)

$ 377,573 $ 616,686 $ 45,163

(1) Stock-based compensation expense included in the above line items:

Year Ended December 31,

2022 2021 2020

(in thousands)

4 unchanged sentences

General and administrative 201,661 170,543 119,273

Total $ 1,387,787 $ 1,092,135 $ 770,182

(2) Depreciation and amortization expense included in the above line items:

Year Ended December 31,

2022 2021 2020

(in thousands)

4 unchanged sentences

General and administrative 12,728 15,499 13,996

Total $ 202,173 $ 119,141 $ 86,744

(3) See “Non-GAAP Financial Measures” of this Annual Report on Form 10-K for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

1 unchanged sentence

Year Ended December 31,

2022 2021 2020

Consolidated Statements of Operations Data:

Revenue 100 % 100 % 100 %

Costs and expenses:

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Income tax benefit (expense) (1) — (1)

Year Ended December 31,

Net loss (31) % (12) % (38) %

Year Ended December 31, 2022 vs 2021

2022 2021 2020 $ % $ %

(dollars in thousands)

Revenue $ 4,601,847 $ 4,117,048 $ 2,506,626 $ 484,799 12 % $ 1,610,422 64 %

2022 compared to 2021

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Cost of Revenue

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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Cost of revenue for the year ended December 31, 2022 increased $65.1 million compared to the same period in 2021.

T he increase in cost of revenue was primarily driven by higher content costs, including Spotlight, which launched in the fourth quarter of 2020 as well as growth in revenue share due to the overall increase in revenue and higher proportion of revenue subject to revenue share.

The increases were also a result of increased infrastructure costs attributable to DAU growth net of infrastructure cost efficiencies and content review costs across the platform.

The increase in cost of revenue was primarily driven by the growth in revenue share due to the overall increase in revenue and higher mix of revenue subject to revenue share, increased infrastructure costs attributable to DAU growth, and

$20.6 million relating to restructuring charges.

The increase was offset by infrastructure cost efficiencies and lower content costs.

Research and Development Expenses

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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Research and development expenses for the year ended December 31, 2022 increased $544.3 million compared to the same period in 2021.

The increase was primarily driven by greater personnel expenses due to growth in research and development headcount, including increased cash- and stock-based compensation expenses .

The increase was primarily driven by higher personnel expenses, including increased cash- and stock-based compensation expenses, and $78.9 million relating to restructuring charges.

Sales and Marketing Expenses

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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Sales and marketing expenses for the year ended December 31, 2022 increased $326.0 million compared to the same period in 2021.

The increase was primarily driven by greater personnel expenses due to growth in sales and marketing headcount, including increased cash- and stock-based compensation expenses , as well as increased marketing investments.

The increase was primarily driven by higher personnel expenses, including increased cash- and stock-based compensation expense, marketing investments, and $30.8 million relating to restructuring charges .

The increase was also due to higher amortization expense, which resulted from our revision of the useful lives of certain customer relationships and trademarks .

General and Administrative Expenses

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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General and administrative expenses for the year ended December 31, 2022 increased $242.6 million compared to the same period in 2021.

The increase was primarily driven by greater personnel expenses due to growth in headcount, including increased cash- and stock-based compensation expenses, as well as an increase in professional service fees.

The increase was primarily driven by higher personnel expenses, higher other administrative expenses, and $58.7 million relating to restructuring charges.

Interest Income

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

Interest Income

(NM = Not Meaningful)

Interest Income $ 58,597 $ 5,199 $ 18,127 $ 53,398 NM $ (12,928) (71) %

2022 compared to 2021

Interest income for the year ended December 31, 2021 decreased $12.9 million compared to the same period in 2020.

The decrease was primarily a result of lower interest rates on U.S.

government-backed securities, partially offset by a higher overall invested cash balance.

Interest income for the year ended December 31, 2022 increased $53.4 million compared to the same period in 2021.

The increase was primarily a result of higher interest rates on U.S.

government-backed securities and a higher overall invested cash balance.

Interest Expense

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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2022 compared to 2021

Interest expense for the year ended December 31, 2021 decreased $79.6 million, compared to the same period in 2020 primarily due to the early adoption of ASU 2020-06 on January 1, 2021.

As a result of this adoption, we account for the Convertible Notes as a single liability, which eliminates the amortization of the debt discount.

Prior to January 1, 2021, the carrying amount of the equity component was recorded as a debt discount and amortized to interest expense.

Interest expense related to the amortization of debt issuance costs was $4.3 million for the year ended December 31, 2021, while interest expense related to the amortization of debt discount and issuance costs was $81.4 million for the year ended December 31, 2020.

Contractual interest expense was $8.9 million for the year ended December 31, 2021 and $11.2 million for the year ended December 31, 2020.

Interest expense for the year ended December 31, 2022 increased $3.8 million, compared to the same period in 2021 primarily due to increases in amortization of debt issuance costs.

Other Income (Expense), Net

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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2022 compared to 2021

Other income, net for the year ended December 31, 2021 increased $225.2 million, compared to other income, net for the same period in 2020.

Other income, net for the current year was primarily a result of $207.7 million of unrealized gains and $27.8 million of realized gains on strategic investments, and $59.4 million of unrealized gains on publicly traded securities reclassified from strategic investments to marketable securities in the fourth quarter.

This increase is partially offset by an induced conversion expense related to the Convertible Notes of $41.5 million .

Other income, net in the comparable period in 2020 was primarily a result of unrealized gains on strategic investments partially offset by impairments of strategic investments.

Other expense, net for the year ended December 31, 2022 was $42.5 million, compared to other income, net of $240.2 million for the same period in 2021, an increase in other expense, net of $282.7 million.

Other expense, net for the current year was primarily a result of $101.3 million total losses on publicly traded securities primarily classified as marketable securities, offset by $19.9 million unrealized gains and $45.9 million realized gains on strategic investments.

Other income, net in the comparable period in 2021 was primarily a result of $207.7 million of unrealized gains and $27.8 million of realized gains on strategic investments, an d $59.4 million of unrealized gains on publicly traded securities reclassified from strategic investments to marketable securities in the fourth quarter, partially offset by an induced conversion expense related to the Convertible Notes of $41.5 million.

Income Tax Benefit (Expense)

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

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Income tax expense was $29.0 million for the year ended December 31, 2022 , compared to $13.6 million for the same period in 2021 .

The increase was primarily attributable to the partial valuation allowance releases on our deferred tax assets in the prior period due to deferred tax liabilities acquired in business acquisitions, as well as the capitalization of research and development expenditures under Section 174 of the Internal Revenue Code.

Beginning in 2022, the Tax Cuts and Jobs Act eliminates the option to currently deduct research and development expenditures in the period incurred and requires taxpayers to capitalize and amortize such expenditures over five or fifteen years, as applicable, pursuant to Section 174 of the Internal Revenue Code.

Although this tax law change did not result in any U.S.

federal tax liability due to the use of existing U.S.

federal net operating loss carryforwards, it did result in incremental state tax liability and expense due to limitations on the use of existing state net operating loss carryforwards.

Our effective tax rate differs from the U.S.

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Net Loss and Adjusted EBITDA

Year Ended December 31,

Year Ended December 31, 2022 vs 2021

Change 2021 vs 2020

2022 2021 2020 $ % $ %

(dollars in thousands)

Net Loss $ (1,429,653) $ (487,955) $ (944,839) $ (941,698) (193) % $ 456,884 (48) %

Adjusted EBITDA $ 377,573 $ 616,686 $ 45,163 $ (239,113) (39) % $ 571,523 1,265 %

2 unchanged sentences

Adjusted EBITDA for the year ended December 31, 2022 was $377.6 million, compared to $616.7 million for the same period in 2021.

The increase in Adjusted EBITDA was attributable to increased revenues, partially offset by increased cost of revenue primarily due to higher content acquisition costs between the periods.

The decreases in net loss were also partially offset by an increase in stock-based compensation expense.

The decrease in Adjusted EBITDA was attributable to increased cost of revenue and overall operating expenses, partially offset by increased revenues.

For a discussion of the limitations associated with using Adjusted EBITDA rather than GAAP measures and a reconciliation of this measure to net loss, see “Non-GAAP Financial Measures.”

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We may contemplate and engage in merger and acquisition activity that could materially impact our liquidity and capital resource position.

In 2021, we entered into various exchange agreements, or the Exchange Agreements, with certain holders of the convertible senior notes due in 2025, or the 2025 Notes, and the convertible senior notes due in 2026, or the 2026 Notes, pursuant to which we exchanged approximately $715.9 million principal amount of the 2025 Notes and approximately $426.5 million principal amount of the 2026 Notes for aggregate consideration of approximately 52.4 million shares of Class A common stock.

In April 2021, we entered into a purchase agreement for the sale of an aggregate of $1.15 billion principal amount of convertible senior notes due in 2027, or the 2027 Notes.

The net proceeds from the issuance of the 2027 Notes were $1.05

billion, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2027 Capped Call Transactions discussed further in Note 7.

In October 2022, our board of directors authorized a stock repurchase program of up to $500.0 million of our Class A common stock.

The program was completed in the fourth quarter of 2022, during which we repurchased, and subsequently retired, 53.9 million shares of our Class A common stock for an aggregate of $500.5 million, representing the entire amount approved by our board of directors and including costs associated with the repurchases.

In July 2022, our board of directors authorized a stock repurchase program of up to $500.0 million of our Class A common stock.

The program was completed in the third quarter of 2022, during which we repurchased 51.3 million shares of our Class A common stock for an aggregate of $500.5 million, representing the entire amount approved by our board of directors and including costs associated with the repurchases.

In May 2022, we entered into a five-year senior unsecured revolving credit facility, or Credit Facility, with certain lenders that allows us to borrow up to $1.05 billion to fund working capital and general corporate-purpose expenditures.

The prior revolving credit facility entered into in July 2016 (as amended) was terminated concurrently with the entry into the Credit Facility.

The prior credit facility was never drawn upon and, as of December 31, 2021, there were no amounts outstanding on the prior credit facility.

On the Credit Facility, loans bear interest, at our option, at a rate equal to (i) a term secured overnight financing rate, or SOFR, plus 0.75% or the base rate, if selected by us, for loans made in U.S.

dollars, (ii) the Sterling overnight index average plus 0.7826% for loans made in Sterling, and (iii) foreign indices as stated in the credit agreement plus 0.75% for loans made in other permitted foreign currencies.

The base rate is defined as the greatest of (i) the Wall Street Journal prime rate, (ii) the greater of the (a) federal funds rate and (b) the overnight bank funding rate, plus 0.50%, and (iii) the applicable SOFR for a period of one month (but not less than zero) plus 1.00.

The Credit Facility also contains an annual commitment fee of 0.10% on the daily undrawn balance of the facility.

As of December 31, 2022, we had $40.1 million in the form of outstanding standby letters of credit, with no amounts outstanding under the Credit Facility.

In February 2022, we entered into a purchase agreement for the sale of an aggregate of $1.5 billion principal amount of convertible senior notes due in 2028, the full amount of which is outstanding as of December 31, 2022.

The net proceeds from the issuance of the 2028 Notes were $1.31 billion, net of debt issuance costs and the 2028 Capped Call Transactions discussed further in Note 7.

The 2028 Notes mature on March 1, 2028 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.

The sale price requirement for conversion was not satisfied as of December 31, 2022 and as a result, the 2028 Notes will not be eligible for optional conversion during the first quarter of 2023.

In April 2021, we entered into a purchase agreement for the sale of an aggregate of $1.15 billion principal amount of convertible senior notes due in 2027, the full amount of which is outstanding as of December 31, 2022.

The net proceeds from the issuance of the 2027 Notes were $1.05 billion, net of debt issuance costs and the 2027 Capped Call Transactions discussed further in Note 7.

The 2027 Notes mature on May 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.

The 2027 Notes were not convertible as of December 31, 2021.

In April 2020, we entered into a purchase agreement for the sale of an aggregate of $1.0 billion principal amount of the 2025 Notes.

The net proceeds from the issuance of the 2025 Notes were $888.6 million, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2025 Capped Call Transactions, discussed further in Note 7.

The sale price requirement for conversion was not satisfied as of December 31, 2022 and as a result, the 2027 Notes will not be eligible for optional conversion during the first quarter of 2023.

In April 2020, we entered into a purchase agreement for the sale of an aggregate of $1.0 billion principal amount of convertible senior notes due in 2025, of which $284.1 million remains outstanding as of December 31, 2022.

The net proceeds from the issuance of the 2025 Notes were $888.6 million, net of debt issuance costs and the 2025 Capped Call Transactions discussed further in Note 7.

The 2025 Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.

The sale price requirement for conversion was satisfied as of December 31, 2021 and as a result, the 2025 Notes will continue to be eligible for optional conversion during the first quarter of 2022.

In August 2019, we entered into a purchase agreement for the sale of an aggregate of $1.265 billion principal amount of the 2026 Notes.

The net proceeds from the issuance of the 2026 Notes were $1.15 billion, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2026 Capped Call Transactions, discussed further in Note 7.

The sale price requirement for conversion was not satisfied as of December 31, 2022 and as a result, the 2025 Notes will not be eligible for optional conversion during the first quarter of 2023.

In August 2019, we entered into a purchase agreement for the sale of an aggregate of $1.265 billion principal amount of convertible senior notes due in 2026, of which $838.5 million remains outstanding as of December 31, 2022.

The net proceeds from the issuance of the 2026 Notes were $1.15 billion, net of debt issuance costs and the 2026 Capped Call Transactions discussed further in Note 7.

The 2026 Notes mature on August 1, 2026 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.

The sale price requirement for conversion was satisfied as of December 31, 2021 and as a result, the 2026 Notes will continue to be eligible for optional conversion during the first quarter of 2022.

In July 2016, we entered into a senior unsecured revolving credit facility, or the Credit Facility, with certain lenders, some of which are affiliated with certain members of the underwriting syndicate for our Convertible Notes offerings, to fund working capital and general corporate-purpose expenditures.

Since July 2016, we have amended the Credit Facility multiple times.

As of December 31, 2021, the Credit Facility has a maximum borrowing amount of $1.05 billion, bears interest at LIBO plus 0.75%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility and terminates in August 2023.

As of December 31, 2021, no amounts were outstanding under the Credit Facility.

As of December 31, 2021, we had $23.9 million in the form of outstanding standby letters of credit.

The sale price requirement for conversion was not satisfied as of December 31, 2022 and as a result, the 2026 Notes will not be eligible for optional conversion during the first quarter of 2023.

We believe our existing cash balance is sufficient to fund our ongoing working capital, investing, and financing requirements for at least the next 12 months.

Our future capital requirements will depend on many factors including our growth rate, headcount, sales and marketing activities, research and development efforts, the introduction of new features, products, and acquisitions, and continued user engagement.

Our future capital requirements will depend on many factors including our growth rate, headcount, sales and marketing activities, research and development efforts, the introduction of new features,

products, and acquisitions, and continued user engagement.

We continually evaluate opportunities to issue or repurchase equity or debt securities, obtain, retire, or restructure credit facilities or financing arrangements, or declare dividends for strategic reasons or to further strengthen our financial position.

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Year Ended December 31,

2022 2021 2020

(dollars in thousands)

1 unchanged sentence

Net cash provided by (used in) investing activities (1,062,275) 90,227 (729,864)

Net cash provided by financing activities

Net cash provided by (used in) financing activities 306,714 1,065,073 922,791

Change in cash, cash equivalents, and restricted cash $ (570,947) $ 1,448,180 $ 25,283

Free Cash Flow (1)

For information on how we define and calculate Free Cash Flow and a reconciliation to net cash used in operating activities to Free Cash Flow, see “Non-GAAP Financial Measures.”

Net Cash Provided By ( Used I n ) Operating Activities

$ 55,308 $ 223,005 $ (225,476)

(1) For information on how we define and calculate Free Cash Flow and a reconciliation to net cash provided by (used in) operating activities to Free Cash Flow, see “Non-GAAP Financial Measures.”

Net Cash Provided By (Used In) Operating Activities

2022 compared to 2021

Net cash provided by operating activities was $292.9 million in the year ended December 31, 2021, as compared to net cash used in operations of $167.6 million in the year ended December 31, 2020, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $1.1 billion and depreciation and amortization expense of $119.1 million, partially offset by gains on debt and equity securities, net of $289.1 million.

Net cash provided by operating activities for the year ended December 31, 2021 was also impacted by an increase in the accounts receivable balance of $333.0 million due to an increase in revenue compared to the prior period.

Net cash provided by operating activities was $184.6 million for the year ended December 31, 2022, compared to net cash provided by operating activities of $292.9 million for the year ended December 31, 2021, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $1.4 billion, depreciation and amortization expense of $202.2 million, and losses on debt and equity securities, net of $36.8 million.

Net cash provided by operating activities for the year ended December 31, 2022 was also impacted by an increase in the accounts receivable balance of $119.8 million due to the timing of collections.

Net Cash Provided By (Used In) Investing Activities

2022 compared to 2021

Net cash provided by investing activities was $90.2 million for the year ended December 31, 2021, compared to net cash used in investing activities of $729.9 million for the same period in 2020.

Our investing activities in the year ended December 31, 2021 consisted of cash provided by the sales and maturities of marketable securities of $2.9 billion, partially offset by the purchase of marketable securities of $2.4 billion and cash paid for acquisitions of $310.9 million.

Net cash used in investing activities for the year ended December 31, 2020 consisted of cash used in the purchase of marketable securities of $3.5 billion, cash paid for acquisitions of $168.9 million, and cash used in strategic investments of $111.6 million, partially offset by the sales and maturities of marketable securities of $3.1 billion.

Net Cash Provided By Financing Activities

Net cash used in investing activities was $1.1 billion for the year ended December 31, 2022, compared to net cash provided by investing activities of $90.2 million for the year ended December 31, 2021.

Our investing activities in the year ended December 31, 2022 consisted of purchases of marketable securities of $3.5 billion, partially offset by maturities of marketable securities of $2.5 billion.

Our investing activities for the year ended December 31, 2021 consisted of cash provided by the sales and maturities of marketable securities of $2.9 billion, partially offset by the purchase of marketable securities of $2.4 billion and cash paid for acquisitions of $310.9 million.

Net Cash Provided By (Used In) Financing Activities

2022 compared to 2021

Net cash provided by financing activities was $1.1 billion and $0.9 billion for the years ended December 31, 2021 and 2020, respectively.

Our financing activities for the year ended December 31, 2021 consisted primarily of net proceeds of $1.1 billion from the issuance of the 2027 Notes, offset by the purchase of the 2027 Capped Call Transactions of $86.8 million.

Our financing activities for the year ended December 31, 2020 consisted primarily of net proceeds of $988.6 million from the issuance of the 2025 Notes, offset by the purchase of the 2025 Capped Call Transactions of $100.0 million.

Net cash provided by financing activities in all periods presented includes proceeds from the exercise of stock options.

Net cash provided by financing activities was $306.7 million for the year ended December 31, 2022, compared to net cash provided by financing activities of $1.1 billion for the year ended December 31, 2022 and 2021, respectively.

Our financing activities for the year ended December 31, 2022 consisted primarily of net proceeds of $1.5 billion from the issuance of the 2028 Notes, offset by the purchase of the 2028 Capped Call Transactions of $177.0 million and repurchases of our Class A common stock for an aggregate of $1.0 billion, representing the entire amount approved by our board of directors and including costs associated with the repurchases.

Our financing activities for the year ended December 31,

2021 consisted primarily of net proceeds of $1.1 billion from the issuance of the 2027 Notes, offset by the purchase of the 2027 Capped Call Transactions of $86.8 million.

Net cash provided by (used in) financing activities in all periods presented includes proceeds from the exercise of stock options.

Free Cash Flow

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Free Cash Flow also included purchases of property and equipment of $129.3 million for the year ended December 31, 2022.

See “Non-GAAP Financial Measures.”

Free Cash Flow was $(225.5) million for the year ended December 31, 2020 and was composed of net cash used in operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital.

Free Cash Flow was $223.0 million for the year ended December 31, 2021 and was composed of net cash provided by operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital.

Free Cash Flow also included purchases of property and equipment of $69.9 million for the year ended December 31, 2021.

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We believe Free Cash Flow is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business and is a key financial indicator used by management.

Additionally, we believe that Free Cash Flow is an important measure since we use

third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue generating activities.

Additionally, we believe that Free Cash Flow is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue generating activities.

Free Cash Flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash.

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stock-based compensation expense;

and payroll and other tax expense related to stock-based compensation;

payroll and other tax expense related to stock-based compensation;

and certain other non-cash or non-recurring items impacting net income (loss) from time to time.

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• Adjusted EBITDA excludes stock-based compensation expense and payroll and other tax expense related to stock-based compensation, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy;

Adjusted EBITDA excludes income tax expense.

The following table presents a reconciliation of Free Cash Flow to net cash used in operating activities, the most comparable GAAP financial measure, for each of the periods presented:

• Adjusted EBITDA excludes income tax benefit (expense).

The following table presents a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most comparable GAAP financial measure, for each of the periods presented:

Year Ended December 31,

2022 2021 2020

(in thousands)

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Year Ended December 31,

2022 2021 2020

(in thousands)

Adjusted EBITDA reconciliation:

Net loss $ (1,429,653) $ (487,955) $ (944,839)

Add (deduct):

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Payroll and other tax expense related to stock-based compensation 44,213 107,479 50,309

Securities class actions legal charges (1)

Restructuring charges (1)

Adjusted EBITDA $ 377,573 $ 616,686 $ 45,163

Securities class actions legal charges in the fourth quarter of 2019 were related to a preliminary agreement to settle the securities class actions that arose following our initial public offering in 2017.

The preliminary settlement agreement was signed in January 2020 and provided for a resolution of all of the pending claims in the stockholder class actions for $187.5 million.

We recorded legal settlement expense, net of amounts directly covered by insurance, of $100.0 million.

(1) Restructuring charges in 2022 were composed primarily of severance and related charges of $97.1 million, stock-based compensation expense, lease exit and related charges, impairment charges, contract termination charges, and intangible asset amortization.

These charges are non-recurring and not reflective of underlying trends in our business.

See Note 18 to our consolidated financial statements included in the "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for more information.

Contingencies

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Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.

We have non-cancelable contractual agreements primarily related to the hosting of our data storage processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments.

We had $2.7 billion in commitments, as of December 31, 2021, primarily due within three years.

We have non-cancelable contractual agreements primarily related to the hosting of our data processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments.

We had $3.7 billion in commitments, as of December 31, 2022, primarily due within 3 years.

Critical Accounting Policies and Estimates

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We generate substantially all of our revenues by offering various advertising products on Snapchat, which include Snap Ads and AR Ads, referred to as advertising revenue.

AR Ads include Sponsored Filters and Sponsored Lenses.

Sponsored Filters 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.

AR Ads include Sponsored Lenses, which allow users to interact with an advertiser’s brand by enabling branded augmented reality experiences, and Sponsored Filters, which allow users to interact with an advertiser’s brand by enabling stylized brand artwork to be overlaid on a Snap.

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 agreements based on the number of impressions delivered is recognized when the advertisement is served.

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.

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RSUs vest and RSAs lapse to a forfeiture condition on the satisfaction of service conditions.

The service conditions for RSUs and RSAs 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.

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.

The service condition for RSUs and RSAs granted after February 2018 is generally satisfied in equal monthly or quarterly installments over three or four years.

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On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Convertible Notes

Prior to January 1, 2021, we accounted for the 2025 Notes and the 2026 Notes as separate liability and equity components.

On issuance, the carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did not have an associated convertible feature.

The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole.

We estimated the fair value of the liability and equity components using a convertible bond model, which includes subjective assumptions such as the expected term, expected volatility, and the interest rate of a similar non-convertible debt instrument.

These assumptions involved inherent uncertainties and management judgement.

Effective January 1, 2021, we early adopted Accounting Standards Update, or ASU, 2020-06 using the modified retrospective approach.

As a result, the 2025 Notes and 2026 Notes are each accounted for as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.

Adoption of the new standard resulted in a decrease to accumulated deficit of $95.0 million, a decrease to additional paid-in capital of $664.0 million, and an increase to convertible senior notes, net of $569.0 million.

Loss Contingencies

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Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different.

We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate.

We make adjustments to these reserves when facts and

circumstances change, such as the closing of a tax audit or the refinement of an estimate.

To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis