Snap Inc 10-Q

ITEM 1. FINANCIAL STATEMENTS Snap Inc. Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cash flows from operating activities Net loss $ ( 359,502 ) $ ( 71,959 ) $ ( 1,141,193 ) $ ( 510,505 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 36,291 32,510 153,682 84,278 Stock-based compensation 342,959 300,898 937,213 794,571 Amortization of debt issuance costs 1,835 1,109 5,028 3,301 Losses (gains) on debt and equity securities, net ( 75,778 ) ( 121,007 ) 15,559 ( 223,527 ) Induced conversion expense related to convertible notes — 4,536 — 41,538 Other 12,133 ( 732 ) 16,337 4,019 Change in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net of allowance 17,410 ( 132,908 ) 62,436 ( 178,044 ) Prepaid expenses and other current assets 7,044 ( 4,191 ) ( 32,114 ) ( 15,562 ) Operating lease right-of-use assets 17,922 11,470 53,205 35,217 Other assets ( 5,095 ) ( 4,204 ) ( 12,633 ) ( 5,440 ) Accounts payable 9,381 11,084 60,442 17,430 Accrued expenses and other current liabilities 60,036 56,687 ( 17,184 ) 89,726 Operating lease liabilities ( 12,116 ) ( 13,911 ) ( 46,431 ) ( 35,265 ) Other liabilities 3,425 2,170 4,976 5,615 Net cash provided by (used in) operating activities 55,945 71,552 59,323 107,352 Cash flows from investing activities Purchases of property and equipment ( 37,836 ) ( 19,836 ) ( 82,381 ) ( 45,310 ) Purchases of strategic investments ( 6,000 ) ( 735 ) ( 12,350 ) ( 33,510 ) Sales of strategic investments — — 63,276 36,435 Cash paid for acquisitions, net of cash acquired ( 19,650 ) ( 37,375 ) ( 31,658 ) ( 176,591 ) Purchases of marketable securities ( 821,830 ) ( 609,176 ) ( 2,732,266 ) ( 1,896,766 ) Sales of marketable securities 39,158 19,999 51,917 367,555 Maturities of marketable securities 923,871 492,921 1,820,442 2,006,744 Other ( 12,648 ) ( 1,000 ) ( 18,141 ) ( 1,335 ) Net cash provided by (used in) investing activities 65,065 ( 155,202 ) ( 941,161 ) 257,222 Cash flows from financing activities Proceeds from issuance of convertible notes, net of issuance costs — — 1,483,500 1,137,227 Purchase of capped calls — — ( 177,000 ) ( 86,825 ) Proceeds from the exercise of stock options 217 4,045 3,871 11,755 Payments of debt issuance costs — — ( 3,006 ) — Repurchases of Class A non-voting common stock ( 500,513 ) — ( 500,513 ) — Net cash provided by (used in) financing activities ( 500,296 ) 4,045 806,852 1,062,157 Change in cash, cash equivalents, and restricted cash ( 379,286 ) ( 79,605 ) ( 74,986 ) 1,426,731 Cash, cash equivalents, and restricted cash, beginning of period 2,299,023 2,052,879 1,994,723 546,543 Cash, cash equivalents, and restricted cash, end of period $ 1,919,737 $ 1,973,274 $ 1,919,737 $ 1,973,274 Supplemental disclosures Cash paid for income taxes, net $ 1,482 $ 1,940 $ 8,966 $ 16,228 Cash paid for interest $ 4,186 $ 3,508 $ 8,191 $ 10,249 See Notes to Consolidated Financial Statements. 6 Snap Inc. Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 1,128,476 $ 1,067,471 $ 3,302,112 $ 2,819,163 Costs and expenses: Cost of revenue 466,757 443,473 1,334,031 1,301,095 Research and development 564,258 412,021 1,524,858 1,131,272 Sales and marketing 270,336 217,526 823,596 547,536 General and administrative 262,367 175,275 727,336 516,202 Total costs and expenses 1,563,718 1,248,295 4,409,821 3,496,105 Operating loss ( 435,242 ) ( 180,824 ) ( 1,107,709 ) ( 676,942 ) Interest income 18,445 1,257 29,899 3,645 Interest expense ( 5,425 ) ( 4,031 ) ( 16,147 ) ( 13,626 ) Other income (expense), net 71,961 112,631 ( 22,486 ) 176,971 Loss before income taxes ( 350,261 ) ( 70,967 ) ( 1,116,443 ) ( 509,952 ) Income tax benefit (expense) ( 9,241 ) ( 992 ) ( 24,750 ) ( 553 ) Net loss $ ( 359,502 ) $ ( 71,959 ) $ ( 1,141,193 ) $ ( 510,505 ) Net loss per share attributable to Class A, Class B, and Class C common stockholders (Note 3): Basic $ ( 0.22 ) $ ( 0.05 ) $ ( 0.70 ) $ ( 0.33 ) Diluted $ ( 0.22 ) $ ( 0.05 ) $ ( 0.70 ) $ ( 0.33 ) Weighted average shares used in computation of net loss per share: Basic 1,608,523 1,580,966 1,619,885 1,543,568 Diluted 1,608,523 1,580,966 1,619,885 1,543,568 See Notes to Consolidated Financial Statements. 7 Snap Inc. Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net loss $ ( 359,502 ) $ ( 71,959 ) $ ( 1,141,193 ) $ ( 510,505 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) on marketable securities, net of tax ( 2,495 ) 23 ( 14,519 ) ( 119 ) Foreign currency translation ( 10,933 ) ( 4,091 ) ( 24,273 ) ( 11,465 ) Total other comprehensive income (loss), net of tax ( 13,428 ) ( 4,068 ) ( 38,792 ) ( 11,584 ) Total comprehensive loss $ ( 372,930 ) $ ( 76,027 ) $ ( 1,179,985 ) $ ( 522,089 ) See Notes to Consolidated Financial Statements. 8 Snap Inc. Consolidated Balance Sheets (in thousands, except par value) September 30, 2022 December 31, 2021 (unaudited) Assets Current assets Cash and cash equivalents $ 1,918,845 $ 1,993,809 Marketable securities 2,510,107 1,699,076 Accounts receivable, net of allowance 992,747 1,068,873 Prepaid expenses and other current assets 115,973 92,244 Total current assets 5,537,672 4,854,002 Property and equipment, net 240,752 202,644 Operating lease right-of-use assets 383,037 322,252 Intangible assets, net 229,128 277,654 Goodwill 1,632,796 1,588,452 Other assets 261,809 291,302 Total assets $ 8,285,194 $ 7,536,306 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 188,605 $ 125,282 Operating lease liabilities 57,913 52,396 Accrued expenses and other current liabilities 893,414 674,108 Total current liabilities 1,139,932 851,786 Convertible senior notes, net 3,740,804 2,253,087 Operating lease liabilities, noncurrent 384,495 325,509 Other liabilities 119,701 315,756 Total liabilities 5,384,932 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, 1,402,916 shares issued, 1,351,604 shares outstanding at September 30, 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, 22,638 shares issued and outstanding at September 30, 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 September 30, 2022, and 260,888 shares authorized, 231,627 shares issued and outstanding at December 31, 2021. 2 2 Treasury stock, at cost. 51,312 shares of Class A non-voting common stock at September 30, 2022. ( 500,513 ) — Additional paid-in capital 12,859,689 12,069,097 Accumulated deficit ( 9,425,659 ) ( 8,284,466 ) Accumulated other comprehensive income (loss) ( 33,271 ) 5,521 Total stockholders’ equity 2,900,262 3,790,168 Total liabilities and stockholders’ equity $ 8,285,194 $ 7,536,306 See Notes to Consolidated Financial Statements. 9 Snap Inc. Consolidated Statements of Stockholders’ Equity (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Shares Amount Shares Amount Shares Amount Shares Amount Class A non-voting common stock Balance, beginning of period 1,390,709 $ 14 1,321,477 $ 13 1,364,887 $ 14 1,248,010 $ 12 Shares issued in connection with exercise of stock options under stock-based compensation plans 26 — 342 — 286 — 890 — Issuance of Class A non-voting common stock in connection with acquisitions — — 84 — 1,277 — 5,817 — Issuance of Class A non-voting common stock for vesting of restricted stock units and restricted stock awards, net 12,181 — 13,912 — 36,325 — 42,636 — Issuance of Class A non-voting common stock for the induced conversion related to convertible senior notes — — 14,012 — — — 52,410 — Conversion of Class B voting common stock to Class A non-voting common stock — — 63 — 141 — 127 1 Repurchases of Class A non-voting common stock ( 51,312 ) — — — ( 51,312 ) — — Balance, end of period 1,351,604 14 1,349,890 13 1,351,604 14 1,349,890 13 Class B voting common stock Balance, beginning of period 22,638 — 23,640 — 22,769 — 23,696 — Shares issued in connection with exercise of stock options under stock-based compensation plans — — 59 — 10 — 67 — Conversion of Class B voting common stock to Class A non-voting common stock — — ( 63 ) — ( 141 ) — ( 127 ) — Balance, end of period 22,638 — 23,636 — 22,638 — 23,636 — Class C voting common stock Balance, beginning of period 231,627 2 231,627 2 231,627 2 231,627 2 Issuance of Class C voting common stock for settlement of restricted stock units, net — — — — — — — — Balance, end of period 231,627 2 231,627 2 231,627 2 231,627 2 Treasury stock Balance, beginning of period — — — — — — — — Repurchases of Class A non-voting common stock 51,312 ( 500,513 ) — — 51,312 ( 500,513 ) — — Balance, end of period 51,312 ( 500,513 ) — — 51,312 ( 500,513 ) — — Additional paid-in capital Balance, beginning of period — 12,529,743 — 11,129,196 — 12,069,097 — 10,200,141 Stock-based compensation expense — 329,728 — 299,450 — 919,669 — 792,454 Shares issued in connection with exercise of stock options under stock-based compensation plans — 218 — 4,045 — 3,884 — 11,755 Cumulative-effect adjustment from accounting changes — — — — — — — ( 664,021 ) Issuance of Class A non-voting common stock in connection with acquisitions — — — — — 44,039 — 308,636 Issuance of Class A non-voting common stock for the induced conversion related to convertible senior notes — — — 304,647 — — — 1,175,198 Purchase of capped calls — — — — — ( 177,000 ) — ( 86,825 ) Balance, end of period — 12,859,689 — 11,737,338 — 12,859,689 — 11,737,338 Accumulated deficit Balance, beginning of period — ( 9,066,157 ) — ( 8,235,057 ) — ( 8,284,466 ) — ( 7,891,542 ) Cumulative-effect adjustment from accounting changes — — — — — — — 95,031 Net loss — ( 359,502 ) — ( 71,959 ) — ( 1,141,193 ) — ( 510,505 ) Balance, end of period — ( 9,425,659 ) — ( 8,307,016 ) — ( 9,425,659 ) — ( 8,307,016 ) Accumulated other comprehensive income (loss) Balance, beginning of period — ( 19,843 ) — 13,847 — 5,521 — 21,363 Other comprehensive income (loss), net of tax — ( 13,428 ) — ( 4,068 ) — ( 38,792 ) — ( 11,584 ) Balance, end of period — ( 33,271 ) — 9,779 — ( 33,271 ) — 9,779 Total stockholders’ equity 1,657,181 $ 2,900,262 1,605,153 $ 3,440,116 1,657,181 $ 2,900,262 1,605,153 $ 3,440,116 See Notes to Consolidated Financial Statements. 10 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 and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. Other than described below, 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 . Future Stock Split to be Effected in the Form of a Stock Dividend In July 2022, our board of directors determined that it was advisable and in our best interest to approve a stock split to be effected in the form of a special dividend of one share of Class A common stock on each outstanding share of our common stock at a future date (the “Future Stock Split”). In connection with the Future Stock Split, we entered into certain agreements (the “Co-Founder Agreements”) with Evan Spiegel and Robert Murphy, our co-founders, and certain of their respective affiliates requiring them, among other things, to convert shares of Class B common stock and Class C common stock into Class A common stock under certain circumstances. The Future Stock Split will be not be declared and paid until the later of (i) June 30, 2023 and (ii) the first business day following the date on which the average of the volume weighted average price per share of Class A common stock equals or exceeds $ 40 per share for 65 consecutive trading days. If this does not occur by July 21, 2032, the Future Stock Split will not be declared and paid, and the Co-Founder Agreements will terminate. No adjustments have been made to share or per share 11 amounts for Class A common stock in the accompanying consolidated financial statements for the effects of the Future Stock Split as these triggering conditions have not been met. Recent Accounting Pronouncements In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The guidance is effective for annual periods beginning after December 15, 2023, with early adoption permitted. Effective April 1, 2022 , we early adopted ASU 2022-03 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 November 2021, the FASB issued 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 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. 12 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 subscriptions and sales of hardware products. For the periods presented, all such revenue was not material. The following table represents our revenue disaggregated by geography based on the billing address of the advertising customer: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Revenue: North America (1) (2) $ 804,484 $ 772,797 $ 2,328,600 $ 1,960,644 Europe (3) 163,066 160,257 497,087 456,420 Rest of world 160,926 134,417 476,425 402,099 Total revenue $ 1,128,476 $ 1,067,471 $ 3,302,112 $ 2,819,163 (1) North America includes Mexico, the Caribbean, and Central America. (2) United States revenue was $ 779.1 million and $2,258.0 million for the three and nine months ended September 30, 2022, respectively, and $ 750.1 million and $1,901.7 million for the three and nine months ended September 30, 2021 , respectively. (3) Europe includes Russia and Turkey. Effective March 2022, we halted advertising sales to Russian and Belarusian entities. 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 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, restricted stock units (“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. 13 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 and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 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 Class A Common Class B Common Class C Common Class A Common Class B Common Class C Common Numerator: Net loss $ ( 302,674 ) $ ( 5,060 ) $ ( 51,768 ) $ ( 60,340 ) $ ( 1,076 ) $ ( 10,543 ) $ ( 962,047 ) $ ( 15,967 ) $ ( 163,179 ) $ ( 426,077 ) $ ( 7,822 ) $ ( 76,606 ) Net loss attributable to common stockholders $ ( 302,674 ) $ ( 5,060 ) $ ( 51,768 ) $ ( 60,340 ) $ ( 1,076 ) $ ( 10,543 ) $ ( 962,047 ) $ ( 15,967 ) $ ( 163,179 ) $ ( 426,077 ) $ ( 7,822 ) $ ( 76,606 ) Denominator: Basic shares: Weighted-average common shares - Basic 1,354,258 22,638 231,627 1,325,700 23,639 231,627 1,365,593 22,665 231,627 1,288,290 23,651 231,627 Diluted shares: Weighted-average common shares - Diluted 1,354,258 22,638 231,627 1,325,700 23,639 231,627 1,365,593 22,665 231,627 1,288,290 23,651 231,627 Net loss per share attributable to common stockholders: Basic $ ( 0.22 ) $ ( 0.22 ) $ ( 0.22 ) $ ( 0.05 ) $ ( 0.05 ) $ ( 0.05 ) $ ( 0.70 ) $ ( 0.70 ) $ ( 0.70 ) $ ( 0.33 ) $ ( 0.33 ) $ ( 0.33 ) Diluted $ ( 0.22 ) $ ( 0.22 ) $ ( 0.22 ) $ ( 0.05 ) $ ( 0.05 ) $ ( 0.05 ) $ ( 0.70 ) $ ( 0.70 ) $ ( 0.70 ) $ ( 0.33 ) $ ( 0.33 ) $ ( 0.33 ) 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: Three and Nine Months Ended September 30, 2022 2021 (in thousands) Stock options 4,084 4,708 Unvested RSUs and RSAs 94,143 95,874 Convertible Notes (if-converted) 89,379 62,755 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 nine months ended September 30, 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 67,165 $ 18.88 Vested ( 40,756 ) $ 20.81 Forfeited ( 18,446 ) $ 26.00 Unvested at September 30, 2022 94,143 $ 23.23 All RSUs and RSAs vest on the satisfaction of a service-based condition. Total unrecognized compensation cost related to outstanding RSUs and RSAs was $ 1.8 billion as of September 30, 2022 and is expected to be recognized over a weighted- 14 average period of 1.6 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 . Stock Options The following table summarizes the stock option award activity under the Stock Plans during the nine months ended September 30, 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 119 — $ 15.03 — $ — Exercised ( 286 ) ( 10 ) $ 13.13 — $ — Forfeited ( 43 ) — $ 12.82 — $ — Outstanding at September 30, 2022 3,466 618 $ 10.51 3.38 $ 11,250 (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 September 30, 2022, respectively. Total unrecognized compensation cost related to unvested stock options was $ 1.1 million as of September 30, 2022 and is expected to be recognized over a weighted-average period of 1.3 years. Stock-Based Compensation Expense by Function Total stock-based compensation expense by function was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Cost of revenue $ 2,745 $ 9,132 $ 8,040 $ 14,635 Research and development 246,783 198,893 651,299 537,177 Sales and marketing 43,098 51,675 133,746 118,250 General and administrative 50,333 41,198 144,128 124,509 Total $ 342,959 $ 300,898 $ 937,213 $ 794,571 Stock Repurchases In July 2022, our board of directors authorized a stock repurchase program of up to $ 500.0 million of our Class A common stock, which was completed in the third quarter of 2022. During the three months ended September 30, 2022, we repurchased 51.3 million shares of our Class A common stock under the program for an aggregate of $ 500.5 million, representing the entire amount approved by our board of directors and including costs associated with the repurchases. These shares are recorded as treasury stock on our consolidated balance sheets. 5. Business Acquisitions 2022 Acquisitions In the nine months ended September 30, 2022, we completed acquisitions to enhance our existing platform, technology, and workforce. The aggregate purchase consideration was $ 120.5 million, which included $ 17.7 million in cash, $ 44.0 million in shares of our Class A common stock, and $ 58.8 million recorded in other liabilities on our consolidated balance sheets. Of the aggregate purchase consideration, $ 69.3 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, $ 101.7 million is deductible for tax purposes. 15 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 represented purchase consideration and primarily consisted 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 election. The remaining $ 31.4 million of total consideration transferred represented compensation for future employment services. The allocation of the total purchase consideration for this acquisition was 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 represented current and future cash consideration payments. The allocation of the total purchase consideration for this acquisition was 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. 16 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 our consolidated balance sheets. 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 nine months ended September 30, 2022 were as follows: Goodwill (in thousands) Balance as of December 31, 2021 $ 1,588,452 Goodwill acquired 69,291 Foreign currency translation ( 24,947 ) Balance as of September 30, 2022 $ 1,632,796 Intangible assets consisted of the following: As of September 30, 2022 Weighted- Average Remaining Useful Life - Years Gross Carrying Amount Accumulated Amortization Net (in thousands, except years) Domain names 3.0 $ 937 $ 529 $ 408 Trademarks 1.5 800 411 389 Technology 3.2 338,557 154,903 183,654 Customer relationships 5.8 21,000 5,609 15,391 Patents 9.2 39,279 13,867 25,412 Other 1.3 6,000 2,126 3,874 $ 406,573 $ 177,445 $ 229,128 17 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 Amortization of intangible assets was $ 20.9 million and $ 107.6 million for the three and nine months ended September 30, 2022, respectively, and $ 18.1 million and $ 43.0 million for the three and nine months ended September 30, 2021 , respectively. In the second and third quarters of 2022, we revised the useful lives of certain customer relationships, trademarks, domain names, and technology, which resulted in a $ 43.6 million increase to amortization expense for the nine months ended September 30, 2022. As of September 30, 2022, the estimated intangible asset amortization expense for the next five years and thereafter is as follows: Estimated Amortization (in thousands) Remainder of 2022 $ 24,741 2023 70,110 2024 57,168 2025 41,092 2026 16,664 Thereafter 19,353 Total $ 229,128 7. Long-Term Debt 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. 18 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; • 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. 19 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. 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. Inducement expense for the three and nine months ended September 30, 2021 was $ 4.5 million and $ 41.5 million, respectively. There was no inducement expense recorded for the three and nine months ended September 30, 2022. 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 our consolidated statements of cash flows. 20 The Convertible Notes consisted of the following: As of September 30, 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 $ 838,482 $ 1,150,000 $ 1,500,000 $ 284,105 $ 838,493 $ 1,150,000 Unamortized debt issuance costs ( 1,683 ) ( 5,020 ) ( 9,770 ) ( 15,310 ) ( 2,168 ) ( 5,982 ) ( 11,361 ) Net carrying amount $ 282,422 $ 833,462 $ 1,140,230 $ 1,484,690 $ 281,937 $ 832,511 $ 1,138,639 As of September 30, 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 2.6 years, 3.8 years, 4.6 years, and 5.4 years, respectively. Interest expense related to the amortization of debt issuance costs was $ 1.7 million and $ 4.8 million for the three and nine months ended September 30, 2022, respectively, and $ 1.1 million and $ 3.3 million for the three and nine months ended September 30, 2021, respectively. Contractual interest expense was $ 2.2 million and $ 6.4 million for the three and nine months ended September 30, 2022, respectively, and $ 1.9 million and $ 7.2 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022 , the if-converted value of the Convertible Notes did not exceed the principal amount. The sale price for conversion was not satisfied as of September 30, 2022 for the Convertible Notes, and as a result, the Convertible Notes will not be eligible for optional conversion during the fourth quarter of 2022. 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 September 30, 2022 , the Capped Call Transactions were out-of-the-money. Credit Facility 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 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 September 30, 2022 , we had $ 32.4 million in the form of outstanding standby letters of credit, with no amounts outstanding under the Credit Facility . 21 8. Commitments and Contingencies 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 $ 4.0 billion in commitments as of September 30, 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. 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 September 30, 2022. We believe the fair value of these liabilities is immaterial and accordingly have no liabilities recorded for these agreements at September 30, 2022. 22 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Operating lease expense $ 25,230 $ 17,795 $ 77,686 $ 49,883 Sublease income ( 92 ) ( 682 ) ( 956 ) ( 2,010 ) Total net lease costs $ 25,138 $ 17,113 $ 76,730 $ 47,873 Lease Term and Discount Rate The weighted-average remaining lease term (in years) and discount rate related to the operating leases were as follows: Nine Months Ended September 30, 2022 2021 Weighted-average remaining lease term 6.8 6.9 Weighted-average discount rate 4.9 % 5.2 % 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 September 30, 2022 were as follows: Operating Leases (in thousands) Remainder of 2022 $ 22,741 2023 78,620 2024 100,758 2025 96,844 2026 47,957 Thereafter 181,331 Total lease payments $ 528,251 Less: Imputed interest ( 85,843 ) Present value of lease liabilities $ 442,408 As of September 30, 2022 , we have additional operating leases for facilities that have not yet commenced with lease obligations of $ 40.2 million. These operating leases will commence between 2022 and 2023 with lease terms of 5 years to 11 years. Other Information Cash payments included in the measurement of our o perating lease liabilities were $ 20.6 million and $ 66.8 million for the three and nine months ended September 30, 2022 , respectively, and $ 19.1 million and $ 54.1 million for the three and nine months ended September 30, 2021 , respectively. Lease liabilities arising from obtaining operating lease right-of-use assets were $ 134.8 million for the nine months ended September 30, 2022. There were no lease liabilities arising from obtaining operating lease right-of-use assets during the three months ended September 30, 2022. Lease liabilities arising from obtaining operating lease right-of-use assets were $ 8.4 million and $ 56.1 million for the three and nine months ended September 30, 2021, respectively. 23 10. Strategic Investments We hold strategic investments in privately held companies with a carrying value of $ 226.7 million and $ 262.7 million as of September 30, 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. There were no gains or losses recognized on our strategic investments in privately held companies for the three months ended September 30, 2022. We recognized $ 19.7 million of unrealized gains and $ 45.9 million of realized gains on investments in privately held companies for the nine months ended September 30, 2022 . We recognized unrealized gains on investments in privately held companies of $ 60.6 million and $ 136.0 million for the three and nine months ended September 30, 2021 , respectively, and $ 27.8 million of realized gains for the nine months ended September 30, 2021. Unrealized and realized gains on all strategic investments are included within other income (expense), net on 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. Strategic investments are included within other assets on our consolidated balance sheets. A ll strategic investments are reviewed periodically for impairment. Impairment expense recorded for the three and nine months ended September 30, 2022 and 2021, respectively, 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. The following tables set forth our financial assets as of September 30, 2022 and December 31, 2021 that are measured at fair value on a recurring basis during the period: September 30, 2022 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (in thousands) Cash $ 1,805,384 $ — $ — $ 1,805,384 Level 1 securities: U.S. government securities 1,675,064 20 ( 13,648 ) 1,661,436 U.S. government agency securities 59,047 14 ( 149 ) 58,912 Publicly traded equity securities (1) 95,406 21,453 — 116,859 Level 2 securities: Corporate debt securities 279,520 7 ( 2,429 ) 277,098 Commercial paper 336,741 — — 336,741 Certificates of deposit 172,524 — ( 2 ) 172,522 Total $ 4,423,686 $ 21,494 $ ( 16,228 ) $ 4,428,952 (1) In the second quarter of 2022, we reclassified a strategic investment from Level 3 to Level 1 at its fair value using the beginning-of-period approach, following the commencement of public market trading of the investment during the period (a portion of which was subject to short-term lock-up restrictions as of September 30, 2022). 24 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 investments in publicly traded companies with an aggregate carrying value of $ 116.9 million and $ 193.2 million as of September 30, 2022 and December 31, 2021, respectively, recorded as marketable securities. We recorded total gains of $ 76.2 million and total losses of $ 79.8 million related to these investments for the three and nine months ended September 30, 2022, respectively, within other income (expense), net on our consolidated statements of operations. Unrealized gains related to publicly traded equity securities still held as of September 30, 2022 were $ 53.5 million for the three months ended September 30, 2022 and unrealized losses were $ 69.7 million for the nine months ended September 30, 2022. Gross unrealized losses on marketable debt securities were not material for the three and nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we considered any decreases in fair value on our marketable debt securities to be driven by factors other than credit risk, including market risk. As of September 30, 2022, $ 0.2 million of our total $ 2.4 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 September 30, 2022, the fair value of the 2025 Notes, the 2026 Notes, the 2027 Notes, and the 2028 Notes was $ 262.6 million, $ 725.6 million, $ 798.0 million, and $ 1.0 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. 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 $ 9.2 million and $ 24.8 million for the three and nine months ended September 30, 2022, respectively, compared to an income tax expense of $ 1.0 million and $ 0.6 million for the three and nine months ended September 30, 2021 , respectively. 25 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 ( 14,501 ) ( 24,273 ) ( 38,774 ) Amounts reclassified from AOCI (1) ( 18 ) — ( 18 ) Net current period OCI ( 14,519 ) ( 24,273 ) ( 38,792 ) Balance at September 30, 2022 $ ( 16,341 ) $ ( 16,930 ) $ ( 33,271 ) (1) Realized gains and losses on marketable securities are reclassified from AOCI into other income (expense), net in our consolidated statements of operations. 14. Property and Equipment, Net The following table lists property and equipment, net by geographic area: As of September 30, 2022 As of December 31, 2021 (in thousands) Property and equipment, net: United States $ 202,900 $ 174,826 Rest of world (1) 37,852 27,818 Total property and equipment, net $ 240,752 $ 202,644 (1) No individual country exceeded 10% of our total property and equipment, net for any period presented. 15. Restructuring In the third quarter of 2022, we initiated a strategic reprioritization plan, which included a reduction of our global employee headcount by approximately 20 %. We expect to incur total restructuring charges of up to $ 190 million, primarily through December 31, 2022. The following table summarizes the restructuring charges (benefits) in our consolidated statements of operations for the three months ended September 30, 2022: Severance and Related Charges (1) Stock-Based Compensation Expense (Benefit) Lease Exit and Related Charges Other (2) Total (in thousands) Cost of revenue $ 1,318 $ ( 11 ) $ — $ 13,092 $ 14,399 Research and development 46,528 27,848 — 683 75,059 Sales and marketing 27,800 ( 1,606 ) — 730 26,924 General and administrative 15,420 4,038 16,626 2,097 38,181 Total $ 91,066 $ 30,269 $ 16,626 $ 16,602 $ 154,563 (1) Severance and related charges include cash severance expense and other termination benefits. The majority of cash paid for restructuring in the third quarter of 2022 was related to severance and benefits. (2) Other includes impairment and contract termination charges. The liabilities related to the reprioritization plan were $ 42.1 million as of September 30, 2022. 26 16. Subsequent Events In October 2022, our board of directors authorized a stock repurchase program of up to $ 500.0 million of our Class A common stock. Repurchases of Class A common stock may be made from time to time, either through open market transactions (including pre-set trading plans) or through other transactions in accordance with applicable securities laws. Repurchases have been authorized for the next 12 months but the program may be modified, suspended, or terminated at any time. 27