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 Months EndedMarch 31, 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 months endedMarch 31, 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 First Quarter Results Our key community metrics and financial results for the first quarter of 2021 are as follows: Community growth: •Facebook daily active users (DAUs) were 1.88 billion on average forMarch 2021 , an increase of 8% year-over-year. •Facebook monthly active users (MAUs) were 2.85 billion as ofMarch 31, 2021 , an increase of 10% year-over-year. •Family daily active people (DAP) was 2.72 billion on average forMarch 2021 , an increase of 15% year-over-year. •Family monthly active people (MAP) was 3.45 billion as ofMarch 31, 2021 , an increase of 15% year-over-year. Financial results: •Revenue was$26.17 billion , up 48% year-over-year, and advertising revenue was$25.44 billion , up 46% year-overyear. •Total costs and expenses were$14.79 billion , up 25% year-over-year. •Income from operations was$11.38 billion , and operating margin was 43%. •Net income was$9.50 billion , with diluted earnings per share of$3.30 . •Capital expenditures, including principal payments on finance leases, were$4.42 billion . •Effective tax rate was 17%. •Cash and cash equivalents and marketable securities were$64.22 billion as ofMarch 31, 2021 . •Headcount was 60,654 as ofMarch 31, 2021 , an increase of 26% 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. 26 -------------------------------------------------------------------------------- Table of Contents In the first 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 to help limit the spread of the illness, which have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. 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 inthe United States &Canada region. We are unable to predict the impact of the pandemic on user growth and engagement with any certainty and we expect these trends to 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, as well as increasing consumer demand for purchasing products relative to services, and we experienced increasing demand for advertising as a result of these trends. However, it is possible that this increased demand may not continue in future periods and may even recede as 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. 27 -------------------------------------------------------------------------------- Table of Contents Trends in Our Facebook User Metrics The numbers for our key
[[Image Removed: fb-20210331_g2.jpg]] [[Image Removed: fb-20210331_g3.jpg]]
DAU/MAU: 77% 77% 77% 77% 77% 77% 77% 76% 75% DAU/MAU: 74% 74% 74% 75% 75% 74% 74% 74% 73%
[[Image Removed: fb-20210331_g4.jpg]] [[Image Removed: fb-20210331_g5.jpg]]
DAU/MAU: 61% 61% 62% 62% 62% 61% 62% 62% 62% DAU/MAU: 64% 64% 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 8% to 1.88 billion on average during March 2021 from
1.73 billion during March 2020 . Users in India , the Philippines , and Indonesia
represented the top three sources of growth in DAUs during March 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-20210331_g6.jpg]][[Image Removed: fb-20210331_g7.jpg]] [[Image Removed: fb-20210331_g8.jpg]]
[[Image Removed: fb-20210331_g9.jpg]] [[Image Removed: fb-20210331_g10.jpg]] As ofMarch 31, 2021 , we had 2.85 billion MAUs, an increase of 10% fromMarch 31, 2020 . Users inIndia ,Indonesia , andthe Philippines represented the top three sources of growth in the first quarter of 2021, relative to the same period in 2020. 29 -------------------------------------------------------------------------------- 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 first quarter of 2021 inthe United States &Canada region was more than 12 times higher than in theAsia-Pacific region . [[Image Removed: fb-20210331_g11.jpg]] ARPU:$6.42 $7.05 $7.26 $8.52 $6.95 $7.05 $7.89 $10.14 $9.27 [[Image Removed: fb-20210331_g12.jpg]] [[Image Removed: fb-20210331_g13.jpg]] ARPU:$30.12 $33.27 $34.55 $41.41 $34.18 $36.49 $39.63 $53.56 $48.03 ARPU:$9.55 $10.70 $10.68 $13.21 $10.64 $11.03 $12.41 $16.87 $15.49 [[Image Removed: fb-20210331_g14.jpg]] [[Image Removed: fb-20210331_g15.jpg]] ARPU:$2.78 $3.04 $3.24 $3.57 $3.06 $2.99 $3.67 $4.05 $3.94 ARPU:$1.89 $2.13 $2.24 $2.48 $1.99 $1.78 $2.22 $2.77 $2.64 [[Image Removed: fb-20210331_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$9.27 , an increase of 33% from the first quarter of 2020. Over this period, ARPU increased by 46% inEurope , 41% inUnited States &Canada , 33% in Rest of World and 29% 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. 31 -------------------------------------------------------------------------------- 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 15% to 2.72 billion on average duringMarch 2021 from 2.36 billion duringMarch 2020 . 32 -------------------------------------------------------------------------------- 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-20210331_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 ofMarch 31, 2021 , we had 3.45 billion MAP, an increase of 15% from 2.99 billion as ofMarch 31, 2020 . 33
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•Average Revenue Per Person (ARPP). We define ARPP as our total revenue during a
given quarter, divided by the average of the number of MAP at the beginning and
end of the quarter. While ARPP includes all sources of revenue, the number of
MAP used in this calculation only includes users of our Family products as
described in the definition of MAP above. The share of revenue from users who
are not also MAP was not material.
[[Image Removed: fb-20210331_g19.jpg]]
ARPP: $5.66 $6.20 $6.33 $7.38 $6.03 $6.10
[[Image Removed: fb-20210331_g16.jpg]]
During the first 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 and content costs, credit card and
other transaction fees related to processing customer transactions, and cost of
consumer hardware products sold.
Research and development. Research and development expenses consist primarily of
salaries and benefits, share-based compensation, and facilities-related costs
for employees on our engineering and technical teams who are responsible for
building new products as well as improving existing products.
Marketing and sales. Marketing and sales expenses consist of salaries and
benefits, and share-based compensation for our employees engaged in sales, sales
support, marketing, business development, and customer service functions. Our
marketing and sales expenses also include marketing and promotional expenditures
and professional services such as content reviewers to support our community and
product operations.
General and administrative. General and administrative expenses consist of
legal-related costs; salaries and benefits, and share-based compensation for
certain of our executives as well as our legal, finance, human resources,
corporate communications and policy, and other administrative employees; and
professional services.
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Results of Operations
The following table sets forth our condensed consolidated statements of income
data:
Three Months Ended March 31,
2021 2020
(in millions)
Revenue $ 26,171 $ 17,737
Costs and expenses:
Cost of revenue 5,131 3,459
Research and development 5,197 4,015
Marketing and sales 2,843 2,787
General and administrative 1,622 1,583
Total costs and expenses 14,793 11,844
Income from operations 11,378 5,893
Interest and other income (expense), net 125 (32)
Income before provision for income taxes 11,503 5,861 Provision for income taxes 2,006 959 Net income $ 9,497$ 4,902
The following table sets forth our condensed consolidated statements of income data (as a percentage of revenue)(1):
Three Months Ended March 31,
2021 2020
Revenue 100 % 100 %
Costs and expenses:
Cost of revenue 20 20
Research and development 20 23
Marketing and sales 11 16
General and administrative 6 9
Total costs and expenses 57 67
Income from operations 43 33
Interest and other income (expense), net - -
Income before provision for income taxes 44 33 Provision for income taxes 8 5 Net income 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:
Three Months Ended March 31,
2021 2020
(in millions)
Cost of revenue $ 118 $ 94
Research and development 1,408 999
Marketing and sales 174 149
General and administrative 130 93
Total share-based compensation expense $ 1,830
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Share-based compensation expense included in costs and expenses (as a percentage
of revenue)(1):
Three Months Ended March 31,
2021 2020
Cost of revenue - % 1 %
Research and development 5 6
Marketing and sales 1 1
General and administrative - 1
Total share-based compensation expense 7 % 8 %
____________________________________
(1) Percentages have been rounded for presentation purposes and may differ from unrounded results. Three Months EndedMarch 31, 2021 and 2020 Revenue Three Months Ended March 31, 2021 2020 % change (in millions, except for percentages) Advertising$ 25,439 $ 17,440 46 % Other revenue 732 297 146 % Total revenue$ 26,171 $ 17,737 48 % Revenue in the three months endedMarch 31, 2021 increased$8.43 billion , or 48%, compared to the same period in 2020. The increase was mostly due to an increase in advertising revenue as a result of increases in the average price per ad and the number of ads delivered. During the three months endedMarch 31, 2021 , the average price per ad increased by 30%, as compared with a decrease of approximately 16% in the same period in 2020. The increase in average price per ad during the three months endedMarch 31, 2021 was mainly caused by a recovery from declines in advertising demand due to the COVID-19 pandemic that started in the first quarter of 2020. Additionally, overall advertising demand increased, as compared to the same period in 2020, across our ad products and in all regions in part due to increasing consumer demand for purchasing products relative to services, as well as the shift of commerce from offline to online. During the three months endedMarch 31, 2021 , the number of ads delivered increased by 12%, as compared with an increase of approximately 39% in the same period in 2020. The increase in the ads delivered was driven by increases in users and in the number and frequency of ads displayed across our products. In the near-term, we anticipate that future advertising revenue growth will be determined primarily by price, which will be influenced by the extent to which we continue to see increasing advertising demand as the effects of the COVID-19 pandemic subside and the related economic recovery progresses, as well as the extent to which changes to the regulatory environment and third-party mobile operating systems and browsers result in limitations on our ad targeting and measurement tools. Other revenue in the first quarter of 2021 increased$435 million , or 146%, compared to the same period in 2020. The increase in other revenue was 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 months endedMarch 31, 2021 compared to the same period in 2020 had a favorable impact on revenue. If we had translated revenue for the three months endedMarch 31, 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$25.47 billion and$24.74 billion , respectively. Using these constant rates, total revenue and advertising revenue would have been$706 million and$695 million lower than actual total revenue and advertising revenue, respectively, for the three months endedMarch 31, 2021 . 37 --------------------------------------------------------------------------------
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Cost of revenue
Three Months Ended March 31,
2021 2020 % change
(in millions, except for percentages)
Cost of revenue $ 5,131 $ 3,459 48 %
Percentage of revenue 20 % 20 %
Cost of revenue in the three months ended March 31, 2021 increased
$1.67 billion , or 48%, compared to the same period in 2020. The increase was
mostly 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, to a lesser extent, higher cost associated with partner arrangements,
including traffic acquisition and payment processing costs.
Research and development
Three Months Ended March 31,
2021 2020 % change
(in millions, except for percentages)
Research and development $ 5,197 $ 4,015 29 %
Percentage of revenue 20 % 23 %
Research and development expenses in the three months ended March 31, 2021
increased $1.18 billion , or 29%, compared to the same period in 2020. The
increase was mostly due to higher payroll and benefits expenses as a result of
a 35% growth in employee headcount from March 31, 2020 to March 31, 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 March 31,
2021 2020 % change
(in millions, except for percentages)
Marketing and sales $ 2,843 $ 2,787 2 %
Percentage of revenue 11 % 16 %
Marketing and sales expenses in the three months ended March 31, 2021 increased
$56 million , or 2%, compared to the same period in 2020. The majority of
increase was driven by an increase in payroll and benefits expenses, partially
offset by a decrease in marketing expenses. Our payroll and benefits expenses
increased as a result of a 10% increase in employee headcount from March 31,
2020 to March 31, 2021 in our marketing and sales functions.
General and administrative
Three Months Ended March 31,
2021 2020 % change
(in millions, except for percentages)
General and administrative $ 1,622 $ 1,583 2 %
Percentage of revenue 6 % 9 %
General and administrative expenses in the three months ended March 31, 2021
increased $39 million , or 2%, compared to the same period in 2020. The majority
of the increase was due to an increase in payroll and benefits expenses,
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 a 23% increase in employee headcount from March
31, 2020 to March 31, 2021 in our general and administrative functions.
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Interest and other income (expense), net
Three Months Ended March 31,
2021 2020 % change
(in millions, except for percentages)
Interest income, net $ 118 $ 228 (48) %
Foreign currency exchange losses, net (93) (251) (63) %
Other income (expense), net 100 (9) NM
Interest and other income (expense), net $ 125 $ (32) NM
Interest and other income (expense), net in the three months ended March 31,
2021 increased $157 million compared to the same period in 2020. The increase
was due to a decrease in foreign currency exchange losses as a result of foreign
currency transactions and remeasurement and an increase in other income due to
net unrealized gains related to our equity investments, 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 March 31,
2021 2020 % change
(in millions, except for percentages)
Provision for income taxes $ 2,006 $ 959 109 %
Effective tax rate 17 % 16 %
Our provision for income taxes in the three months ended March 31, 2021
increased $1.05 billion , or 109%, compared to the same period in 2020, primarily
due to an increase in income from operations. Our effective tax rate did not
materially change in the three months ended March 31, 2021 compared to the same
period 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 the April 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 of March 31, 2021 , we had net unrecognized tax
benefits of $3.62 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.
In July 2016 , we received a Statutory Notice of Deficiency (Notice) from the IRS
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, the IRS stated that it will also apply its position for tax years
subsequent to 2010 and has done so in years covered by the second Notice
described below. We do not agree with the position of the IRS and have filed a
petition in the Tax Court challenging the Notice. On January 15, 2020 , the IRS's
amendment to answer was filed stating that it planned to assert at trial
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an adjustment that is higher than the adjustment stated in the Notice. The first
session of the trial was completed in March 2020 and a second session is
expected to continue beginning in October 2021 . Based on the information
provided, we believe that, if the IRS 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 filed U.S. return, plus interest and any penalties asserted.
In March 2018 , we received a second Notice from the IRS in conjunction with the
examination of our 2011 through 2013 tax years. The IRS 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 the IRS 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 filed U.S.
returns, plus interest and any penalties asserted. We do not agree with the
positions of the IRS 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 the IRS in the two
Notices and its Pretrial Memorandum. In addition, if the IRS 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 of March 31, 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.
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Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, marketable
securities, and cash generated from operations. Cash and cash equivalents and
marketable securities consist mostly of cash on deposit with banks, investments
in money market funds, and investments in U.S. government securities, U.S.
government agency securities, and corporate debt securities. Cash and cash
equivalents and marketable securities were $64.22 billion as of March 31, 2021 ,
an increase of $2.27 billion from December 31, 2020 . The increase was mostly due
to $12.24 billion of cash generated from operations, offset by $4.42 billion for
capital expenditures, including principal payments on finance leases,
$3.94 billion for repurchases of our Class A common stock, $1.08 billion of
taxes paid related to net share settlement of employee restricted stock unit
(RSU) awards and $600 million of net purchases of marketable securities.
Cash paid for income taxes was $2.91 billion in the three months ended March 31,
2021 . As of March 31, 2021 , our federal net operating loss carryforward was
$10.61 billion and our federal tax credit carryforward was $444 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 in January 2017 and does not have an expiration
date. As of December 31, 2020 , $8.60 billion remained available and authorized
for repurchases under this program. In January 2021 , an additional $25.0 billion
of repurchases was authorized under this program. During the three months ended
March 31, 2021 , we repurchased and subsequently retired 15 million shares of our
Class A common stock for an aggregate amount of $4.11 billion . As of March 31,
2021 , $29.49 billion remained available and authorized for repurchases.
As of March 31, 2021 , $8.12 billion of the $64.22 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
eliminated U.S. taxes on foreign subsidiary distributions. As a result, earnings
in foreign jurisdictions are available for distribution to the U.S. without
incremental U.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 three months ended March 31, 2021
mostly consisted of net income adjusted for certain non-cash items, such as
$1.97 billion of depreciation and amortization and $1.83 billion of share-based
compensation expense, offset by $1.68 billion decrease in accrued expenses and
other current liabilities. The increase in cash flow from operating activities
during the three months ended March 31, 2021 , compared to the same period
in 2020, was due to higher net income partially offset by changes in working
capital such as a $2.70 billion increase in cash payments of income taxes.
Cash Used in Investing Activities
Cash used in investing activities during the three months ended March 31, 2021
was primarily from $4.27 billion of purchases of property and equipment as we
continued to invest in data centers, servers, office facilities, and network
infrastructure. The increase in cash used in investing activities during the
three months ended March 31, 2021 , compared to the same period in 2020, was
mostly due to an increase in 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 three months ended March 31, 2021
mostly consisted of $3.94 billion for repurchases of our Class A common stock
and $1.08 billion of taxes paid related to net share settlement of RSUs. The
increase in cash used in financing activities during the three months ended
March 31, 2021 , compared to the same period in 2020, was primarily due to an
increase in repurchases of our Class A common stock.
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Off-Balance Sheet Arrangements
As of March 31, 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.
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 of March 31, 2021 :
Payment Due by Period
The remainder
Total of 2021 2022-2023 2024-2025 Thereafter
(in millions)
Operating lease obligations,
including imputed interest(1) $ 20,548 $ 959 $ 3,007 $ 3,082 $ 13,500
Finance lease obligations,
including imputed interest(1) 1,193 241 266 117 569
Transition tax payable 1,543 - 300 1,243 -
Other contractual commitments 9,067 4,778 1,550 450 2,289
Total contractual obligations
5,123
____________________________________
(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. 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$5.73 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$3.62 billion related to net uncertain tax positions as ofMarch 31, 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. 42 -------------------------------------------------------------------------------- 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 . 43
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