Snap Inc 10-Q

ITEM 1. FINANCIAL STATEMENTS Snap Inc. Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 31, 2022 2021 Cash flows from operating activities Net loss $ ( 359,624 ) $ ( 286,882 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 38,100 23,498 Stock-based compensation 275,444 237,073 Amortization of debt issuance costs 1,413 1,044 Losses (gains) on debt and equity securities, net 79,127 ( 22,518 ) Other 1,125 6,836 Change in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net of allowance 126,027 129,316 Prepaid expenses and other current assets ( 27,178 ) ( 12,436 ) Operating lease right-of-use assets 16,984 11,198 Other assets ( 308 ) ( 898 ) Accounts payable 54,980 56,505 Accrued expenses and other current liabilities ( 62,828 ) 5,349 Operating lease liabilities ( 17,816 ) ( 13,295 ) Other liabilities 2,013 2,096 Net cash provided by operating activities 127,459 136,886 Cash flows from investing activities Purchases of property and equipment ( 21,175 ) ( 10,851 ) Purchases of strategic investments ( 150 ) ( 1,350 ) Cash paid for acquisitions, net of cash acquired ( 788 ) ( 108,912 ) Purchases of marketable securities ( 1,342,381 ) ( 523,219 ) Sales of marketable securities 9,777 108,056 Maturities of marketable securities 342,545 816,931 Other ( 5,493 ) ( 100 ) Net cash (used in) provided by investing activities ( 1,017,665 ) 280,555 Cash flows from financing activities Proceeds from issuance of convertible notes, net of issuance costs 1,483,500 — Purchase of capped calls ( 177,000 ) — Proceeds from the exercise of stock options 2,266 4,453 Net cash provided by financing activities 1,308,766 4,453 Change in cash, cash equivalents, and restricted cash 418,560 421,894 Cash, cash equivalents, and restricted cash, beginning of period 1,994,723 546,543 Cash, cash equivalents, and restricted cash, end of period $ 2,413,283 $ 968,437 Supplemental disclosures Cash paid for income taxes, net $ 2,636 $ 11,008 Cash paid for interest $ 3,454 $ 5,127 See Notes to Consolidated Financial Statements. 5 Snap Inc. Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited) Three Months Ended March 31, 2022 2021 Revenue $ 1,062,727 $ 769,584 Costs and expenses: Cost of revenue 420,897 412,601 Research and development 455,563 348,580 Sales and marketing 241,886 150,286 General and administrative 215,908 161,723 Total costs and expenses 1,334,254 1,073,190 Operating loss ( 271,527 ) ( 303,606 ) Interest income 3,123 1,137 Interest expense ( 5,173 ) ( 5,031 ) Other (expense) income, net ( 77,537 ) 22,058 Loss before income taxes ( 351,114 ) ( 285,442 ) Income tax expense ( 8,510 ) ( 1,440 ) Net loss $ ( 359,624 ) $ ( 286,882 ) Net loss per share attributable to Class A, Class B, and Class C common stockholders (Note 3): Basic $ ( 0.22 ) $ ( 0.19 ) Diluted $ ( 0.22 ) $ ( 0.19 ) Weighted average shares used in computation of net loss per share: Basic 1,619,113 1,501,636 Diluted 1,619,113 1,501,636 See Notes to Consolidated Financial Statements. 6 Snap Inc. Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended March 31, 2022 2021 Net loss $ ( 359,624 ) $ ( 286,882 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) on marketable securities, net of tax ( 6,692 ) 116 Foreign currency translation ( 2,842 ) ( 9,569 ) Total other comprehensive income (loss), net of tax ( 9,534 ) ( 9,453 ) Total comprehensive loss $ ( 369,158 ) $ ( 296,335 ) See Notes to Consolidated Financial Statements. 7 Snap Inc. Consolidated Balance Sheets (in thousands, except par value) March 31, 2022 December 31, 2021 (unaudited) Assets Current assets Cash and cash equivalents $ 2,412,372 $ 1,993,809 Marketable securities 2,588,619 1,699,076 Accounts receivable, net of allowance 941,715 1,068,873 Prepaid expenses and other current assets 117,102 92,244 Total current assets 6,059,808 4,854,002 Property and equipment, net 214,441 202,644 Operating lease right-of-use assets 426,027 322,252 Intangible assets, net 292,310 277,654 Goodwill 1,645,284 1,588,452 Other assets 307,067 291,302 Total assets $ 8,944,937 $ 7,536,306 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 180,387 $ 125,282 Operating lease liabilities 51,684 52,396 Accrued expenses and other current liabilities 610,728 674,108 Total current liabilities 842,799 851,786 Convertible senior notes, net 3,736,843 2,253,087 Operating lease liabilities, noncurrent 426,834 325,509 Other liabilities 375,425 315,756 Total liabilities 5,381,901 3,746,138 Commitments and contingencies (Note 8) Stockholders’ equity Class A non-voting common stock, $ 0.00001 par value. 3,000,000 shares authorized, 1,378,259 shares issued and outstanding at March 31, 2022, and 3,000,000 shares authorized, 1,364,887 shares issued and outstanding at December 31, 2021. 14 14 Class B voting common stock, $ 0.00001 par value. 700,000 shares authorized, 22,677 shares issued and outstanding at March 31, 2022, and 700,000 shares authorized, 22,769 shares issued and outstanding at December 31, 2021. — — Class C voting common stock, $ 0.00001 par value. 260,888 shares authorized, 231,627 shares issued and outstanding at March 31, 2022, and 260,888 shares authorized, 231,627 shares issued and outstanding at December 31, 2021. 2 2 Additional paid-in capital 12,211,123 12,069,097 Accumulated other comprehensive income (loss) ( 4,013 ) 5,521 Accumulated deficit ( 8,644,090 ) ( 8,284,466 ) Total stockholders’ equity 3,563,036 3,790,168 Total liabilities and stockholders’ equity $ 8,944,937 $ 7,536,306 See Notes to Consolidated Financial Statements. 8 Snap Inc. Consolidated Statements of Stockholders’ Equity (in thousands) (unaudited) Three Months Ended March 31, 2022 2021 Shares Amount Shares Amount Class A non-voting common stock Balance, beginning of period 1,364,887 $ 14 1,248,010 $ 12 Shares issued in connection with exercise of stock options under stock-based compensation plans 160 — 314 — Issuance of Class A non-voting common stock in connection with acquisitions 1,118 — — — Issuance of Class A non-voting common stock for vesting of restricted stock units and restricted stock awards, net 11,996 — 15,348 1 Conversion of Class B voting common stock to Class A non-voting common stock 98 — 61 — Balance, end of period 1,378,259 14 1,263,733 13 Class B voting common stock Balance, beginning of period 22,769 — 23,696 — Shares issued in connection with exercise of stock options under stock-based compensation plans 6 — 5 — Conversion of Class C voting common stock to Class B voting common stock — — — — Conversion of Class B voting common stock to Class A non-voting common stock ( 98 ) — ( 61 ) — Balance, end of period 22,677 — 23,640 — Class C voting common stock Balance, beginning of period 231,627 2 231,627 2 Issuance of Class C voting common stock for settlement of restricted stock units, net — — — — Conversion of Class C voting common stock to Class B voting common stock — — — — Balance, end of period 231,627 2 231,627 2 Additional paid-in capital Balance, beginning of period — 12,069,097 — 10,200,141 Stock-based compensation expense — 272,720 — 237,073 Shares issued in connection with exercise of stock options under stock-based compensation plans — 2,267 — 4,453 Cumulative-effect adjustment from accounting changes — — — ( 664,021 ) Issuance of Class A non-voting common stock in connection with acquisitions — 44,039 — — Purchase of capped calls — ( 177,000 ) — — Balance, end of period — 12,211,123 — 9,777,646 Accumulated deficit Balance, beginning of period — ( 8,284,466 ) — ( 7,891,542 ) Cumulative-effect adjustment from accounting changes — — — 95,031 Net loss — ( 359,624 ) — ( 286,882 ) Balance, end of period — ( 8,644,090 ) — ( 8,083,393 ) Accumulated other comprehensive income (loss) Balance, beginning of period — 5,521 — 21,363 Other comprehensive income (loss), net of tax ( 9,534 ) — ( 9,453 ) Balance, end of period — ( 4,013 ) — 11,910 Total stockholders’ equity 1,632,563 $ 3,563,036 1,519,000 $ 1,706,178 See Notes to Consolidated Financial Statements. 9 Snap Inc. Notes to Consolidated Financial Statements 1. Description of Business and Summary of Significant Accounting Policies Snap Inc. is a camera company. Snap Inc. (“we,” “our,” or “us”) was formed as Future Freshman, LLC, a California limited liability company, in 2010. We changed our name to Toyopa Group, LLC in 2011, incorporated as Snapchat, Inc., a Delaware corporation, in 2012, and changed our name to Snap Inc. in 2016. Snap Inc. is headquartered in Santa Monica, California. Our flagship product, Snapchat, is a camera application that was created to help people communicate through short videos and images called “Snaps.” Basis of Presentation The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Our consolidated financial statements include the accounts of Snap Inc. and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) in February 2022 (the “Annual Report”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position, results of operations, and cash flows. Certain reclassifications have been made in the prior periods to conform to the current year's presentation. None of these reclassifications had a material impact on our consolidated financial statements. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. There have been no changes to our significant accounting policies described in our Annual Report that have had a material impact on our consolidated financial statements and related notes. Use of Estimates The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management’s estimates are based on historical information available as of the date of the consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. Key estimates relate primarily to determining the fair value of assets and liabilities assumed in business combinations, evaluation of contingencies, uncertain tax positions, forfeiture rate, the fair value of stock-based awards, and the fair value of strategic investments. On an ongoing basis, management evaluates our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities . Recent Accounting Pronouncements In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, Government Assistance (Topic 832): Disclosure by Business Entities about Government Assistance , which improves the transparency of government assistance received by requiring the disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on an entity's financial statements. The guidance is effective for annual periods beginning after December 15, 2021, with early adoption permitted. Effective January 1, 2022 , we early adopted ASU 2021-10 on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . The guidance is effective for interim and annual periods beginning after December 10 15, 2022, with early adoption permitted. Effective January 1, 2022 , we early adopted ASU 2021-08 on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021 , we early adopted ASU 2020-06 using the modified retrospective approach. Adoption of the new standard resulted in a decrease to accumulated deficit of $ 95.0 million, a decrease to additional paid-in capital of $ 664.0 million, and an increase to convertible senior notes, net of $ 569.0 million. 2. 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. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine collectability by performing ongoing credit evaluations and monitoring customer accounts receivable balances. Sales tax, including value added tax, is excluded from reported revenue. We generate substantially all of our revenues by offering various advertising products on Snapchat, which include Snap Ads and AR Ads, referred to as advertising revenue. AR Ads include Sponsored 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. We also generate revenue from sales of hardware products. For the periods presented, revenue from the sales of hardware products was not material. 11 The following table represents our revenue disaggregated by geography based on the billing address of the advertising customer: Three Months Ended March 31, 2022 2021 (in thousands) Revenue: North America (1) (2) $ 749,243 $ 531,363 Europe (3) 159,076 129,118 Rest of world 154,408 109,103 Total revenue $ 1,062,727 $ 769,584 (1) North America includes Mexico, the Caribbean, and Central America. (2) United States revenue was $ 727.4 million and $ 514.6 million for the three months ended March 31, 2022 and 2021, respectively. (3) Europe includes Russia and Turkey. 3. Net Loss per Share We compute net loss per share using the two-class method required for multiple classes of common stock. We have three classes of authorized common stock for which voting rights differ by class. Basic net loss per share is computed by dividing net loss attributable to each class of stockholders by the weighted-average number of shares of stock outstanding during the period, adjusted for v ested restricted stock units (“RSUs”) that have not been settled and restricted stock awards (“RSAs”) for which the risk of forfeiture has not yet lapsed. For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. Diluted net loss per share attributable to common stockholders is computed by dividing the resulting net loss attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding. We use the if-converted method for calculating any potential dilutive effect of the convertible senior notes due in 2025, 2026, 2027, and 2028 (collectively, the “Convertible Notes”) on diluted net loss per share. The Convertible Notes would have a dilutive impact on net income per share when the average market price of Class A common stock for a given period exceeds the respective conversion price of the Convertible Notes. For the periods presented, our potentially dilutive shares relating to stock options, RSUs, RSAs, and Convertible Notes were not included in the computation of diluted net loss per share as the effect of including these shares in the calculation would have been anti-dilutive. The numerators and denominators of the basic and diluted net loss per share computations for our common stock are calculated as follows for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 (in thousands, except per share data) Class A Common Class B Common Class C Common Class A Common Class B Common Class C Common Numerator: Net loss $ ( 303,132 ) $ ( 5,045 ) $ ( 51,447 ) $ ( 238,107 ) $ ( 4,523 ) $ ( 44,252 ) Net loss attributable to common stockholders $ ( 303,132 ) $ ( 5,045 ) $ ( 51,447 ) $ ( 238,107 ) $ ( 4,523 ) $ ( 44,252 ) Denominator: Basic shares: Weighted-average common shares - Basic 1,364,772 22,714 231,627 1,246,333 23,676 231,627 Diluted shares: Weighted-average common shares - Diluted 1,364,772 22,714 231,627 1,246,333 23,676 231,627 Net loss per share attributable to common stockholders: Basic $ ( 0.22 ) $ ( 0.22 ) $ ( 0.22 ) $ ( 0.19 ) $ ( 0.19 ) $ ( 0.19 ) Diluted $ ( 0.22 ) $ ( 0.22 ) $ ( 0.22 ) $ ( 0.19 ) $ ( 0.19 ) $ ( 0.19 ) 12 The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented: As of March 31, 2022 2021 (in thousands) Stock options 4,132 5,305 Unvested RSUs and RSAs 77,793 114,307 Convertible Notes (if-converted) 89,379 101,591 4. Stockholders’ Equity We maintain three share-based employee compensation plans: the 2017 Equity Incentive Plan (“2017 Plan”), the 2014 Equity Incentive Plan (“2014 Plan”), and the 2012 Equity Incentive Plan (“2012 Plan”, and collectively with the 2017 Plan and the 2014 Plan, the “Stock Plans”). The 2017 Plan serves as the successor to the 2014 Plan and 2012 Plan and provides for the grant of incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, stock appreciation rights, RSAs, RSUs, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our affiliates. Restricted Stock Units and Restricted Stock Awards The following table summarizes the RSU and RSA activity during the three months ended March 31, 2022: Class A Outstanding Weighted- Average Grant Date Fair Value (in thousands, except per share data) Unvested at December 31, 2021 86,180 $ 26.07 Granted 6,864 $ 34.87 Vested ( 12,816 ) $ 20.05 Forfeited ( 2,435 ) $ 25.03 Unvested at March 31, 2022 77,793 $ 27.87 All RSUs and RSAs vest on the satisfaction of a service based condition. Total unrecognized compensation cost related to outstanding RSUs and RSAs was $ 1.9 billion as of March 31, 2022 and is expected to be recognized over a weighted-average period of 2.2 years. The service condition for RSUs and RSAs 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. In limited instances, we have issued RSUs with vesting periods in excess of four years. The service condition for RSUs and RSAs granted after February 2018 is generally satisfied in equal monthly or quarterly installments over three to four years . 13 Stock Options The following table summarizes the stock option award activity under the Stock Plans during the three months ended March 31, 2022: Class A Number of Shares Class B Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1) (in thousands, except per share data) Outstanding at December 31, 2021 3,676 628 $ 10.59 4.19 $ 157,374 Granted — — $ — — $ — Exercised ( 160 ) ( 6 ) $ 13.70 — $ — Forfeited ( 6 ) — $ 26.42 — $ — Outstanding at March 31, 2022 3,510 622 $ 10.46 3.90 $ 106,477 (1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of our Class A common stock as of December 31, 2021 and March 31, 2022, respectively. Total unrecognized compensation cost related to unvested stock options was $ 1.6 million as of March 31, 2022 and is expected to be recognized over a weighted-average period of 1.1 years. Stock-Based Compensation Expense by Function Total stock-based compensation expense by function was as follows: Three Months Ended March 31, 2022 2021 (in thousands) Cost of revenue $ 2,446 $ 2,656 Research and development 182,866 163,793 Sales and marketing 42,071 29,084 General and administrative 48,061 41,540 Total $ 275,444 $ 237,073 5. Business Acquisitions 2022 Acquisitions In the three months ended March 31, 2022, we completed acquisitions to enhance our existing platform, technology, and workforce. The aggregate purchase consideration was $ 102.5 million, which included $ 0.5 million in cash, $ 44.0 million in shares of our Class A common stock, and $ 58.0 million recorded in other liabilities on the consolidated balance sheet. Of the aggregate purchase consideration, $ 60.8 million was allocated to goodwill and the remainder primarily to identifiable intangible assets. The goodwill amount represents synergies related to our existing platform expected to be realized from the business acquisitions and assembled workforces. Of the acquired goodwill and intangible assets, $ 83.9 million is deductible for tax purposes. 2021 Acquisitions Wave Optics In May 2021, we acquired Wave Optics Limited (“Wave Optics”), a display technology company that supplies light engines and diffractive waveguides for augmented reality displays. The total consideration was $ 541.8 million, of which $ 510.4 million represents purchase consideration and primarily consists of 4.7 million shares of our Class A common stock with a fair value of $ 252.0 million, cash of $ 13.7 million, and a $ 238.4 million payable due no later than May 2023 in either cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our 14 election . The remaining $ 31.4 million of total consideration transferred represents compensation for future employment services. The allocation of purchase price is subject to change based on information received related to the assets and liabilities that existed as of the acquisition date. The allocation of the total purchase consideration for this acquisition is estimated as follows: Total (in thousands) Trademarks $ 20,584 Technology 77,118 Customer relationships 32,708 Goodwill 370,236 Net deferred tax liability ( 3,313 ) Other assets acquired and liabilities assumed, net 13,111 Total $ 510,444 The goodwill amount represents synergies expected to be realized from the business combination and assembled workforce. The associated goodwill and intangible assets are not deductible for tax purposes. Fit Analytics In March 2021, we acquired Fit Analytics GmbH (“Fit Analytics”), a sizing technology company that powers solutions for retailers and brands, to grow our e-commerce and shopping offerings. The purchase consideration for Fit Analytics was $ 124.4 million, which primarily represents current and future cash consideration payments. The allocation of purchase price is based on information received related to the assets and liabilities that existed as of the acquisition date. The allocation of the total purchase consideration for this acquisition is as follows: Total (in thousands) Trademarks $ 800 Technology 17,000 Customer relationships 17,000 Goodwill 88,132 Net deferred tax liability ( 5,643 ) Other assets acquired and liabilities assumed, net 7,160 Total $ 124,449 The goodwill amount represents synergies expected to be realized from this business combination and assembled workforce. The associated goodwill and intangible assets are not deductible for tax purposes. Other 2021 Acquisitions For the year ended December 31, 2021, we completed other acquisitions to enhance our existing platform, technology, and workforce. The aggregate purchase consideration was $ 266.1 million, which included $ 139.5 million in cash, $ 93.7 million in shares of our Class A common stock, and $ 32.9 million recorded in other liabilities on the consolidated balance sheet. 15 The aggregate allocation of purchase consideration was as follows: Total (in thousands) Technology $ 64,150 Customer relationships 4,000 Goodwill 203,482 Net deferred tax liability ( 11,871 ) Other assets acquired and liabilities assumed, net 6,325 Total $ 266,086 The goodwill amount represents synergies related to our existing platform expected to be realized from the business acquisitions and assembled workforces. Of the acquired goodwill and intangible assets, $ 8.2 million is deductible for tax purposes. 6. Goodwill and Intangible Assets The changes in the carrying amount of goodwill for the three months ended March 31, 2022 were as follows: Goodwill (in thousands) Balance as of December 31, 2021 $ 1,588,452 Goodwill acquired 60,791 Foreign currency translation ( 3,959 ) Balance as of March 31, 2022 $ 1,645,284 Intangible assets consisted of the following: As of March 31, 2022 Weighted- Average Remaining Useful Life - Years Gross Carrying Amount Accumulated Amortization Net (in thousands, except years) Domain names 4.5 $ 963 $ 417 $ 546 Trademarks 4.1 21,384 3,708 17,676 Technology 3.7 369,068 159,580 209,488 Customer relationships 4.9 53,708 8,998 44,710 Patents 6.6 26,689 12,173 14,516 Other 1.8 6,000 626 5,374 $ 477,812 $ 185,502 $ 292,310 As of December 31, 2021 Weighted- Average Remaining Useful Life - Years Gross Carrying Amount Accumulated Amortization Net (in thousands except years) Domain names 4.6 $ 967 $ 365 $ 602 Trademarks 4.3 21,384 2,613 18,771 Technology 3.6 343,800 142,588 201,212 Customer relationships 5.1 53,709 6,332 47,377 Patents 4.0 21,195 11,503 9,692 $ 441,055 $ 163,401 $ 277,654 16 Amortization of intangible assets was $ 22.5 million and $ 10.4 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the estimated intangible asset amortization expense for the next five years and thereafter is as follows: Estimated Amortization (in thousands) Remainder of 2022 $ 64,244 2023 81,366 2024 66,841 2025 49,493 2026 18,979 Thereafter 11,387 Total $ 292,310 7. Convertible Notes 2028 Notes In February 2022, we entered into a purchase agreement with certain counterparties for the sale of an aggregate of $ 1.50 billion principal amount of convertible senior notes due in 2028 (the “2028 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2028 Notes consisted of a $ 1.30 billion initial placement and an over-allotment option that provided the initial purchasers of the 2028 Notes with the option to purchase an additional $ 200.0 million aggregate principal amount of the 2028 Notes, which was fully exercised. The 2028 Notes were issued pursuant to an indenture dated February 11, 2022 . The net proceeds from the issuance of the 2028 Notes were $ 1.31 billion, net of debt issuance costs and cash used to purchase the capped call transactions (“2028 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2028 Notes are unsecured and unsubordinated obligations. Interest is payable in cash semi-annually in arrears beginning on September 1, 2022 at a rate of 0.125 % per year. The 2028 Notes mature on March 1, 2028 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2028 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 17.7494 shares of Class A common stock per $ 1,000 principal amount of 2028 Notes, which is equivalent to an initial conversion price of approximately $ 56.34 per share of our Class A common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2028 Notes. We may redeem for cash all or any portion of the 2028 Notes, at our option, on or after March 5, 2025 if the last reported sale price of our Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days at a redemption price equal to 100 % of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, if any. Holders of the 2028 Notes may convert all or a portion of their 2028 Notes at their option prior to December 1, 2027, in multiples of $ 1,000 principal amounts, only under the following circumstances: • if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the 2028 Notes on each such trading day; • during the five business day period after any ten consecutive trading day period in which the trading price per $ 1,000 principal amount of the 2028 Notes for each day of that ten consecutive trading day period was less than 98 % of the product of the last reported sale price of our Class A common stock and the applicable conversion rate of the 2028 Notes on such trading day; 17 • on a notice of redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, in which case we may be required to increase the conversion rate for the 2028 Notes so surrendered for conversion in connection with such redemption notice; or • on the occurrence of specified corporate events. On or after December 1, 2027, the 2028 Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Holders of the 2028 Notes who convert the 2028 Notes in connection with a make-whole fundamental change, as defined in the indenture governing the 2028 Notes, or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the 2028 Notes may require us to repurchase all or a portion of the 2028 Notes at a price equal to 100 % of the principal amount of 2028 Notes, plus any accrued and unpaid interest, if any. We accounted for the issuance of the 2028 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives. 2027 Notes 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 “2027 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2027 Notes were $ 1.05 billion, net of debt issuance costs and cash used to purchase the capped call transactions (the “2027 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2027 Notes are unsecured and unsubordinated obligations which do not bear regular interest and for which the principal balance will not accrete. The 2027 Notes will mature on May 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2027 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 11.2042 shares of Class A common stock per $ 1,000 principal amount of 2027 Notes, which is equivalent to an initial conversion price of approximately $ 89.25 per share of our Class A common stock. We may redeem for cash all or portions of the 2027 Notes, at our option, on or after May 5, 2024 based on certain circumstances. 2025 Notes 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 “2025 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2025 Notes were $ 888.6 million, net of debt issuance costs and cash used to purchase the capped call transactions (the “2025 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2025 Notes are unsecured and unsubordinated obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 0.25 % per year. The 2025 Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2025 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 46.1233 shares of Class A common stock per $ 1,000 principal amount of 2025 Notes, which is equivalent to an initial conversion price of approximately $ 21.68 per share of our Class A common stock. We may redeem for cash all or portions of the 2025 Notes, at our option, on or after May 6, 2023 based on certain circumstances. 18 2026 Notes 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 “2026 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2026 Notes were $ 1.15 billion, net of debt issuance costs and cash used to purchase the capped call transactions (the “2026 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2026 Notes are unsecured and unsubordinated obligations. Interest is payable in cash semi-annually in arrears beginning on February 1, 2020 at a rate of 0.75 % per year. The 2026 Notes mature on August 1, 2026 unless repurchased, redeemed, or converted in accordance with the terms prior to such date. The 2026 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 43.8481 shares of Class A common stock per $ 1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $ 22.81 per share of our Class A common stock. We may redeem for cash all or portions of the 2026 Notes, at our option, on or after August 6, 2023 based on certain circumstances. Exchange Transactions In 2021, we entered into various exchange agreements (collectively, 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 (the “Exchange Shares”). The Exchange Shares included an additional 0.7 million shares of our Class A common stock not provided for under the original conversion terms of the 2025 Notes and the 2026 Notes to induce the holders to agree to the exchange. The Exchange Agreements were accounted for as an induced conversion with the fair value of 0.7 million Exchange Shares, less accrued interest, recognized as an inducement expense in other income (expense), net in our consolidated statements of operations and included as an adjustment to reconcile net loss to net cash provided by (used in) operating activities in our consolidated statements of cash flows. There was no inducement expense recorded for the three months ended March 31, 2022 or 2021. The common stock consideration issued under the original terms of the 2025 Notes and the 2026 Notes was accounted for under the general conversion accounting guidance with the net carrying amount of $ 1,132.6 million recorded in additional paid-in-capital and as a non-cash transaction excluded from cash activities on the consolidated statements of cash flows. The Convertible Notes consisted of the following: As of March 31, 2022 As of December 31, 2021 2025 Notes 2026 Notes 2027 Notes 2028 Notes 2025 Notes 2026 Notes 2027 Notes (in thousands) Principal $ 284,105 $ 838,491 $ 1,150,000 $ 1,500,000 $ 284,105 $ 838,493 $ 1,150,000 Unamortized debt issuance costs ( 2,006 ) ( 5,662 ) ( 10,831 ) ( 17,254 ) ( 2,168 ) ( 5,982 ) ( 11,361 ) Net carrying amount $ 282,099 $ 832,829 $ 1,139,169 $ 1,482,746 $ 281,937 $ 832,511 $ 1,138,639 As of March 31, 2022, the debt issuance costs on the 2025 Notes, the 2026 Notes, the 2027 Notes, and the 2028 Notes will be amortized over the remaining period of approximately 3.1 years, 4.3 years, 5.1 years, and 5.9 years, respectively. Interest expense related to the amortization of debt issuance costs was $ 1.4 million and $ 1.0 million for the three months ended March 31, 2022 and 2021, respectively. Contractual interest expense was $ 2.0 million and $ 3.0 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the if-converted value of the 2025 Notes and the 2026 Notes exceeded the principal amount by $ 187.5 million and $ 484.7 million, respectively. As of March 31, 2022, the if-converted value of the 2027 Notes and the 2028 Notes did not exceed the principal amount. The sale price for conversion was satisfied as of March 31, 2022 for the 2025 Notes and the 2026 Notes, and as a result, the 2025 Notes and 2026 Notes will continue to be eligible for optional conversion during the second quarter of 2022. The 2027 Notes and the 2028 Notes were not eligible for conversion as of 19 March 31 , 202 2 . No sinking fund is provided for the Convertible Notes, which means that we are not required to redeem or retire them periodically. Refer to Note 7 in our consolidated financial statements in the Annual Report for additional details. Capped Call Transactions In connection with the pricing of the 2025 Notes, the 2026 Notes, the 2027 Notes, and the 2028 Notes, we entered into the 2025 Capped Call Transactions, the 2026 Capped Call Transactions, the 2027 Capped Call Transactions, and the 2028 Capped Call Transactions (collectively, the “Capped Call Transactions”), respectively, with certain counterparties at a net cost of $ 100.0 million, $ 102.1 million, $ 86.8 million, and $ 177.0 million, respectively. The cap price of the 2025 Capped Call Transactions, the 2026 Capped Call Transactions, the 2027 Capped Call Transactions, and the 2028 Capped Call Transactions is initially $ 32.12 , $ 32.58 , $ 121.02 , and $ 93.90 per share of our Class A common stock, respectively. All are subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Convertible Notes. The Capped Call Transactions are intended to reduce potential dilution to holders of our Class A common stock beyond the conversion prices up to the cap prices on any conversion of the Convertible Notes or offset any cash payments we are required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to a cap. The cost of the Capped Call Transactions was recorded as a reduction of our additional paid-in capital in our consolidated balance sheets. The Capped Call Transactions will not be remeasured as long as they continue to meet the conditions for equity classification. As of March 31, 2022, the 2025 Capped Call Transactions and 2026 Capped Call Transactions were in-the-money. 8. Commitments and Contingencies Commitments We have non-cancelable contractual agreements primarily related to the hosting of our data storage processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments. We had $ 4.4 billion in commitments as of March 31, 2022, primarily due within three years. For additional discussion on leases, see Note 9 to our consolidated financial statements. Contingencies We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many legal and tax contingencies can take years to be resolved. Pending Matters In November 2021, we and certain of our officers and directors, were named as defendants in a securities class action lawsuit purportedly brought on behalf of purchasers of our Class A common stock, alleging that we and certain of our officers made false or misleading statements and omissions concerning the impact that Apple’s App Tracking Transparency framework would have on our business. We believe we have meritorious defenses to this lawsuit, and continue to defend the lawsuit vigorously. Based on the preliminary nature of the proceedings in this case, the outcome of this matter remains uncertain. The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and cash flows for a particular period. For the pending matter described above, it is not possible to estimate the reasonably possible loss or range of loss. We are subject to various other legal proceedings and claims in the ordinary course of business, including certain patent, trademark, privacy, regulatory, and employment matters. Although occasional adverse decisions or settlements may occur, we do not believe that the final disposition of any of our other pending matters will seriously harm our business, financial condition, results of operations, and cash flows. 20 Indemnifications In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. We have not incurred material costs to defend lawsuits or settle claims related to these indemnifications as of March 31, 2022. We believe the fair value of these liabilities is immaterial and accordingly have no liabilities recorded for these agreements at March 31, 2022. 9. Leases We have various non-cancelable lease agreements for certain of our offices with original lease periods expiring between 2022 and 2042. Our lease terms may include options to extend or terminate the lease when it is reasonably certain we will exercise that option. Certain of the arrangements have free rent periods or escalating rent payment provisions. Lease Cost The components of lease cost were as follows: Three Months Ended March 31, 2022 2021 (in thousands) Operating lease expense $ 23,626 $ 14,940 Sublease income ( 673 ) ( 402 ) Total net lease costs $ 22,953 $ 14,538 Lease Term and Discount Rate The weighted-average remaining lease term (in years) and discount rate related to the operating leases were as follows: Three Months Ended March 31, 2022 2021 Weighted-average remaining lease term 7.0 7.3 Weighted-average discount rate 4.9 % 5.5 % We use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. Maturity of Lease Liabilities The present value of our operating lease liabilities as of March 31, 2022 were as follows: Operating Leases (in thousands) Remainder of 2022 $ 49,962 2023 96,315 2024 105,045 2025 98,684 2026 50,079 Thereafter 173,745 Total lease payments $ 573,830 Less: Imputed interest ( 95,312 ) Present value of lease liabilities $ 478,518 As of March 31, 2022, we have additional operating leases for facilities that have not yet commenced with lease obligations of $ 60.1 million. These operating leases will commence between 2022 and 2024 with lease terms of greater than two years to eleven years . 21 Other Information Cash payments included in the measurement of our o perating lease liabilities were $ 23.5 million and $ 17.0 million for the three months ended March 31, 2022 and 2021, respectively. Lease liabilities arising from obtaining operating lease right-of-use assets were $ 122.2 million and $ 9.4 million for the three months ended March 31, 2022 and 2021, respectively. 10. Strategic Investments We hold strategic investments in privately held companies with a carrying value of $ 275.9 million and $ 262.7 million as of March 31, 2022 and December 31, 2021, respectively, which consist primarily of equity securities, and to a lesser extent, debt securities. These strategic investments are primarily recorded at fair value on a non-recurring basis. The estimation of fair value for these privately held strategic investments requires the use of significant unobservable inputs, such as the issuance of new equity by the company, and as a result, we deem these assets as Level 3 financial instruments within the fair value measurement framework. We recognized unrealized gains on investments in privately held companies of $ 13.3 million and $ 23.3 million for the three months ended March 31, 2022 and 2021, respectively. Unrealized and realized gains on all strategic investments are included within other income (expense), net on the consolidated statements of operations and included as an adjustment to reconcile net loss to net cash provided by (used in) operating activities in our consolidated statements of cash flows. Strategic investments are included within other assets on the consolidated balance sheets. In the fourth quarter of 2021, we reclassified a publicly traded strategic investment to marketable securities. See Note 11 for further information. A ll strategic investments are reviewed periodically for impairment. Impairment expense recorded for the three months ended March 31, 2022 and 2021 was not material. 11. Fair Value Measurements Assets and liabilities measured at fair value are classified into the following categories: • Level 1: Quoted market prices in active markets for identical assets or liabilities. • Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. • Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets. We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. 22 The following tables set forth our financial assets as of March 31, 2022 and December 31, 2021 that are measured at fair value on a recurring basis during the period: March 31, 2022 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (in thousands) Cash $ 2,211,850 $ — $ — $ 2,211,850 Level 1 securities: U.S. government securities 1,751,529 17 ( 7,324 ) 1,744,222 U.S. government agency securities 67,497 — ( 65 ) 67,432 Publicly traded equity securities 71,139 29,924 — 101,063 Level 2 securities: Corporate debt securities 317,508 13 ( 1,000 ) 316,521 Commercial paper 473,660 — ( 1 ) 473,659 Certificates of deposit 86,244 — — 86,244 Total $ 4,979,427 $ 29,954 $ ( 8,390 ) $ 5,000,991 December 31, 2021 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (in thousands) Cash $ 1,966,966 $ — $ — $ 1,966,966 Level 1 securities: U.S. government securities 811,092 1 ( 1,454 ) 809,639 U.S. government agency securities 77,409 1 ( 8 ) 77,402 Publicly traded equity securities 71,139 122,064 — 193,203 Level 2 securities: Corporate debt securities 143,124 — ( 207 ) 142,917 Commercial paper 422,328 — ( 1 ) 422,327 Certificates of deposit 80,431 — — 80,431 Total $ 3,572,489 $ 122,066 $ ( 1,670 ) $ 3,692,885 We held an investment in a publicly traded company with a carrying value of $ 101.1 million and $ 193.2 million as of March 31, 2022 and December 31, 2021, respectively, recorded as a marketable security. We recorded $ 92.1 million in unrealized losses related to this investment for the three months ended March 31, 2022 within other income (expense), net on the consolidated statements of operations. This investment was reclassified from strategic investments to marketable securities in the fourth quarter of 2021. Gross unrealized losses were not material for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we considered any decreases in fair value on our marketable securities to be driven by factors other than credit risk, including market risk. As of March 31, 2022, $ 175.3 million of our total $ 2.6 billion in marketable debt securities have contractual maturities between one and five years . All other marketable debt securities have contractual maturities less than one year. W e carry the Convertible Notes at face value less the unamortized debt issuance costs on our consolidated balance sheets and present the fair value for disclosure purposes only. As of March 31, 2022, the fair value of the 2025 Notes, the 2026 Notes, the 2027 Notes, and the 2028 Notes was $ 508.6 million, $ 1.5 billion, $ 986.1 million, and $ 1.5 billion, respectively. As of December 31, 2021, the fair value of the 2025 Notes, the 2026 Notes, and the 2027 Notes was $ 650.1 million, $ 1.9 billion, and $ 1.1 billion, respectively. The estimated fair value of the Convertible Notes, which are classified as Level 2 financial instruments, was determined based on the estimated or actual bid prices of the Convertible Notes in an over-the-counter market on the last business day of the period. 23 12. Income Taxes Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. 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. Income tax expense was $ 8.5 million and $ 1.4 million for the three months ended March 31, 2022 and 2021, respectively. 13. Accumulated Other Comprehensive Income (Loss) The table below presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component and the reclassifications out of AOCI: Changes in Accumulated Other Comprehensive Income (Loss) by Component Marketable Securities Foreign Currency Translation Total (in thousands) Balance at December 31, 2021 $ ( 1,822 ) $ 7,343 $ 5,521 OCI before reclassifications ( 6,692 ) ( 2,842 ) ( 9,534 ) Amounts reclassified from AOCI (1) — — — Net current period OCI ( 6,692 ) ( 2,842 ) ( 9,534 ) Balance at March 31, 2022 $ ( 8,514 ) $ 4,501 $ ( 4,013 ) (1) Realized gains and losses on marketable securities are reclassified from AOCI into other income (expense), net in the consolidated statements of operations. 14. Property and Equipment, Net The following table lists property and equipment, net by geographic area: As of March 31, 2022 As of December 31, 2021 (in thousands) Property and equipment, net: United States $ 185,378 $ 174,826 Rest of world (1) 29,063 27,818 Total property and equipment, net $ 214,441 $ 202,644 (1) No individual country exceeded 10% of our total property and equipment, net for any period presented. 24