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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion of historical items and year-to-year comparisons between 2022 and 2021 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, 2022, filed with the SEC on February 1, 2023.
Overview of Full Year 2023 Results
Our key user metrics and financial results for fiscal year 2023 are as follows:
User Metrics
• Daily Active Users, or DAUs, increased 10% year-over-year to 414 million in Q4 2023.
• Average revenue per user, or ARPU, was $3.29 in Q4 2023, compared to $3.47 in Q4 2022.
Financial Results
• Revenue was $4.6 billion in 2023, compared to $4.6 billion in 2022.
• Total costs and expenses were $6.0 billion in 2023, compared to $6.0 billion in 2022.
• Net loss was $1.3 billion in 2023, compared to $1.4 billion in 2022 .
• Adjusted EBITDA was $161.6 million in 2023, compared to $377.6 million in 2022.
• Diluted net loss per share was $(0.82) in 2023, compared to $(0.89) in 2022.
• Cash provided by operating activities was $246.5 million in 2023, compared to $184.6 million in 2022.
• Free Cash Flow was $34.8 million in 2023 , compared to $55.3 million in 2022 .
• Cash, cash equivalents, and marketable securities were $3.5 billion as of December 31, 2023.
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 and disruptions, supply chain disruptions, inflation, changes in interest and foreign currency exchange rates, banking instability, and other risks and uncertainties 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. Demand has also been disrupted by recent changes we made to our advertising platform, and, in the future, we may
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continue to experience adverse impacts to our revenue growth as a result of these changes.
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 in 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 414 million DAUs on average in the fourth quarter of 2023, an increase of 39 million, or 10%, from the fourth quarter of 2022.
Quarterly Average Daily Active Users (1)
(in millions)
Global
YOY growth: 20% 18% 18% 19% 17% 15% 14% 12% 10%
(1) Numbers may not foot due to rounding.
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North America (2)
Europe (3)
YOY growth: 6% 5% 4% 4% 3% 3% 2% 1% —% 11% 10% 10% 11% 12% 10% 9% 7% 4%
(2) North America includes Mexico, the Caribbean, and Central America.
(3) Europe includes Russia and Turkey.
Rest of World
YOY growth: 41 % 36 % 35 % 34 % 31 % 27 % 25 % 21 % 19 %
Monetization
In the year ended December 31, 2023, we recorded revenue of $4.6 billion compared to $4.6 billion for the year ended December 31, 2022. 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 $3.29 in the fourth quarter of 2023, compared to $3.47 in the fourth quarter of 2022. 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 content partner. We also generate revenue from subscriptions and sales of hardware products, 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 items impacting net income (loss) from time to time. We consider the exclusion of these items 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,
2023 2022 2021
(in thousands)
Consolidated Statements of Operations Data:
Revenue $ 4,606,115 $ 4,601,847 $ 4,117,048
Costs and expenses (1) (2) :
Cost of revenue 2,114,117 1,815,342 1,750,246
Research and development 1,910,862 2,109,800 1,565,467
Sales and marketing 1,122,092 1,118,746 792,764
General and administrative 857,423 953,265 710,640
Total costs and expenses 6,004,494 5,997,153 4,819,117
Operating loss (1,398,379) (1,395,306) (702,069)
Interest income 168,394 58,597 5,199
Interest expense (22,024) (21,459) (17,676)
Other income (expense), net (42,414) (42,529) 240,175
Loss before income taxes (1,294,423) (1,400,697) (474,371)
Income tax benefit (expense) (28,062) (28,956) (13,584)
Net loss $ (1,322,485) $ (1,429,653) $ (487,955)
Adjusted EBITDA (3)
$ 161,577 $ 377,573 $ 616,686
(1) Stock-based compensation expense included in the above line items:
Year Ended December 31,
2023 2022 2021
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 9,555 $ 12,288 $ 17,221
Research and development 893,026 970,746 740,130
Sales and marketing 255,688 203,092 164,241
General and administrative 165,735 201,661 170,543
Total $ 1,324,004 $ 1,387,787 $ 1,092,135
(2) Depreciation and amortization expense included in the above line items:
Year Ended December 31,
2023 2022 2021
(in thousands)
Depreciation and amortization expense:
Cost of revenue $ 12,751 $ 24,235 $ 19,711
Research and development 106,278 98,041 62,159
Sales and marketing 26,161 67,169 21,772
General and administrative 23,251 12,728 15,499
Total $ 168,441 $ 202,173 $ 119,141
(3) See “Non-GAAP Financial Measures” in 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.
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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,
2023 2022 2021
Consolidated Statements of Operations Data:
Revenue 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 46 39 43
Research and development 41 46 38
Sales and marketing 24 24 19
General and administrative 19 21 17
Total costs and expenses 130 130 117
Operating loss (30) (30) (17)
Interest income 4 1 —
Interest expense (1) — —
Other income (expense), net (1) (1) 6
Loss before income taxes (28) (30) (12)
Income tax benefit (expense) (1) (1) —
Net loss (29) % (31) % (12) %
Revenue
Year Ended December 31, 2023 vs 2022
Change
2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Revenue $ 4,606,115 $ 4,601,847 $ 4,117,048 $ 4,268 — % $ 484,799 12 %
2023 compared to 2022
Revenue for the year ended December 31, 2023 increased $4.3 million compared to the same period in 2022. In 2023, subscription revenue increased, partially offset by a reduction in advertiser spend and auction-based advertising demand.
Cost of Revenue
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Cost of Revenue $ 2,114,117 $ 1,815,342 $ 1,750,246 $ 298,775 16 % $ 65,096 4 %
2023 compared to 2022
Cost of revenue for the year ended December 31, 2023 increased $298.8 million compared to the same period in 2022. The increase was primarily driven by increased infrastructure costs attributable to DAU growth and investments in machine learning and AI, partially offset by lower content and advertising partner costs and $20.6 million relating to restructuring charges in the prior period.
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Research and Development Expenses
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Research and Development Expenses $ 1,910,862 $ 2,109,800 $ 1,565,467 $ (198,938) (9) % $ 544,333 35 %
2023 compared to 2022
Research and development expenses for the year ended December 31, 2023 decreased $198.9 million compared to the same period in 2022. The decrease was primarily driven by lower cash- and stock-based compensation expenses due to decreased headcount compared to the prior period and $78.9 million relating to restructuring charges in the prior period.
Sales and Marketing Expenses
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Sales and Marketing Expenses $ 1,122,092 $ 1,118,746 $ 792,764 $ 3,346 — % $ 325,982 41 %
2023 compared to 2022
Sales and marketing expenses for the year ended December 31, 2023 increased $3.3 million compared to the same period in 2022. The increase was primarily driven by higher stock-based compensation expenses and increased marketing investments , partially offset by lower cash-based compensation expenses. The prior period included higher amortization expense from our revision of the useful lives of certain customer relationships and trademarks and $30.8 million relating to restructuring charges .
General and Administrative Expenses
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
General and Administrative Expenses $ 857,423 $ 953,265 $ 710,640 $ (95,842) (10) % $ 242,625 34 %
2023 compared to 2022
General and administrative expenses for the year ended December 31, 2023 decreased $95.8 million compared to the same period in 2022. The decrease was primarily driven by lower personnel expenses, including cash- and stock-based compensation expenses compared to the prior period, and $58.7 million relating to restructuring charges in the prior period.
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Interest Income
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
(NM = Not Meaningful)
Interest Income $ 168,394 $ 58,597 $ 5,199 $ 109,797 187 % $ 53,398 NM
2023 compared to 2022
Interest income for the year ended December 31, 2023 increased $109.8 million compared to the same period in 2022, primarily due to higher interest rates on U.S. government-backed securities, offset by a lower overall invested cash balance.
Interest Expense
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Interest Expense $ (22,024) $ (21,459) $ (17,676) $ (565) 3 % $ (3,783) 21 %
2023 compared to 2022
Interest expense for the year ended December 31, 2023 increased $0.6 million compared to the same period in 2022. Interest expense for all periods consists primarily of amortization of debt issuance costs and contractual interest expense.
Other Income (Expense), Net
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Other Income (Expense), Net $ (42,414) $ (42,529) $ 240,175 $ 115 — % $ (282,704) (118) %
2023 compared to 2022
Other expense, net for the year ended December 31, 2023 was $42.4 million, compared to other expense, net of $42.5 million for the same period in 2022 . Other expense, net for the current year was primarily a result of $28.4 million in unrealized losses on strategic investments and $6.7 million in total losses on publicly traded securities classified as marketable securities. Other expense, net in the comparable period in 2022 was primarily a result of $101.3 million in total losses on publicly traded securities primarily classified as marketable securities, offset by $19.9 million in unrealized gains and $45.9 million in realized gains on strategic investments.
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Income Tax Benefit (Expense)
Year Ended December 31, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Income Tax Benefit (Expense) $ (28,062) $ (28,956) $ (13,584) $ 894 3 % $ (15,372) (113) %
Effective Tax Rate (2.2) % (2.1) % (2.9) %
2023 compared to 2022
Income tax expense was $28.1 million for the year ended December 31, 2023 , compared to $29.0 million for the same period in 2022 . 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, 2023 vs 2022
Change 2022 vs 2021
Change
2023 2022 2021 $ % $ %
(dollars in thousands)
Net Loss $ (1,322,485) $ (1,429,653) $ (487,955) $ 107,168 7 % $ (941,698) (193) %
Adjusted EBITDA $ 161,577 $ 377,573 $ 616,686 $ (215,996) (57) % $ (239,113) (39) %
2023 compared to 2022
Net loss for the year ended December 31, 2023 was $1,322.5 million, compared to $1,429.7 million for the same period in 2022. Adjusted EBITDA for the year ended December 31, 2023 was $161.6 million, compared to $377.6 million for the same period in 2022. The decrease in Adjusted EBITDA was attributable to increased cost of revenue and sales and marketing expenses, partially offset by decreased research and development and general and administrative expenses.
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 $3.5 billion as of December 31, 2023, 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.
In October 2023, our board of directors authorized a stock repurchase program of up to $500.0 million of our Class A common stock. During the fourth quarter of 2023, we repurchased 18.4 million shares of our Class A common stock for an aggregate of $189.4 million, including costs associated with the repurchases. As of December 31, 2023, the remaining availability under the stock repurchase authorization was $310.8 million.
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. 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
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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, or (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, 2023, we had $49.6 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 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, 2023 and as a result, the 2028 Notes will not be eligible for optional conversion during the first quarter of 2024.
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 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, 2023 and as a result, the 2027 Notes will not be eligible for optional conversion during the first quarter of 2024.
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, 2023. 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, 2023 and as a result, the 2025 Notes will not be eligible for optional conversion during the first quarter of 2024.
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, 2023. 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, 2023 and as a result, the 2026 Notes will not be eligible for optional conversion during the first quarter of 2024.
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. 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, 2023, approximately 3% 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.
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The following table sets forth the major components of our consolidated statements of cash flows for the periods presented:
Year Ended December 31,
2023 2022 2021
(dollars in thousands)
Net cash provided by (used in) operating activities $ 246,521 $ 184,614 $ 292,880
Net cash provided by (used in) investing activities 570,954 (1,062,275) 90,227
Net cash provided by (used in) financing activities (458,789) 306,714 1,065,073
Change in cash, cash equivalents, and restricted cash $ 358,686 $ (570,947) $ 1,448,180
Free Cash Flow (1)
$ 34,794 $ 55,308 $ 223,005
(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
2023 compared to 2022
Net cash provided by operating activities was $246.5 million for the year ended December 31, 2023, compared to net cash provided by operating activities of $184.6 million for the year ended December 31, 2022, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $1.3 billion and depreciation and amortization expense of $168.4 million. Net cash provided by operating activities for the year ended December 31, 2023 was also driven by a $95.0 million increase in accounts payable and a $62.1 million increase in accrued expenses and other current liabilities, primarily due to the timing of payments, partially offset by a $98.1 million increase in accounts receivables due to the timing of collections and an increase in billings in the period.
Net Cash Provided by (Used in) Investing Activities
2023 compared to 2022
Net cash provided by investing activities was $571.0 million for the year ended December 31, 2023, compared to net cash used in investing activities of $1.1 billion for the year ended December 31, 2022. Our investing activities in the year ended December 31, 2023 consisted primarily of maturities of marketable securities of $2.4 billion and sales of marketable securities of $459.5 million, partially offset by purchases of marketable securities of $2.0 billion and purchases of property and equipment of $211.7 million. Our investing activities for 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.
Net Cash Provided by (Used in) Financing Activities
2023 compared to 2022
Net cash used in financing activities was $458.8 million for the year ended December 31, 2023, compared to net cash provided by financing activities of $306.7 million for the year ended December 31, 2022. Our financing activities for the year ended December 31, 2023 consisted primarily of $189.4 million of repurchases of our Class A common stock and $270.4 million of deferred payments for acquisitions completed in prior periods. 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.
Free Cash Flow
2023 compared to 2022
Free Cash Flow was $34.8 million for the year ended December 31, 2023, compared to $55.3 million for the year ended December 31, 2022. Free Cash Flow in all periods 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
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included purchases of property and equipment of $211.7 million for the year ended December 31, 2023, compared to $129.3 million for the year ended December 31, 2022. 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 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
• Adjusted EBITDA excludes income tax benefit (expense).
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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,
2023 2022 2021
(in thousands)
Free Cash Flow reconciliation:
Net cash provided by (used in) operating activities $ 246,521 $ 184,614 $ 292,880
Less:
Purchases of property and equipment (211,727) (129,306) (69,875)
Free Cash Flow $ 34,794 $ 55,308 $ 223,005
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,
2023 2022 2021
(in thousands)
Adjusted EBITDA reconciliation:
Net loss $ (1,322,485) $ (1,429,653) $ (487,955)
Add (deduct):
Interest income (168,394) (58,597) (5,199)
Interest expense 22,024 21,459 17,676
Other (income) expense, net 42,414 42,529 (240,175)
Income tax (benefit) expense 28,062 28,956 13,584
Depreciation and amortization 159,999 186,434 119,141
Stock-based compensation expense 1,319,783 1,353,283 1,092,135
Payroll and other tax expense related to stock-based compensation 39,324 44,213 107,479
Restructuring charges (1)
40,850 188,949 —
Adjusted EBITDA $ 161,577 $ 377,573 $ 616,686
(1) Restructuring charges in 2023 relating to the wind down of our AR Enterprise business were composed primarily of cash severance, stock-based compensation expense, and charges related to the revision of the useful lives and disposal of certain acquired intangible assets. Additionally, we recognized an income tax benefit of $5.7 million relating to the wind down, which is included in the income tax (benefit) expense line item above. Restructuring charges in 2022 relating to the strategic reprioritization plan 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 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 $3.0 billion in commitments, as of December 31, 2023, primarily due within three years. For additional discussion on our leases, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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
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.
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 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.
The substantial majority of advertising revenue is generated from the display of advertisements on Snapchat through contractual agreements that are either based on the number of advertising impressions delivered or on a fixed fee basis over a period of time. 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.
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
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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 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.