SNAPCHAT INC filed this 10-Q on 08/11/17
SNAP INC - 10-Q - 20170811 - MANAGEMENT_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 in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our prospectus dated March 1, 2017, or Prospectus, as filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act 1933, as amended, or the Securities Act (File No. 333-215866).

Executive Overview of Second Quarter Results

Our key user metrics and financial results for the second quarter of 2017 are as follows:

User Metrics

 

Daily Active Users, or DAUs, were 173 million, as compared to 143 million in the previous year, an increase of 30.5 million or 21% year-over-year.

 

Average revenue per user, or ARPU, was $1.05, as compared to $0.50 in the second quarter of 2016.

Financial Results

 

Revenue was $181.7 million, an increase of 153% year-over-year.

 

Total costs and expenses were $630.7 million.

 

Loss from operations was $449.0 million.

 

Net loss was $443.1 million with diluted loss per share of $(0.36).

 

Adjusted EBITDA was $(194.0) million.

 

Cash used in operations was $209.6 million and Free Cash Flow was $(228.9) million.

 

Capital expenditures were $19.4 million.

 

Cash, cash equivalents, and marketable securities were $2.8 billion as of June 30, 2017.

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. Our products empower 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 was created to help people communicate through short videos and images. We call each of those short videos or images a Snap. On average, 173 million people use Snapchat daily, and over 3.0 billion Snaps are created every day. On average, our users visit Snapchat more than 20 times per day and spend over 30 minutes on Snapchat every day.

Trends in User Metrics

User Engagement

We define a Daily Active User as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. We measure average Daily Active Users for a particular quarter by calculating the average Daily Active Users for that quarter. We also break out Daily Active Users by geography because certain markets have a greater revenue opportunity and lower bandwidth costs.

We averaged 173 million DAUs across the quarter, as compared to 143 million in the second quarter of 2016, an increase of 21%. The majority of that growth continues to be driven by core markets like North America and Europe.

22


 

Quarterly Average Daily Active Users

(in millions)

 

 

 

(1)

North America includes Mexico and the Caribbean.

(2)

Europe includes Russia and Turkey.

 

23


 

Monetization

We monetize our business primarily through advertising. Our advertising products include Snap Ads and Sponsored Creative Tools like Sponsored Lenses and Sponsored Geofilters. While our advertising business is still in its early stages, it has grown rapidly. In the three months ended June 30, 2017, we recorded revenue of $181.7 million as compared to revenue of $71.8 million for the same period in 2016, representing a 153% year-over-year increase. In the six months ended June 30, 2017, we recorded revenue of $331.3 million as compared to revenue of $110.6 million for the same period in 2016, a 200% year-over-year increase.

We measure progress in our advertising business using ARPU because it helps us understand the rate at which we’re monetizing our daily user base. We define ARPU as quarterly revenue divided by the average Daily Active Users.

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 and the Caribbean.

(2)

Europe includes Russia and Turkey.

24


 

ARPU was $1.05 in the second quarter of 2017, up from $0.50 a year ago and $0.90 in the first quarter of 2017. In North America, ARPU was $1.97, 88% higher than our global average. We believe North America remains a leading indicator for the scale potential of our business.

Results of Operations

The following table summarizes certain selected historical financial results:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(in thousands)

 

Revenue

$

181,671

 

 

$

71,798

 

 

$

331,319

 

 

$

110,596

 

Loss from operations

 

(449,018

)

 

 

(115,859

)

 

 

(2,662,785

)

 

 

(219,680

)

Net loss

 

(443,093

)

 

 

(115,894

)

 

 

(2,651,930

)

 

 

(220,470

)

Adjusted EBITDA (1)

 

(193,990

)

 

 

(105,121

)

 

 

(382,233

)

 

 

(198,355

)

 

(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 include Snap Ads and Sponsored Creative Tools. We sell advertising directly to advertisers, referred to as Snap-sold revenue. Certain partners that provide content on Snapchat, or content partners, also sell directly to advertisers, referred to as partner-sold revenue. We report Snap-sold revenue on a gross basis and partner-sold revenue on a net basis. Currently, our Sponsored Creative Tools, which include Sponsored Lenses and Sponsored Geofilters, are only Snap-sold. For the three months ended June 30, 2017 and 2016, approximately 93% and 88% of our advertising revenue was Snap-sold, respectively, and approximately 7% and 12% of our advertising revenue was partner-sold, respectively. For the six months ended June 30, 2017 and 2016, approximately 93% and 89% of our advertising revenue was Snap-sold, respectively, while approximately 7% and 11% was partner-sold, respectively. Snap Ads, whether Snap-sold or partner-sold, may be subject to revenue sharing arrangements between us and the content partner.

We also generate revenue from sales of our hardware product, Spectacles. This revenue is reported net of allowances for returns.

Cost of Revenue

Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products. Hosting costs primarily include expenses related to bandwidth, computing, and storage costs. Cost of revenue also includes revenue share payments to our content partners, content creation costs, which include personnel-related costs, and advertising measurement services. In addition, cost of revenue includes inventory costs for Spectacles and facilities and other supporting overhead costs, including depreciation and amortization.

Research and Development Expenses

Research and development expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expenses for our engineers 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, communications, and customer service functions. Sales and marketing expenses also

25


 

include costs incurred for indirect advertising, market research, tradeshows, branding, marketing, promotional expense, and public relations, as well as facilities and other supp orting 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 executives, finance, legal, information technology, human resources, and other administrative teams, including facilities and supporting overhead costs, and depreciation and amortization. General and administrative expenses also include external professional services.

Interest Income

Interest income consists primarily of interest earned on our cash, cash equivalents, and marketable securities.

Interest Expense

Interest expense consists primarily of interest on build-to-suit lease financing obligations and commitment fees and amortization of financing costs related to our revolving credit facility.

Other Income (Expense), Net

Other income (expense), net consists of realized gains and losses on sales of marketable securities, our portion of equity method investment income and losses, and foreign currency transaction gains and losses.

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 foreign 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; and stock-based compensation expense and related payroll tax expense. We consider the exclusion of certain non-cash expenses in calculating Adjusted EBITDA to provide a useful measure for period-to-period comparisons of our business and for investors and others to evaluate our operating results in the same manner as does our management. Additionally, we believe that Adjusted EBITDA is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities. See “Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA.

26


 

Discussion of Results of Oper ations

The following table sets forth our consolidated statements of operations data:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(in thousands)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

181,671

 

 

$

71,798

 

 

$

331,319

 

 

$

110,596

 

Costs and expenses (1) (2) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

152,148

 

 

 

94,757

 

 

 

315,506

 

 

 

170,530

 

Research and development

 

255,735

 

 

 

36,052

 

 

 

1,061,583

 

 

 

64,150

 

Sales and marketing

 

90,903

 

 

 

24,587

 

 

 

310,636

 

 

 

39,324

 

General and administrative

 

131,903

 

 

 

32,261

 

 

 

1,306,379

 

 

 

56,272

 

Total costs and expenses

 

630,689

 

 

 

187,657

 

 

 

2,994,104

 

 

 

330,276

 

Loss from operations

 

(449,018

)

 

 

(115,859

)

 

 

(2,662,785

)

 

 

(219,680

)

Interest income

 

6,349

 

 

 

871

 

 

 

8,773

 

 

 

1,230

 

Interest expense

 

(998

)

 

 

 

 

 

(1,693

)

 

 

 

Other income (expense), net

 

786

 

 

 

(939

)

 

 

973

 

 

 

(1,932

)

Loss before income taxes

 

(442,881

)

 

 

(115,927

)

 

 

(2,654,732

)

 

 

(220,382

)

Income tax benefit (expense)

 

(212

)

 

 

33

 

 

 

2,802

 

 

 

(88

)

Net loss

$

(443,093

)

 

$

(115,894

)

 

$

(2,651,930

)

 

$

(220,470

)

Adjusted EBITDA (3)

$

(193,990

)

 

$

(105,121

)

 

$

(382,233

)

 

$

(198,355

)

 

(1)

Stock-based compensation and related payroll tax expense included in above line items:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(in thousands)

 

Stock-based compensation and related payroll tax expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

2,223

 

 

$

128

 

 

$

22,249

 

 

$

282

 

Research and development

 

163,848

 

 

 

2,700

 

 

 

885,977

 

 

 

5,348

 

Sales and marketing

 

20,558

 

 

 

553

 

 

 

181,500

 

 

 

1,327

 

General and administrative

 

55,814

 

 

 

1,361

 

 

 

1,165,791

 

 

 

3,323

 

Total

$

242,443

 

 

$

4,742

 

 

$

2,255,517

 

 

$

10,280

 

 

(2)

Depreciation and amortization expense included in the above line items:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(in thousands)

 

Depreciation and amortization expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

2,970

 

 

$

99

 

 

$

4,639

 

 

$

169

 

Research and development

 

5,983

 

 

 

4,164

 

 

 

11,738

 

 

 

7,776

 

Sales and marketing

 

1,589

 

 

 

236

 

 

 

4,189

 

 

 

386

 

General and administrative

 

2,043

 

 

 

1,497

 

 

 

4,469

 

 

 

2,714

 

Total

$

12,585

 

 

$

5,996

 

 

$

25,035

 

 

$

11,045

 

 

(3)

See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

27


 

The following table sets forth the components of our consolidated statements of operations data for each of the periods presented as a percentage of revenue:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

84

 

 

 

132

 

 

 

95

 

 

 

154

 

Research and development

 

141

 

 

 

50

 

 

 

320

 

 

 

58

 

Sales and marketing

 

50

 

 

 

34

 

 

 

94

 

 

 

36

 

General and administrative

 

73

 

 

 

45

 

 

 

394

 

 

 

51

 

Total costs and expenses

 

347

 

 

 

261

 

 

 

904

 

 

 

299

 

Loss from operations

 

247

 

 

 

161

 

 

 

804

 

 

 

199

 

Interest income

 

3

 

 

 

1

 

 

 

3

 

 

 

1

 

Interest expense

 

1

 

 

 

 

 

 

1

 

 

 

 

Other income (expense), net

 

 

 

 

1

 

 

 

 

 

 

2

 

Loss before income taxes

 

244

 

 

 

161

 

 

 

801

 

 

 

199

 

Income tax benefit (expense)

 

 

 

 

 

 

 

1

 

 

 

 

Net loss

 

244

%

 

 

161

%

 

 

800

%

 

 

199

%

 

Three and Six Months Ended June 30, 2017 and 2016

Revenue

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

Revenue

$

181,671

 

 

$

71,798

 

 

$

331,319

 

 

$

110,596

 

Revenue as a dollar change

 

 

 

 

$

109,873

 

 

 

 

 

 

$

220,723

 

Revenue as a percentage change

 

 

 

 

 

153

%

 

 

 

 

 

 

200

%

 

Revenue for the three months ended June 30, 2017 increased $109.9 million compared to the same period in 2016. Revenue was $331.3 million for the six months ended June 30, 2017, as compared to $110.6 million for the same period in 2016. The increase in revenue was primarily due to an increase in the number of advertisements delivered. The number of advertisements delivered increased between the periods primarily due to increased advertiser demand across our product offerings, our growing sales team, and increased user engagement as measured by a 21% increase in DAUs. Additionally, there was incremental spend in advertisements sold through our advertising API which launched in November 2016, allowing advertisers access to additional inventory at a lower price than our direct sales channels. ARPU increased due to the growth in revenue as a result of the number of advertisements delivered, which outpaced DAU growth during the period.

Snap-sold revenue was $164.8 million and partner-sold revenue was $11.5 million during the three months ended June 30, 2017 compared to $63.3 million for Snap-sold revenue and $8.5 million for partner-sold revenue during the three months ended June 30, 2016. Snap-sold revenue was $293.9 million and partner-sold revenue was $23.6 million during the six months ended June 30, 2017 compared to $98.4 million for Snap-sold revenue and $12.2 million for partner-sold revenue during the six months ended June 30, 2016.

Revenue for the three months ended June 30, 2017 was $181.7 million, as compared to $149.6 million for the three months ended March 31, 2017. The increase was primarily due to an increase in the number of advertisements delivered, partially offset by an increase in advertising inventory sold through our API which tends to be at a lower price.

28


 

Cost of Revenue

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

Cost of Revenue

$

152,148

 

 

$

94,757

 

 

$

315,506

 

 

$

170,530

 

Cost of Revenue as a dollar change

 

 

 

 

$

57,391

 

 

 

 

 

 

$

144,976

 

Cost of Revenue as a percentage change

 

 

 

 

 

61

%

 

 

 

 

 

 

85

%

 

Cost of revenue for the three months ended June 30, 2017 increased $57.4 million, or 61%, compared to the same period in 2016. The increase in cost of revenue primarily consisted of $27.2 million related to increased hosting costs, in part attributable to DAU growth of 21% between the periods, $13.1 million related to increased revenue share payments to our partners consistent with our overall increase in revenue, and $9.1 million related to increased content creation costs, which include personnel-related costs.

Cost of revenue for the six months ended June 30, 2017 increased $145.0 million or 85%, compared to the same period in 2016. The increase in cost of revenue primarily consisted of $63.5 million related to increased hosting costs, in part attributable to DAU growth of 21% between the periods, $29.5 million related to increased revenue share payments to our partners consistent with our overall increase in revenue, and $31.4 million related to increased content creation costs. Content creation costs include personnel-related costs, including $21.9 million primarily related to stock-based compensation expense primarily due to the recognition of expense related to restricted stock units, or RSUs, with a performance condition satisfied on the effectiveness of the registration statement for our initial public offering, or IPO.

Research and Development Expenses

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Research and Development Expenses

$

255,735

 

 

$

36,052

 

 

$

1,061,583

 

 

$

64,150

 

Research and Development Expenses as a dollar change

 

 

 

 

$

219,683

 

 

 

 

 

 

$

997,433

 

Research and Development Expenses as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

Research and development expenses for the three and six months ended June 30, 2017 increased $219.7 million and $997.4 million, respectively, compared to the same periods in 2016. The increase was driven by an increase in research and development headcount of approximately 190%. The investment in personnel supported our efforts to continue growing our user base and building and improving products for our users and advertisers. The increase for the six months ended June 30, 2017 was also due to an $876.6 million increase in stock-based compensation expense primarily due to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the registration statement for our IPO.

Sales and Marketing Expenses

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Sales and Marketing Expenses

$

90,903

 

 

$

24,587

 

 

$

310,636

 

 

$

39,324

 

Sales and Marketing Expenses as a dollar change

 

 

 

 

$

66,316

 

 

 

 

 

 

$

271,312

 

Sales and Marketing Expenses as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

Sales and marketing expenses for the three and six months ended June 30, 2017 increased $66.3 million and $271.3 million, respectively, compared to the same periods in 2016. The increase was primarily due to an increase in sales and marketing headcount of approximately 160% and an increase in marketing events. The increase for the six months ended June 30, 2017 was also due to a $179.0 million increase in stock-based compensation expense primarily due to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the registration statement for our IPO.

29


 

General and Administrative Expenses

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

General and Administrative Expenses

$

131,903

 

 

$

32,261

 

 

$

1,306,379

 

 

$

56,272

 

General and Administrative Expenses as a dollar change

 

 

 

 

$

99,642

 

 

 

 

 

 

$

1,250,107

 

General and Administrative Expenses as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

General and administrative expenses for the three and six months ended June 30, 2017 increased $99.6 million and $1.3 billion, respectively, compared to the same periods in 2016. The increase was primarily due to increased personnel costs from an increase in general and administrative headcount of approximately 110%. Additionally, there was in increase in legal and other professional fees related to increased acquisition activity and general growth. The increase for the six months ended June 30, 2017 was also driven by an increase in stock-based compensation expense of $1.1 billion, composed of CEO award expense of $636.6 million and the remainder primarily related to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the registration statement for our IPO.

Interest Income

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Interest Income

$

6,349

 

 

$

871

 

 

$

8,773

 

 

$

1,230

 

Interest Income as a dollar change

 

 

 

 

$

5,478

 

 

 

 

 

 

$

7,543

 

Interest Income as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

Interest income for the three and six months ended June 30, 2017 increased $5.5 million and $7.5 million, respectively, compared to the same periods in 2016. The increase was primarily a result of a larger invested balance in marketable securities due to IPO proceeds and higher interest rates on U.S. government-backed securities.

Interest Expense

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Interest Expense

$

(998

)

 

$

 

 

$

(1,693

)

 

$

 

Interest Expense as a dollar change

 

 

 

 

$

(998

)

 

 

 

 

 

$

(1,693

)

Interest Expense as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

Interest expense for the three and six months ended June 30, 2017 was $1.0 million and $1.7 million, respectively. Interest expense was composed primarily of interest on financing obligations related to a build-to-suit lease placed into service in the third quarter of 2016 and commitment fees and amortization of costs related to our revolving credit facility, which was executed in the third quarter of 2016.

Other Income (Expense), Net

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Other Income (Expense), Net

$

786

 

 

$

(939

)

 

$

973

 

 

$

(1,932

)

Other Income (Expense), Net as a dollar change

 

 

 

 

$

1,725

 

 

 

 

 

 

$

2,905

 

Other Income (Expense), Net as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

30


 

Other income, net for the three months ended June 30, 2017 was $0.8 million, as compared to other expense, net of $0. 9 million for the same period in 2016. Other income, net for the six months ended June 30, 2017 was $1.0 million, as compared to other expense, net of $1.9 million for the same period in 2016. The change from the comparative period was primarily a result o f a decrease in our share of losses on equity method investments and an increase in foreign currency transaction gains.

Income Tax Benefit (Expense)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Income Tax Benefit (Expense)

$

(212

)

 

$

33

 

 

$

2,802

 

 

$

(88

)

Income Tax Benefit (Expense) as a dollar change

 

 

 

 

$

(245

)

 

 

 

 

 

$

2,890

 

Income Tax Benefit (Expense) as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

Effective Tax Rate

 

0.0

%

 

 

0.0

%

 

 

0.1

%

 

 

0.0

%

 

The income tax benefit for the six months ended June 30, 2017 was primarily from the partial release of a valuation allowance against our net deferred tax assets. The valuation allowance release was the result of net deferred tax liabilities originating from acquisitions that were an available source of income to realize a portion of our deferred tax assets.

Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowance 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. For additional discussion, see Note 8 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Net Loss and Adjusted EBITDA

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(dollars in thousands)

 

 

(NM = Not Meaningful)

 

Net Loss

$

(443,093

)

 

$

(115,894

)

 

$

(2,651,930

)

 

$

(220,470

)

Net Loss as a dollar change

 

 

 

 

$

(327,199

)

 

 

 

 

 

$

(2,431,460

)

Net Loss as a percentage change

 

 

 

 

NM

 

 

 

 

 

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

$

(193,990

)

 

$

(105,121

)

 

$

(382,233

)

 

$

(198,355

)

Adjusted EBITDA as a dollar change

 

 

 

 

$

(88,869

)

 

 

 

 

 

$

(183,878

)

Adjusted EBITDA as a percentage change

 

 

 

 

 

85

%

 

 

 

 

 

 

93

%

 

Net loss for the three and six months ended June 30, 2017 was $443.1 million and $2.7 billion, respectively, as compared to $115.9 million and $220.5 million, respectively, for the same periods in 2016. Adjusted EBITDA loss for the three and six months ended June 30, 2017 was $194.0 million and $382.2 million, respectively, as compared to $105.1 million and $198.4 million, respectively, for the same periods in 2016. The increase in net loss was driven by a $2.2 billion increase in stock-based compensation expense primarily related to the CEO award and the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the registration statement for our IPO. The remaining increase in net loss and the increase in Adjusted EBITDA was driven by an increase in cost of revenue and operating expenses, which more than offset revenue growth during the period. The increase in cost of revenue was primarily related to higher hosting costs and revenue share payments to our partners. The increase in operating expenses was primarily related to increased headcount. 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.

31


 

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; and stock-based compensation expense and related payroll tax expense. We believe that Adjusted EBITDA helps identify underlying trends in our busine ss that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.

We use the non-GAAP financial measure of Free Cash Flow, which is defined as net cash 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 believe that both Adjusted EBITDA and Free Cash Flow 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 Adjusted EBITDA and Free Cash Flow to assist investors in seeing our financial performance through the eyes of management, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures as compared to the closest comparable GAAP measure. Some of these limitations are that:

 

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 related payroll tax expense, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy;

 

Adjusted EBITDA does not reflect tax payments that reduce cash available to us; and

 

Free Cash Flow does not reflect our future contractual commitments.

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,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(in thousands)

 

Adjusted EBITDA reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(443,093

)

 

$

(115,894

)

 

$

(2,651,930

)

 

$

(220,470

)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

(6,349

)

 

 

(871

)

 

 

(8,773

)

 

 

(1,230

)

Interest expense

 

998

 

 

 

 

 

 

1,693

 

 

 

 

Other (income) expense, net

 

(786

)

 

 

939

 

 

 

(973

)

 

 

1,932

 

Income tax (benefit) expense

 

212

 

 

 

(33

)

 

 

(2,802

)

 

 

88

 

Depreciation and amortization

 

12,585

 

 

 

5,996

 

 

 

25,035

 

 

 

11,045

 

Stock-based compensation expense

 

245,028

 

 

 

4,742

 

 

 

2,237,149

 

 

 

10,280

 

Payroll tax expense related to stock-based compensation

 

(2,585

)

 

 

 

 

 

18,368

 

 

 

 

Adjusted EBITDA

$

(193,990

)

 

$

(105,121

)

 

$

(382,233

)

 

$

(198,355

)

 

32


 

The following table presents a reconciliation of Free Cash Flow to net cash 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,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(in thousands)

 

Free Cash Flow reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

$

(209,574

)

 

$

(134,110

)

 

$

(364,571

)

 

$

(226,651

)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(19,365

)

 

 

(16,421

)

 

 

(37,358

)

 

 

(28,873

)

Free Cash Flow

$

(228,939

)

 

$

(150,531

)

 

$

(401,929

)

 

$

(255,524

)

 

Liquidity and Capital Resources

Cash, cash equivalents, and marketable securities were $2.8 billion as of June 30, 2017, primarily consisting of cash on deposit with banks and highly liquid investments in U.S. government and agency securities. Our primary source of liquidity is cash generated through financing activities. Our primary uses of cash include operating costs such as personnel-related expenses and the hosting costs of the Snapchat application, acquisitions and investments, and facility-related capital spending. Other than as noted below, 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 July 2016, we entered into a five-year senior unsecured revolving credit facility, or the Credit Facility, with lenders, some of which are affiliated with certain members of the underwriting syndicate for our IPO, that allows us to borrow up to $1.1 billion to fund working capital and general corporate-purpose expenditures. The loan bears interest at LIBOR plus 0.75%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. No origination fees were incurred at the closing of the Credit Facility. Any amounts outstanding under this facility will be due and payable in July 2021. In December 2016, the amount we are permitted to borrow under the Credit Facility was increased to $1.2 billion. As of June 30, 2017, no amounts were outstanding under the Credit Facility.

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.

As of June 30, 2017, approximately 1% 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.

RSU Settlement

In July 2017, a total of 15.4 million RSUs that vested between the IPO and the expiration of the lock-up period for our IPO were net-settled. We delivered 5.7 million shares of Class A common stock and 1.8 million shares of Class B common stock to our RSU holders. Additionally, we remitted approximately $105.0 million to satisfy tax withholding and remittance obligations through July 31, 2017, not including tax withholding that was remitted at the IPO, which was $206.6 million. We withheld and remitted income taxes at applicable statutory rates based on the then-current value of the underlying shares. We will continue to evaluate the net settlement of RSUs that vest in the future.

33


 

The following table sets forth the major components of our consolidated statements of cash flows for the periods presented:

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

(in thousands)

 

Net cash used in operating activities

$

(364,571

)

 

$

(226,651

)

Net cash used in investing activities

 

(1,724,681

)

 

 

(983,336

)

Net cash provided by financing activities

 

2,440,808

 

 

 

1,157,147

 

Net increase (decrease) in cash

$

351,556

 

 

$

(52,840

)

Free Cash Flow (1)

$

(401,929

)

 

$

(255,524

)

 

(1)

For information on how we define and calculate Free Cash Flow and a reconciliation to net cash used in operating activities to Free Cash Flow, see “Non-GAAP Financial Measures.”

Six Months Ended June 30, 2017 and 2016

Net Cash Used in Operating Activities

Net cash used in operating activities increased $137.9 million in the six months ended June 30, 2017 compared to the same period in 2016. Net cash used in operating activities was $364.6 million for the six months ended June 30, 2017, resulting primarily from net loss, adjusted for non-cash items, primarily stock-based compensation expense of $2.2 billion, and a $47.8 million increase in prepaid expenses and other current assets primarily due to timing of prepayments, partially offset by a $82.2 million increase in accrued expenses and other liabilities primarily driven by an increase in accrued hosting costs and accrued compensation costs due to increased headcount.

Net Cash Used in Investing Activities

Net cash used in investing activities was $1.7 billion for the six months ended June 30, 2017, an increase of $741.3 million as compared to the prior period, primarily due to the use of $2.7 billion for the purchase of marketable securities and cash paid for acquisitions of $224.2 million, partially offset by cash provided by the sales and maturities of marketable securities of $1.3 billion.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $2.4 billion and $1.2 billion, for the six months ended June 30, 2017 and 2016, respectively. Our financing activities in 2017 consisted of proceeds from the issuance of Class A common stock in our IPO of $2.7 billion, net of underwriting commissions, partially offset by cash used for stock repurchases from employees for minimum tax withholdings of $208.4 million.

Free Cash Flow

Free Cash Flow was $(401.9) million and $(255.5) million for the six months ended June 30, 2017 and 2016, respectively, and was composed of net cash used in operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital. Free Cash Flow also included purchases of property and equipment of $37.4 million and $28.9 million for the six months ended June 30, 2017 and 2016, respectively.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements for any of the periods presented.

Contingencies

We are involved in claims, lawsuits, indirect and other 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

34


 

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 assu mptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.

Commitments

The following table summarizes our contractual obligations as of June 30, 2017:

 

Total

 

 

Less than 1

Year

(Remainder of 2017)

 

 

1-3 Years

(2018 and 2019)

 

 

3-5 Years

(2020 and 2021)

 

 

After 5

Years

(Thereafter)

 

 

(in thousands)

 

Operating leases

$

410,445

 

 

$

17,686

 

 

$

100,264

 

 

$

110,138

 

 

$

182,357

 

Financing leases

 

47,854

 

 

 

2,340

 

 

 

9,522

 

 

 

10,039

 

 

 

25,953

 

Hosting commitments

 

2,826,350

 

 

 

242,762

 

 

 

1,125,255

 

 

 

1,425,000

 

 

 

33,333

 

Other commitments

 

70,152

 

 

 

55,014

 

 

 

15,138

 

 

 

 

 

 

 

Total contractual commitments

$

3,354,801

 

 

$

317,802

 

 

$

1,250,179

 

 

$

1,545,177

 

 

$

241,643

 

 

For additional discussion on our operating and financing leases and data hosting and other purchase commitments, see Note 6 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In January 2017, we entered into the Google Cloud Platform License Agreement. Under the agreement, we were granted a license to access and use certain cloud services. The agreement has an initial term of five years and we are required to purchase at least $400.0 million of cloud services in each year of the agreement, though for each of the first four years, up to 15% of this amount may be moved to a subsequent year. If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference.

In March 2016, we entered into the AWS Enterprise Agreement for the use of cloud services from Amazon Web Services, Inc., or AWS, that was amended in March 2016, and again in February 2017. Such agreement will continue indefinitely until terminated by either party. Under the February 2017 addendum to the agreement, we committed to spend $1.0 billion between January 2017 and December 2021 on AWS services ($50.0 million in 2017, $125.0 million in 2018, $200.0 million in 2019, $275.0 million in 2020, and $350.0 million in 2021). If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference. Any such payment may be applied to future use of AWS services during the addendum term, although it will not count towards meeting the future minimum purchase commitments under the addendum.

Approximately $29.0 million of our other purchase commitments relate to hardware inventory commitments. We continue to invest to build inventory as we expand product distribution and marketing to understand the global demand for our products. Our assumptions of future demand for our products are inherently uncertain, and we may be required to record a write-down of our inventory and a liability for non-cancellable purchase commitments which would adversely affect our results of operations in that period.

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, and income taxes.

There have been no material changes to our critical accounting policies and estimates as described in our Prospectus, except as described below.

35


 

Stock-Based Compensation

We have granted stock-based awards consisting primarily of RSUs, and to a lesser extent, stock options, to employees, members of our board of directors, and non-employee advisors. The substantial majority of our stock-based awards have been made to employees. RSUs granted before January 1, 2017, or Pre-2017 RSUs, include both service-based and performance conditions to vest in the underlying common stock. The service-based condition for the majority of these awards is satisfied over four years. The performance condition related to these awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred in March 2017. On the effectiveness of the registration statement for our IPO, we recognized $1.3 billion in stock-based compensation expense. All RSUs granted after December 31, 2016 vest on the satisfaction of only service-based conditions.

Restricted Stock Units and Stock Option Awards

In the three and six months ended June 30, 2017, total stock-based compensation expense recognized was $245.0 million and $2.2 billion, respectively. As of June 30, 2017, we have approximately $1.0 billion of unrecognized stock-based compensation expense related to our Pre-2017 RSUs to be recognized over a weighted-average period of approximately 2.9 years. Total unrecognized compensation cost related to Post-2017 RSUs was $597.4 million as of June 30, 2017 and is expected to be recognized over a weighted-average period of 5.3 years. Total unrecognized compensation cost related to stock options was $37.0 million as of June 30, 2017 and is expected to be recognized over a weighted-average period of 2.2 years.

CEO Award

In addition, on the closing of the IPO, our CEO received an RSU award, or CEO award, for 37.4 million shares of Series FP preferred stock, which automatically converted into an equivalent number of shares of Class C common stock on the closing of the IPO. The CEO award represented 3.0% of all outstanding shares on the closing of the IPO, including shares sold by us in the IPO and vested stock options and RSUs on the closing of the IPO, net of shares withheld to satisfy tax withholding obligations. The CEO award vested immediately on the closing of the IPO, and such shares will be delivered to the CEO in equal quarterly installments over three years beginning in the third full calendar quarter following the IPO. There is no continuing service requirement for our CEO. In the three months ended March 31, 2017, the stock-based compensation expense recognized related to the CEO award was $636.6 million, which is based on the vesting of 37.4 million shares of Class C common stock, at the public offering price of $17.00 per share.

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.