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, 2020 , 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 and Six Months EndedJune 30, 2021 and 2020-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 and six months endedJune 30, 2021 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 Second Quarter Results Our key community metrics and financial results for the second quarter of 2021 are as follows: Community growth: •Facebook daily active users (DAUs) were 1.91 billion on average forJune 2021 , an increase of 7% year-over-year. •Facebook monthly active users (MAUs) were 2.90 billion as ofJune 30, 2021 , an increase of 7% year-over-year. •Family daily active people (DAP) was 2.76 billion on average forJune 2021 , an increase of 12% year-over-year. •Family monthly active people (MAP) was 3.51 billion as ofJune 30, 2021 , an increase of 12% year-over-year. Financial results: •Revenue was$29.08 billion , up 56% year-over-year, and advertising revenue was$28.58 billion , up 56% year-overyear. •Total costs and expenses were$16.71 billion , up 31% year-over-year. •Income from operations was$12.37 billion , and operating margin was 43%. •Net income was$10.39 billion , with diluted earnings per share of$3.61 . •Capital expenditures, including principal payments on finance leases, were$4.74 billion . •Effective tax rate was 17%. •Cash and cash equivalents and marketable securities were$64.08 billion as ofJune 30, 2021 . •Headcount was 63,404 as ofJune 30, 2021 , an increase of 21% year-over-year. Our mission is to give people the power to build community and bring the world closer together. 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: (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. 27 -------------------------------------------------------------------------------- Table of Contents In the second quarter of 2021, 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. Our business and results of operations have been impacted by the COVID-19 pandemic and the preventative measures implemented by authorities from time to time to help limit the spread of the illness, which have caused, and are continuing to cause, business slowdowns or shutdowns in certain affected countries and regions. Beginning in the first quarter of 2020, we experienced significant increases in the size and engagement of our active user base across a number of regions as a result of the COVID-19 pandemic. More recently, we have seen these pandemic-related trends subside, particularly in certain developed markets. We are unable to predict the impact of the pandemic on user growth and engagement with any certainty and these trends may continue to be subject to volatility. The COVID-19 pandemic has also previously caused a reduction in the demand for advertising, as well as a related decline in the pricing of our ads, particularly in the second quarter of 2020. More recently, we believe the pandemic has contributed to an acceleration in the shift of commerce from offline to online, and we experienced increasing demand for advertising as a result of this trend. However, it is possible that this increased demand may not continue in future periods and may even recede to the extent the effects of the pandemic subside, which could adversely affect our advertising revenue growth. The impact of the pandemic on user growth and engagement, the demand for and pricing of our advertising services, as well as on our overall results of operations, remains highly uncertain for the foreseeable future. In addition, we expect that future advertising revenue growth will continue to be adversely affected by limitations on our ad targeting and measurement tools arising from changes to the regulatory environment and third-party mobile operating systems and browsers. We intend to continue to invest in our business based on our company priorities, and we anticipate that additional investments in our data center capacity, servers, network infrastructure, and office facilities, as well as scaling our headcount to support our growth, including in our consumer hardware initiatives, will continue to drive expense growth in 2021. 28 -------------------------------------------------------------------------------- Table of Contents Trends in Our Facebook User Metrics The numbers for our key
[[Image Removed: fb-20210630_g2.jpg]] [[Image Removed: fb-20210630_g3.jpg]]
DAU/MAU: 77% 77% 77% 77% 77% 77% 76% 75% 75% DAU/MAU: 74% 74% 75% 75% 74% 74% 74% 73% 73%
[[Image Removed: fb-20210630_g4.jpg]] [[Image Removed: fb-20210630_g5.jpg]]
DAU/MAU: 61% 62% 62% 62% 61% 62% 62% 62% 62% DAU/MAU: 64% 65% 65% 65% 65% 65% 65% 65% 65%
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region,
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Worldwide DAUs increased 7% to 1.91 billion on average during June 2021 from
1.79 billion during June 2020 . Users in India , the Philippines , and Pakistan
represented the top three sources of growth in DAUs during June 2021 , relative
to the same period in 2020.
•Monthly Active Users (MAUs). We define a monthly active user as a registered
and logged-in Facebook user who visited Facebook through our 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: fb-20210630_g6.jpg]][[Image Removed: fb-20210630_g7.jpg]] [[Image Removed: fb-20210630_g8.jpg]]
[[Image Removed: fb-20210630_g9.jpg]] [[Image Removed: fb-20210630_g10.jpg]] As ofJune 30, 2021 , we had 2.90 billion MAUs, an increase of 7% fromJune 30, 2020 . Users inIndia ,the Philippines , andPakistan represented the top three sources of growth in the second quarter of 2021, relative to the same period in 2020. 30 -------------------------------------------------------------------------------- Table of Contents 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 products 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 second quarter of 2021 inthe United States &Canada region was more than 12 times higher than in theAsia-Pacific region . [[Image Removed: fb-20210630_g11.jpg]] ARPU:$7.05 $7.26 $8.52 $6.95 $7.05 $7.89
[[Image Removed: fb-20210630_g12.jpg]] [[Image Removed: fb-20210630_g13.jpg]] ARPU:$33.27 $34.55 $41.41 $34.18 $36.49 $39.63 $53.56 $48.03 $53.01 ARPU:$10.70 $10.68 $13.21 $10.64 $11.03 $12.41 $16.87 $15.49 $17.23
[[Image Removed: fb-20210630_g14.jpg]] [[Image Removed: fb-20210630_g15.jpg]]
ARPU:$3.04 $3.24 $3.57 $3.06 $2.99 $3.67 $4.05 $3.94 $4.16 ARPU:$2.13 $2.24 $2.48 $1.99 $1.78 $2.22 $2.77 $2.64 $3.05 [[Image Removed: fb-20210630_g16.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$10.12 , an increase of 44% from the second quarter of 2020. Over this period, ARPU increased by 71% in Rest of World, 56% inEurope , 45% inUnited States &Canada , and 39% inAsia-Pacific . 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. 32 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 2020 . In the first quarter of 2021, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 60 million DAP to our reported worldwide DAP inMarch 2021 . Worldwide DAP increased 12% to 2.76 billion on average duringJune 2021 from 2.47 billion duringJune 2020 . 33 -------------------------------------------------------------------------------- Table of Contents •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 to individual 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: fb-20210630_g18.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 4% 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. In the second quarter of 2020, we updated our Family metrics calculations to reflect recent data from a periodic WhatsApp user survey and to incorporate certain methodology improvements, and we estimate such updates contributed an aggregate of approximately 50 million MAP to our reported worldwide MAP inJune 2020 . In the first quarter of 2021, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 70 million MAP to our reported worldwide MAP inMarch 2021 . As ofJune 30, 2021 , we had 3.51 billion MAP, an increase of 12% from 3.14 billion as ofJune 30, 2020 . 34 -------------------------------------------------------------------------------- Table of Contents •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: fb-20210630_g19.jpg]] ARPP:$6.20 $6.33 $7.38 $6.03 $6.10 $6.76
[[Image Removed: fb-20210630_g16.jpg]]
During the second quarter of 2021, 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 products, net fees we receive from developers using our Payments
infrastructure, and 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 costs and credit card and other fees
related to processing customer transactions, as well as cost of consumer
hardware products sold and content costs.
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.
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; other
taxes, such as digital services taxes, other tax levies, and gross receipts
taxes; and professional services.
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Results of Operations
The following table sets forth our condensed consolidated statements of income
data (in millions):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue $ 29,077 $ 18,687 $ 55,248 $ 36,423
Costs and expenses:
Cost of revenue 5,399 3,829 10,530 7,288
Research and development 6,096 4,462 11,293 8,477
Marketing and sales 3,259 2,840 6,102 5,627
General and administrative 1,956 1,593 3,578 3,175
Total costs and expenses 16,710 12,724 31,503 24,567
Income from operations 12,367 5,963 23,745 11,856
Interest and other income, net 146 168 271 136
Income before provision for income taxes 12,513 6,131 24,016 11,992
Provision for income taxes 2,119 953 4,124 1,911
Net income $ 10,394 $ 5,178 $ 19,892 $ 10,081 The following table sets forth our condensed consolidated statements of income data (as a percentage of revenue)(1):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 19 20 19 20
Research and development 21 24 20 23
Marketing and sales 11 15 11 15
General and administrative 7 9 6 9
Total costs and expenses 57 68 57 67
Income from operations 43 32 43 33
Interest and other income, net 1 1 - -
Income before provision for income taxes 43 33 43 33
Provision for income taxes 7 5 7 5
Net income 36 % 28 % 36 % 28 %
____________________________________
(1) Percentages have been rounded for presentation purposes and may differ from
unrounded results.
Share-based compensation expense included in costs and expenses (in millions):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Cost of revenue $ 163 $ 117 $ 281 $ 211
Research and development 1,967 1,261 3,376 2,260
Marketing and sales 239 187 413 336
General and administrative 179 130 309 223
Total share-based compensation expense
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Share-based compensation expense included in costs and expenses (as a percentage
of revenue)(1):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Cost of revenue 1 % 1 % 1 % 1 %
Research and development 7 7 6 6
Marketing and sales 1 1 1 1
General and administrative 1 1 1 1
Total share-based compensation expense 9 % 9 % 8 % 8 %
____________________________________
(1) Percentages have been rounded for presentation purposes and may differ from unrounded results. Three and Six Months EndedJune 30, 2021 and 2020 Revenue Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % change 2021 2020 % change (in millions, except for percentages) Advertising$ 28,580 $ 18,321 56 %$ 54,018 $ 35,760 51 % Other revenue 497 366 36 % 1,230 663 86 % Total revenue$ 29,077 $ 18,687 56 %$ 55,248 $ 36,423 52 % Revenue in the three and six months endedJune 30, 2021 increased$10.39 billion , or 56%, and$18.83 billion , or 52%, respectively, compared to the same periods in 2020. The increases were mostly driven by an increase in advertising revenue as a result of increases in both the average price per ad and the number of ads delivered. During the three and six months endedJune 30, 2021 , the average price per ad increased by 47% and 39%, respectively, as compared with decreases of approximately 21% and 19%, respectively, in the same periods in 2020. The increase in average price per ad during the three and six months endedJune 30, 2021 was mainly caused by a recovery from declines in advertising demand due to the onset of the COVID-19 pandemic in the first two quarters of 2020. Additionally, overall advertising demand increased, as compared to the same periods in 2020, across our ad products and in all regions in part due to the continued shift of commerce from offline to online. During the three and six months endedJune 30, 2021 , the number of ads delivered increased by 6% and 9%, respectively, as compared with an increase of approximately 40% in each of the same periods in 2020. 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. In the near-term, we anticipate that future advertising revenue growth will be determined primarily by price. Other revenue in the three and six months endedJune 30, 2021 increased$131 million , or 36%, and$567 million , or 86%, respectively, compared to the same periods in 2020. These increases in other revenue were primarily due to increased sales in our consumer hardware products. Foreign Exchange Impact on Revenue The general weakening of theU.S. dollar relative to certain foreign currencies in the three and six months endedJune 30, 2021 compared to the same periods in 2020 had a favorable impact on revenue. If we had translated revenue for the three months endedJune 30, 2021 using the prior year's monthly exchange rates for our settlement or billing currencies other than theU.S. dollar, our total revenue and advertising revenue would have been$28.09 billion and$27.60 billion , respectively. Using these constant rates, total revenue and advertising revenue would have been$982 million and$975 million lower than actual total revenue and advertising revenue, respectively, for the three months endedJune 30, 2021 . If we had translated revenue for the six months endedJune 30, 2021 using the prior year's monthly exchange rates for our settlement or billing currencies other than theU.S. dollar, our total revenue and advertising revenue would have been$53.56 billion and$52.35 billion , respectively. Using these constant rates, total revenue and advertising revenue would have been$1.69 billion and$1.67 billion lower than actual total revenue and advertising revenue, respectively, for the six months endedJune 30, 2021 . 38 --------------------------------------------------------------------------------
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Cost of revenue
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % change 2021 2020 % change
(in millions, except for percentages)
Cost of revenue $ 5,399 $ 3,829 41 % $ 10,530 $ 7,288 44 %
Percentage of revenue 19 % 20 % 19 % 20 %
Cost of revenue in the three and six months ended June 30, 2021 increased
$1.57 billion , or 41%, and $3.24 billion , or 44%, respectively, compared to the
same periods in 2020. The increases were primarily due to an increase in
operational expenses related to our data centers and technical infrastructure,
an increase in cost of consumer hardware products sold and higher cost
associated with partner arrangements, including traffic acquisition and payment
processing costs.
Research and development
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % change 2021 2020 % change
(in millions, except for percentages)
Research and development $ 6,096 $ 4,462 37 % $ 11,293 $ 8,477 33 %
Percentage of revenue 21 % 24 % 20 % 23 %
Research and development expenses in the three and six months ended June 30,
2021 increased $1.63 billion , or 37%, and $2.82 billion , or 33%, respectively,
compared to the same periods in 2020. The increases were mostly due to higher
payroll and benefits expenses as a result of a 30% growth in employee headcount
from June 30, 2020 to June 30, 2021 in engineering and other technical functions
supporting our continued investment in our family of products and consumer
hardware products.
Marketing and sales
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % change 2021 2020 % change
(in millions, except for percentages)
Marketing and sales $ 3,259 $ 2,840 15 % $ 6,102 $ 5,627 8 %
Percentage of revenue 11 % 15 % 11 % 15 %
Marketing and sales expenses in the three and six months ended June 30, 2021
increased $419 million , or 15%, and $475 million , or 8%, respectively, compared
to the same periods in 2020. The increases were primarily due to increases in
payroll and benefits expenses and marketing expenses. Our payroll and benefits
expenses increased as a result of a 6% increase in employee headcount from June
30, 2020 to June 30, 2021 in our marketing and sales functions.
General and administrative
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 % change 2021 2020 % change
(in millions, except for percentages)
General and administrative$ 1,956 $ 1,593 23 %$ 3,578 $ 3,175 13 % Percentage of revenue 7 % 9 % 6 % 9 % General and administrative expenses in the three and six months endedJune 30, 2021 increased$363 million , or 23%, and$403 million , or 13%, respectively, compared to the same periods in 2020. The increase in the three months endedJune 30, 2021 was mostly due to increases in payroll and benefits expenses and legal-related costs. The increase in the six months endedJune 30, 2021 was mostly due to increases in payroll and benefits expenses and other taxes, partially offset by lower bad debt expense due to a decrease in our estimated credit losses compared to the same period in 2020. Our payroll and benefits expenses increased mainly due to an 18% increase in employee headcount fromJune 30, 2020 toJune 30, 2021 in our general and administrative functions. 39 -------------------------------------------------------------------------------- Table of Contents Interest and other income, net Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % change 2021 2020 % change (in millions, except for percentages) Interest income, net $ 121$ 162 (25) % $ 239$ 390 (39) % Foreign currency exchange gains (losses), net - 28 (100) % (93) (223) (58) % Other income (expense), net 25 (22) NM 125 (31) NM
Interest and other income, net $ 146
(13) % $ 271$ 136 99 % Interest and other income, net in the three months endedJune 30, 2021 decreased$22 million compared to the same period in 2020. The decrease was mainly due to a decrease in interest income related to lower interest rates. Interest and other income, net in the six months endedJune 30, 2021 increased$135 million compared to the same period in 2020. The increase was due to an increase in other income due to net unrealized gains related to our equity investments and lower foreign currency exchange losses as a result of foreign currency transactions and remeasurement, partially offset by a decrease in interest income related to lower interest rates compared to the same period in 2020. Provision for income taxes Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % change 2021 2020 % change (in millions, except for percentages) Provision for income taxes$ 2,119 $ 953 122 %$ 4,124 $ 1,911 116 % Effective tax rate 17 % 16 % 17 % 16 % Our provision for income taxes in the three and six months endedJune 30, 2021 increased$1.17 billion , or 122%, and$2.21 billion , or 116%, respectively, compared to the same periods in 2020, primarily due to an increase in income from operations. Our effective tax rate did not materially change in the three and six months endedJune 30, 2021 compared to the same periods in 2020. 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 depend upon the stock price at the time of employee award vesting. If our stock price remains constant to theJuly 23, 2021 price, we expect our effective tax rate for the full year of 2021 will be in the high-teens. 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 ofJune 30, 2021 , we had net unrecognized tax benefits of$3.82 billion which were accrued as other liabilities. These unrecognized tax benefits were predominantly accrued for uncertainties related to transfer pricing with 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 and has done so in years covered by 40 -------------------------------------------------------------------------------- Table of Contents the second Notice described below. 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's amendment to answer was filed stating that it planned to assert at trial an adjustment that is higher than the adjustment stated in the Notice. The first session of the trial was completed inMarch 2020 and a second session is expected to continue beginning inOctober 2021 . 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 ofJune 30, 2021 , 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. 41 -------------------------------------------------------------------------------- Table of Contents 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, investments inU.S. government securities,U.S. government agency securities, and corporate debt securities. Cash and cash equivalents and marketable securities were$64.08 billion as ofJune 30, 2021 , an increase of$2.13 billion fromDecember 31, 2020 . The increase was mostly due to$25.49 billion of cash generated from operations, offset by$11.02 billion for repurchases of our Class A common stock,$9.16 billion for capital expenditures, including principal payments on finance leases, and$2.43 billion of taxes paid related to net share settlement of employee restricted stock unit (RSU) awards. Cash paid for income taxes was$6.29 billion in the six months endedJune 30, 2021 . As ofJune 30, 2021 , our federal net operating loss carryforward was$10.60 billion and our federal tax credit carryforward was$527 million . We anticipate the utilization of a significant portion of these net operating losses and credits within the next three years. 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, 2020 ,$8.60 billion remained available and authorized for repurchases under this program. InJanuary 2021 , an additional$25.0 billion of repurchases was authorized under this program. During the six months endedJune 30, 2021 , we repurchased and subsequently retired 37 million shares of our Class A common stock for an aggregate amount of$11.26 billion . As ofJune 30, 2021 ,$22.34 billion remained available and authorized for repurchases. As ofJune 30, 2021 ,$8.52 billion of the$64.08 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. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs and fund our share repurchase program for the foreseeable future. Cash Provided by Operating Activities Cash flow from operating activities during the six months endedJune 30, 2021 mostly consisted of net income adjusted for certain non-cash items, such as$4.38 billion of share-based compensation expense,$3.96 billion of depreciation and amortization, partially offset by an increase of$2.31 billion of prepaid expenses and other current assets. The increase in cash flow from operating activities during the six months endedJune 30, 2021 , compared to the same period in 2020, was mostly due to higher net income. Cash Used in Investing Activities Cash used in investing activities during the six months endedJune 30, 2021 consisted mostly of$8.88 billion of purchases of property and equipment as we continued to invest in data centers, servers, office facilities, and network infrastructure, and$3.86 billion of net purchases of marketable securities. The increase in cash used in investing activities during the six months endedJune 30, 2021 , compared to the same period in 2020, was mostly due to increases in net purchases of marketable securities and purchases of property and equipment. We anticipate making capital expenditures of approximately$19 billion to$21 billion in 2021. Cash Used in Financing Activities Cash used in financing activities during the six months endedJune 30, 2021 mostly consisted of$11.02 billion for repurchases of our Class A common stock and$2.43 billion of taxes paid related to net share settlement of RSUs. The increase in cash used in financing activities during the six months endedJune 30, 2021 , compared to the same period in 2020, was primarily due to an increase in repurchases of our Class A common stock. Off-Balance Sheet Arrangements As ofJune 30, 2021 , we did not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. 42 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our principal commitments consist mostly of obligations under operating leases and other contractual commitments. Our obligations under operating leases include among others, certain of our offices, data centers, land, colocations, and equipment. Our other contractual commitments are primarily related to our investments in network infrastructure, consumer hardware and content costs. The following table summarizes our commitments to settle contractual obligations in cash as ofJune 30, 2021 : Payment Due by Period The remainder Total of 2021 2022-2023 2024-2025 Thereafter (in millions) Operating lease obligations, including imputed interest(1)$ 20,827 $ 626 $ 3,121 $ 3,159 $ 13,921 Finance lease obligations, including imputed interest(1) 1,538 275 479 144 640 Transition tax payable 1,543 - 300 1,243 - Other contractual commitments 12,850 5,798 3,168 1,259 2,625
Total contractual obligations
7,068
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(1) Includes variable lease payments that were fixed subsequent to lease commencement or modification. Additionally, as part of the normal course of the business, we may also enter into multi-year agreements to purchase renewable energy that do not specify a fixed or minimum volume commitment or to purchase certain network components that do not specify a fixed or minimum price 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$8.06 billion . The ultimate spend under these agreements may vary and will be based on prevailing market prices or actual volume purchased. Our other liabilities also include$3.82 billion related to net uncertain tax positions as ofJune 30, 2021 . 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. Contingencies We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations. We record 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. 43 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance withU.S. 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. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates and assumptions on our condensed consolidated financial statements is material. We believe that the assumptions and estimates associated with gross vs. net in revenue recognition, valuation of equity investments, income taxes, loss contingencies, and valuation of long-lived assets including goodwill and intangible assets and their associated estimated useful lives have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be 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, 2020 . 44 --------------------------------------------------------------------------------
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