Snap Inc 10-Q

Item 2. 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 Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report. 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 Quarterly Report on Form 10-Q, particularly in “Risk Factors,” “Note Regarding Forward-Looking Statements,” and “Note Regarding User Metrics and Other Data.” Overview of First Quarter 2021 Results Our key user metrics and financial results for the first quarter of 2021 were as follows: User Metrics • Daily Active Users, or DAUs, increased to 280 million in Q1 2021, compared to 229 million in Q1 2020. • Average revenue per user, or ARPU, increased to $2.74 in Q1 2021, compared to $2.02 in Q1 2020. Financial Results • Revenue increased 66% to $769.6 million in Q1 2021, compared to $462.5 million in Q1 2020. • Total costs and expenses, excluding stock-based compensation and other payroll related tax expense, increased 41% to $794.8 million in Q1 2021, compared to $564.9 million in Q1 2020. • Net loss decreased 6% to $(286.9) million in Q1 2021, compared to $(305.9) million in Q1 2020. • Diluted net loss per share decreased 11% to $(0.19) in Q1 2021, compared to $(0.21) in Q1 2020. • Adjusted EBITDA increased 98% to $(1.7) million in Q1 2021, compared to $(81.2) million in Q1 2020. • Cash provided by operating activities was $136.9 million in Q1 2021, compared to $6.3 million in Q1 2020. • Capital expenditures were $10.9 million in Q1 2021, compared to $10.9 million in Q1 2020. • Free Cash Flow was $126.0 million in Q1 2021, compared to $(4.6) million in Q1 2020. • Cash, cash equivalents, and marketable securities were $2.6 billion as of March 31, 2021. • Common shares outstanding plus shares underlying stock-based awards, including restricted stock units, restricted stock awards, and outstanding stock options, totaled 1,629 million at March 31, 2021, compared with 1,589 million one year ago. 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. 22 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 280 million DAUs on average in the first quarter of 2021, an increase of 51 million, or 22%, from the first quarter of 2020. Quarterly Average Daily Active Users (in millions) (1) North America includes Mexico, the Caribbean, and Central America. (2) Europe includes Russia and Turkey. 23 Monetization We recorded revenue of $769.6 million for the three months ended March 31, 2021, compared to revenue of $462.5 million for the same period in 2020, an increase of 66% 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’re monetizing our daily user base. ARPU was $2.74 in the first quarter of 2021, up from $2.02 in the first quarter of 2020. 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. 24 Results of Operations The following table summarizes certain selected historical financial results: Three Months Ended March 31, 2021 2020 (dollars in thousands) Revenue $ 769,584 $ 462,478 Operating loss (303,606 ) (286,364 ) Net loss (286,882 ) (305,936 ) Adjusted EBITDA (1) (1,709 ) (81,237 ) (1) For information on how we define and calculate Adjusted EBITDA, and a reconciliation of net loss to Adjusted EBITDA, see “Non-GAAP Financial Measures.” 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 hardware. This revenue is reported net of allowances for returns. Cost of Revenue Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs. Cost of revenue also includes payments for content, developer, and advertiser partner costs as well as advertising measurement services. In addition, cost of revenue includes third-party selling costs, 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. Interest Income Interest income consists primarily of interest earned on our cash, cash equivalents, and marketable securities. 25 Interest Expense Interest expense consists primarily of interest expense associated with 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. 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 and other payroll related 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 “Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA. 26 Discussion of Results of Operations Impact of COVID-19 Pandemic The broader impact of the recent COVID-19 pandemic on our results of operations and overall financial performance continues to remain uncertain. The COVID-19 pandemic has impacted revenue growth, and will likely continue to adversely impact many aspects of our business and our partners. See “Risk Factors” for further discussion of the potential adverse impacts of the COVID-19 pandemic and related events on our business and partners. The following table sets forth our consolidated statements of operations data: Three Months Ended March 31, 2021 2020 (dollars in thousands) Consolidated Statements of Operations Data: Revenue $ 769,584 $ 462,478 Costs and expenses (1) (2) : Cost of revenue 412,601 253,410 Research and development 348,580 238,613 Sales and marketing 150,286 122,205 General and administrative 161,723 134,614 Total costs and expenses 1,073,190 748,842 Operating loss (303,606 ) (286,364 ) Interest income 1,137 8,589 Interest expense (5,031 ) (15,113 ) Other income (expense), net 22,058 (12,389 ) Loss before income taxes (285,442 ) (305,277 ) Income tax benefit (expense) (1,440 ) (659 ) Net loss $ (286,882 ) $ (305,936 ) Adjusted EBITDA (3) $ (1,709 ) $ (81,237 ) (1) Stock-based compensation expense included in the above line items: Three Months Ended March 31, 2021 2020 (dollars in thousands) Stock-based compensation expense: Cost of revenue $ 2,656 $ 1,782 Research and development 163,793 118,317 Sales and marketing 29,084 24,806 General and administrative 41,540 27,144 Total $ 237,073 $ 172,049 (2) Depreciation and amortization expense included in the above line items: Three Months Ended March 31, 2021 2020 (dollars in thousands) Depreciation and amortization expense: Cost of revenue $ 5,276 $ 5,525 Research and development 11,036 8,915 Sales and marketing 3,186 3,166 General and administrative 4,000 3,598 Total $ 23,498 $ 21,204 (3) See “Non-GAAP Financial Measures” 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. 27 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: Three Months Ended March 31, 2021 2020 Consolidated Statements of Operations Data: Revenue 100 % 100 % Costs and expenses: Cost of revenue 54 55 Research and development 45 52 Sales and marketing 20 26 General and administrative 21 29 Total costs and expenses 139 162 Operating loss (39 ) (62 ) Interest income — 2 Interest expense (1 ) (3 ) Other income (expense), net 3 (3 ) Loss before income taxes (37 ) (66 ) Income tax benefit (expense) — — Net loss (37 )% (66 )% Three Months Ended March 31, 2021 and 2020 Revenue Three Months Ended March 31, 2021 2020 (dollars in thousands) Revenue $ 769,584 $ 462,478 Revenue as a dollar change $ 307,106 Revenue as a percentage change 66 % Revenue for the three months ended March 31, 2021 increased $307.1 million compared to the same period in 2020. Revenue increased due to a combination of growth in advertisers and advertising demand and optimization efficiencies. Cost of Revenue Three Months Ended March 31, 2021 2020 (dollars in thousands) Cost of Revenue $ 412,601 $ 253,410 Cost of Revenue as a dollar change $ 159,191 Cost of Revenue as a percentage change 63 % Cost of revenue for the three months ended March 31, 2021 increased $159.2 million compared to the same period in 2020. The increase in cost of revenue was primarily driven by higher content costs which include $90.0 million for Spotlight, which launched in Q4 2020, as well as increases in revenue share due to the overall increase in revenue and higher mix of revenue subject to revenue share. The increase was also a result of increased infrastructure costs, attributable to DAU growth, net of infrastructure cost efficiencies and rate improvements. 28 Research and Development Expenses Three Months Ended March 31, 2021 2020 (dollars in thousands) Research and Development Expenses $ 348,580 $ 238,613 Research and Development Expenses as a dollar change $ 109,967 Research and Development Expenses as a percentage change 46 % Research and development expenses for the three months ended March 31, 2021 increased $110.0 million compared to the same period in 2020. The increase was primarily driven by an increase in personnel expenses due to the growth in research and development headcount and stock-based compensation expense, and changes to our cash compensation programs. Sales and Marketing Expenses Three Months Ended March 31, 2021 2020 (dollars in thousands) Sales and Marketing Expenses $ 150,286 $ 122,205 Sales and Marketing Expenses as a dollar change $ 28,081 Sales and Marketing Expenses as a percentage change 23 % Sales and marketing expenses for the three months ended March 31, 2021 increased $28.1 million compared to the same period in 2020. T he increase was primarily driven by an increase in personnel expenses due to the growth in sales and marketing headcount and stock-based compensation expense as well as increased marketing investments. 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 Three Months Ended March 31, 2021 2020 (dollars in thousands) General and Administrative Expenses $ 161,723 $ 134,614 General and Administrative Expenses as a dollar change $ 27,109 General and Administrative Expenses as a percentage change 20 % General and administrative expenses for the three months ended March 31, 2021 increased $27.1 million compared to the same period in 2020. The increase was primarily due to an increase in personnel expenses driven by stock-based compensation expense as well as headcount growth. This increase was partially offset by the impact of lower travel and event-related spending due to COVID-19 related restrictions on these activities. Interest Income Three Months Ended March 31, 2021 2020 (dollars in thousands) Interest Income $ 1,137 $ 8,589 Interest Income as a dollar change $ (7,452 ) Interest Income as a percentage change (87 )% Interest income for the three months ended March 31, 2021 decreased $7.5 million compared to the same period in 2020. The decrease was primarily a result of lower interest rates on U.S. government-backed securities, partially offset by a higher overall invested cash balance. 29 Interest Expense Three Months Ended March 31, 2021 2020 (dollars in thousands) Interest Expense $ (5,031 ) $ (15,113 ) Interest Expense as a dollar change $ 10,082 Interest Expense as a percentage change (67 )% Interest expense for the three months ended March 31, 2021 decreased $10.1 million compared to the same period in 2020 due to the early adoption of ASU 2020-06 on January 1, 2021. As a result, we account for the Convertible Notes as a single liability, which eliminates the amortization of the debt discount. Prior to January 1, 2021, the carrying amount of the equity component was recorded as a debt discount and amortized to interest expense. Interest expense related to the amortization of debt issuance costs was $1.0 million for the three months ended March 31, 2021 while interest expense related to the amortization of debt discount and issuance costs was $11.6 million for the three months ended March 31, 2020. Contractual interest expense was $3.0 million and $2.4 million for the three months ended March 31, 2021 and 2020, respectively. Other Income (Expense), Net Three Months Ended March 31, 2021 2020 (dollars in thousands) Other Income (Expense), Net $ 22,058 $ (12,389 ) Other Income (Expense), Net as a dollar change $ 34,447 Other Income (Expense), Net as a percentage change (278 )% Other income, net for the three months ended March 31, 2021 was $22.1 million, compared to other expense, net of $(12.4) million in the same period in 2020. Other income, net for the three months ended March 31, 2021 was primarily a result of a $23.3 million gain on non-marketable investments. Other expense, net for the three months ended March 31, 2020 was primarily a result of a $10.5 million impairment of non-marketable investments. Income Tax Benefit (Expense) Three Months Ended March 31, 2021 2020 (dollars in thousands) Income Tax Benefit (Expense) $ (1,440 ) $ (659 ) Income Tax Benefit (Expense) as a dollar change $ (781 ) Income Tax Benefit (Expense) as a percentage change 119 % Effective Tax Rate (0.5 )% (0.2 )% Income tax expense for the three months ended March 31, 2021 was $1.4 million compared to an income tax expense of $0.7 million for the same period in 2020. 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. 30 Net Loss and Adjusted EBITDA Three Months Ended March 31, 2021 2020 (dollars in thousands) Net Loss $ (286,882 ) $ (305,936 ) Net Loss as a dollar change $ 19,054 Net Loss as a percentage change (6 )% Adjusted EBITDA $ (1,709 ) $ (81,237 ) Adjusted EBITDA as a dollar change $ 79,528 Adjusted EBITDA as a percentage change (98 )% Net loss for the three months ended March 31, 2021 was $286.9 million compared to $305.9 million for the same period in 2020. Adjusted EBITDA for the three months ended March 31, 2021 was $(1.7) million compared to $(81.2) million for the same period in 2020. The increase in Adjusted EBITDA was attributable to increased revenues, partially offset by increased cost of revenue primarily due to higher content acquisition costs between the periods. The decrease in net loss was also partially offset by the increase in stock-based compensation expense. 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.” 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 and other payroll related tax expense; and certain other non-cash or non-recurring items impacting net income (loss) from time to time. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA. We believe that both Free Cash Flow and Adjusted EBITDA provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to key metrics used by our management for financial and operational decision-making. We are presenting the non-GAAP measures of Free Cash Flow and Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures compared to the closest comparable GAAP measure. Some of these limitations are that: • Free Cash Flow does not reflect our future contractual commitments. • Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; 31 • Adjusted EBITDA excludes stock-based compensation expense and other payroll related tax expense, 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 expense. The following table presents a reconciliation of Free Cash Flow to net cash provided by operating activities, the most comparable GAAP financial measure, for each of the periods presented: Three Months Ended March 31, 2021 2020 (dollars in thousands) Free Cash Flow reconciliation: Net cash provided by operating activities $ 136,886 $ 6,283 Less: Purchases of property and equipment (10,851 ) (10,891 ) Free Cash Flow $ 126,035 $ (4,608 ) The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented: Three Months Ended March 31, 2021 2020 (dollars in thousands) Adjusted EBITDA reconciliation: Net loss $ (286,882 ) $ (305,936 ) Add (deduct): Interest income (1,137 ) (8,589 ) Interest expense 5,031 15,113 Other (income) expense, net (22,058 ) 12,389 Income tax (benefit) expense 1,440 659 Depreciation and amortization 23,498 21,204 Stock-based compensation expense 237,073 172,049 Payroll and other tax expense related to stock-based compensation 41,326 11,874 Adjusted EBITDA $ (1,709 ) $ (81,237 ) Liquidity and Capital Resources Cash, cash equivalents, and marketable securities were $2.6 billion as of March 31, 2021, 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 March 31, 2021 and as a result, the 2025 Notes will continue to be eligible for optional conversion during the second quarter of 2021 . 32 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 March 31, 2021 and as a result, the 2026 Note s will continue to be eligible for optional conversion during the second 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 March 31, 2021, no amounts were outstanding under the Credit Facility. As of March 31, 2021, we had $26.1 million in the form of outstanding standby letters of credit. 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 March 31, 2021, approximately 12% 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: Three Months Ended March 31, 2021 2020 (dollars in thousands) Net cash provided by operating activities $ 136,886 $ 6,283 Net cash provided by investing activities 280,555 371,577 Net cash provided by financing activities 4,453 3,130 Change in cash, cash equivalents, and restricted cash $ 421,894 $ 380,990 Free Cash Flow (1) $ 126,035 $ (4,608 ) (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.” Three Months Ended March 31, 2021 and 2020 Net Cash Provided by Operating Activities Net cash provided by operating activities increased $130.6 million in the three months ended March 31, 2021, compared to the same period in 2020. Net cash provided by operating activities was $136.9 million for the three months ended March 31, 2021, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $237.1 million and depreciation and amortization expense of $23.5 million. Net cash provided by operating activities for the three months ended March 31, 2021 was also driven by a decrease in the accounts receivable balance of $129.3 million due to higher collections in the period, and a $56.5 million increase in accounts payable primarily due to the timing of payments. 33 Net Cash Provided by Investing Activities Net cash provided by investing activities was $280.6 million for the three months ended March 31, 2021, compared to net cash provided by investing activities of $371.6 million for the same period in 2020. Our investing activities in the three months ended March 31, 2021 consisted of cash provided by the sales and maturities of marketable securities of $925.0 million, partially offset by the purchase of marketable securities of $523.2 million and cash paid for acquisitions of $108.9 million. Net cash provided by investing activities in the prior period consisted of cash provided by the sales and maturities of marketable securities of $970.6 million, partially offset by cash used in the purchase of marketable securities of $552.7 million . Net Cash Provided by Financing Activities Net cash provided by financing activities was $4.5 million for the three months ended March 31, 2021 compared to net cash provided by financing activities of $3.1 million for the same period in 2020. Our financing activities for the three months ended March 31, 2021 and 2020 consisted of net proceeds from the exercise of stock options. Free Cash Flow Free Cash Flow was $126.0 million and $(4.6) million in the three months ended March 31, 2021 and 2020, respectively, and was composed of net cash provided by operating activities, resulting primarily from net loss, adjusted for non-cash items as well as changes in working capital and other operating assets and liabilities. Free Cash Flow also included purchases of property and equipment of $(10.9) million and $(10.9) million for the three months ended March 31, 2021 and 2020, respectively. See “Non-GAAP Financial Measures.” 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 March 31, 2021: Total Less than 1 Year (Remainder of 2021) 1-3 Years (2022 and 2023) 3-5 Years (2024 and 2025) After 5 Years (Thereafter) (in thousands) Hosting commitments $ 896,679 $ 520,039 376,640 $ — $ — Lease commitments 415,259 43,940 135,329 127,623 108,367 Other commitments 47,260 34,280 12,921 57 2 Total contractual commitments $ 1,359,198 $ 598,259 $ 524,890 $ 127,680 $ 108,369 For additional discussion on our leases, hosting, and other purchase commitments, see Note 7 and Note 8 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 34 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. 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 revenue recognition, stock-based compensation, business combinations and valuation of goodwill and other acquired intangible assets, Convertible Notes, loss contingencies, and income taxes. There have been no material changes to our critical accounting policies and estimates as described in our Annual Report, other than described below. Recent Accounting Pronouncements See Note 1 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q. Item 3. Qualitative and Quantitative Factors about Market Risk We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk and foreign currency risk as follows: Interest Rate Risk We had cash and cash equivalents totaling $967.5 million and $545.6 million at March 31, 2021 and December 31, 2020, respectively. We had marketable securities totaling $1.6 billion and $2.0 billion at March 31, 2021 and December 31, 2020, respectively. Our cash and cash equivalents consist of cash in bank accounts and marketable securities consisting of U.S. government debt and agency securities, corporate debt securities, certificates of deposit, and commercial paper. The primary objectives of our investment activities are to preserve principal and provide liquidity without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the relatively short-term nature of our investment portfolio, a hypothetical 100 basis point change in interest rates would not have a material effect on the fair value of our portfolio for the periods presented. In April 2020, we issued 2025 Notes with an aggregate principal amount of $1.0 billion. We carry the 2025 Notes at face value less the unamortized debt issuance costs on our consolidated balance sheets. The 2025 Notes have a fixed interest rate; therefore, we have no financial statement risk associated with changes in interest rates with respect to the 2025 Notes. The fair value of the 2025 Notes changes when the market price of our stock fluctuates or market interest rates change. In August 2019, we issued 2026 Notes with an aggregate principal amount of $1.265 billion. We carry the 2026 Notes at face value less the unamortized debt issuance costs on our consolidated balance sheets. The 2026 Notes have a fixed interest rate; therefore, we have no financial statement risk associated with changes in interest rates with respect to the 2026 Notes. The fair value of the 2026 Notes changes when the market price of our stock fluctuates or market interest rates change. 35 Foreign Currency Risk For all periods presented, our sales and operating expenses were predominately denominated in U.S. dollars. We therefore have not had material foreign currency risk associated with sales and cost-based activities. The functional currency of our material operating entities is the U.S. dollar. For the periods presented, we believe the exposure to foreign currency fluctuation from operating expenses is immaterial as the related costs do not constitute a significant portion of our total expenses. As we grow operations, our exposure to foreign currency risk will likely become more significant. For the periods presented, we did not enter into any foreign currency exchange contracts. We may, however, enter into foreign currency exchange contracts for purposes of hedging foreign exchange rate fluctuations on our business operations in future operating periods as our exposures are deemed to be material. For additional discussion on foreign currency risk, see “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q.