Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors,” “Note Regarding Forward-Looking Statements,” and “Note Regarding User Metrics and Other Data.”
The following generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of historical items and year-to-year comparisons between 2021 and 2020 that are not included in this discussion can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 4, 2022.
Overview of Full Year 2022 Results
Our key user metrics and financial results for fiscal year 2022 are as follows:
User Metrics
• 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 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.
• 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
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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
We define a DAU as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. We define ARPU as quarterly revenue divided by the average DAUs. We assess the health of our business by measuring DAUs and ARPU because we believe that these metrics are important ways for both management and investors to understand engagement and monitor the performance of our platform. We also measure ARPU because we believe that this metric helps our management and investors to assess the extent to which we are monetizing our service.
User Engagement
We calculate average DAUs 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. DAUs are broken out by geography because markets have different characteristics . 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.
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Quarterly Average Daily Active Users
(in millions)
Global
YOY growth: 17% 20% 17% 18% 22% 22% 23% 23% 20% 18% 18% 19% 17%
North America (1)
Europe (2)
YOY growth: 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.
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Rest of World
YOY growth: 36 % 45 % 37 % 43 % 55 % 57 % 55 % 49 % 41 % 36 % 35 % 34 % 31 %
Monetization
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. We monetize our business primarily through advertising. Our advertising products include Snap Ads and AR Ads.
We measure our business using ARPU because it helps us understand the rate at which we are monetizing our daily user base. 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. This differs from the presentation of our revenue by geography in the notes to our consolidated financial statements, where revenue is based on the billing address of the advertising customer.
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Quarterly Average Revenue per User
Global
North America (1)
Europe (2)
(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.
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Rest of World
Results of Operations
Components of Results of Operations
Revenue
We generate substantially all of our revenue through the sale of our advertising products, which primarily include Snap Ads and AR Ads, referred to as advertising revenue. Snap Ads may be subject to revenue sharing arrangements between us and the media partner. 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 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.
Research and Development Expenses
Research and development expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expense for our engineers, designers, and other employees engaged in the research and development of our products. In addition, research and development expenses include facilities and other supporting overhead costs, including depreciation and amortization. Research and development costs are expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions, and stock-based compensation expense for our employees engaged in sales and sales support, business development, media, marketing, corporate partnerships, and customer service functions. Sales and marketing expenses also include costs incurred for advertising, market research, tradeshows, branding, marketing, promotional expense, and public relations, as well as facilities and other supporting overhead costs, including depreciation and amortization.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expense for our finance, legal, information technology, human resources, and other administrative teams. General and administrative expenses also include facilities and supporting overhead costs, including depreciation and amortization, and external professional services.
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Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents, and marketable securities.
Interest Expense
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 primarily consists of gains and losses on strategic investments, marketable securities, and foreign currency transactions.
Income Tax Benefit (Expense)
We are subject to income taxes in the United States and numerous foreign jurisdictions. 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. 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.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), excluding interest income; interest expense; other income (expense), net; income tax benefit (expense); depreciation and amortization; stock-based compensation expense; 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. See “Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA.
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Discussion of Results of Operations
The following table sets forth our consolidated statements of operations data:
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) :
Cost of revenue 1,815,342 1,750,246 1,182,505
Research and development 2,109,800 1,565,467 1,101,561
Sales and marketing 1,118,746 792,764 555,468
General and administrative 953,265 710,640 529,164
Total costs and expenses $ 5,997,153 4,819,117 3,368,698
Operating loss (1,395,306) (702,069) (862,072)
Interest income 58,597 5,199 18,127
Interest expense (21,459) (17,676) (97,228)
Other income (expense), net (42,529) 240,175 14,988
Loss before income taxes (1,400,697) (474,371) (926,185)
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)
Stock-based compensation expense:
Cost of revenue $ 12,288 $ 17,221 $ 9,367
Research and development 970,746 740,130 533,272
Sales and marketing 203,092 164,241 108,270
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)
Depreciation and amortization expense:
Cost of revenue $ 24,235 $ 19,711 $ 22,205
Research and development 98,041 62,159 37,627
Sales and marketing 67,169 21,772 12,916
General and administrative 12,728 15,499 13,996
Total $ 202,173 $ 119,141 $ 86,744
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(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.
The following table sets forth the components of our consolidated statements of operations data for each of the periods presented as a percentage of revenue:
Year Ended December 31,
2022 2021 2020
Consolidated Statements of Operations Data:
Revenue 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 39 43 47
Research and development 46 38 44
Sales and marketing 24 19 22
General and administrative 21 17 21
Total costs and expenses 130 117 134
Operating loss (30) (17) (34)
Interest income 1 — 1
Interest expense — — (4)
Other income (expense), net (1) 6 1
Loss before income taxes (30) (12) (37)
Income tax benefit (expense) (1) — (1)
Net loss (31) % (12) % (38) %
Revenue
Year Ended December 31, 2022 vs 2021
Change
2021 vs 2020
Change
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
Revenue for the year ended December 31, 2022 increased $484.8 million compared to the same period in 2021. Revenue increased due to a combination of growth in advertisers and auction-based advertising demand and optimization efficiencies.
Cost of Revenue
Year Ended December 31, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
Cost of Revenue $ 1,815,342 $ 1,750,246 $ 1,182,505 $ 65,096 4 % $ 567,741 48 %
2022 compared to 2021
Cost of revenue for the year ended December 31, 2022 increased $65.1 million compared to the same period in 2021. 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
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$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, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
Research and Development Expenses $ 2,109,800 $ 1,565,467 $ 1,101,561 $ 544,333 35 % $ 463,906 42 %
2022 compared to 2021
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 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, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
Sales and Marketing Expenses $ 1,118,746 $ 792,764 $ 555,468 $ 325,982 41 % $ 237,296 43 %
2022 compared to 2021
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 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, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
General and Administrative Expenses $ 953,265 $ 710,640 $ 529,164 $ 242,625 34 % $ 181,476 34 %
2022 compared to 2021
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 higher personnel expenses, higher other administrative expenses, and $58.7 million relating to restructuring charges.
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Interest Income
Year Ended December 31, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
(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, 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, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
Interest Expense $ (21,459) $ (17,676) $ (97,228) $ (3,783) 21 % $ 79,552 (82) %
2022 compared to 2021
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, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
Other Income (Expense), Net $ (42,529) $ 240,175 $ 14,988 $ (282,704) (118) % $ 225,187 1,502 %
2022 compared to 2021
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.
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Income Tax Benefit (Expense)
Year Ended December 31, 2022 vs 2021
Change 2021 vs 2020
Change
2022 2021 2020 $ % $ %
(dollars in thousands)
Income Tax Benefit (Expense) $ (28,956) $ (13,584) $ (18,654) $ (15,372) 113 % $ 5,070 (27) %
Effective Tax Rate (2.1) % (2.9) % (2.0) %
2022 compared to 2021
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. statutory tax rate primarily due to valuation allowances on our deferred tax assets as it is more likely than not that some or all of our deferred tax assets will not be realized.
For additional discussion, see Note 12 to our consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Net Loss and Adjusted EBITDA
Year Ended December 31, 2022 vs 2021
Change 2021 vs 2020
Change
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 %
2022 compared to 2021
Net loss for the year ended December 31, 2022 was $1,429.7 million, compared to $488.0 million for the same period in 2021. 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 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.”
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities were $3.9 billion as of December 31, 2022, primarily consisting of cash on deposit with banks and highly liquid investments in U.S. government and agency securities, publicly traded equity securities, corporate debt securities, certificates of deposit, and commercial paper. Our primary source of liquidity is cash generated through financing activities. Our primary uses of cash include operating costs such as personnel-related costs and the infrastructure costs of the Snapchat application, facility-related capital spending, and acquisitions and investments. There are no known material subsequent events that could have a material impact on our cash or liquidity. We may contemplate and engage in merger and acquisition activity that could materially impact our liquidity and capital resource position.
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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 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 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 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,
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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.
As of December 31, 2022, approximately 6% of our cash, cash equivalents, and marketable securities was held outside the United States. These amounts were primarily held in the United Kingdom and are utilized to fund our foreign operations. Cash held outside the United States may be repatriated, subject to certain limitations, and would be available to be used to fund our domestic operations. However, repatriation of funds may result in additional tax liabilities. We believe our existing cash balance in the United States is sufficient to fund our working capital needs.
The following table sets forth the major components of our consolidated statements of cash flows for the periods presented:
Year Ended December 31,
2022 2021 2020
(dollars in thousands)
Net cash provided by (used in) operating activities $ 184,614 $ 292,880 $ (167,644)
Net cash provided by (used in) investing activities (1,062,275) 90,227 (729,864)
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)
$ 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 $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 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 $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,
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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
2022 compared to 2021
Free Cash Flow was $55.3 million for the year ended December 31, 2022 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 $129.3 million for the year ended December 31, 2022. 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. See “Non-GAAP Financial Measures.”
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
We use the non-GAAP financial measure of Free Cash Flow, which is defined as net cash provided by (used in) operating activities, reduced by purchases of property and equipment. 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. Free Cash Flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.
We use the non-GAAP financial measure of Adjusted EBITDA, which is defined as net income (loss); excluding interest income; interest expense; other income (expense), net; income tax benefit (expense); depreciation and amortization; stock-based compensation expense; 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 believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.
We believe that both Free Cash Flow and Adjusted EBITDA provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to key metrics used by our management for financial and operational decision-making. We are presenting the non-GAAP measures of Free Cash Flow and Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures compared to the closest comparable GAAP measure. Some of these limitations are that:
• Free Cash Flow does not reflect our future contractual commitments.
• Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;
• 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; and
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• 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)
Free Cash Flow reconciliation:
Net cash provided by (used in) operating activities $ 184,614 $ 292,880 $ (167,644)
Less:
Purchases of property and equipment (129,306) (69,875) (57,832)
Free Cash Flow $ 55,308 $ 223,005 $ (225,476)
The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented:
Year Ended December 31,
2022 2021 2020
(in thousands)
Adjusted EBITDA reconciliation:
Net loss $ (1,429,653) $ (487,955) $ (944,839)
Add (deduct):
Interest income (58,597) (5,199) (18,127)
Interest expense 21,459 17,676 97,228
Other (income) expense, net 42,529 (240,175) (14,988)
Income tax (benefit) expense 28,956 13,584 18,654
Depreciation and amortization 186,434 119,141 86,744
Stock-based compensation expense 1,353,283 1,092,135 770,182
Payroll and other tax expense related to stock-based compensation 44,213 107,479 50,309
Restructuring charges (1)
188,949 — —
Adjusted EBITDA $ 377,573 $ 616,686 $ 45,163
(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
We are involved in claims, lawsuits, tax matters, government investigations, and proceedings arising in the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. We also disclose material contingencies when we believe that a loss is not probable but reasonably possible. Significant judgment is required to determine both probability and the estimated amount. Such claims, suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Many of these legal and tax contingencies can take years to resolve. 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.
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Commitments
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
We prepare our financial statements in accordance with GAAP. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
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, including value added tax, is excluded from reported revenue.
We determine revenue recognition by first identifying the contract or contracts with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when, or as, we satisfy a performance obligation.
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 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 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.
In arrangements where another party is involved in providing specified services to a customer, we evaluate whether we are the principal or agent. In this evaluation, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. For advertising revenue arrangements where we are not the principal, we recognize revenue on a net basis. For the periods presented, revenue for arrangements where we are the agent was not material.
Stock-Based Compensation
In the year ended December 31, 2022, total stock-based compensation expense recognized was $1.4 billion. We have granted stock-based awards consisting primarily of restricted stock units, or RSUs, restricted stock awards, or RSAs, and to a lesser extent, stock options to employees, members of our board of directors, and non-employee advisors. The substantial majority of our stock-based awards have been made to employees. RSUs vest and RSAs lapse to a forfeiture condition on the satisfaction of service conditions. 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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We account for stock-based employee compensation under the fair value recognition and measurement provisions, in accordance with applicable accounting standards, which requires stock-based awards to be measured based on the grant date fair value. Stock-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of operations. Accordingly, stock-based compensation expense is only recorded for those potential stock-based awards that we expect to vest. We estimate the forfeiture rate using historical forfeitures of equity awards and other expected changes in facts and circumstances, if any. We will re-evaluate our estimated forfeiture rate if actual forfeitures differ from our initial estimates. A modification of the terms of a stock-based award is treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value of the modification to the award.
Restricted Stock Units and Restricted Stock Awards
As of December 31, 2022, total unrecognized compensation cost related to outstanding RSUs and RSAs was $2.0 billion and is expected to be recognized over a weighted-average period of 1.8 years.
Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets
We estimate the fair value of assets acquired and liabilities assumed in a business combination. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology, useful lives, and discount rates. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. 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.
Loss Contingencies
We are involved in claims, lawsuits, tax matters, government investigations, and proceedings arising in the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. When there appears to be a range of possible costs with equal likelihood, a liability is recorded based on the low-end of such range. However, the likelihood of a loss is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available, the potential effect of future events, and decisions by third parties impacting the ultimate resolution of the contingency. It is also not uncommon for such matters to be resolved over multiple reporting periods. During this time, relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of potential loss. We also disclose material contingencies when we believe that a loss is reasonably possible.
Significant judgment is required to determine both probability and the estimated amounts of loss contingencies. Such claims, suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change, it could have a material impact on our results of operations, financial position, and cash flows.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our uncertain tax positions.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. 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
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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.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.