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 Second Quarter 2022 Results
Our key user metrics and financial results for the second quarter of 2022 were as follows:
User Metrics
•
Daily Active Users, or DAUs, increased 18% year-over-year to 347 million in Q2 2022.
•
Average revenue per user, or ARPU, decreased 4% year-over-year to $3.20 in Q2 2022.
Financial Results
•
Revenue increased 13% year-over-year to $1,110.9 million in Q2 2022.
•
Total costs and expenses, excluding stock-based compensation and other payroll related tax expense, increased 32% to $1,183.0 million in Q2 2022.
•
Net loss was $422.1 million in Q2 2022, compared to $151.7 million in Q2 2021 .
•
Diluted net loss per share was $(0.26) in Q2 2022, compared to $(0.10) in Q2 2021.
•
Adjusted EBITDA was $7.2 million in Q2 2022, compared to $117.4 million in Q2 2021.
•
Cash used in operating activities was $124.1 million in Q2 2022, compared to $101.1 million in Q2 2021.
•
Free Cash Flow was $(147.5) million in Q2 2022, compared to $(115.7) million in Q2 2021.
•
Cash, cash equivalents, and marketable securities were $4.9 billion as of June 30, 2022.
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.
28
Trends in User Metrics
We define a DAU as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. We define ARPU as quarterly revenue divided by the average DAUs. We assess the health of our business by measuring DAUs and ARPU because we believe that these metrics are important ways for both management and investors to understand engagement and monitor the performance of our platform. We also measure ARPU because we believe that this metric helps our management and investors to assess the extent to which we are monetizing our service.
User Engagement
We calculate average DAUs for a particular quarter by adding the number of DAUs on each day of that quarter and dividing that sum by the number of days in that quarter. DAUs are broken out by geography because markets have different characteristics . We had 347 million DAUs on average in the second quarter of 2022, an increase of 54 million, or 18%, from the second quarter of 2021.
Quarterly Average Daily Active Users
(in millions)
(1)
North America includes Mexico, the Caribbean, and Central America.
(2)
Europe includes Russia and Turkey.
29
Monetization
We recorded revenue of $1,110.9 million for the three months ended June 30, 2022, compared to revenue of $982.1 million for the same period in 2021, an increase of 13% 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 $3.20 in the second quarter of 2022, down from $3.35 in the second quarter of 2021. 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. Effective March 2022, we halted advertising sales to Russian and Belarusian entities.
30
Results of Operations
The following table summarizes certain selected historical financial results:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Revenue
$
1,110,909
$
982,108
$
2,173,636
$
1,751,692
Operating loss
(400,940
)
(192,512
)
(672,467
)
(496,118
)
Net loss
(422,067
)
(151,664
)
(781,691
)
(438,546
)
Adjusted EBITDA ( 1)
7,190
117,403
71,658
115,694
(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 products. This revenue is reported net of allowances for returns.
Cost of Revenue
Cost of revenue consists of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs. Cost of revenue also includes payments for content, developer, and advertiser partner costs. In addition, cost of revenue includes third-party selling costs and personnel-related costs, including salaries, benefits, and stock-based compensation expenses. Cost of revenue also includes facilities and other supporting overhead costs, including depreciation and amortization, and inventory costs.
Research and Development Expenses
Research and development expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expense for our engineers, designers, and other employees engaged in the research and development of our products. In addition, research and development expenses include facilities and other supporting overhead costs, including depreciation and amortization. Research and development costs are expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions, and stock-based compensation expense for our employees engaged in sales and sales support, business development, media, marketing, corporate partnerships, and customer service functions. Sales and marketing expenses also include costs incurred for advertising, market research, tradeshows, branding, marketing, promotional expense, and public relations, as well as facilities and other supporting overhead costs, including depreciation and amortization.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expense for our finance, legal, information technology, human resources, and other administrative teams. General and administrative expenses also include facilities and supporting overhead costs, including depreciation and amortization, and external professional services.
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents, and marketable securities.
31
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 marketable securities, foreign currency transaction gains and losses, and gains and losses 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.
32
Discussion of Results of Operations
The following table sets forth our consolidated statements of operations data:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Consolidated Statements of Operations Data:
Revenue
$
1,110,909
$
982,108
$
2,173,636
$
1,751,692
Costs and expenses ( 1) (2) :
Cost of revenue
446,377
445,021
867,274
857,622
Research and development
505,037
370,671
960,600
719,251
Sales and marketing
311,374
179,724
553,260
330,010
General and administrative
249,061
179,204
464,969
340,927
Total costs and expenses
1,511,849
1,174,620
2,846,103
2,247,810
Operating loss
(400,940
)
(192,512
)
(672,467
)
(496,118
)
Interest income
8,331
1,251
11,454
2,388
Interest expense
(5,549
)
(4,564
)
(10,722
)
(9,595
)
Other income (expense), net
(16,910
)
42,282
(94,447
)
64,340
Loss before income taxes
(415,068
)
(153,543
)
(766,182
)
(438,985
)
Income tax benefit (expense)
(6,999
)
1,879
(15,509
)
439
Net loss
$
(422,067
)
$
(151,664
)
$
(781,691
)
$
(438,546
)
Adjusted EBITDA ( 3)
$
7,190
$
117,403
$
71,658
$
115,694
(1)
Stock-based compensation expense included in the above line items:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Stock-based compensation expense:
Cost of revenue
$
2,849
$
2,847
$
5,295
$
5,503
Research and development
221,650
174,491
404,516
338,284
Sales and marketing
48,577
37,491
90,648
66,575
General and administrative
45,734
41,771
93,795
83,311
Total
$
318,810
$
256,600
$
594,254
$
493,673
(2)
Depreciation and amortization expense included in the above line items:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Depreciation and amortization expense:
Cost of revenue
$
5,061
$
4,727
$
10,573
$
10,003
Research and development
22,362
14,358
44,485
25,394
Sales and marketing
49,061
5,162
56,453
8,348
General and administrative
2,807
4,023
5,880
8,023
Total
$
79,291
$
28,270
$
117,391
$
51,768
(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.
33
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 June 30,
Six Months Ended June 30,
2022
2021
2022
2021
Consolidated Statements of Operations Data:
Revenue
100
%
100
%
100
%
100
%
Costs and expenses:
Cost of revenue
40
45
40
49
Research and development
45
38
44
41
Sales and marketing
28
18
25
19
General and administrative
22
18
21
19
Total costs and expenses
136
120
131
128
Operating loss
(36
)
(20
)
(31
)
(28
)
Interest income
1
—
1
—
Interest expense
—
—
—
(1
)
Other income (expense), net
(2
)
4
(4
)
4
Loss before income taxes
(37
)
(16
)
(35
)
(25
)
Income tax benefit (expense)
(1
)
—
(1
)
—
Net loss
(38
)%
(16
)%
(36
)%
(25
)%
For Three and Six Months Ended June 30, 2022 and 2021
Revenue
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Revenue
$
1,110,909
$
982,108
$
2,173,636
$
1,751,692
Revenue as a dollar change
$
128,801
$
421,944
Revenue as a percentage change
13
%
24
%
Revenue for the three and six months ended June 30, 2022 increased $128.8 million and $421.9 million compared to the same periods in 2021. 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 June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Cost of Revenue
$
446,377
$
445,021
$
867,274
$
857,622
Cost of Revenue as a dollar change
$
1,356
$
9,652
Cost of Revenue as a percentage change
0
%
1
%
Cost of revenue for the three and six months ended June 30, 2022 increased $1.4 million and $9.7 million compared to the same periods in 2021. The changes were primarily driven by the growth in revenue share due to the overall increase in revenue and higher mix of revenue subject to revenue share, increased infrastructure costs attributable to DAU growth net of infrastructure cost efficiencies and content review costs across the platform, offset by lower content costs.
34
Research and Development Expenses
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Research and Development Expenses
$
505,037
$
370,671
$
960,600
$
719,251
Research and Development Expenses as a dollar change
$
134,366
$
241,349
Research and Development Expenses as a percentage change
36
%
34
%
Research and development expenses for the three and six months ended June 30, 2022 increased $134.4 million and $241.3 million compared to the same periods in 2021. The increases were primarily driven by higher personnel expenses due to growth in research and development headcount, including increased cash- and stock-based compensation expenses .
Sales and Marketing Expenses
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Sales and Marketing Expenses
$
311,374
$
179,724
$
553,260
$
330,010
Sales and Marketing Expenses as a dollar change
$
131,650
$
223,250
Sales and Marketing Expenses as a percentage change
73
%
68
%
Sales and marketing expenses for the three and six months ended June 30, 2022 increased $131.7 million and $223.3 million compared to the same periods in 2021. 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, and marketing investments. These increases were also due to higher amortization expense, which resulted from our revision of the useful lives of certain customer relationships and trademarks.
General and Administrative Expenses
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
General and Administrative Expenses
$
249,061
$
179,204
$
464,969
$
340,927
General and Administrative Expenses as a dollar change
$
69,857
$
124,042
General and Administrative Expenses as a percentage change
39
%
36
%
General and administrative expenses for the three and six months ended June 30, 2022 increased $69.9 million and $124.0 million compared to the same periods in 2021. These 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 other administrative expenses.
Interest Income
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Interest Income
$
8,331
$
1,251
$
11,454
$
2,388
Interest Income as a dollar change
$
7,080
$
9,066
Interest Income as a percentage change
566
%
380
%
Interest income for the three and six months ended June 30, 2022 increased $7.1 million and $9.1 million compared to the same periods in 2021. The increases were primarily a result of higher interest rates on U.S. government-backed securities and a higher overall invested cash balance.
35
Interest Expense
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Interest Expense
$
(5,549
)
$
(4,564
)
$
(10,722
)
$
(9,595
)
Interest Expense as a dollar change
$
(985
)
$
(1,127
)
Interest Expense as a percentage change
22
%
12
%
Interest expense for the three and six months ended June 30, 2022 increased $1.0 million and $1.1 million compared to the same periods in 2021, primarily due to the increases in amortization of debt issuance costs, partially offset by lower contractual interest expense.
Other Income (Expense), Net
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Other Income (Expense), Net
$
(16,910
)
$
42,282
$
(94,447
)
$
64,340
Other Income (Expense), Net as a dollar change
$
(59,192
)
$
(158,787
)
Other Income (Expense), Net as a percentage change
(140
)%
(247
)%
Other expense, net for the three and six months ended June 30, 2022 was $16.9 million and $94.4 million compared to other income, net of $42.3 million and $64.3 million in the same periods in 2021. Other expense, net for the three months ended June 30, 2022 was primarily a result of a $63.9 million unrealized loss on publicly traded securities classified as marketable securities, offset by a $6.4 million unrealized gain and $45.9 million realized gain on strategic investments. Other income, net for the three months ended June 30, 2021 was primarily a result of a $52.1 million unrealized gain and a $27.8 million realized gain on strategic investments offset by induced conversion expense related to the Convertible Notes.
Other expense, net for the six months ended June 30, 2022 was primarily a result of $156.0 million unrealized loss on publicly traded securities classified as marketable securities, offset by a $19.7 million unrealized gain and a $45.9 million realized gain on strategic investments. Other income, net for the six months ended June 30, 2021 was primarily a result of a $75.4 million unrealized gain and a $27.8 million realized gain on strategic investments offset by induced conversion expense related to the Convertible Notes.
Income Tax Benefit (Expense)
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Income Tax Benefit (Expense)
$
(6,999
)
$
1,879
$
(15,509
)
$
439
Income Tax Benefit (Expense) as a dollar change
$
(8,878
)
$
(15,948
)
Income Tax Benefit (Expense) as a percentage change
(472
)%
(3633
)%
Effective Tax Rate
(1.7
)%
1.2
%
(2.0
)%
0.1
%
36
Income tax expense for the three and six months ended June 30, 2022 was $7.0 million and $15.5 million, respectively, compared to an income tax benefit of $1.9 million and $0.4 million, respectively, for the same periods in 2021. This change was primarily attributable to the partial valuation allowance releases on our deferred tax assets in the prior period due to deferred tax liabilities acquired in business acquisitions. Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on our deferred tax assets as it is more likely than not that some or all of the deferred tax assets will not be realized.
Net Loss and Adjusted EBITDA
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Net Loss
$
(422,067
)
$
(151,664
)
$
(781,691
)
$
(438,546
)
Net Loss as a dollar change
$
(270,403
)
$
(343,145
)
Net Loss as a percentage change
(178
)%
(78
)%
Adjusted EBITDA
$
7,190
$
117,403
$
71,658
$
115,694
Adjusted EBITDA as a dollar change
$
(110,213
)
$
(44,036
)
Adjusted EBITDA as a percentage change
94
%
38
%
Net loss for the three and six months ended June 30, 2022 was $422.1 million and $781.7 million, respectively, compared to $151.7 million and $438.5 million, respectively, for the same periods in 2021. Adjusted EBITDA for the three and six months ended June 30, 2022 was $7.2 million and $71.7 million, respectively, compared to $117.4 million and $115.7 million, respectively, for the same periods in 2021. These decreases in Adjusted EBITDA were driven by increased overall operating expenses, partially offset by higher revenue, stock-based compensation expense, depreciation and amortization, and other (income) expense, net.
For a discussion of the limitations associated with using Adjusted EBITDA rather than GAAP measures and a reconciliation of this measure to net loss, see “Non-GAAP Financial Measures.”
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
We use the non-GAAP financial measure of Free Cash Flow, which is defined as net cash provided by (used in) operating activities, reduced by purchases of property and equipment. We believe Free Cash Flow is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business and is a key financial indicator used by management. Additionally, we believe that Free Cash Flow is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue generating activities. Free Cash Flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.
We use the non-GAAP financial measure of Adjusted EBITDA, which is defined as net income (loss); excluding interest income; interest expense; other income (expense), net; income tax benefit (expense); depreciation and amortization; stock-based compensation expense; and payroll and other tax expense related to stock-based compensation; 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.
37
These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures compared to the closest comparable GAAP measure. Some of these limitations are that:
•
Free Cash Flow does not reflect our future contractual commitments.
•
Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;
•
Adjusted EBITDA excludes stock-based compensation expense and payroll and other tax expense related to stock-based compensation, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy; and
•
Adjusted EBITDA excludes income tax expense.
The following table presents a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most comparable GAAP financial measure, for each of the periods presented:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Free Cash Flow reconciliation:
Net cash provided by (used in) operating activities
$
(124,081
)
$
(101,086
)
$
3,378
$
35,800
Less:
Purchases of property and equipment
(23,370
)
(14,623
)
(44,545
)
(25,474
)
Free Cash Flow
$
(147,451
)
$
(115,709
)
$
(41,167
)
$
10,326
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 June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Adjusted EBITDA reconciliation:
Net loss
$
(422,067
)
$
(151,664
)
$
(781,691
)
$
(438,546
)
Add (deduct):
Interest income
(8,331
)
(1,251
)
(11,454
)
(2,388
)
Interest expense
5,549
4,564
10,722
9,595
Other (income) expense, net
16,910
(42,282
)
94,447
(64,340
)
Income tax expense (benefit)
6,999
(1,879
)
15,509
(439
)
Depreciation and amortization
79,291
28,270
117,391
51,768
Stock-based compensation expense
318,810
256,600
594,254
493,673
Payroll and other tax expense related to stock-based compensation
10,029
25,045
32,480
66,371
Adjusted EBITDA
$
7,190
$
117,403
$
71,658
$
115,694
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities were $4.9 billion as of June 30, 2022, primarily consisting of cash on deposit with banks and highly liquid investments in U.S. government and agency securities, publicly traded equity securities, corporate debt securities, certificates of deposit, and commercial paper. Our primary source of liquidity is cash generated through financing activities. Our primary uses of cash include operating costs such as personnel-related costs and the infrastructure costs of the Snapchat application, facility-related capital spending, and acquisitions and investments. There are no known material subsequent events that could have a material impact on our cash or liquidity. We may contemplate and engage in merger and acquisition activity that could materially impact our liquidity and capital resource position.
In May 2022, we entered into a five-year senior unsecured revolving credit facility (“Credit Facility”) with certain lenders that allows us to borrow up to $1.05 billion to fund working capital and general corporate-purpose expenditures. The
38
prior revolving credit facility entered into in July 2016 (as amended) was terminated concurrently with the entry into the Credit Facility. Loans bear interest, at our option, at a rate equal to ( i ) a term secured overnight financing rate (“SOFR”) plus 0.75% or the base rate, if selected by us, for loans made in U.S. dollars, (ii) the Sterling overnight index average plus 0.7826% for loans made in Sterling, and (iii) foreign indices as stated in the credit agreement plus 0.75% for loans made in other permitted foreign currencies. The base rate is defined as the greatest of ( i ) the Wall Street Journal prime rate, (ii) the greater of the (a) federal funds rate and (b) the overnight bank funding rate, plus 0.50%, and (iii) the applicable SOFR for a period of one month (but not less than zero) plus 1.00. The Credit Facility also contains an annual commitment fee of 0.10% on the daily undrawn balance of the facility. As of June 30, 2022, we had $ 26.6 million in the form of outstanding standby letters of credit, with no amounts outstanding under the Credit Facility.
In February 2022, we entered into a purchase agreement for the sale of an aggregate of $1.5 billion principal amount of convertible senior notes due in 2028. The net proceeds from the issuance of the 2028 Notes were $1.31 billion, net of debt issuance costs and the 2028 Capped Call Transactions discussed further in Note 7. The 2028 Notes mature on March 1, 2028 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The sale price requirement for conversion was not satisfied as of June 30, 2022 and as a result, the 2028 Notes will not be eligible for optional conversion during the third quarter of 2022 .
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 sale price requirement for conversion was not satisfied as of June 30, 2022 and as a result, the 2027 Notes will not be eligible for optional conversion during the third quarter of 2022 .
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 not satisfied as of June 30, 2022 and as a result, the 2025 Notes will not be eligible for optional conversion during the third quarter of 2022 .
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 not satisfied as of June 30, 2022 and as a result, the 2026 Notes will not be eligible for optional conversion during the third quarter of 2022 .
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 June 30, 2022, approximately 7% of our cash, cash equivalents, and marketable securities was held outside the United States. These amounts were primarily held in the United Kingdom and are utilized to fund our foreign operations. Cash held outside the United States may be repatriated, subject to certain limitations, and would be available to be used to fund our domestic operations. However, repatriation of funds may result in additional tax liabilities. We believe our existing cash balance in the United States is sufficient to fund our working capital needs.
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The following table sets forth the major components of our consolidated statements of cash flows for the periods presented:
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
(dollars in thousands)
Net cash provided by (used in) operating activities
$
(124,081
)
$
(101,086
)
$
3,378
$
35,800
Net cash provided by (used in) investing activities
11,439
131,869
(1,006,226
)
412,424
Net cash provided by (used in) financing activities
(1,618
)
1,053,659
1,307,148
1,058,112
Change in cash, cash equivalents, and restricted cash
$
(114,260
)
$
1,084,442
$
304,300
$
1,506,336
Free Cash Flow (1)
$
(147,451
)
$
(115,709
)
$
(41,167
)
$
10,326
(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.”
For Three and Six Months Ended June 30, 2022 and 2021
Net Cash Provided by (Used in) Operating Activities
Net cash used in operating activities was $124.1 million in the three months ended June 30, 2022, as compared to net cash used in operations of $101.1 million in the three months ended June 30, 2021, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $318.8 million, depreciation and amortization expense of $79.3 million and losses on debt and equity securities, net of $12.2 million. Net cash used in operating activities for the three months ended June 30, 2022 was also driven by an increase in the accounts receivable balance of $81.0 million due to an increase in revenue in the period and a $14.4 million decrease in accrued expenses and other current liabilities, primarily due to the timing of payments.
Net cash provided by operating activities was $3.4 million in the six months ended June 30, 2022, as compared to net cash provided by operating activities of $35.8 million in the six months ended June 30, 2021, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $594.3 million, depreciation and amortization expense of $117.4 million and losses on debt and equity securities, net of $91.3 million.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $11.4 million for the three months ended June 30, 2022, compared to net cash provided by investing activities of $131.9 million for the same period in 2021. Our investing activities in the three months ended June 30, 2022 primarily consisted of maturities of marketable securities of $544.0 million and sales of strategic investments of $63.3 million, partially offset by purchases of marketable securities of $568.1 million . Net cash provided by investing activities for the three months ended June 30, 2021 consisted of cash provided by sales and maturities of marketable securities of $936.4 million, partially offset by purchases of marketable securities of $764.4 million.
Net cash used in investing activities was $1.0 billion for the six months ended June 30, 2022, compared to net cash provided by investing activities of $412.4 million for the same period in 2021. Our investing activities in the six months ended June 30, 2022 consisted mainly of purchases of marketable securities of $1.9 billion, partially offset by maturities of marketable securities of $896.6 million. Net cash provided by investing activities for the six months ended June 30, 2021 consisted of cash provided by sales and maturities of marketable securities of $1.9 billion, partially offset by purchases of marketable securities of $1.3 billion and cash paid for acquisitions of $139.2 million .
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was $1.6 million for the three months ended June 30, 2022 and net cash provided by financing activities was $1.3 billion for the six months ended June 30, 2022, compared to net cash provided by financing activities of $1.1 billion and $1.1 billion for the same periods in 2021, respectively. Our financing activities for the three months ended June 30, 2022 were not material. Our financing activities for the six months ended June 30, 2022 consisted primarily of net proceeds of $1.5 billion from the issuance of the 2028 Notes, offset by the purchase of the 2028 Capped Call Transactions of $177.0 million. Our financing activities for the three and six months ended June 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.
Free Cash Flow
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Free Cash Flow was $(147.5) million and $ (41.2) million for the three and six months ended June 3 0 , 202 2 , respectively, compared to ($115.7) million and $10.3 million for the three and six months ended June 3 0 , 20 2 1 , respectively . Free Cash Flow in all periods was composed of net cash provided by (used in) 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 $ 23.4 million and $44.5 million for the three and six months ended June 3 0 , 202 2 , respectively, compared to $14.6 million and $25.5 million for the three and six months ended June 3 0 , 20 2 1 , respectively . S ee “Non-GAAP Financial Measures.”
Contingencies
We are involved in claims, lawsuits, tax matters, government investigations, and proceedings arising in the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. We also disclose material contingencies when we believe that a loss is not probable but reasonably possible. Significant judgment is required to determine both probability and the estimated amount. Such claims, suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Many of these legal and tax contingencies can take years to resolve. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
Commitments
We have non-cancelable contractual agreements primarily related to the hosting of our data processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments. We had $4.2 billion in commitments, as of June 30, 2022, primarily due within three years. For additional discussion on our leases see Note 9 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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, loss contingencies, and income taxes.
There have been no material changes to our critical accounting policies and estimates as described in our Annual Report.
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 $2.3 billion and $2.0 billion at June 30, 2022 and December 31, 2021, respectively. We had marketable securities totaling $2.6 billion and $1.7 billion at June 30, 2022 and December 31, 2021, respectively. Our cash and cash equivalents consist of cash in bank accounts and marketable securities consisting of U.S. government debt and agency securities, publicly traded equity 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 February 2022, we issued the 2028 Notes with an aggregate principal amount of $1.5 billion, the full amount of which is outstanding as of June 30, 2022. We carry the 2028 Notes at face value less the unamortized debt issuance costs on our consolidated balance sheets. The 2028 Notes have a fixed interest rate; therefore, we have no financial statement risk associated with changes in interest rates with respect to the 2028 Notes. The fair value of the 2028 Notes changes when the market price of our stock fluctuates or market interest rates change.
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 June 30, 2022. 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 June 30, 2022. 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 June 30, 2022. 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.