TWITTER, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1 "Financial Statements" in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q. Overview and Highlights of Quarterly Results Subsequent to our announcement of our financial results for the second quarter of 2020, which was furnished on Form 8-K onJuly 23, 2020 , we received a draft complaint from theFTC alleging violations of our 2011 consent order with theFTC and the FTC Act. The allegations relate to our use of phone number and/or email address data provided for safety and security purposes for targeted advertising during periods between 2013 and 2019. As a result, prior to the filing of this Form 10-Q, we estimated a probable loss and recorded an accrual of$150.0 million which is included in accrued and other current liabilities in the consolidated balance sheet and in general and administrative expenses in the consolidated statements of operations. The additional expense of$150.0 million resulted in a$0.19 increase in basic and diluted net loss per share for the three and six months endedJune 30, 2020 . Revenue in the second quarter of 2020 totaled$683.4 million , a decrease of 19%, compared to the second quarter of 2019. •Advertising revenue totaled$562.0 million , a decrease of 23% year over year. •Data licensing and other revenue totaled$121.4 million , an increase of 6% year over year. •U.S. revenue totaled$364.9 million , a decrease of 20% year over year. •International revenue totaled$318.5 million , a decrease of 18% year over year. Net loss was$1.38 billion for the three months endedJune 30, 2020 , which was inclusive of a$1.10 billion provision for income taxes related to the establishment of a valuation allowance against deferred tax assets. Net income for the three months endedJune 30, 2019 was$1.12 billion , which was inclusive of a$1.08 billion benefit from income taxes related to the establishment of deferred tax assets from the intra-entity transfer of intangible assets. Loss from operations was$273.9 million , or 40% of total revenue, for the three months endedJune 30, 2020 , compared to income from operations of$75.7 million , or 9% of total revenue, for the three months endedJune 30, 2019 . Cash, cash equivalents and short-term investments in marketable securities totaled$7.77 billion as ofJune 30, 2020 . Average monetizable daily active users (mDAU) for the three months endedJune 30, 2020 was 186 million, an increase of 34% year over year. 30 -------------------------------------------------------------------------------- COVID-19 Update The COVID-19 pandemic has resulted in public health responses including travel bans, restrictions, social distancing requirements, and shelter-in-place orders, which have negatively impacted our business, operations, and financial performance. In the second quarter of 2020, we saw our highest reported quarterly year-over-year mDAU growth rate primarily driven by external factors, such as continued shelter-in-place requirements for many people, increased global conversation around the COVID-19 pandemic and other current events. Our work to serve the conversation around COVID-19, to help people find trusted sources of information, to better organize and surface the many topics and interests that bring people to Twitter, and innovations such as virtual watch parties for movie launches and virtual concerts helped us serve our larger audience. We also continue to benefit from ongoing product improvements, including continued increases in relevance of notifications, Search, Explore, and the Home timeline. We believe that mDAU growth in the second quarter of 2020 would still have been strong in the absence of external factors due to the ongoing benefit of these product improvements. While we experienced significant growth in mDAU, we also continued to see a significant decrease in advertising spend since the pandemic became global in March. This decrease in advertising spend led to twelve quarters cumulative taxable losses from operations in a foreign subsidiary, which is a significant piece of negative evidence in assessing the ability to realize deferred tax assets. As ofJune 30, 2020 , we have concluded that the deferred tax assets in a foreign subsidiary are not more-likely-than-not to be realized and recorded a valuation allowance of$1.10 billion . This valuation allowance would be reversed in the event, and to the extent, that it is more-likely-than-not that there will be sufficient taxable income in the foreign subsidiary to realize the tax benefit. Depending on the extent and severity of COVID-19's impact, we could have additional deferred tax asset valuation allowances in future periods. In light of the current operating and economic environment, we have shifted resources and priorities to increase focus on our revenue products. We have decreased our expense growth due to decisions we have made to reduce spending, continued cost savings from restricted business operations, and some of the challenges of growing headcount and investing in our objectives in the current environment. As we continue to adapt our operations and improve and increase hiring, we intend to continue investing in our most important work. We expect total costs and expenses to increase 10% or more year-over-year in the third quarter of 2020. We have responded quickly and decisively to the challenges presented by the current environment, updating our policies, increasing our use of machine learning and automation to take actions on potentially abusive and manipulative content, ensuring the continuity of our service, and partnering with advertisers to adapt their campaigns to the current situation. Given the continued and unprecedented uncertainty and rapidly shifting market conditions of the business environment, we cannot reasonably estimate the full impacts of the COVID-19 pandemic on our future financial and operational results. Our past results may not be indicative of our future performance, and historical trends in revenue, income (loss) from operations, net income (loss), and net income (loss) per share may differ materially. For example, to the extent the pandemic continues to disrupt economic activity globally, it could continue to adversely affect our business, operations and financial results through prolonged decreases in advertising spend, credit deterioration of our customers, depressed economic activity, or declines in capital markets. The timing of our capital expenditures related to the buildout of our new data center and to address our near-term capacity needs are contingent on improvements in the IT supply chain. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and there may be developments outside our control requiring us to adjust our operating plan. As such, given the unprecedented uncertainty around the duration and severity of the impact on market conditions and the business environment, we cannot reasonably estimate the full impacts of the COVID-19 pandemic on our operating results in the future. The risks related to the COVID-19 pandemic on our business are further described in "Part II-Other Information, Item 1A. Risk Factors." 31 -------------------------------------------------------------------------------- Key Metrics We review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Monetizable Daily Active Usage or Users (mDAU). We define mDAU as people, organizations, or other accounts who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that are able to show ads. We believe that mDAU, and its related growth, is the best way to measure our success against our objectives and to show the size of our audience and engagement. Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in or otherwise authenticated active total accounts. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three months ended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU for the three months ended in the previous year. Additionally, our calculation of mDAU is not based on any standardized industry methodology and is not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. In the three months endedJune 30, 2020 , we had 186 million average mDAU, which represents an increase of 34% from the three months endedJune 30, 2019 . The increase was driven by global conversation around current events and ongoing product improvements. In the three months endedJune 30, 2020 , we had 36 million average mDAU inthe United States and 150 million average mDAU in the rest of the world, which represent increases of 24% and 37%, respectively, from the three months endedJune 30, 2019 . For additional information on how we calculate changes in mDAU and factors that can affect this metric, see the section titled "Note Regarding Key Metrics." [[Image Removed: twtr-20200630_g1.jpg]] [[Image Removed: twtr-20200630_g2.jpg]][[Image Removed: twtr-20200630_g3.jpg]] Changes in Ad Engagements and Changes in Cost perAd Engagement . We define an ad engagement as an interaction with one of our pay-for-performance advertising products. Ad engagements with our advertising products are based on the completion of an objective set out by an advertiser such as expanding, Retweeting, liking or replying to a Promoted Tweet, viewing an embedded video, downloading or engaging with a promoted mobile application, clicking on a website link, signing up for marketing emails from advertisers, following the account that Tweets a Promoted Tweet, or completing a transaction on an external website. We believe changes in ad engagements is one way to measure engagement with our advertising products. We believe changes in cost per ad engagement is one way to measure demand. 32 -------------------------------------------------------------------------------- In the three months endedJune 30, 2020 , ad engagements increased 3% from the three months endedJune 30, 2019 , resulting primarily from audience growth offset by a mix shift to ad formats with lower clickthrough rates. In the three months endedJune 30, 2020 , cost per ad engagement decreased by 25% compared to the three months endedJune 30, 2019 , driven by like-for-like price decreases across most ad formats and lower demand.
[[Image Removed: twtr-20200630_g4.jpg]][[Image Removed: twtr-20200630_g5.jpg]]
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Results of Operations
The following tables set forth our consolidated statements of operations data
for each of the periods presented (in thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenue
Advertising services $ 561,994
121,444 114,258 246,889 221,682
Total revenue 683,438 841,381 1,491,075 1,628,271
Costs and expenses (1)
Cost of revenue 288,039 277,965 572,076 541,976
Research and development 215,806 159,242 416,194 305,488
Sales and marketing 207,286 240,249 428,573 446,048
General and administrative 246,237 88,239 355,605 165,415
Total costs and expenses 957,368 765,695 1,772,448 1,458,927
Income (loss) from operations (273,930) 75,686 (281,373) 169,344
Interest expense (39,828) (38,317) (73,098) (75,577)
Interest income 25,013 42,887 57,910 83,428
Other income (expense), net (361) 7,523 (8,080) 7,087
Income (loss) before income taxes (289,106) 87,779 (304,641) 184,282
Provision (benefit) for income taxes 1,088,899 (1,031,781) 1,081,760 (1,126,082)
Net income (loss) $ (1,378,005) $ 1,119,560 $ (1,386,401) $ 1,310,364
(1)Costs and expenses include stock-based compensation expense as follows (in
thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Cost of revenue $ 8,996 $ 5,973 $ 14,752 $ 11,021
Research and development 77,988 50,229 138,575 96,490
Sales and marketing 29,183 22,202 48,022 40,267
General and administrative 16,709 16,211 29,430 30,328
Total stock-based compensation expense $ 132,876 $ 94,615 $ 230,779 $ 178,106
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The following table sets forth our consolidated statements of operations data for each of the periods presented as a percentage of revenue:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenue
Advertising services 82 % 86 % 83 % 86 %
Data licensing and other 18 14 17 14
Total revenue 100 100 100 100
Costs and expenses
Cost of revenue 42 33 38 33
Research and development 32 19 28 19
Sales and marketing 30 29 29 27
General and administrative 36 10 24 10
Total costs and expenses 140 91 119 90
Income (loss) from operations (40) 9 (19) 10
Interest expense (6) (5) (5) (5)
Interest income 4 5 4 5
Other income (expense), net - 1 (1) 0
Income (loss) before income taxes (42) 10 (20) 11
Provision (benefit) for income taxes 159 (123) 73 (69)
Net income (loss) (202) % 133 % (93) % 80 %
Revenue
We generate the substantial majority of our revenue from the sale of advertising
services. We also generate revenue by licensing our data to third parties and
providing mobile advertising exchange services.
Advertising Services
We generate most of our advertising revenue by selling our Promoted Products.
Currently, our Promoted Products consist of the following:
•Promoted Tweets. Promoted Tweets, which are labeled as "promoted," appear
within a timeline, search results or profile pages just like an ordinary Tweet
regardless of device, whether it be desktop or mobile. Using our proprietary
algorithms and understanding of the interests of each account, we can deliver
Promoted Tweets that are intended to be relevant to a particular account. We
enable our advertisers to target an audience based on an individual account's
interest graph. Our Promoted Tweets are pay-for-performance or
pay-for-impression delivered advertising that are priced through an auction. Our
Promoted Tweets include objective-based features that allow advertisers to pay
only for the types of engagement selected by the advertisers, such as Tweet
engagements (e.g., Retweets, replies and likes), website clicks, mobile
application installs or engagements, obtaining new followers, or video views.
•Promoted Accounts. Promoted Accounts, which are labeled as "promoted," provide
a way for our advertisers to grow a community of people who are interested in
their business, products or services. Our Promoted Accounts are
pay-for-performance advertising priced through an auction.
•Promoted Trends. Promoted Trends, which are labeled as "promoted," appear at
the top of the list of trending topics or timeline for an entire day in a
particular country or on a global basis. We sell our Promoted Trends on a
fixed-fee-per-day basis.
While the majority of the Promoted Products we sell to our advertisers are
placed on Twitter, we also generate advertising revenue by placing advertising
products that we sell to advertisers on third-party publishers' websites,
applications or other offerings.
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Data Licensing and Other
We generate data licensing and other revenue by (i) offering data products and
data licenses that allow our data partners to access, search and analyze
historical and real-time data on our platform (which consists of public Tweets
and their content), and (ii) providing mobile advertising exchange services
through our MoPub exchange. Our data partners generally purchase licenses to
access all or a portion of our data for a fixed period. We recognize data
licensing revenue as our data partners consume and benefit from their use of the
licensed data. In addition, we operate a mobile ad exchange and receive service
fees from transactions completed on the exchange. Our mobile ad exchange enables
buyers and sellers to purchase and sell advertising inventory and matches buyers
and sellers. We have determined we are not the principal as it relates to the
purchase and sale of advertising inventory in transactions between third-party
buyers and sellers on the exchange. Therefore, we report revenue related to our
ad exchange services on a net basis.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(in thousands) (in thousands)
Advertising services $ 561,994 $ 727,123 (23) % $ 1,244,186 $ 1,406,589 (12) %
Data licensing and other 121,444 114,258 6 % 246,889 221,682 11 %
Total revenue $ 683,438 $ 841,381 (19) % $ 1,491,075 $ 1,628,271 (8) %
Revenue in the three and six months ended June 30, 2020 decreased by $157.9
million or 19% and $137.2 million and 8%, respectively, compared to the three
and six months ended June 30, 2019 .
In the three and six months ended June 30, 2020 , advertising revenue decreased
by $165.1 million or 23% and $162.4 million or 12%, respectively, compared to
the three and six months ended June 30, 2019 .
The decrease in advertising revenue in the three and six months ended June 30,
2020 reflects continued widespread economic disruption related to the COVID-19
pandemic and a significant decrease in global advertising spend. In the first
quarter of 2020, these factors led to a 27% decline in advertising revenue in
the last three weeks of March compared to the same period in the prior year.
There was a gradual, moderate recovery relative to March levels throughout most
of the second quarter of 2020, with the exception of late May to mid-June, when
many brands slowed or paused spend in reaction to US civil unrest. During the
last three weeks of June, advertising revenue declined 15% year over year for
this period. Demand gradually improved once brands returned after the protests
subsided.
The decrease in advertising revenue in the three and six months ended June 30,
2020 was attributable to decreases in cost per ad engagement of 25% and 22%,
respectively, offset by increases in the number of ad engagements of 3% and 13%,
respectively, compared to the same periods in 2019. The decreases in cost per ad
engagement were driven by like-for-like price decreases across most ad formats
and lower demand beginning in March and continuing through the second quarter of
2020. The increases in the number of ad engagements resulted primarily from
audience growth offset by a mix shift to ad formats with lower clickthrough
rates.
In the three and six months ended June 30, 2020 , data licensing and other
revenue increased by 6% and 11% compared to the three and six months ended
June 30, 2019 , respectively. The increase was attributable to expanded and new
partnerships in Developer and Enterprise Solutions, and the timing of revenue
recognition. Looking ahead, we continue to expect year-over-year data licensing
and other revenue growth to moderate over the course of 2020.
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Cost of Revenue
Cost of revenue includes infrastructure costs, other direct costs including
revenue share expenses, amortization of acquired intangible assets and
amortization of capitalized labor costs for internally developed software,
allocated facilities costs, as well as traffic acquisition costs, or TAC.
Infrastructure costs consist primarily of data center costs related to our
co-located facilities, which include lease and hosting costs, related support
and maintenance costs and energy and bandwidth costs, public cloud hosting
costs, as well as depreciation of servers and networking equipment; and
personnel-related costs, including salaries, benefits and stock-based
compensation, for our operations teams. TAC consists of costs we incur with
third parties in connection with the sale to advertisers of our advertising
products that we place on third-party publishers' websites, and applications or
other offerings collectively resulting from acquisitions. Certain elements of
our cost of revenue are fixed and cannot be reduced in the near term.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(in thousands) (in thousands)
Cost of revenue $ 288,039 $ 277,965 4 % $ 572,076 $ 541,976 6 %
Cost of revenue as a 42 % 33 % 38 % 33 %
percentage of revenue
In the three months ended June 30, 2020 , cost of revenue increased by $10.1
million compared to the three months ended June 30, 2019 . The increase was
attributable to a $7.9 million increase in depreciation expense primarily
related to additional internally developed software, server and networking
equipment and a $2.2 million increase in direct costs, primarily driven by an
increase in infrastructure costs and traffic acquisition costs, offset by a
decrease in revenue share expenses.
In the six months ended June 30, 2020 , cost of revenue increased by $30.1
million compared to the six months ended June 30, 2019 . The increase was
attributable to a $16.3 million increase in direct costs, primarily driven by an
increase in infrastructure cost and traffic acquisition costs, offset by a
decrease in revenue share expenses, and a $13.8 million increase in depreciation
expense primarily related to additional internally developed software, server
and networking equipment.
We plan to continue to scale the capacity and enhance the capability and
reliability of our infrastructure to support mDAU growth and increased activity
on our platform.
Research and Development
Research and development expenses consist primarily of personnel-related costs,
including salaries, benefits and stock-based compensation, for our engineers and
other employees engaged in the research and development of our products and
services. In addition, research and development expenses include amortization of
acquired intangible assets, allocated facilities costs, and other supporting
overhead costs.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(in thousands) (in thousands)
Research and development $ 215,806 $ 159,242 36 % $ 416,194 $ 305,488 36 %
Research and development as 32 % 19 % 28 % 19 %a percentage of revenue
In the three months endedJune 30, 2020 , research and development expenses increased by$56.6 million compared to the three months endedJune 30, 2019 . The increase was attributable to a$39.2 million increase in personnel-related costs mainly driven by an increase in employee headcount, a$13.9 million net increase in allocated facilities costs and other supporting overhead expenses, and a$3.5 million decrease in the capitalization of costs associated with developing software for internal use. In the six months endedJune 30, 2020 , research and development expenses increased by$110.7 million compared to the three months endedJune 30, 2019 . The increase was attributable to a$69.7 million increase in personnel-related costs mainly driven by an increase in employee headcount, a$30.8 million net increase in allocated facilities costs and other supporting overhead expenses, and a$10.2 million decrease in the capitalization of costs associated with developing software for internal use. We plan to continue to invest in key areas of our business to ensure that we have an appropriate level of engineering, product management and design personnel and related resources to support our research and development efforts on key priorities. 37 -------------------------------------------------------------------------------- Sales and Marketing Sales and marketing expenses consist primarily of personnel-related costs, including salaries, commissions, benefits and stock-based compensation for our employees engaged in sales, sales support, business development and media, marketing, corporate communications and customer service functions. In addition, marketing and sales-related expenses also include advertising costs, market research, trade shows, branding, marketing, public relations costs, amortization of acquired intangible assets, allocated facilities costs, and other supporting overhead costs. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) (in thousands) Sales and marketing$ 207,286 $ 240,249
(14) %$ 428,573 $ 446,048 (4) % Sales and marketing as a 30 % 29 % 29 % 27 %
percentage of revenue
In the three months endedJune 30, 2020 , sales and marketing expenses decreased by$33.0 million compared to the three months endedJune 30, 2019 . The decrease was attributable to a$26.8 million decrease in marketing and sales-related expenses, primarily due to reduced marketing campaigns, customer events, and travel, and a$6.2 million net decrease in allocated facilities costs and other supporting overhead expenses. In the six months endedJune 30, 2020 , sales and marketing expenses decreased by$17.5 million compared to the three months endedJune 30, 2019 . The decrease was attributable to a$32.2 million decrease in marketing and sales-related expenses, primarily due to reduced marketing campaigns, customer events, and travel, offset by a$14.7 million net increase in allocated facilities costs and other supporting overhead expenses. We continue to evaluate key areas in our business to ensure we have an appropriate level of sales and marketing expenses to execute on our key priorities and objectives. General and Administrative General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include fees and costs for professional services, including consulting, third-party legal and accounting services and facilities costs and other supporting overhead costs that are not allocated to other departments. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) (in thousands) General and administrative$ 246,237 $ 88,239 179 %$ 355,605 $ 165,415 115 % General and administrative as 36 % 10 % 24 % 10 %
a percentage of revenue
In the three months endedJune 30, 2020 , general and administrative expenses increased by$158.0 million compared to the three months endedJune 30, 2019 . The increase was attributable to a$150.0 million legal accrual related to an ongoingFTC matter recorded in the second quarter of 2020, a$15.3 million increase in personnel-related costs mainly driven by an increase in employee headcount, and a$5.5 million increase in professional service fees, offset by a$12.8 million increase in facilities and other supporting overhead expenses allocated to other functions. In the six months endedJune 30, 2020 , general and administrative expenses increased by$190.2 million compared to the three months endedJune 30, 2019 . The increase was attributable to a$150.0 million legal accrual related to an ongoingFTC matter recorded in the second quarter of 2020, a$51.8 million increase in personnel-related costs mainly driven by an increase in employee headcount and an$11.4 million increase in professional service fees, offset by a$23.0 million increase in facilities and other supporting overhead expenses allocated to other functions. We plan to continue to invest in general and administrative functions to ensure we have an appropriate level of support for our key objectives. 38 -------------------------------------------------------------------------------- Interest Expense Interest expense consists primarily of interest expense incurred in connection with the$935.0 million principal amount of 0.25% convertible senior notes due in 2019, or the 2019 Notes, which we repaid at maturity inSeptember 2019 , the$954.0 million principal amount of 1.00% convertible senior notes due in 2021, or the 2021 Notes, the$1.15 billion principal amount of 0.25% convertible senior notes due in 2024, or the 2024 Notes, the$700.0 million principal amount of 3.875% senior notes due in 2027, or the 2027 Notes, and the$1.0 billion principal amount of 0.375% convertible senior notes due in 2025, or the 2025 Notes, and interest expense related to finance leases and other financing facilities. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) (in thousands) Interest expense 39,828 38,317 4 % 73,098 75,577 (3) % In the three months endedJune 30, 2020 , interest expense increased by$1.5 million compared to the three months endedJune 30, 2019 . The increase was primarily attributable to the issuance of the 2027 Notes inDecember 2019 and the 2025 Notes inMarch 2020 , offset by our repayment of the 2019 Notes at their maturity inSeptember 2019 . In the six months endedJune 30, 2020 , interest expense decreased by$2.5 million compared to the six months endedJune 30, 2019 . The decrease was primarily attributable to our repayment of the 2019 Notes at their maturity inSeptember 2019 , offset by the issuance of the 2027 Notes inDecember 2019 and the 2025 Notes inMarch 2020 . Interest expense in the three and six months endedJune 30, 2020 comprised$39.7 million and$72.8 million , respectively, of total interest expense related to the Notes as well as the credit facility, and$0.1 million and$0.3 million , respectively, related to finance leases of equipment. Interest Income Interest income is generated from our cash equivalents and short-term investments net of the related amortization of premium paid on such investments. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) (in thousands) Interest income$ 25,013 $ 42,887 (42) %$ 57,910 $ 83,428 (31) % Interest income decreased by$17.9 million and$25.5 million in the three and six months endedJune 30, 2020 , respectively, compared to the three and six months endedJune 30, 2019 . The decrease was primarily attributable to lower interest rates. Other Income (Expense), Net Other income (expense), net, consists primarily of unrealized foreign exchange gains and losses due to re-measurement of monetary assets and liabilities denominated in non-functional currencies and realized foreign exchange gains and losses on foreign exchange transactions, and gains and losses on investments in privately-held companies. We expect our foreign exchange gains and losses will vary depending upon movements in the underlying exchange rates. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) (in thousands) Other income (expense), net$ (361) $ 7,523 (105) %$ (8,080) $ 7,087
(214) %
Other expense, net, was$0.4 million and$8.1 million in the three and six months endedJune 30, 2020 , respectively, compared to other income, net, of$7.5 million and$7.1 million in the three and six months endedJune 30, 2019 , respectively. The change was primarily attributable to impairment charges of$0.5 million and$8.5 million on investments in privately-held companies in the three and six months endedJune 30, 2020 , respectively, compared to an$8.6 million gain net of impairment charge on investments in privately-held companies during the three and six months endedJune 30, 2019 . 39 -------------------------------------------------------------------------------- Provision (Benefit) for Income Taxes Our provision (benefit) for income taxes consists of federal and state income taxes inthe United States and income taxes in certain foreign jurisdictions. Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (in thousands) (in thousands)
Provision (benefit) for income taxes
In the three and six months endedJune 30, 2020 , the net provision for income taxes of$1.09 billion and$1.08 billion , respectively, consisted of the income tax expense of$1.10 billion from the establishment of a valuation allowance on deferred tax assets of a foreign subsidiary, which was offset by an income tax benefit of$12.5 million and$19.6 million , respectively. In the three and six months endedJune 30, 2019 , the net benefit from income taxes of$1.03 billion and$1.13 billion , respectively, consisted of the benefit for income taxes of$1.08 billion and$1.21 billion , respectively, related to the establishment of deferred tax assets from intra-entity transfers of intangible assets and the provision for income taxes of$50.7 million and$80.8 million , respectively. The change in provision (benefit) for income taxes was primarily due to the valuation allowance establishment in the three and six months endedJune 30, 2020 , the establishment of deferred tax assets in the three and six months endedJune 30, 2019 , changes in income (loss) before tax by jurisdiction, foreign tax rate differences, tax deductions for stock-based compensation, and research and development credits. We reassessed the ability to realize deferred tax assets by considering the available positive and negative evidence. As ofJune 30, 2020 , we concluded that the deferred tax assets in a foreign subsidiary are not more-likely-than-not to be realized and recorded a valuation allowance of$1.10 billion . In evaluating the need for a valuation allowance, we considered recent operating results which resulted in a cumulative taxable loss in a foreign subsidiary for the twelve quarters endedJune 30, 2020 . The twelve quarters cumulative taxable losses from operations is considered a significant piece of negative evidence and outweighs other positive evidence, such as projections of future income. The twelve quarters cumulative taxable losses and projected near-term losses in the foreign subsidiary are largely driven by the negative impact from the COVID-19 pandemic as it has caused, and may continue to cause, decreased advertiser demand. If there are favorable changes to actual operating results or to projections of future income, we may determine that it is more-likely-than-not such deferred tax assets may be realizable. As ofJune 30, 2020 , we had$786.3 million of deferred tax assets for which we have not established a valuation allowance, related to the US federal, states other thanMassachusetts andCalifornia , and international subsidiaries other thanIreland . The$786.3 million deferred tax asset balance reflects the reduction in net deferred tax assets of$1.10 billion in the three months endedJune 30, 2020 . As ofJune 30, 2020 , we completed our reassessment of the ability to realize these assets and concluded that a valuation allowance was not required. Depending on the extent and severity of COVID-19's impact, our forecasted earnings and expectations may change and could result in a material non-cash income tax charge to record additional valuation allowances to further reduce our deferred tax assets to the net amount we believe is more-likely-than-not to be realized. OnJune 7, 2019 , theNinth Circuit Court of Appeals issued a new opinion in the case ofAltera Corp. v. Commissioner, which upheldDepartment of Treasury regulations which require related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. We have prepared the consolidated financial statements consistent with this opinion. InFebruary 2020 ,Altera Corp. filed a petition to appeal the decision with theSupreme Court of the United States . OnJune 22, 2020 , the Supreme Court denied the petition. We have considered the impact of theSupreme Court's denial and there were no material impacts to our consolidated financial statements. Our effective tax rate could be affected by our jurisdictional mix of income (loss) before taxes, including our allocation of centrally incurred costs to foreign jurisdictions, changes in tax rates and tax regulations, the impact of tax examinations, the impact of business combinations, changes in our corporate structure, changes in the geographic location of business functions or assets, tax effects of stock-based compensation, and changes in management's assessment of the ability to realize deferred tax assets. In addition, the provision is impacted by deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our effective tax rate is based on forecasted annual results which may fluctuate significantly through the rest of the year, in particular due to the uncertainty in our annual forecasts resulting from the unpredictable impact of the COVID-19 pandemic on our operating results. 40 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Six Months Ended June 30,
2020 2019
(in thousands)
Net income (loss) $ (1,386,401) $ 1,310,364
Net cash provided by operating activities $ 447,783 $ 690,666
Net cash used in investing activities$ (112,813) $
(384,382)
Net cash provided by (used in) financing activities
(25,153)
Our principal sources of liquidity are our cash, cash equivalents, and short-term investments in marketable securities. Our cash equivalents and marketable securities are invested primarily in short-term fixed income securities, including government and investment-grade debt securities and money market funds. InMarch 2020 , we also received net proceeds of approximately$985.3 million from the issuance of the 2025 Notes, after deducting the debt issuance costs. InMarch 2020 , our Board of Directors authorized a program to repurchase up to$2.0 billion of our common stock over time. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of our common stock, and may be suspended at any time at our discretion. As ofJune 30, 2020 , no shares have been repurchased under this program. As ofJune 30, 2020 , we had$7.77 billion of cash, cash equivalents and short-term investments in marketable securities, of which$164.9 million was held by our foreign subsidiaries. We do not plan to indefinitely reinvest these funds held by our foreign subsidiaries and have accrued the incremental taxes due as part of repatriation. While the global disruptions caused by the COVID-19 pandemic are currently expected to be temporary, there is uncertainty around its extent and duration. Our liquidity and working capital needs could be negatively impacted. We believe that our existing cash, cash equivalents and short-term investment balances, and our credit facility, together with cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months despite the uncertainty related to the COVID-19 pandemic. Credit Facility We have a revolving credit agreement with certain lenders which provides for a$500.0 million revolving unsecured credit facility maturing onAugust 7, 2023 . We are obligated to pay interest on loans under the credit facility and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee. The interest rate for the credit facility is determined based on calculations using certain market rates as set forth in the credit agreement. In addition, the credit facility contains restrictions on payments including cash payments of dividends. As ofJune 30, 2020 , no amounts had been drawn under the credit facility. Operating Activities Cash provided by operating activities consists of net income (loss) adjusted for certain non-cash items including depreciation and amortization, stock-based compensation, amortization of discount on our Notes, deferred income taxes, impairment of investments in privately-held companies, non-cash restructuring charges, as well as the effect of changes in working capital and other activities. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenue, increases in operating expenses and costs related to acquisitions. For additional discussion, see "Part II-Other Information, Item 1A. Risk Factors." Cash provided by operating activities in the six months endedJune 30, 2020 was$447.8 million , a decrease in cash inflow of$242.9 million compared to the six months endedJune 30, 2019 . Cash provided by operating activities was driven by a net loss of$1.39 billion , as adjusted for the exclusion of non-cash expenses and other adjustments totaling$1.62 billion , of which$1.10 billion was due to a provision for income taxes related to the establishment of a valuation allowance against deferred tax assets,$244.5 million was related to depreciation and amortization expense, and$230.8 million was related to stock-based compensation expense, and the effect of changes in working capital and other carrying balances that resulted in cash inflows of$214.7 million . Cash provided by operating activities in the six months endedJune 30, 2019 was$690.7 million . Cash provided by operating activities was driven by net income of$1.31 billion , as adjusted for the exclusion of non-cash expenses and other adjustments totaling$690.8 million , of which$1.14 billion was due to a benefit from income taxes related to the establishment of deferred tax assets from intra-entity transfers of intangible assets,$229.1 million was related to depreciation and amortization expense, and$178.1 million was related to stock-based compensation expense, and the effect of changes in working capital and other carrying balances that resulted in cash inflows of$71.1 million . 41 -------------------------------------------------------------------------------- Investing Activities Our primary investing activities consist of purchases of property and equipment, particularly purchases of servers and networking equipment, leasehold improvements for our facilities, purchases and disposal of marketable securities, strategic investments in privately-held companies, acquisitions of businesses and other activities. Cash used in investing activities in the six months endedJune 30, 2020 was$112.8 million , a decrease in cash outflow of$271.6 million compared to the six months endedJune 30, 2019 . The decrease was primarily due to a$795.4 million increase in proceeds from sales of marketable securities and a$0.8 million increase in proceeds from sales of property and equipment, offset by a$287.8 million decrease in proceeds from maturities of marketable securities, a$130.8 million increase in purchases of marketable securities, a$68.3 million increase in purchases of property and equipment, a$14.0 million increase in cash used in business combinations, as well as$12.4 million of cash used in other investing activities in the six months endedJune 30, 2020 compared to$11.3 million of cash generated from other investing activities in the six months endedJune 30, 2019 . We intend to increase capital expenditure in absolute dollars sequentially in the third quarter of 2020. The increase will allow us to address our near-term capacity needs and continue our buildout of a new data center, contingent on improvements in the IT supply chain. Financing Activities Our primary financing activities consist of issuance of securities, including common stock issued under our employee stock purchase plan, repayment of convertible notes, payments of finance lease obligations, and stock option exercises by employees and other service providers. Cash provided by financing activities in the six months endedJune 30, 2020 was$989.1 million , compared to$25.2 million cash used in financing activities in the six months endedJune 30, 2019 . The change was primarily due to$985.3 million of net proceeds from the issuance of the 2025 Notes net of issuance costs in the six months endedJune 30, 2020 , a$21.5 million decrease in payments of finance lease obligations, and a$9.2 million increase in proceeds from the issuance of shares of stock from the ESPP, offset by a$1.7 million increase in tax payments related to net share settlements of equity awards and a$0.1 million decrease in proceeds from option exercises. Contractual Obligations Our principal commitments consist of obligations under the Notes (including principal and coupon interest), finance and operating leases for equipment, office space and co-located data center facilities, as well as non-cancellable contractual commitments. Refer to Note 14 - Commitments and Contingencies for more details. Off Balance Sheet Arrangements We do not have any off-balance sheet arrangements and did not have any such arrangements as ofJune 30, 2020 . Critical Accounting Policies and Estimates We prepare our consolidated financial statements and related notes in accordance with GAAP. In doing so, we make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 for a more complete discussion of our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Recent Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 - "Description of Business and Summary of Significant Accounting Policies" in the notes to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q. 42
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