Snap Inc 10-K

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 in “Financial Statements and Supplementary Data” of 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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussion of historical items and year-to-year comparisons between 2019 and 2018 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, 2019, filed with the SEC on February 4, 2020. Overview of Full Year 2020 Results Our key user metrics and financial results for fiscal year 2020 are as follows: User Metrics • Daily Active Users, or DAUs, increased to 265 million in Q4 2020, compared to 218 million in Q4 2019. • Average revenue per user, or ARPU, increased 33% to $3.44 in Q4 2020, compared to $2.58 in Q4 2019. Financial Results • Cash used in operating activities was $(167.6) million in 2020, compared to $(305.0) million in 2019. • Free Cash Flow was $(225.5) million in 2020, compared to $(341.4) million in 2019. • Common shares outstanding plus shares underlying stock-based awards, including restricted stock units, restricted stock awards, and outstanding stock options, totaled 1,630 million at December 31, 2020, compared with 1,576 million one year ago. • Capital expenditures were $57.8 million in 2020, compared to $36.5 million in 2019. • Cash, cash equivalents, and marketable securities were $2.5 billion as of December 31, 2020. • Revenue increased 46% to $2.5 billion in 2020, compared to $1.7 billion in 2019. • Total costs and expenses excluding stock-based compensation and related payroll tax expense increased 21% to $2.5 billion in 2020, compared to $2.1 billion in 2019. • Net loss decreased 9% to $(944.8) million in 2020, compared to $(1.0) billion in 2019. • Diluted net loss per share decreased 13% to $(0.65) in 2020, compared to $(0.75) in 2019. • Adjusted EBITDA increased 122% to $45.2 million in 2020, compared to $(202.2) million in 2019. Overview Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate. We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together. Our flagship product, Snapchat, is a camera application that helps people communicate visually with friends and family through short videos and images called Snaps. 46 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. 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 265 million DAUs on average in the fourth quarter of 2020, compared to 249 million in the prior quarter and 218 million in the fourth quarter of 2019. Quarterly Average Daily Active Users (in millions) (1) North America includes Mexico, the Caribbean, and Central America. (2) Europe includes Russia and Turkey. 47 Monetization In the year ended December 31, 2020, we recorded revenue of $2.5 billion compared to revenue of $1.7 billion for the year ended December 31, 2019, an increase of 46% 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 $3.44 in the fourth quarter of 2020, up from $2.73 in the third quarter of 2020 and $2.58 in the fourth quarter of 2019. 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. Quarterly Average Revenue per User (1) North America includes Mexico, the Caribbean, and Central America. (2) Europe includes Russia and Turkey. 48 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, and measurement services, 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 our hardware product, Spectacles. This revenue is reported net of allowances for returns. Cost of Revenue Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs. Cost of revenue also includes payments for content and third-party selling costs, referred to as partner arrangements. In addition, cost of revenue includes advertising measurement services, 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 for Spectacles. 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. 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 our senior convertible notes, or the Convertible Notes, and commitment fees and amortization of financing costs related to our revolving credit facility. Other Income (Expense), Net Other income (expense), net consists of realized gains and losses on sales of marketable securities, our portion of non-marketable investment income and losses, foreign currency transaction gains and losses, and gains and impairments on non-marketable investments. Other income (expense), net also includes any gains or losses on divestitures of businesses. 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. 49 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 and related payroll tax expense; and certain other non-cash or non-recurring items impacting net income (loss) from time to time. We consider the exclusion of certain non-cash and non-recurring expenses in calculating Adjusted EBITDA to provide a useful measure for period-to-period comparisons of our business and for investors and others to evaluate our operating results in the same manner as does our management. Additionally, we believe that Adjusted EBITDA is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities. See “Selected Financial Data — Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA. Discussion of Results of Operations The following table sets forth our consolidated statements of operations data: Year Ended December 31, 2020 2019 2018 (in thousands) Consolidated Statements of Operations Data: Revenue $ 2,506,626 $ 1,715,534 $ 1,180,446 Costs and expenses (1) (2) : Cost of revenue 1,182,505 895,838 798,865 Research and development 1,101,561 883,509 772,185 Sales and marketing 555,468 458,598 400,824 General and administrative 529,164 580,917 477,022 Total costs and expenses 3,368,698 2,818,862 2,448,896 Operating loss (862,072 ) (1,103,328 ) (1,268,450 ) Interest income 18,127 36,042 27,228 Interest expense (97,228 ) (24,994 ) (3,894 ) Other income (expense), net 14,988 59,013 (8,248 ) Loss before income taxes (926,185 ) (1,033,267 ) (1,253,364 ) Income tax benefit (expense) (18,654 ) (393 ) (2,547 ) Net loss $ (944,839 ) $ (1,033,660 ) $ (1,255,911 ) Adjusted EBITDA (3) $ 45,163 $ (202,230 ) $ (575,637 ) (1) Stock-based compensation expense included in the above line items: Year Ended December 31, 2020 2019 2018 (in thousands) Stock-based compensation expense: Cost of revenue $ 9,367 $ 6,365 $ 4,393 Research and development 533,272 464,639 340,533 Sales and marketing 108,270 93,355 84,059 General and administrative 119,273 121,654 109,226 Total $ 770,182 $ 686,013 $ 538,211 (2) Depreciation and amortization expense included in the above line items: Year Ended December 31, 2020 2019 2018 (in thousands) Depreciation and amortization expense: Cost of revenue $ 22,205 $ 21,271 $ 26,282 Research and development 37,627 33,208 33,001 Sales and marketing 12,916 13,256 15,089 General and administrative 13,996 19,510 17,276 Total $ 86,744 $ 87,245 $ 91,648 (3) See “Selected Financial Data—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. 50 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, 2020 2019 2018 Consolidated Statements of Operations Data: Revenue 100 % 100 % 100 % Costs and expenses: Cost of revenue 47 52 68 Research and development 44 52 65 Sales and marketing 22 27 34 General and administrative 21 34 40 Total costs and expenses 134 164 207 Operating loss 34 64 107 Interest income 1 2 2 Interest expense 4 1 — Other income (expense), net 1 3 1 Loss before income taxes 37 60 106 Income tax benefit (expense) 1 — — Net loss 38 % 60 % 106 % Revenue Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Revenue $ 2,506,626 $ 1,715,534 $ 1,180,446 $ 791,092 46 % $ 535,088 45 % 2020 compared to 2019 Revenue for the year ended December 31, 2020 increased $791.1 million compared to the same period in 2019. Revenue increased due to a combination of growth in advertisers and advertising demand and optimization efficiencies, as well as a shift towards higher yielding products and regions. Cost of Revenue Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Cost of Revenue $ 1,182,505 $ 895,838 $ 798,865 $ 286,667 32 % $ 96,973 12 % 2020 compared to 2019 Cost of revenue for the year ended December 31, 2020 increased $286.7 million compared to the same period in 2019. The increase in cost of revenue primarily consisted of increased infrastructure costs of $96.7 million, attributable to DAU growth and increased user activity between the periods, net of infrastructure cost efficiencies. The increase was also a result of higher revenue share due to both the overall increase in revenue and a higher mix of revenue subject to revenue share as well as higher content acquisition costs. 51 Research and Development Expenses Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Research and Development Expenses $ 1,101,561 $ 883,509 $ 772,185 $ 218,052 25 % $ 111,324 14 % 2020 compared to 2019 Research and development expenses for the year ended December 31, 2020 increased $218.1 million compared to the same period in 2019. The increase primarily consisted of an increase in personnel costs, driven by growth in research and development headcount that contributed to higher stock-based compensation expense, and changes to our cash compensation programs. Sales and Marketing Expenses Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Sales and Marketing Expenses $ 555,468 $ 458,598 $ 400,824 $ 96,870 21 % $ 57,774 14 % 2020 compared to 2019 Sales and marketing expenses for the year ended December 31, 2020 increased $96.9 million compared to the same period in 2019. T he increase was primarily driven by increased marketing investments and an increase in personnel expenses due to the growth in sales and marketing headcount and stock-based compensation expense. The increase was partially offset by the impact of lower travel and event-related spending due to COVID-19 related restrictions on these activities. General and Administrative Expenses Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) General and Administrative Expenses $ 529,164 $ 580,917 $ 477,022 $ (51,753 ) (9 )% $ 103,895 22 % 2020 compared to 2019 General and administrative expenses for the year ended December 31, 2020 decreased $51.8 million compared to the same period in 2019. The decrease was primarily due to the $100.0 million preliminary settlement of the securities class action in the prior period, partially offset by an increase in personnel expenses driven by an increase in headcount and changes to our cash compensation programs. This decrease was also due to a lower cost per head driven by a decrease in stock-based compensation expense as well as the impact of lower travel and event-related spending due to COVID-19 related restrictions on these activities. Interest Income Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Interest Income $ 18,127 $ 36,042 $ 27,228 $ (17,915 ) (50 )% $ 8,814 32 % 2020 compared to 2019 Interest income for the year ended December 31, 2020 decreased $17.9 million compared to the same period in 2019. The decrease was primarily a result of lower interest rates on U.S. government-backed securities, partially offset by a higher overall invested cash balance. 52 Interest Expense Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) (NM = Not Meaningful) Interest Expense $ (97,228 ) $ (24,994 ) $ (3,894 ) $ (72,234 ) 289 % $ (21,100 ) NM 2020 compared to 2019 Interest expense for the year ended December 31, 2020 increased $72.2 million, compared to the same period in 2019. The increase in interest expense in the current period relates to the Convertible Notes. Other Income (Expense), Net Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) (NM = Not Meaningful) Other Income (Expense), Net $ 14,988 $ 59,013 $ (8,248 ) $ (44,025 ) (75 )% $ 67,261 NM 2020 compared to 2019 Other income, net for the year ended December 31, 2020 decreased $44.0 million, compared to other income, net for the same period in 2019. Other income, net for the current year was primarily a result of gains on non-marketable investments partially offset by impairments of non-marketable investments. Other income, net in the comparable period in 2019 was primarily a result of a gain of $39.9 million on the divestiture of Placed, LLC, or Placed, a location-based measurement services company, as well as gains on non-marketable investments. Income Tax Benefit (Expense) Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Income Tax Benefit (Expense) $ (18,654 ) $ (393 ) $ (2,547 ) $ (18,261 ) 4647 % $ 2,154 (85 )% Effective Tax Rate (2.0 )% (0.0 )% (0.2 )% 2020 compared to 2019 Income tax expense was $18.7 million for the year ended December 31, 2020, compared to $0.4 million for the same period in 2019. This increase was primarily driven by a discrete expense resulting from intra-entity transfers of intangible assets, partially offset by a discrete benefit resulting from a partial valuation allowance release on our deferred tax assets due to deferred tax liabilities originating from acquisitions. 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 11 to our consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. 53 Net Loss and Adjusted EBITDA Year Ended December 31, 2020 vs 2019 Change 2019 vs 2018 Change 2020 2019 2018 $ % $ % (dollars in thousands) Net Loss $ (944,839 ) $ (1,033,660 ) $ (1,255,911 ) $ 88,821 (9 )% $ 222,251 (18 )% Adjusted EBITDA $ 45,163 $ (202,230 ) $ (575,637 ) $ 247,393 (122 )% $ 373,407 (65 )% 2020 compared to 2019 Net loss for the year ended December 31, 2020 was $944.8 million, compared to $1.0 billion for the same period in 2019. Adjusted EBITDA for the year ended December 31, 2020 was $45.2 million, compared to $(202.2) million for the same period in 2019. The decrease in net loss was attributable to a legal expense of $100.0 million for the preliminary settlement agreement of securities class actions in the prior period, partially offset by a gain of $39.9 million on the divestiture of Placed recognized in the prior period. The increase in Adjusted EBITDA was driven by increased revenues, partially offset by increased cost of revenue mainly due to higher infrastructure costs attributable to DAU growth and increased user activity between the periods. 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 “Selected Financial Data—Non-GAAP Financial Measures.” Unaudited Quarterly Results of Operations Data The following table sets forth the primary components of our unaudited quarterly consolidated statements of cash flows for each of the four quarters in the periods ended December 31, 2020 and December 31, 2019. These unaudited quarterly statements of cash flows have been prepared on the same basis as our audited consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. In the opinion of management, the financial information reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods. This information should be read in conjunction with our consolidated financial statements and the related notes included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results in any future period. March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (in thousands) Consolidated Statements of Cash Flows Data: Net cash provided by (used in) operating activities $ (66,178 ) $ (95,789 ) $ (76,149 ) $ (66,842 ) $ 6,283 $ (66,554 ) $ (54,828 ) $ (52,545 ) Net cash provided by (used in) investing activities (80,928 ) 184,715 (688,319 ) (144,076 ) 371,577 (492,124 ) (375,250 ) (234,067 ) Net cash provided by (used in) financing activities 5,596 1,342 1,157,550 1,364 3,130 909,059 2,434 8,168 Change in cash, cash equivalents, and restricted cash $ (141,510 ) $ 90,268 $ 393,082 $ (209,554 ) $ 380,990 $ 350,381 $ (427,644 ) $ (278,444 ) 54 The following table sets forth the major components of our unaudited quarterly consolidated statements of operations for each of the four quarters in the periods ended December 31, 2020 and December 31, 2019. These unaudited quarterly results of operations have been prepared on the same basis as our audited consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. In the opinion of management, the financial information reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods. This information should be read in conjunction with our consolidated financial statements and the related notes included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results in any future period. March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (in thousands) Consolidated Statements of Operations Data: Revenue $ 320,426 $ 388,021 $ 446,199 $ 560,888 $ 462,478 $ 454,158 $ 678,668 $ 911,322 Costs and expenses (1) (2) : Cost of revenue 203,767 215,492 223,140 253,439 253,410 250,454 293,095 385,546 Research and development 216,185 236,199 211,599 219,526 238,613 260,863 283,639 318,446 Sales and marketing 97,882 111,504 123,240 125,972 122,205 132,118 143,511 157,634 General and administrative 118,653 129,644 117,073 215,547 134,614 121,331 126,287 146,932 Total costs and expenses 636,487 692,839 675,052 814,484 748,842 764,766 846,532 1,008,558 Operating loss (316,061 ) (304,818 ) (228,853 ) (253,596 ) (286,364 ) (310,608 ) (167,864 ) (97,236 ) Interest income 7,816 7,446 10,317 10,463 8,589 4,768 2,801 1,969 Interest expense (756 ) (809 ) (8,654 ) (14,775 ) (15,113 ) (24,727 ) (28,212 ) (29,176 ) Other income (expense), net (1,127 ) 44,085 (1,481 ) 17,536 (12,389 ) 3,575 (5,669 ) 29,471 Loss before income taxes (310,128 ) (254,096 ) (228,671 ) (240,372 ) (305,277 ) (326,992 ) (198,944 ) (94,972 ) Income tax benefit (expense) (279 ) (1,078 ) 1,296 (332 ) (659 ) 1,041 (909 ) (18,127 ) Net loss $ (310,407 ) $ (255,174 ) $ (227,375 ) $ (240,704 ) $ (305,936 ) $ (325,951 ) $ (199,853 ) $ (113,099 ) (1) Stock-based compensation expense included in the above line items: March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (in thousands) Stock-based compensation expense: Cost of revenue $ 1,849 $ 1,786 $ 1,332 $ 1,398 $ 1,782 $ 2,066 $ 2,623 $ 2,896 Research and development 112,242 132,610 108,176 111,611 118,317 127,516 132,003 155,436 Sales and marketing 17,760 26,474 23,333 25,788 24,806 27,107 27,393 28,964 General and administrative 30,705 34,704 28,387 27,858 27,144 29,482 30,061 32,586 Total $ 162,556 $ 195,574 $ 161,228 $ 166,655 $ 172,049 $ 186,171 $ 192,080 $ 219,882 (2) Depreciation and amortization expense included in the above line items: March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (in thousands) Depreciation and amortization expense: Cost of revenue $ 6,146 $ 5,642 $ 4,580 $ 4,903 $ 5,525 $ 5,532 $ 5,615 $ 5,533 Research and development 8,650 7,188 8,632 8,738 8,915 8,463 9,526 10,723 Sales and marketing 4,015 3,045 3,109 3,087 3,166 3,381 3,233 3,136 General and administrative 4,508 6,785 4,325 3,892 3,598 3,549 3,430 3,419 Total $ 23,319 $ 22,660 $ 20,646 $ 20,620 $ 21,204 $ 20,925 $ 21,804 $ 22,811 55 The following table presents a reconciliation of Free Cash Flow to net cash used in operating activities, the most comparable GAAP financial measure, for each of the periods presented: March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (in thousands) Reconciliation of Free Cash Flow: Net cash provided by (used in) operating activities $ (66,178 ) $ (95,789 ) $ (76,149 ) $ (66,842 ) $ 6,283 $ (66,554 ) $ (54,828 ) $ (52,545 ) Less: Purchases of property and equipment (11,814 ) (7,633 ) (7,938 ) (9,093 ) (10,891 ) (15,767 ) (14,727 ) (16,447 ) Free Cash Flow $ (77,992 ) $ (103,422 ) $ (84,087 ) $ (75,935 ) $ (4,608 ) $ (82,321 ) $ (69,555 ) $ (68,992 ) The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented: March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (in thousands) Reconciliation of Adjusted EBITDA: Net loss $ (310,407 ) $ (255,174 ) $ (227,375 ) $ (240,704 ) $ (305,936 ) $ (325,951 ) $ (199,853 ) $ (113,099 ) Add (deduct): Interest income (7,816 ) (7,446 ) (10,317 ) (10,463 ) (8,589 ) (4,768 ) (2,801 ) (1,969 ) Interest expense 756 809 8,654 14,775 15,113 24,727 28,212 29,176 Other (income) expense, net 1,127 (44,085 ) 1,481 (17,536 ) 12,389 (3,575 ) 5,669 (29,471 ) Income tax (benefit) expense 279 1,078 (1,296 ) 332 659 (1,041 ) 909 18,127 Depreciation and amortization 23,319 22,660 20,646 20,620 21,204 20,925 21,804 22,811 Stock-based compensation expense 162,556 195,574 161,228 166,655 172,049 186,171 192,080 219,882 Payroll tax expense related to stock-based compensation 6,737 7,871 4,604 8,628 11,874 7,942 10,341 20,152 Securities class actions legal charges — — — 100,000 — — — — Adjusted EBITDA $ (123,449 ) $ (78,713 ) $ (42,375 ) $ 42,307 $ (81,237 ) $ (95,570 ) $ 56,361 $ 165,609 56 The following table sets forth the components of our unaudited quarterly consolidated statements of operations for each of the periods presented as a percentage of revenue: March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Consolidated Statements of Operations Data: Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Costs and expenses: Cost of revenue 64 56 50 45 55 55 43 42 Research and development 67 61 47 39 52 57 42 35 Sales and marketing 31 29 28 22 26 29 21 17 General and administrative 37 33 26 38 29 27 19 16 Total costs and expenses 199 179 151 145 162 168 125 111 Operating loss 99 79 51 45 62 68 25 11 Interest income 2 2 2 2 2 1 — — Interest expense — — 2 3 3 5 4 3 Other income (expense), net — 11 — 3 3 1 1 3 Loss before income taxes 97 65 51 43 66 72 29 10 Income tax benefit (expense) — — — — — — — 2 Net loss 97 % 66 % 51 % 43 % 66 % 72 % 29 % 12 % Liquidity and Capital Resources Cash, cash equivalents, and marketable securities were $2.5 billion as of December 31, 2020, primarily consisting of cash on deposit with banks and highly liquid investments in U.S. government and agency 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 April 2020, we entered into a purchase agreement for the sale of an aggregate of $1.0 billion principal amount of senior convertible notes, or the 2025 Notes . The net proceeds from the issuance of the 2025 Notes were $888.6 million, net of debt issuance costs and cash used to pay the costs of the capped call transactions, or 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 for conversion was satisfied as of December 31, 2020 and as a result, the 2025 Notes first became eligible for optional conversion during the first quarter of 2021. In August 2019 , we entered into a purchase agreement for the sale of an aggregate of $1.265 billion principal amount of senior convertible notes, or the 2026 Notes . The net proceeds from the issuance of the 2026 Notes were $1.15 billion, net of debt issuance costs and cash used to pay the costs of the capped call transactions, or 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 for conversion was satisfied as of December 31, 2020 and as a result, the 2026 Notes first became eligible for optional conversion during the first quarter of 2021. In July 2016, we entered into a five-year senior unsecured revolving credit facility, or the Credit Facility, with lenders some of which are affiliated with certain members of the underwriting syndicate for our Convertible Notes offering, that allows us to borrow up to $1.1 billion to fund working capital and general corporate-purpose expenditures. The loan bears interest at LIBO plus 0.75%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. No origination fees were incurred at the closing of the Credit Facility. In December 2016, the amount we are permitted to borrow under the Credit Facility was increased to $1.2 billion. In February 2018, the amount we are permitted to borrow under the Credit Facility was increased to $1.25 billion. In August 2018, we amended the Credit Facility to extend the term to August 2023 with respect to an aggregate of $1.05 billion of the $1.25 billion that we may borrow under the Credit Facility. In August 2019, we amended the Credit Facility to revise the covenants that restrict the repurchase of equity securities and the incurrence of indebtedness to permit the 2026 Capped Call Transactions and issuance of the 2026 Notes. In April 2020, we amended the Credit Facility to revise the covenants that restrict the incurrence of indebtedness to permit the 2025 Capped Call Transactions and issuance of the 2025 Notes. As of December 31, 2020, no amounts were outstanding under the Credit Facility. As of December 31, 2020, we had $25.4 million in the form of outstanding standby letters of credit. 57 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, 2020, approximately 9% 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, 2020 2019 2018 (dollars in thousands) Net cash used in operating activities $ (167,644 ) $ (304,958 ) $ (689,924 ) Net cash provided by (used in) investing activities (729,864 ) (728,608 ) 694,454 Net cash provided by financing activities 922,791 1,165,852 47,437 Change in cash, cash equivalents, and restricted cash $ 25,283 $ 132,286 $ 51,967 Free Cash Flow (1) $ (225,476 ) $ (341,436 ) $ (810,166 ) (1) For information on how we define and calculate Free Cash Flow and a reconciliation to net cash used in operating activities to Free Cash Flow, see “Selected Financial Data — Non-GAAP Financial Measures.” Net Cash Used in Operating Activities 2020 compared to 2019 Net cash used in operating activities decreased $137.3 million in the year ended December 31, 2020 compared to the same period in 2019. Net cash used in operating activities was $167.6 million for the year ended December 31, 2020, resulting primarily from net loss, adjusted for non-cash items, including stock-based compensation expense of $770.2 million, depreciation and amortization expense of $86.7 million, and amortization of debt discount and issuance costs of $81.4 million. Net cash used in operating activities was also driven by a $255.8 million increase in the accounts receivable balance due to an increase in revenue, partially offset by an increase in accrued expenses and other current liabilities of $108.6 million primarily due to the timing of payments. Net Cash Used in Investing Activities 2020 compared to 2019 Net cash used in investing activities was $729.9 million and $728.6 million for the years ended December 31, 2020 and 2019, respectively. Our investing activities in the current period consisted primarily of the purchase of marketable securities of $3.5 billion, partially offset by the sales and maturities of marketable securities of $3.1 billion. Net cash used in investing activities in the prior period consisted of the purchase of marketable securities of $2.5 billion partially offset by the sales and maturities of marketable securities of $1.8 billion. Net Cash Provided by Financing Activities 2020 compared to 2019 Net cash provided by financing activities was $922.8 million and $1.2 billion for the years ended December 31, 2020 and 2019, respectively. Our financing activities in the current period consisted primarily of net proceeds of $888.6 million from the issuance of the 2025 Notes and the purchase of the 2025 Capped Call Transactions. Net cash provided by financing activities in the prior periods consisted of net proceeds of $1.15 billion from the issuance of the 2026 Convertible Notes and the purchase of the 2026 Capped Call Transactions. 58 Free Cash Flow 2020 compared to 2019 Free Cash Flow was $(225.5) million and $(341.4) million for the years ended December 31, 2020 and 2019, respectively, and was composed of net cash used in operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital. Free Cash Flow also included purchases of property and equipment of $57.8 million and $36.5 million for the years ended December 31, 2020 and 2019, respectively. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements for any of the periods presented. 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. Commitments The following table summarizes our contractual obligations as of December 31, 2020: Total 1 Year (2021) 2-3 Years (2022 and 2023) 4-5 Years (2024 and 2025) After 5 Years (Thereafter) (in thousands) Hosting commitments $ 1,029,000 $ 646,667 $ 382,333 $ — $ — Lease commitments 418,685 59,276 128,937 122,403 108,069 Other commitments 45,243 34,483 10,701 57 2 Total contractual commitments $ 1,492,928 $ 740,426 $ 521,971 $ 122,460 $ 108,071 For additional discussion on our leases, hosting, and other purchase commitments, see Note 8 and Note 9 to our consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. In January 2017, we entered into the Google Cloud Platform License Agreement. Under the agreement, we were granted a license to access and use certain cloud services. The agreement has an initial term of five years and we are required to purchase at least $400.0 million of cloud services in each year of the agreement. For each of the first four years, up to 15% of this amount may be moved to a subsequent year. If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference. In March 2016, we entered into the AWS Enterprise Agreement for the use of cloud services from Amazon Web Services, Inc. We are committed to spend an aggregate of $1.1 billion between January 2017 and December 2022 on AWS services ($90.0 million in 2018, $150.0 million in 2019, $215.0 million in 2020, $280.0 million in 2021, and $349.0 million in 2022). If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference. Any such payment may be applied to future use of AWS services during the term, although it will not count towards meeting the future minimum purchase commitments. 59 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 Filters and Sponsored Lenses. Sponsored Filters allow users to interact with an advertiser’s brand by enabling stylized brand artwork to be overlaid on a Snap. Sponsored Lenses allow users to interact with an advertiser’s brand by enabling branded augmented reality experiences. The substantial majority of advertising revenue is generated from the display of advertisements on Snapchat through contractual agreements that are either on a fixed fee basis over a period of time or based on the number of advertising impressions delivered. Revenue related to agreements based on the number of impressions delivered is recognized when the advertisement is displayed. Revenue related to fixed fee arrangements is recognized ratably over the service period, typically less than 30 days in duration, and such arrangements do not contain minimum impression guarantees. In 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, 2020, total stock-based compensation expense recognized was $770.2 million. 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 granted before January 1, 2017, or Pre-2017 RSUs, included both service-based and performance conditions to vest in the underlying common stock. The service-based condition for the majority of these awards is satisfied over four years. The performance condition related to these awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred in March 2017. On the effectiveness of the registration statement for our IPO, we recognized $1.3 billion in stock-based compensation expense. All RSUs and RSAs granted after December 31, 2016, or Post-2017 Awards, vest on the satisfaction of only service-based conditions. The service condition for Post-2017 Awards 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 Post-2017 Awards granted after February 2018 is generally satisfied in equal monthly or quarterly installments over three or four years. 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. 60 Restricted Stock Units and Restricted Stock Awards As of December 31, 2020, total unrecognized compensation cost related to Post-2017 Awards was $1.8 billion and is expected to be recognized over a weighted-average period of 2.6 years. All compensation cost related to Pre-2017 RSUs was recognized as of December 31, 2020. CEO Award On the closing of the IPO, our CEO received the CEO award for 37.4 million shares of Series FP preferred stock, which automatically converted into an equivalent number of shares of Class C common stock on the closing of the IPO. The CEO award represented 3.0% of all outstanding shares on the closing of the IPO, including shares sold by us in the IPO and vested stock options and RSUs on the closing of the IPO, net of shares withheld to satisfy tax withholding obligations. The CEO award vested immediately on the closing of the IPO, and such shares were being delivered to the CEO in equal quarterly installments over three years beginning in November 2017. As of December 31, 2020, all shares subject to the CEO award have been settled. 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. Convertible Notes We account for the Convertible Notes as separate liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option is calculated by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole. We estimated the fair value of the liability and equity components using a convertible bond model, which includes subjective assumptions such as the expected term, expected volatility, and the interest rate of a similar non-convertible debt instrument. These assumptions involve inherent uncertainties and management judgement. 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. 61 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.