Item 2. Management’s Discussion and Analysis
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 Third Quarter 2021 Results
Our key user metrics and financial results for the third quarter of 2021 were as follows:
User Metrics
•
Daily Active Users, or DAUs, increased 23% year-over-year to reach 306 million in Q3 2021.
•
Average revenue per user, or ARPU, increased 28% year-over-year to reach $3.49 in Q3 2021.
Financial Results
•
Revenue increased 57% year-over-year to reach $1,067.5 million in Q3 2021.
•
Total costs and expenses, excluding stock-based compensation and other payroll related tax expense, increased 44% to $925.8 million in Q3 2021.
•
Net loss improved by $127.9 million year-over-year to $(72.0) million in Q3 2021.
•
Diluted net loss per share improved by 67% to $(0.05) in Q3 2021, compared to $(0.14) in Q3 2020.
•
Adjusted EBITDA improved by $117.8 million year-over-year to $174.2 million in Q3 2021.
•
Cash provided by operating activities was $71.6 million in Q3 2021, compared to cash used in operating activities of $(54.8) million in Q3 2020.
•
Capital expenditures were $19.8 million in Q3 2021, compared to $14.7 million in Q3 2020.
•
Free Cash Flow was $51.7 million in Q3 2021, compared to $(69.6) million in Q3 2020.
•
Cash, cash equivalents, and marketable securities were $3.5 billion as of September 30, 2021.
•
Common shares outstanding plus shares underlying stock-based awards, including restricted stock units, restricted stock awards, and outstanding stock options, totaled 1,698 million at September 30, 2021, compared to 1,624 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.
25
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 because we believe that this metric is an important way for management and investors to understand engagement and monitor the performance of our platform. We also measure ARPU because we believe that this metric helps our management and investors to assess the extent to which we are monetizing our service.
User Engagement
We calculate average DAUs for a particular quarter by adding the number of DAUs on each day of that quarter and dividing that sum by the number of days in that quarter. DAUs are broken out by geography because markets have different characteristics . We had 306 million DAUs on average in the third quarter of 2021, an increase of 57 million, or 23%, from the third 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.
26
Monetization
We recorded revenue of $1,067.5 million for the three months ended September 30, 2021, compared to revenue of $678.7 million for the same period in 2020, an increase of 57% 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 $3.49 in the third quarter of 2021, up from $2.73 in the third 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.
27
Results of Operations
The following table summarizes certain selected historical financial results:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Revenue
$
1,067,471
$
678,668
$
2,819,163
$
1,595,304
Operating loss
(180,824
)
(167,864
)
(676,942
)
(764,836
)
Net loss
(71,959
)
(199,853
)
(510,505
)
(831,740
)
Adjusted EBITDA ( 1)
174,199
56,361
289,893
(120,446
)
(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, 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.
28
Interest Expense
Interest expense consists primarily of interest expense associated with the Convertible Notes and commitment fees related to our revolving credit facility.
Other Income (Expense), Net
Other income (expense), net consists of realized and unrealized gains and losses on sales of marketable securities, foreign currency transaction gains and losses, and gains and impairment on strategic 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.
29
Discussion of Results of Operations
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 and contribute to uncertainty in various aspects of our business. 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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Consolidated Statements of Operations Data:
Revenue
$
1,067,471
$
678,668
$
2,819,163
$
1,595,304
Costs and expenses ( 1) (2) :
Cost of revenue
443,473
293,095
1,301,095
796,959
Research and development
412,021
283,639
1,131,272
783,115
Sales and marketing
217,526
143,511
547,536
397,834
General and administrative
175,275
126,287
516,202
382,232
Total costs and expenses
1,248,295
846,532
3,496,105
2,360,140
Operating loss
(180,824
)
(167,864
)
(676,942
)
(764,836
)
Interest income
1,257
2,801
3,645
16,158
Interest expense
(4,031
)
(28,212
)
(13,626
)
(68,052
)
Other income (expense), net
112,631
(5,669
)
176,971
(14,483
)
Loss before income taxes
(70,967
)
(198,944
)
(509,952
)
(831,213
)
Income tax benefit (expense)
(992
)
(909
)
(553
)
(527
)
Net loss
$
(71,959
)
$
(199,853
)
$
(510,505
)
$
(831,740
)
Adjusted EBITDA ( 3)
$
174,199
$
56,361
$
289,893
$
(120,446
)
(1)
Stock-based compensation expense included in the above line items:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Stock-based compensation expense:
Cost of revenue
$
9,132
$
2,623
$
14,635
$
6,471
Research and development
198,893
132,003
537,177
377,836
Sales and marketing
51,675
27,393
118,250
79,306
General and administrative
41,198
30,061
124,509
86,687
Total
$
300,898
$
192,080
$
794,571
$
550,300
(2)
Depreciation and amortization expense included in the above line items:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Depreciation and amortization expense:
Cost of revenue
$
4,876
$
5,615
$
14,879
$
16,672
Research and development
17,321
9,526
42,715
26,904
Sales and marketing
6,306
3,233
14,654
9,780
General and administrative
4,007
3,430
12,030
10,577
Total
$
32,510
$
21,804
$
84,278
$
63,933
30
(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.
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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Consolidated Statements of Operations Data:
Revenue
100
%
100
%
100
%
100
%
Costs and expenses:
Cost of revenue
42
43
46
50
Research and development
39
42
40
49
Sales and marketing
20
21
19
25
General and administrative
16
19
18
24
Total costs and expenses
117
125
123
148
Operating loss
(17
)
(25
)
(24
)
(48
)
Interest income
—
—
—
1
Interest expense
—
(4
)
—
(4
)
Other income (expense), net
11
(1
)
6
(1
)
Loss before income taxes
(7
)
(29
)
(18
)
(52
)
Income tax benefit (expense)
—
—
—
—
Net loss
(7
)%
(29
)%
(18
)%
(52
)%
Three and Nine Months Ended September 30, 2021 and 2020
Revenue
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Revenue
$
1,067,471
$
678,668
$
2,819,163
$
1,595,304
Revenue as a dollar change
$
388,803
$
1,223,859
Revenue as a percentage change
57
%
77
%
Revenue for the three and nine months ended September 30, 2021 increased $388.8 million and $1,223.9 million, respectively, compared to the same periods in 2020. Revenue increased in both periods due to a combination of growth in advertisers and auction-based advertising demand and optimization efficiencies.
Cost of Revenue
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Cost of Revenue
$
443,473
$
293,095
$
1,301,095
$
796,959
Cost of Revenue as a dollar change
$
150,378
$
504,136
Cost of Revenue as a percentage change
51
%
63
%
31
Cost of revenue for the three and nine months ended September 30, 2021 increased $150.4 million and $504.1 million, respectively, compared to the same periods in 2020. The increase in cost of revenue was primarily driven by higher content costs which included $35.5 million and $201.2 million for the three and nine months ended September 30, 2021, respectively, for Spotlight, which launched in Q4 2020. In addition, the increases were driven by the growth in revenue share due to the overall increase in revenue and higher mix of revenue subject to revenue share. The increases were also a result of increased infrastructure costs attributable to DAU growth net of infrastructure cost efficiencies, campaign delivery and measurement costs, and content review costs across the platform.
Research and Development Expenses
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Research and Development Expenses
$
412,021
$
283,639
$
1,131,272
$
783,115
Research and Development Expenses as a dollar change
$
128,382
$
348,157
Research and Development Expenses as a percentage change
45
%
44
%
Research and development expenses for the three and nine months ended September 30, 2021 increased $128.4 million and $348.2 million, respectively, compared to the same periods in 2020. The increases were primarily driven by higher personnel expenses due to growth in research and development headcount, including increased cash- and stock-based compensation expense .
Sales and Marketing Expenses
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Sales and Marketing Expenses
$
217,526
$
143,511
$
547,536
$
397,834
Sales and Marketing Expenses as a dollar change
$
74,015
$
149,702
Sales and Marketing Expenses as a percentage change
52
%
38
%
Sales and marketing expenses for the three and nine months ended September 30, 2021 increased $74.0 million and $149.7 million, respectively, compared to the same periods in 2020. The increases were primarily driven by higher personnel expenses due to growth in sales and marketing headcount, including increased cash- and stock-based compensation expense , as well as increased marketing investments.
General and Administrative Expenses
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
General and Administrative Expenses
$
175,275
$
126,287
$
516,202
$
382,232
General and Administrative Expenses as a dollar change
$
48,988
$
133,970
General and Administrative Expenses as a percentage change
39
%
35
%
General and administrative expenses for the three and nine months ended September 30, 2021 increased $49.0 million and $134.0 million, respectively, compared to the same periods in 2020. The increases were primarily driven by higher personnel expenses due to growth in headcount, including increased cash- and stock-based compensation expense, as well as an increase in professional service fees.
32
Interest Income
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Interest Income
$
1,257
$
2,801
$
3,645
$
16,158
Interest Income as a dollar change
$
(1,544
)
$
(12,513
)
Interest Income as a percentage change
(55
)%
(77
)%
Interest income for the three and nine months ended September 30, 2021 decreased $1.5 million and $12.5 million, respectively, compared to the same periods in 2020. The decreases were primarily a result of lower interest rates on U.S. government-backed securities, partially offset by a higher overall invested cash balance.
Interest Expense
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Interest Expense
$
(4,031
)
$
(28,212
)
$
(13,626
)
$
(68,052
)
Interest Expense as a dollar change
$
24,181
$
54,426
Interest Expense as a percentage change
(86
)%
(80
)%
Interest expense for the three and nine months ended September 30, 2021 decreased $24.2 million and $54.4 million, respectively, compared to the same periods in 2020 primarily due to the early adoption of ASU 2020-06 on January 1, 2021. As a result of this adoption, we account for the Convertible Notes as a single liability, which eliminates the amortization of the debt discount. Prior to January 1, 2021, the carrying amount of the equity component was recorded as a debt discount and amortized to interest expense. Interest expense related to the amortization of debt issuance costs was $1.1 million and $3.3 million for the three and nine months ended September 30, 2021, respectively, while interest expense related to the amortization of debt discount and issuance costs was $24.5 million and $56.5 million for the three and nine months ended September 30, 2020, respectively. Contractual interest expense was $1.9 million and $7.2 million for the three and nine months ended September 30, 2021, respectively, and $3.0 million and $8.2 million for the three and nine months ended September 30, 2020, respectively.
Other Income (Expense), Net
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
(NM = Not Meaningful)
Other Income (Expense), Net
$
112,631
$
(5,669
)
$
176,971
$
(14,483
)
Other Income (Expense), Net as a dollar change
$
118,300
$
191,454
Other Income (Expense), Net as a percentage change
NM
NM
Other income, net for the three and nine months ended September 30, 2021 was $112.6 million and $177.0 million, respectively, compared to other expense, net of $5.7 million and other expense, net of $14.5 million, respectively, in the same periods in 2020. Other income, net for the three months ended September 30, 2021 was primarily a result of a $123.2 million unrealized gain on strategic investments.
Other income, net for the nine months ended September 30, 2021 was primarily a result of a $198.6 million unrealized gain and a $27.8 million realized gain on strategic investments offset by induced conversion expense related to the Convertible Notes of $41.5 million. Other expense, net for the nine months ended September 30, 2020 was primarily a result of a $15.5 million impairment of strategic investments.
33
Income Tax Benefit (Expense)
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Income Tax Benefit (Expense)
$
(992
)
$
(909
)
$
(553
)
$
(527
)
Income Tax Benefit (Expense) as a dollar change
$
(83
)
$
(26
)
Income Tax Benefit (Expense) as a percentage change
9
%
5
%
Effective Tax Rate
(1.4
)%
(0.5
)%
(0.1
)%
(0.1
)%
Income tax expense for the three and nine months ended September 30, 2021 was $(1.0) million and $(0.6) million, respectively, compared to an income tax expense of $(0.9) million and $(0.5) million, respectively, for the same periods 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.
Net Loss and Adjusted EBITDA
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Net Loss
$
(71,959
)
$
(199,853
)
$
(510,505
)
$
(831,740
)
Net Loss as a dollar change
$
127,894
$
321,235
Net Loss as a percentage change
(64)
%
(39)
%
Adjusted EBITDA
$
174,199
$
56,361
$
289,893
$
(120,446
)
Adjusted EBITDA as a dollar change
$
117,838
$
410,339
Adjusted EBITDA as a percentage change
209
%
341
%
Net loss for the three and nine months ended September 30, 2021 was $72.0 million and $510.5 million, respectively, compared to $199.9 million and $831.7 million, respectively, for the same periods in 2020. Adjusted EBITDA for the three and nine months ended September 30, 2021 was $174.2 million and $289.9 million, respectively, compared to $56.4 million and $(120.4) million, respectively, for the same periods in 2020. The increases in Adjusted EBITDA were attributable to increased revenues, partially offset by increased cost of revenue primarily due to higher content acquisition costs between the periods. The decreases in net loss were also partially offset by an increase in stock-based compensation expense in both 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 “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.
34
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;
•
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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Free Cash Flow reconciliation:
Net cash provided by (used in) operating activities
$
71,552
$
(54,828
)
$
107,352
$
(115,099
)
Less:
Purchases of property and equipment
(19,836
)
(14,727
)
(45,310
)
(41,385
)
Free Cash Flow
$
51,716
$
(69,555
)
$
62,042
$
(156,484
)
35
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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Adjusted EBITDA reconciliation:
Net loss
$
(71,959
)
$
(199,853
)
$
(510,505
)
$
(831,740
)
Add (deduct):
Interest income
(1,257
)
(2,801
)
(3,645
)
(16,158
)
Interest expense
4,031
28,212
13,626
68,052
Other (income) expense, net
(112,631
)
5,669
(176,971
)
14,483
Income tax (benefit) expense
992
909
553
527
Depreciation and amortization
32,510
21,804
84,278
63,933
Stock-based compensation expense
300,898
192,080
794,571
550,300
Payroll and other tax expense related to stock-based compensation
21,615
10,341
87,986
30,157
Adjusted EBITDA
$
174,199
$
56,361
$
289,893
$
(120,446
)
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities were $3.5 billion as of September 30, 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 2021, we entered into the Exchange Agreements with certain holders of the 2025 Notes and the 2026 Notes pursuant to which we exchanged approximately $715.9 million principal amount of the 2025 Notes and approximately $426.5 million principal amount of the 2026 Notes for aggregate consideration of approximately 52.4 million shares of Class A common stock.
In April 2021, we entered into a purchase agreement for the sale of an aggregate of $1.15 billion principal amount of convertible senior notes due in 2027. The net proceeds from the issuance of the 2027 Notes were $1.05 billion, net of debt issuance costs and the 2027 Capped Call Transactions discussed further in Note 7. The 2027 Notes mature on May 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2027 Notes were not convertible as of September 30, 2021.
In April 2020, we entered into a purchase agreement for the sale of an aggregate of $1.0 billion principal amount of convertible senior notes due in 2025. The net proceeds from the issuance of the 2025 Notes were $888.6 million, net of debt issuance costs and the 2025 Capped Call Transactions discussed further in Note 7. The 2025 Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The sale price requirement for conversion was satisfied as of September 30, 2021 and as a result, the 2025 Notes will continue to be eligible for optional conversion during the fourth 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 convertible senior notes due in 2026. The net proceeds from the issuance of the 2026 Notes were $1.15 billion, net of debt issuance costs and the 2026 Capped Call Transactions discussed further in Note 7. The 2026 Notes mature on August 1, 2026 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The sale price requirement for conversion was satisfied as of September 30, 2021 and as a result, the 2026 Notes will continue to be eligible for optional conversion during the fourth 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 the Convertible Notes offerings that allows us to borrow up to $1.1 billion to fund working capital and general corporate-purpose expenditures. The loan bears
36
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 Transaction s and issuance of the 2026 Notes . In April 20 20 , we amended the Credit Facility to revise the covenants that restrict the incurrence of indebtedness to permit the issuance of the 2025 Notes . In April 2021, we amended the Credit Facility to revise the covenants that restrict the incurrence of indebtedness to permit the issuance of the 2027 Notes and subject to satisfaction of a specified senior net leverage ratio , additional future indebtedness . In July 2021 , the amount we are permitted to borrow under the Credit Facility decreased to $1.05 billion. As of September 30, 2021 , no amounts were outstanding under the Credit Facility. As of September 30, 2021 , we had $ 2 2 . 4 million in the form of outstan ding 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 September 30, 2021, approximately 8% 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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(dollars in thousands)
Net cash provided by (used in) operating activities
$
71,552
$
(54,828
)
$
107,352
$
(115,099
)
Net cash provided by (used in) investing activities
(155,202
)
(375,250
)
257,222
(495,797
)
Net cash provided by financing activities
4,045
2,434
1,062,157
914,623
Change in cash, cash equivalents, and restricted cash
$
(79,605
)
$
(427,644
)
$
1,426,731
$
303,727
Free Cash Flow (1)
$
51,716
$
(69,555
)
$
62,042
$
(156,484
)
(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 and Nine Months Ended September 30, 2021 and 2020
Net Cash Provided by (Used In) Operating Activities
Net cash provided by operating activities was $71.6 million in the three months ended September 30, 2021, as compared to net cash used in operations of $54.8 million in the three months ended September 30, 2020 resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $300.9 million and depreciation and amortization expense of $32.5 million, partially offset by gains on debt and equity securities, net of $121.0 million. Net cash provided by operating activities for the three months ended September 30, 2021 was also impacted by an increase in the accounts receivable balance of $132.9 million due to an increase in revenue in the period.
Net cash provided by operating activities was $107.4 million in the nine months ended September 30, 2021, as compared to net cash used in operations of $115.1 million in the nine months ended September 30, 2020 resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $794.6 million and depreciation and amortization expense of $84.3 million, partially offset by gains on debt and equity securities, net of $223.5 million. Net cash provided by operating activities for the nine months ended September 30, 2021 was also impacted by an increase in the accounts receivable balance of $178.0 million due to an increase in revenue in the period, partially offset by a $89.7 million increase in accrued expenses and other current liabilities primarily due to the timing of payments.
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Net Cash Provided by (Used In) Investing Activities
Net cash used in investing activities was $155.2 million for the three months ended September 30, 2021, compared to net cash used in investing activities of $375.3 million for the same period in 2020. Our investing activities in the three months ended September 30, 2021 consisted of cash used in the purchase of marketable securities of $609.2 million partially offset by cash provided by the sales and maturities of marketable securities of $512.9 million. Net cash used in investing activities for the three months ended September 30, 2020 consisted primarily of cash used in the purchase of marketable securities of $1.1 billion, partially offset by the sales and maturities of marketable securities of $824.8 million.
Net cash provided by investing activities was $257.2 million for the nine months ended September 30, 2021, compared to net cash used in investing activities of $495.8 million for the same period in 2020. Our investing activities in the nine months ended September 30, 2021 consisted of cash provided by the sales and maturities of marketable securities of $2.4 billion, partially offset by the purchase of marketable securities of $1.9 billion and cash paid for acquisitions of $176.6 million. Net cash used in investing activities for the nine months ended September 30, 2020 consisted of cash used in the purchase of marketable securities of $2.6 billion and strategic investments of $95.3 million, partially offset by the sales and maturities of marketable securities of $2.3 billion.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $4.0 million and $1.1 billion for the three and nine months ended September 30, 2021, compared to net cash provided by financing activities of $2.4 million and $914.6 million for the same periods in 2020, respectively. Our financing activities for the nine months ended September 30, 2021 consisted primarily of net proceeds of $1.1 billion from the issuance of the 2027 Notes, offset by the purchase of the 2027 Capped Call Transactions of $86.8 million. Our financing activities for the nine months ended September 30, 2020 consisted primarily of net proceeds of $988.6 million from the issuance of the 2025 Notes, offset by the purchase of the 2025 Capped Call Transactions of $100.0 million. Net cash provided by financing activities in all periods presented includes proceeds from the exercise of stock options.
Free Cash Flow
Free Cash Flow was $51.7 million and $62.0 million for the three and nine months ended September 30, 2021, respectively, compared to $(69.6) million and $(156.5) million for the three and nine months ended September 30, 2020, respectively. Free Cash Flow in all periods was composed of net cash provided by operating activities, resulting primarily from net loss, adjusted for non-cash items as well as changes in working capital and other operating assets and liabilities. Free Cash Flow also included purchases of property and equipment of $19.8 million and $45.3 million for the three and nine months ended September 30, 2021, respectively, compared to $14.7 million and $41.4 million for the three and nine months ended September 30, 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.
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Commitments
The following table summarizes our contractual obligations as of September 30, 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
$
534,609
$
176,624
$
357,985
$
—
$
—
Lease commitments
459,884
14,423
162,495
159,873
123,093
Other commitments
70,128
21,742
45,314
3,070
2
Total contractual commitments
$
1,064,621
$
212,789
$
565,794
$
162,943
$
123,095
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.
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:
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Interest Rate Risk
We had cash and cash equivalents totaling $2.0 billion and $545.6 million at September 30, 2021 and December 31, 2020, respectively. We had marketable securities totaling $1.5 billion and $2.0 billion at September 30, 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 2021, we issued the 2027 Notes with an aggregate principal amount of $1.15 billion, the full amount of which is outstanding as of September 30, 2021. We carry the 2027 Notes at face value less the unamortized debt issuance costs on our consolidated balance sheets. The 2027 Notes do not bear regular interest; therefore, we have no financial statement risk associated with changes in interest rates with respect to the 2027 Notes. The fair value of the 2027 Notes changes when the market price of our stock fluctuates or market interest rates change.
In April 2020, we issued the 2025 Notes with an aggregate principal amount of $1.0 billion, of which $0.3 billion remains outstanding as of September 30, 2021. 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 the 2026 Notes with an aggregate principal amount of $1.265 billion, of which $0.8 billion remains outstanding as of September 30, 2021. 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.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.