META PLATFORMS, INC. You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSecurities and Exchange Commission . In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, "Risk Factors." For a discussion of limitations in the measurement of certain of our community metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q. Certain revenue information in the section entitled "-Three Months EndedMarch 31, 2020 and 2019-Revenue-Foreign Exchange Impact on Revenue" is presented on a constant currency basis. This information is a non-GAAP financial measure. To calculate revenue on a constant currency basis, we translated revenue for the three months endedMarch 31, 2020 using the prior year's monthly exchange rates for our settlement or billing currencies other than theU.S. dollar. This non-GAAP financial measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We believe this non-GAAP financial measure provides investors with useful supplemental information about the financial performance of our business, enables comparison of financial results between periods where certain items may vary independent of business performance, and allows for greater transparency with respect to key metrics used by management in operating our business.
Executive Overview of First Quarter Results
Our key community metrics and financial results for the first quarter of 2020 are as follows:
Community growth:
•
2020, an increase of 11% year-over-year.
• Facebook monthly active users (MAUs) were 2.60 billion as of March 31,
2020 , an increase of 10% year-over-year.
• Family daily active people (DAP) was 2.36 billion on average for March
2020 , an increase of 12% year-over-year.
• Family monthly active people (MAP) was 2.99 billion as of
an increase of 11% year-over-year.
Financial results:
• Revenue was
was
• Total costs and expenses were
• Income from operations was
• Net income was
• Capital expenditures, including principal payments on finance leases, were
• Effective tax rate was 16%.
• Cash and cash equivalents and marketable securities were
of
• Headcount was 48,268 as of
In the first quarter of 2020, we continued to focus on our main revenue growth
priorities: (i) helping marketers use our products to connect with consumers
where they are and (ii) making our ads more relevant and effective.
In response to the COVID-19 pandemic, we have focused on helping people stay
connected, assisting the public health response, and working on the economic
recovery. We have also continued to invest based on the following company
priorities that we believe will further our mission to give people the power to
build community and bring the world closer together: (i) continue making
progress on the major social issues facing the internet and our company,
including privacy, safety, and security; (ii) build new experiences that
meaningfully improve people's lives today and set the stage for even bigger
improvements in the future; (iii) keep building our business by supporting the
millions of businesses that rely on our services to grow and create jobs; and
(iv) communicate more transparently about what we're doing and the role our
services play in the world.
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Our business has been impacted by the COVID-19 pandemic, which has resulted in
authorities implementing numerous preventative measures to contain or mitigate
the outbreak of the virus, such as travel bans and restrictions, limitations on
business activity, quarantines, and shelter-in-place orders. These measures have
caused, and are continuing to cause, business slowdowns or shutdowns in affected
areas, both regionally and worldwide, which have significantly impacted our
business and results of operations. We have seen a significant increase in the
size of our user base and user engagement as a result of these preventative
measures. At the same time, we experienced a significant reduction in the demand
for advertising, as well as a related decline in the pricing of our ads, over
the last three weeks of the first quarter of 2020. After the initial steep
decrease in our advertising revenue growth rates in March compared to earlier in
the first quarter of 2020, we have seen signs of stability reflected in the
first three weeks of April, where advertising revenue has been approximately
flat compared to the same period a year ago, down from the 17% year-over-year
growth in the first quarter of 2020. We expect that we will lose at least some
of the increased user engagement when various shelter-in-place restrictions are
relaxed in the future. In addition, the demand for and pricing of our
advertising services, as well as our overall results of operations, may be
materially and adversely impacted by the pandemic for the duration of 2020 or
longer, and we are unable to predict the duration or degree of such impact with
any certainty. We also intend to continue to invest in our business based on our
company priorities, and we anticipate that additional investments in our data
center capacity, network infrastructure, and office facilities, as well as
scaling our headcount to support our growth and certain initiatives related to
the COVID-19 pandemic, will continue to drive expense growth in 2020.
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Trends in Our Facebook User Metrics The numbers for our key
and logged-in Facebook user who visited
mobile device, or used our Messenger application (and is also a registered
Facebook user), on a given day. We view DAUs, and DAUs as a percentage of
MAUs, as measures of user engagement on Facebook.
[[Image Removed: daua09.jpg]]
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region,
Worldwide DAUs increased 11% to 1.73 billion on average duringMarch 2020 from 1.56 billion duringMarch 2019 . Users inIndia ,Indonesia , andthe Philippines represented key sources of growth in DAUs duringMarch 2020 , relative to the same period in 2019. 30
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• Monthly Active Users (MAUs). We define a monthly active user as a
registered and logged-in Facebook user who visited
website or a mobile device, or used our Messenger application (and is also
a registered Facebook user), in the last 30 days as of the date of
measurement. MAUs are a measure of the size of our global active user
community on Facebook.
[[Image Removed: maujpeg.jpg]]
As of March 31, 2020 , we had 2.60 billion MAUs, an increase of 10% from
March 31, 2019 . Users in India , Indonesia , and the Philippines represented key
sources of growth in the first quarter of 2020, relative to the same period in
2019.
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Trends in Our Monetization by Facebook User Geography We calculate our revenue by Facebook user geography based on our estimate of the geography in which ad impressions are delivered, virtual and digital goods are purchased, or consumer hardware devices are shipped. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. While ARPU includes all sources of revenue, the number of MAUs used in this calculation only includes users ofUnited States &Canada andEurope are relatively higher primarily due to the size and maturity of those online and mobile advertising markets. For example, ARPU in the first quarter of 2020 inthe United States &Canada region was more than 11 times higher than in theAsia-Pacific region . [[Image Removed: revenuea03.jpg]] [[Image Removed: adrevenueandotherrevenuea02.jpg]] Note: Our revenue by Facebook user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our
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During the first quarter of 2020, worldwide ARPU was$6.95 , an increase of 8% from the first quarter of 2019. Over this period, ARPU increased by 13% inUnited States &Canada , 11% inEurope , 10% inAsia-Pacific and 5% in Rest of World. In addition, user growth was more rapid in geographies with relatively lower ARPU, such asAsia-Pacific and Rest of World. We expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region. 33
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Trends in Our Family Metrics
The numbers for our key Family metrics, our DAP, MAP, and average revenue per person (ARPP), do not include users on our other products unless they would otherwise qualify as MAP or DAP, respectively, based on their other activities on our Family products. Trends in the number of people in our community affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, the volume of Payments transactions, as well as our expenses and capital expenditures. Substantially all of our daily and monthly active people (as defined below) access our Family products on mobile devices.
• Daily Active People (DAP). We define a daily active person as a registered
and logged-in user of
(collectively, our "Family" of products) who visited at least one of these
Family products through a mobile device application or using a web or
mobile browser on a given day. We do not require people to use a common
identifier or link their accounts to use multiple products in our Family,
and therefore must seek to attribute multiple user accounts within and
across products to individual people. Our calculations of DAP rely uponcomplex techniques, algorithms, and machine learning models that seek to
estimate the underlying number of unique people using one or more of these
products, including by matching user accounts within an individual product
and across multiple products when we believe they are attributable to a
single person, and counting such group of accounts as one person. As these
techniques and models require significant judgment, are developed based on
internal reviews of limited samples of user accounts, and are calibrated
against user survey data, there is necessarily some margin of error in our
estimates. We view DAP, and DAP as a percentage of MAP, as measures of
engagement across our products. For additional information, see the
section entitled "Limitations of Key Metrics and Other Data" in this
Quarterly Report on Form 10-Q.
[[Image Removed: dapa05.jpg]]
Note: We report the numbers of DAP and MAP as specific amounts, but these
numbers are estimates of the numbers of unique people using our products and are
subject to statistical variances and errors. While we expect the error margin
for these estimates to vary from period to period, we estimate that such margin
generally will be approximately 3% of our worldwide MAP. At our scale, it is
very difficult to attribute multiple user accounts within and across products to
individual people, and it is possible that the actual numbers of unique people
using our products may vary significantly from our estimates, potentially beyond
our estimated error margins. For additional information, see the section
entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on
Form 10-Q.
Worldwide DAP increased 12% to 2.36 billion on average during
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• Monthly Active People (MAP). We define a monthly active person as a
registered and logged-in user of one or more Family products who visited
at least one of these Family products through a mobile device application
or using a web or mobile browser in the last 30 days as of the date of
measurement. We do not require people to use a common identifier or link
their accounts to use multiple products in our Family, and therefore must
seek to attribute multiple user accounts within and across products toindividual people. Our calculations of MAP rely upon complex techniques,
algorithms, and machine learning models that seek to estimate the
underlying number of unique people using one or more of these products,
including by matching user accounts within an individual product and
across multiple products when we believe they are attributable to a single
person, and counting such group of accounts as one person. As these
techniques and models require significant judgment, are developed based on
internal reviews of limited samples of user accounts, and are calibrated
against user survey data, there is necessarily some margin of error in our
estimates. We view MAP as a measure of the size of our global active
community of people using our products. For additional information, see
the section entitled "Limitations of Key Metrics and Other Data" in this
Quarterly Report on Form 10-Q.
[[Image Removed: mapa02.jpg]]
Note: We report the numbers of DAP and MAP as specific amounts, but these
numbers are estimates of the numbers of unique people using our products and are
subject to statistical variances and errors. While we expect the error margin
for these estimates to vary from period to period, we estimate that such margin
generally will be approximately 3% of our worldwide MAP. At our scale, it is
very difficult to attribute multiple user accounts within and across products to
individual people, and it is possible that the actual numbers of unique people
using our products may vary significantly from our estimates, potentially beyond
our estimated error margins. For additional information, see the section
entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on
Form 10-Q.
As of
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• Average Revenue Per Person (ARPP). We define ARPP as our total revenue
during a given quarter, divided by the average of the number of MAP at the
beginning and end of the quarter. While ARPP includes all sources of
revenue, the number of MAP used in this calculation only includes users of
our Family products as described in the definition of MAP above. The share
of revenue from users who are not also MAP was not material.
[[Image Removed: arppa02.jpg]]
[[Image Removed: adrevenueandotherrevenuea03.jpg]]
During the first quarter of 2020, worldwide ARPP was
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Components of Results of Operations
Revenue
Advertising. We generate substantially all of our revenue from advertising. Our
advertising revenue is generated by displaying ad products on Facebook,
Instagram, Messenger, and third-party affiliated websites or mobile
applications. Marketers pay for ad products either directly or through their
relationships with advertising agencies or resellers, based on the number of
impressions delivered or the number of actions, such as clicks, taken by users.
We recognize revenue from the display of impression-based ads in the contracted
period in which the impressions are delivered. Impressions are considered
delivered when an ad is displayed to a user. We recognize revenue from the
delivery of action-based ads in the period in which a user takes the action the
marketer contracted for. The number of ads we show is subject to methodological
changes as we continue to evolve our ads business and the structure of our ads
products. We calculate price per ad as total ad revenue divided by the number of
ads delivered, representing the effective price paid per impression by a
marketer regardless of their desired objective such as impression or action. For
advertising revenue arrangements where we are not the principal, we recognize
revenue on a net basis.
Other revenue. Other revenue consists of revenue from the delivery of consumer
hardware devices and net fees we receive from developers using our Payments
infrastructure, as well as revenue from various other sources.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated
with the delivery and distribution of our products. These include expenses
related to the operation of our data centers and technical infrastructure, such
as facility and server equipment depreciation, salaries, benefits, and
share-based compensation for employees on our operations teams, and energy and
bandwidth costs. Cost of revenue also includes costs associated with partner
arrangements, including traffic acquisition and content acquisition costs,
credit card and other transaction fees related to processing customer
transactions, and cost of consumer hardware devices sold.
Research and development. Research and development expenses consist primarily of
salaries and benefits, share-based compensation, and facilities-related costs
for employees on our engineering and technical teams who are responsible for
building new products as well as improving existing products. We currently
expense all of our research and development costs as they are incurred.
Marketing and sales. Marketing and sales expenses consist of salaries and
benefits, and share-based compensation for our employees engaged in sales, sales
support, marketing, business development, and customer service functions. Our
marketing and sales expenses also include marketing and promotional expenditures
and professional services such as content reviewers to support our community and
product operations.
General and administrative. General and administrative expenses consist of
legal-related costs; salaries and benefits, and share-based compensation for
certain of our executives as well as our legal, finance, human resources,
corporate communications and policy, and other administrative employees; and
professional services.
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Results of Operations
The following table sets forth our condensed consolidated statements of income
data:
Three Months Ended March 31,
2020 2019
(in millions)
Revenue $ 17,737 $ 15,077
Costs and expenses:
Cost of revenue 3,459 2,816
Research and development 4,015 2,860
Marketing and sales 2,787 2,020
General and administrative 1,583 4,064
Total costs and expenses 11,844 11,760
Income from operations 5,893 3,317
Interest and other income (expense), net (32 ) 165
Income before provision for income taxes 5,861 3,482 Provision for income taxes 959 1,053 Net income$ 4,902 $ 2,429
The following table sets forth our condensed consolidated statements of income data (as a percentage of revenue)(1):
Three Months Ended March 31,
2020 2019
Revenue 100 % 100 %
Costs and expenses:
Cost of revenue 20 19
Research and development 23 19
Marketing and sales 16 13
General and administrative 9 27
Total costs and expenses 67 78
Income from operations 33 22
Interest and other income (expense), net - 1
Income before provision for income taxes 33 23
Provision for income taxes 5 7
Net income 28 % 16 %
____________________________________
(1) Percentages have been rounded for presentation purposes and may differ from
unrounded results.
Share-based compensation expense included in costs and expenses:
Three Months Ended March 31,
2020 2019
(in millions)
Cost of revenue $ 94 $ 87
Research and development 999 723
Marketing and sales 149 113
General and administrative 93 87
Total share-based compensation expense $ 1,335 $ 1,010
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Share-based compensation expense included in costs and expenses (as a percentage
of revenue)(1):
Three Months Ended March 31,
2020 2019
Cost of revenue 1 % 1 %
Research and development 6 5
Marketing and sales 1 1
General and administrative 1 1
Total share-based compensation expense 8 % 7 %
____________________________________
(1) Percentages have been rounded for presentation purposes and may differ from
unrounded results.
Three Months Ended March 31, 2020 and 2019
Revenue
Three Months Ended March 31,
2020 2019 % change
(in millions, except for percentages)
Advertising $ 17,440 $ 14,912 17 %
Other revenue 297 165 80 %
Total revenue $ 17,737 $ 15,077 18 %
Revenue in the three months ended March 31, 2020 increased $2.66 billion , or
18%, compared to the same period in 2019. The increase was almost entirely due
to an increase in advertising revenue as a result of an increase in the number
of ads delivered, partially offset by a decrease in the average price per ad.
During the three months ended March 31, 2020 , the number of ads delivered
increased by 39%, as compared with approximately 32% in the same period in 2019.
The increase in the ads delivered was driven by an increase in the number and
frequency of ads displayed across our products, and an increase in users and
their engagement. During the three months ended March 31, 2020 , the average
price per ad decreased by 16%, as compared with a decrease of approximately 4%,
in the same period in 2019. The decrease in average price per ad was primarily
driven by a decrease in advertising demand globally due to the COVID-19 pandemic
over the last three weeks of the quarter. To a lesser extent, the decrease in
average price per ad was also caused by an increasing proportion of the number
of ads delivered as Stories ads and in geographies that monetize at lower rates.
In the near-term, we anticipate that future advertising revenue growth will be
determined primarily by the extent to which the COVID-19 pandemic and related
economic slowdown result in a decrease in advertising demand.
Foreign Exchange Impact on Revenue
The general strengthening of the U.S. dollar relative to certain foreign
currencies in the three months ended March 31, 2020 compared to the same period
in 2019 had an unfavorable impact on revenue. If we had translated revenue for
the three months ended March 31, 2020 using the prior year's monthly exchange
rates for our settlement or billing currencies other than the U.S. dollar, our
total revenue and advertising revenue would have been $18.01 billion and
$17.71 billion , respectively. Using these constant rates, total revenue and
advertising revenue would have been $275 million and $274 million higher than
actual total revenue and advertising revenue, respectively, for the three months
ended March 31, 2020 .
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Cost of revenue
Three Months Ended March 31,
2020 2019 % change
(in millions, except for percentages)
Cost of revenue $ 3,459 $ 2,816 23 %
Percentage of revenue 20 % 19 %
Cost of revenue in the three months ended March 31, 2020 increased $643 million ,
or 23%, compared to the same period in 2019. The increase was primarily due to
an increase in operational expenses related to our data centers and technical
infrastructure and, to a lesser extent, higher cost of consumer hardware devices
sold and traffic acquisition costs.
Research and development
Three Months Ended March 31,
2020 2019 % change
(in millions, except for percentages)
Research and development $ 4,015 $ 2,860 40 %
Percentage of revenue 23 % 19 %
Research and development expenses in the three months ended March 31, 2020
increased $1.15 billion , or 40%, compared to the same period in 2019. The
increase was primarily due to increases in payroll and benefits expenses and
facilities-related costs as a result of a 35% growth in employee headcount
from March 31, 2019 to March 31, 2020 in our engineering and other technical
functions.
Marketing and sales
Three Months Ended March 31,
2020 2019 % change
(in millions, except for percentages)
Marketing and sales $ 2,787 $ 2,020 38 %
Percentage of revenue 16 % 13 %
Marketing and sales expenses in the three months ended March 31, 2020 increased
$767 million , or 38%, compared to the same period in 2019. The increase was
primarily driven by increases in marketing expenses and payroll and benefits
expenses. Our payroll and benefits expenses increased as a result of a 20%
increase in employee headcount from March 31, 2019 to March 31, 2020 in our
marketing and sales functions.
General and administrative
Three Months Ended March 31,
2020 2019 % change
(in millions, except for percentages)
Legal accrual related to FTC settlement $ - $ 3,000 NM
Other general and administrative 1,583 1,064 49 % General and administrative$ 1,583 $ 4,064 (61 )% Percentage of revenue 9 % 27 % General and administrative expenses in the three months endedMarch 31, 2020 decreased$2.48 billion , or 61%, compared to the same period in 2019. The decrease was mostly due to the$3.0 billion legal accrual recorded in the first quarter of 2019 related to ourFTC settlement, partially offset by an increase of$193 million in bad debt expense, a majority of which was due to an increase in our estimated credit losses as the result of economic slowdown caused by the COVID-19 pandemic. In addition, our payroll and benefits expenses increased as a result of a 29% increase in employee headcount fromMarch 31, 2019 toMarch 31, 2020 in our general and administrative functions. 40
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Interest and other income (expense), net
Three Months Ended March 31,
2020 2019 % change
(in millions, except for percentages)
Interest income, net $ 228 $ 198 15 %
Other expense, net (260 ) (33 ) NM
Interest and other income (expense), net $ (32 ) $ 165 (119 )%
Interest and other income (expense), net in the three months endedMarch 31, 2020 decreased$197 million , or 119%, compared to the same period in 2019. The decrease was due to an increase in other expense, net which was mostly related to higher foreign exchange losses, compared to the same period in 2019, as a result of foreign currency transactions and remeasurement. This decrease was partially offset by an increase in interest income, net due to higher investment balances. Provision for income taxes Three Months Ended March 31, 2020 2019 % change (in millions, except for percentages) Provision for income taxes$ 959 $ 1,053 (9 )% Effective tax rate 16 % 30 % Our provision for income taxes in the first quarter of 2020 decreased$94 million , or 9%, compared to the same period in 2019, which was mostly due to a decrease in income from operations prior to the effect of the 2019 legal accrual related to theFTC settlement that is not expected to be tax-deductible. Our effective tax rate in the first quarter of 2020 decreased compared to the same period in 2019, mostly due to the 2019 legal accrual related to theFTC settlement that is not expected to be tax-deductible. OnJuly 27, 2015 , the United States Tax Court issued a decision (Tax Court Decision) inAltera Corp. v. Commissioner, which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to theNinth Circuit Court of Appeals (Ninth Circuit). OnJune 7, 2019 , the Ninth Circuit issued an opinion (Altera Ninth Circuit Opinion) that reversed the Tax Court Decision. Based on the Altera Ninth Circuit Opinion, we recorded a cumulative income tax expense of$1.11 billion in the second quarter of 2019. OnJuly 22, 2019 , the taxpayer requested a rehearing before the full Ninth Circuit and the request was denied onNovember 12, 2019 . The taxpayer has requested a hearing before theSupreme Court of the United States . As a result, the final outcome of the case is uncertain. InNovember 2019 , we made a$1.64 billion payment related to this matter and recorded the payment to net against the related tax liability included within other liabilities in our consolidated balance sheets. If the Altera Ninth Circuit Opinion is reversed, we would anticipate recording an income tax benefit at that time. Effective Tax Rate Items. Our effective tax rate in the future will depend upon the proportion between the following items and income before provision for income taxes:U.S. tax benefits from foreign derived intangible income, tax effects from share-based compensation, tax effects of integrating intellectual property from acquisitions, settlement of tax contingency items, tax effects of changes in our business, and the effects of changes in tax law. The accounting for share-based compensation may increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return which depends upon the stock price at the time of employee award vesting. If our stock price remains constant to theApril 24, 2020 price, we expect our effective tax rate for the full-year 2020 will be in the high-teens, although we may see fluctuations in our quarterly rate depending on our financial results. Integrating intellectual property from acquisitions into our business generally involves intercompany transactions that have the impact of increasing our provision for income taxes. Consequently, our provision for income taxes and our effective tax rate may initially increase in the period of an acquisition and integration. The magnitude of this impact will depend upon the specific type, size, and taxing jurisdictions of the intellectual property as well as the relative contribution to income in subsequent periods. Unrecognized Tax Benefits. As ofMarch 31, 2020 , we had net unrecognized tax benefits of$3.95 billion which were accrued as other liabilities. These unrecognized tax benefits were predominantly accrued for uncertainties related to transfer pricing with 41
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our foreign subsidiaries, which includes licensing of intellectual property, providing services and other transactions, as well as for uncertainties with our research tax credits. The ultimate settlement of the liabilities will depend upon resolution of tax audits, litigation, or events that would otherwise change the assessment of such items. Based upon the status of litigation described below and the current status of tax audits in various jurisdictions, we do not anticipate a material change to such amounts within the next 12 months. InJuly 2016 , we received a Statutory Notice of Deficiency (Notice) from theIRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, theIRS stated that it will also apply its position for tax years subsequent to 2010. We do not agree with the position of theIRS and have filed a petition in the Tax Court challenging the Notice. OnJanuary 15, 2020 , theIRS filed its Pretrial Memorandum in the case stating that it planned to assert at trial an adjustment that is higher than the adjustment stated in the Notice. The first sessions of the trial began inFebruary 2020 , and additional sessions are expected to continue later in the year. TheIRS did not provide any information about how it intends to apply the revised adjustment to future years. Based on the information provided, we believe that, if theIRS prevails in its updated position, this could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately$9.0 billion in excess of the amounts in our originally filedU.S. return, plus interest and any penalties asserted. InMarch 2018 , we received a second Notice from theIRS in conjunction with the examination of our 2011 through 2013 tax years. TheIRS applied its position from the 2010 tax year to each of these years and also proposed new adjustments related to other transfer pricing with our foreign subsidiaries and certain tax credits that we claimed. If theIRS prevails in its position for these new adjustments, this could result in an additional federal tax liability of up to approximately$680 million in excess of the amounts in our originally filedU.S. returns, plus interest and any penalties asserted. We do not agree with the positions of theIRS in the second Notice and have filed a petition in the Tax Court challenging the second Notice. We have previously accrued an estimated unrecognized tax benefit consistent with the guidance in ASC 740, Income Taxes, that is lower than the potential additional federal tax liability from the positions taken by theIRS in the two Notices and its Pretrial Memorandum. In addition, if theIRS prevails in its positions related to transfer pricing with our foreign subsidiaries, the additional tax that we would owe would be partially offset by a reduction in the tax that we owe under the mandatory transition tax on accumulated foreign earnings from the 2017 Tax Cuts and Jobs Act (Tax Act). As ofMarch 31, 2020 , we have not resolved these matters and proceedings continue in the Tax Court. We believe that adequate amounts have been reserved in accordance with ASC 740, Income Taxes, for any adjustments to the provision for income taxes or other tax items that may ultimately result from these examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination in various jurisdictions, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse effect on our financial position, results of operations, and cash flows. 42
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Liquidity and Capital Resources Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist mostly of cash on deposit with banks, investments in money market funds, and investments inU.S. government securities,U.S. government agency securities, and corporate debt securities. Cash and cash equivalents and marketable securities were$60.29 billion as ofMarch 31, 2020 , an increase of$5.43 billion fromDecember 31, 2019 . The increase was mostly due to$11.0 billion of cash generated from operations, offset by$3.66 billion for capital expenditures, including principal payments on finance leases,$1.25 billion for repurchases of our Class A common stock, and$690 million of taxes paid related to net share settlement of employee restricted stock units (RSU) awards. Cash paid for income taxes was$209 million in the three months endedMarch 31, 2020 . As ofMarch 31, 2020 , our federal net operating loss carryforward was$9.35 billion , and we anticipate that none of this amount will be utilized to offset our federal taxable income in 2020. As ofMarch 31, 2020 , we had$324 million of federal tax credit carryforward, of which none will be available to offset our federal tax liabilities in 2020. InMay 2016 , we entered into a$2.0 billion senior unsecured revolving credit facility, and any amounts outstanding under the facility will be due and payable onMay 20, 2021 . As ofMarch 31, 2020 , no amounts had been drawn down and we were in compliance with the covenants under this credit facility. Our board of directors has authorized a share repurchase program of our Class A common stock, which commenced inJanuary 2017 and does not have an expiration date. As ofDecember 31, 2019 ,$4.90 billion remained available and authorized for repurchases. InJanuary 2020 , an additional$10.0 billion of repurchases was authorized under this program. During the three months endedMarch 31, 2020 , we repurchased and subsequently retired 6 million shares of our Class A common stock for an aggregate amount of$1.24 billion . As ofMarch 31, 2020 ,$13.66 billion remained available and authorized for repurchases. As ofMarch 31, 2020 ,$14.69 billion of the$60.29 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. The Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminatedU.S. taxes on foreign subsidiary distributions. As a result, earnings in foreign jurisdictions are available for distribution to theU.S. without incrementalU.S. taxes. InJuly 2019 , we entered into a settlement and modified consent order to resolve the inquiry of theFTC into our platform and user data practices, which was approved by the federal court and took effect inApril 2020 . The settlement requires us to pay a penalty of$5.0 billion , which is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet as ofMarch 31, 2020 . We paid the penalty inApril 2020 upon the effectiveness of the modified consent order. We currently anticipate that our available funds, credit facility, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future. Cash Provided by Operating Activities Cash flow from operating activities during the three months endedMarch 31, 2020 primarily consisted of net income adjusted for certain non-cash items, such as$1.60 billion of depreciation and amortization and$1.34 billion of share-based compensation expense, and cash collected from accounts receivable. The majority of the increase in cash flow from operating activities during the three months endedMarch 31, 2020 , compared to the same period in 2019, was due to the increases in net income and cash collected from accounts receivables partially offset by a decrease in accrued expenses and other current liabilities. Cash Used in Investing Activities Cash used in investing activities during the three months endedMarch 31, 2020 consisted mostly of$3.56 billion of net purchases of property and equipment as we continued to invest in data centers, servers, office buildings, and network infrastructure, and$476 million of net purchases of marketable securities. The decrease in cash used in investing activities during the three months endedMarch 31, 2020 , compared to the same period in 2019, was mostly due to a decrease in net purchases of marketable securities. 43
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In 2020, we anticipate making capital expenditures of approximately$14 billion to$16 billion and a payment of approximately$5.7 billion , at the current exchange rate, for our investment inJio Platforms Limited . See Note 14 - Subsequent Event in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding our investment inJio Platforms Limited . Cash Used in Financing Activities Cash used in financing activities during the three months endedMarch 31, 2020 consisted mostly of$1.25 billion for repurchases of our Class A common stock,$690 million of taxes paid related to net share settlement of RSUs, and$100 million of principal payments on finance leases. The increase in cash used in financing activities during the three months endedMarch 31, 2020 , compared to the same period in 2019, was mostly due to an increase in repurchases of our Class A common stock. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofMarch 31, 2020 . Contractual Obligations Our principal commitments consist mostly of obligations under operating leases and other contractual commitments. Our obligations under operating leases include among others, certain of our offices, data centers, land, and colocation leases. A majority of the other contractual commitments are related to network infrastructure and data center operations. The following table summarizes our commitments to settle contractual obligations in cash as ofMarch 31, 2020 (in millions): Payment Due by Period The remainder Total of 2020 2021-2022 2023-2024 Thereafter Operating lease obligations, including imputed interest(1)$ 18,208 $ 805$ 2,589 $ 2,614 $ 12,200 Finance lease obligations, including imputed interest(1) 923 204 153 87 479 Transition tax payable 1,579 - - 880 699 Other contractual commitments 7,620 4,052 1,479 431 1,658 Total contractual obligations$ 28,330 $ 5,061 $ 4,221 $ 4,012 $ 15,036
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(1) Includes variable lease payments that were fixed subsequent to lease
commencement or modification.
As part of the normal course of the business, we may enter into multi-year agreements to purchase certain network components that do not specify a fixed or minimum price commitment or to purchase renewable energy that do not specify a fixed or minimum volume commitment. These agreements are generally entered into in order to secure either volume or price. Using projected market prices or expected volume consumption, the total estimated spend is approximately$4.99 billion . The ultimate spend under these agreements may vary and will be based on prevailing market prices or actual volume purchased. In addition, our other liabilities also include$3.95 billion related to net uncertain tax positions as ofMarch 31, 2020 . Due to uncertainties in the timing of the completion of tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months. As a result, this amount is not included in the above contractual obligations table. 44
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Contingencies
We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may incur a loss and the loss or range of loss can be estimated, we disclose the possible loss in the accompanying notes to the condensed consolidated financial statements to the extent material. Significant judgment is required to determine both probability and the estimated amount of loss. Such matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows. See Note 10 - Commitments and Contingencies and Note 12 - Income Taxes in the notes to the condensed consolidated financial statements included in Part I, Item 1, and "Legal Proceedings" contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contingencies. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. In our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , we disclosed the assumptions and estimates associated with income taxes, loss contingencies, and valuation of long-lived assets including goodwill, intangible assets and their associated estimated useful lives have the greatest potential impact on our consolidated financial statements. In addition, during the quarter endedMarch 31, 2020 , in response to the economic slowdown caused by COVID-19 pandemic, we now believe that the assumptions and estimates associated with collectibility assessment of revenue and credit losses of accounts receivable may also have a material impact to our consolidated financial statements in future periods, depending on the duration or degree of the impact of the COVID-19 pandemic on the global economy.
Collectibility assessment of revenue
Under Topic 606, we recognize revenue using a five-step model. In step one, for a revenue contract to exist, it must be probable that substantially all of the consideration to which we are entitled to will be collected. In performing such collectibility assessment, we consider various facts and circumstances including future expectations about our customer's ability and intention to pay. Collectibility assessment uses a probable threshold which requires estimation based on several objective and subjective factors, such as probability of default, customer's intention to pay, payment history, financial strength, geography, and industry sub-vertical risks. The collectibility assessment has become increasingly uncertain during the current economic environment caused by COVID-19 pandemic, and our actual experience in the future may differ from our past experiences or current assessment.
Credit losses of accounts receivable
OnJanuary 1, 2020 , we adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost that an entity does not expect to collect over the asset's contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. 45
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For accounts receivable measured at amortized cost, we use aging analysis,
probability of default methods and incorporate macroeconomic variables that are
most relevant to evaluating and estimating the expected credit losses. These
macroeconomic variables may vary by geography, customer-type, or industry
sub-vertical. The contractual life of our trade accounts receivable is generally
short-term; however, we may experience increasing credit loss risks from
accounts receivable in future periods depending on the duration or degree of
economic slowdown caused by COVID-19 pandemic, and our actual experience in the
future may differ from our past experiences or current assessment.
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