SNAP INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Risk Factors," "Note Regarding Forward-Looking Statements," and "Note Regarding User Metrics and Other Data." The following generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of historical items and year-to-year comparisons between 2020 and 2019 that are not included in this discussion can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC onFebruary 4, 2021 .
Overview of Full Year 2021 Results
Our key user metrics and financial results for fiscal year 2021 are as follows:
User Metrics
• Daily Active Users, or DAUs, increased to 319 million in Q4 2021, compared
to 265 million in Q4 2020.
• Average revenue per user, or ARPU, increased 18% to
compared to
Financial Results
• Revenue increased 64% year-over-year to reach
• Total costs and expenses excluding stock-based compensation and other
payroll related tax expense, increased 42% to
• Net loss improved by
2021.
• Diluted net loss per share improved by 52% to
• Adjusted EBITDA improved by
in 2021.
• Cash provided by (used in) operating activities was
compared to
• Capital expenditures were
in 2020.
• Free Cash Flow was
2020.
• Cash, cash equivalents, and marketable securities were
• Common shares outstanding plus shares underlying stock-based awards,
including restricted stock units, restricted stock awards, and outstanding
stock options, totaled 1,702 million at December 31, 2021 , compared to
1,630 million one year ago.
Overview
We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate. We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together.
Our flagship product,
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--------------------------------------------------------------------------------Trends in User Metrics We define a DAU as a registeredSnapchat user who opens theSnapchat application at least once during a defined 24-hour period. We define ARPU as quarterly revenue divided by the average DAUs. We assess the health of our business by measuring DAUs and ARPU because we believe that these metrics are important ways for both management and investors to understand engagement and monitor the performance of our platform. We also measure ARPU because we believe that this metric helps our management and investors to assess the extent to which we are monetizing our service. User Engagement We calculate average DAUs for a particular quarter by adding the number of DAUs on each day of that quarter and dividing that sum by the number of days in that quarter. DAUs are broken out by geography because markets have different characteristics. We had 319 million DAUs on average in the fourth quarter of 2021, compared to 306 million in the prior quarter and 265 million in the fourth quarter of 2020. Quarterly Average Daily Active Users (in millions) [[Image Removed]] [[Image Removed]] (1)North America includesMexico , theCaribbean , andCentral America . (2)Europe includesRussia andTurkey . 49
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Monetization In the year endedDecember 31, 2021 , we recorded revenue of$4.1 billion compared to revenue of$2.5 billion for the year endedDecember 31, 2020 , an increase of 64% year-over-year. We monetize our business primarily through advertising. Our advertising products include Snap Ads and AR Ads. We measure our business using ARPU because it helps us understand the rate at which we are monetizing our daily user base. ARPU was$4.06 in the fourth quarter of 2021, up from$3.49 in the third quarter of 2021 and$3.44 in the fourth quarter of 2020. For purposes of calculating ARPU, revenue by user geography is apportioned to each region based on a determination of the geographic location in which advertising impressions are delivered, as this approximates revenue based on user activity. This differs from the presentation of our revenue by geography in the notes to our consolidated financial statements, where revenue is based on the billing address of the advertising customer. Quarterly Average Revenue per User [[Image Removed]] [[Image Removed]] (1)North America includesMexico , theCaribbean , andCentral America . (2)Europe includesRussia andTurkey . 50
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Results of Operations
Components of Results of Operations
Revenue
We generate substantially all of our revenue through the sale of our advertising products, which primarily include Snap Ads and AR Ads, referred to as advertising revenue. Snap Ads may be subject to revenue sharing arrangements between us and the media partner. We also generate revenue from the sales of hardware products. This revenue is reported net of allowances for returns.
Cost of Revenue
Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs. Cost of revenue also includes payments for content, developer, and advertiser partner costs. In addition, cost of revenue includes third-party selling costs, personnel-related costs, including salaries, benefits, and stock-based compensation expenses. Cost of revenue also includes facilities and other supporting overhead costs, including depreciation and amortization, and inventory costs.
Research and Development Expenses
Research and development expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expense for our engineers, designers, and other employees engaged in the research and development of our products. In addition, research and development expenses include facilities and other supporting overhead costs, including depreciation and amortization. Research and development costs are expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions, and stock-based compensation expense for our employees engaged in sales and sales support, business development, media, marketing, corporate partnerships, and customer service functions. Sales and marketing expenses also include costs incurred for advertising, market research, tradeshows, branding, marketing, promotional expense, and public relations, as well as facilities and other supporting overhead costs, including depreciation and amortization.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits, and stock-based compensation expense for our finance, legal, information technology, human resources, and other administrative teams. General and administrative expenses also include facilities and supporting overhead costs, including depreciation and amortization, and external professional services.
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents, and marketable securities.
Interest Expense
Interest expense consists primarily of interest expense associated with our senior convertible notes, or the Convertible Notes, and commitment fees related to our revolving credit facility.
Other Income (Expense), Net
Other income (expense), net consists of realized and unrealized gains and losses on marketable securities, foreign currency transaction gains and losses, and gains and impairment on strategic investments.
Income Tax Benefit (Expense)
We are subject to income taxes inthe United States and numerous foreign jurisdictions. These foreign jurisdictions have different statutory tax rates thanthe United States . Additionally, certain of our foreign earnings may also be taxable in the 51
--------------------------------------------------------------------------------United States . Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to domestic income, use of tax credits, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Adjusted EBITDA We define Adjusted EBITDA as net income (loss), excluding interest income; interest expense; other income (expense), net; income tax benefit (expense); depreciation and amortization; stock-based compensation expense; and payroll and other tax expense related to stock-based compensation; and certain other non-cash or non-recurring items impacting net income (loss) from time to time. We consider the exclusion of certain non-cash and non-recurring expenses in calculating Adjusted EBITDA to provide a useful measure for period-to-period comparisons of our business and for investors and others to evaluate our operating results in the same manner as does our management. Additionally, we believe that Adjusted EBITDA is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities. See "Non-GAAP Financial Measures" for additional information and a reconciliation of net loss to Adjusted EBITDA.
Discussion of Results of Operations
The following table sets forth our consolidated statements of operations data:
Year Ended December 31,
2021 2020 2019
(in thousands)
Consolidated Statements of Operations Data:
Revenue $ 4,117,048 $ 2,506,626 $ 1,715,534
Costs and expenses(1) (2):
Cost of revenue 1,750,246 1,182,505 895,838
Research and development 1,565,467 1,101,561 883,509
Sales and marketing 792,764 555,468 458,598
General and administrative 710,640 529,164 580,917
Total costs and expenses 4,819,117 3,368,698 2,818,862
Operating loss (702,069 ) (862,072 ) (1,103,328 )
Interest income 5,199 18,127 36,042
Interest expense (17,676 ) (97,228 ) (24,994 )
Other income (expense), net 240,175 14,988 59,013
Loss before income taxes (474,371 ) (926,185 ) (1,033,267 )
Income tax benefit (expense) (13,584 ) (18,654 ) (393 )
Net loss $ (487,955 ) $ (944,839 ) $ (1,033,660 )
Adjusted EBITDA(3) $ 616,686 $ 45,163 $ (202,230 ) (1) Stock-based compensation expense included in the above line items:
Year Ended December 31,
2021 2020 2019
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 17,221 $ 9,367 $ 6,365
Research and development 740,130 533,272 464,639
Sales and marketing 164,241 108,270 93,355
General and administrative 170,543 119,273 121,654
Total $ 1,092,135 $ 770,182 $ 686,013
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(2) Depreciation and amortization expense included in the above line items:
Year Ended December 31,
2021 2020 2019
(in thousands)
Depreciation and amortization expense:
Cost of revenue $ 19,711 $ 22,205 $ 21,271
Research and development 62,159 37,627 33,208
Sales and marketing 21,772 12,916 13,256
General and administrative 15,499 13,996 19,510
Total $ 119,141 $ 86,744 $ 87,245 (3) See "Non-GAAP Financial Measures" of this Annual Report on Form 10-K for
more information and for a reconciliation of Adjusted EBITDA to net loss,
the most directly comparable financial measure calculated and presented in
accordance with GAAP.
The following table sets forth the components of our consolidated statements of
operations data for each of the periods presented as a percentage of revenue:
Year Ended December 31,
2021 2020 2019
Consolidated Statements of Operations Data:
Revenue 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 43 47 52
Research and development 38 44 52
Sales and marketing 19 22 27
General and administrative 17 21 34
Total costs and expenses 117 134 164
Operating loss 17 34 64
Interest income - 1 2
Interest expense - 4 1
Other income (expense), net 6 1 3
Loss before income taxes 12 37 60
Income tax benefit (expense) - 1 -
Net loss 12 % 38 % 60 %
Revenue
2021 vs 2020 2020 vs 2019
Year Ended December 31, Change Change
2021 2020 2019 $ % $ %
(dollars in thousands)
Revenue
2021 compared to 2020 Revenue for the year endedDecember 31, 2021 increased$1,610.4 million compared to the same period in 2020. Revenue increased due to a combination of growth in advertisers and auction-based advertising demand and optimization efficiencies. 53 -------------------------------------------------------------------------------- Cost of Revenue 2021 vs 2020 2020 vs 2019 Year Ended December 31, Change Change 2021 2020 2019 $ % $ % (dollars in thousands)
Cost of Revenue
48 %$ 286,667 32 % 2021 compared to 2020 Cost of revenue for the year endedDecember 31, 2021 increased$567.7 million compared to the same period in 2020. The increase in cost of revenue was primarily driven by higher content costs, including Spotlight, which launched in the fourth quarter of 2020 as well as growth in revenue share due to the overall increase in revenue and higher proportion of revenue subject to revenue share. The increases were also a result of increased infrastructure costs attributable to DAU growth net of infrastructure cost efficiencies and content review costs across the platform.
Research and Development Expenses
2021 vs 2020 2020 vs 2019
Year Ended December 31, Change Change
2021 2020 2019 $ % $ %
(dollars in thousands)
Research and Development Expenses $ 1,565,467 $ 1,101,561 $ 883,509 $ 463,906 42 % $ 218,052 25 %
2021 compared to 2020
Research and development expenses for the year ended December 31, 2021 increased
$463.9 million compared to the same period in 2020. The increase was primarily
driven by greater personnel expenses due to growth in research and development
headcount, including increased cash- and stock-based compensation expenses.
Sales and Marketing Expenses
2021 vs 2020 2020 vs 2019
Year Ended December 31, Change Change
2021 2020 2019 $ % $ %
(dollars in thousands)
Sales and Marketing Expenses
2021 compared to 2020 Sales and marketing expenses for the year endedDecember 31, 2021 increased$237.3 million compared to the same period in 2020. The increase was primarily driven by greater personnel expenses due to growth in sales and marketing headcount, including increased cash- and stock-based compensation expenses, as well as increased marketing investments.
General and Administrative Expenses
2021 vs 2020 2020 vs 2019
Year Ended December 31, Change Change
2021 2020 2019 $ % $ %
(dollars in thousands)
General and Administrative Expenses $ 710,640 $ 529,164 $ 580,917 $ 181,476 34 % $ (51,753 ) (9 )%
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2021 compared to 2020 General and administrative expenses for the year endedDecember 31, 2021 increased$181.5 million compared to the same period in 2020. The increase was primarily driven by greater personnel expenses due to growth in headcount, including increased cash- and stock-based compensation expenses, as well as an increase in professional service fees. Interest Income 2021 vs 2020 2020 vs 2019 Year Ended December 31, Change Change 2021 2020 2019 $ % $ % (dollars in thousands)
Interest Income
2021 compared to 2020 Interest income for the year endedDecember 31, 2021 decreased$12.9 million compared to the same period in 2020. The decrease was primarily a result of lower interest rates onU.S. government-backed securities, partially offset by a higher overall invested cash balance. Interest Expense 2021 vs 2020 2020 vs 2019 Year Ended December 31, Change Change 2021 2020 2019 $ % $ % (dollars in thousands)
Interest Expense
2021 compared to 2020 Interest expense for the year endedDecember 31, 2021 decreased$79.6 million , compared to the same period in 2020 primarily due to the early adoption of ASU 2020-06 onJanuary 1, 2021 . As a result of this adoption, we account for the Convertible Notes as a single liability, which eliminates the amortization of the debt discount. Prior toJanuary 1, 2021 , the carrying amount of the equity component was recorded as a debt discount and amortized to interest expense. Interest expense related to the amortization of debt issuance costs was$4.3 million for the year endedDecember 31, 2021 , while interest expense related to the amortization of debt discount and issuance costs was$81.4 million for the year endedDecember 31, 2020 . Contractual interest expense was$8.9 million for the year endedDecember 31, 2021 and$11.2 million for the year endedDecember 31, 2020 . Other Income (Expense), Net 2021 vs 2020 2020 vs 2019 Year Ended December 31, Change Change 2021 2020 2019 $ % $ % (dollars in thousands)
Other Income (Expense), Net
2021 compared to 2020 Other income, net for the year endedDecember 31, 2021 increased$225.2 million , compared to other income, net for the same period in 2020. Other income, net for the current year was primarily a result of$207.7 million of unrealized gains and$27.8 million of realized gains on strategic investments, and$59.4 million of unrealized gains on publicly traded securities reclassified from strategic investments to marketable securities in the fourth quarter. This increase is partially offset by an induced conversion expense related to the Convertible Notes of$41.5 million . Other income, net in the comparable period in 2020 was primarily a result of unrealized gains on strategic investments partially offset by impairments of strategic investments. 55 -------------------------------------------------------------------------------- Income Tax Benefit (Expense) 2021 vs 2020 2020 vs 2019 Year Ended December 31, Change Change 2021 2020 2019 $ % $ % (dollars in thousands)
Income Tax Benefit (Expense)
(2.9 )% (2.0 )% (0.0 )%
2021 compared to 2020
Income tax expense was
Our effective tax rate differs from theU.S. statutory tax rate primarily due to valuation allowances on our deferred tax assets as it is more likely than not that some or all of our deferred tax assets will not be realized. For additional discussion, see Note 12 to our consolidated financial statements included in "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Net Loss and Adjusted EBITDA
2021 vs 2020 2020 vs 2019
Year Ended December 31, Change Change
2021 2020 2019 $ % $ %
(dollars in thousands)
Net Loss $ (487,955 ) $ (944,839 ) $ (1,033,660 ) $ 616,686 $ 45,163 $ (202,230 ) $ 571,523 1,265 %$ 247,393 (122 )%
2021 compared to 2020
Net loss for the year endedDecember 31, 2021 was$488.0 million , compared to$944.8 million for the same period in 2020. Adjusted EBITDA for the year endedDecember 31, 2021 was$616.7 million , compared to$45.2 million for the same period in 2020. The increase in Adjusted EBITDA was attributable to increased revenues, partially offset by increased cost of revenue primarily due to higher content acquisition costs between the periods. The decreases in net loss were also partially offset by an increase in stock-based compensation expense.
For a discussion of the limitations associated with using Adjusted EBITDA rather than GAAP measures and a reconciliation of this measure to net loss, see "Non-GAAP Financial Measures."
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities were$3.7 billion as ofDecember 31, 2021 , primarily consisting of cash on deposit with banks and highly liquid investments inU.S. government and agency securities, publicly traded equity securities, corporate debt securities, certificates of deposit, and commercial paper. Our primary source of liquidity is cash generated through financing activities. Our primary uses of cash include operating costs such as personnel-related costs and the infrastructure costs of theSnapchat application, facility-related capital spending, and acquisitions and investments. There are no known material subsequent events that could have a material impact on our cash or liquidity. We may contemplate and engage in merger and acquisition activity that could materially impact our liquidity and capital resource position. In 2021, we entered into various exchange agreements, or the Exchange Agreements, with certain holders of the convertible senior notes due in 2025, or the 2025 Notes, and the convertible senior notes due in 2026, or the 2026 Notes, pursuant to which we exchanged approximately$715.9 million principal amount of the 2025 Notes and approximately$426.5 million principal amount of the 2026 Notes for aggregate consideration of approximately 52.4 million shares of Class A common stock. InApril 2021 , we entered into a purchase agreement for the sale of an aggregate of$1.15 billion principal amount of convertible senior notes due in 2027, or the 2027 Notes. The net proceeds from the issuance of the 2027 Notes were$1.05 56 -------------------------------------------------------------------------------- billion, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2027 Capped Call Transactions discussed further in Note 7. The 2027 Notes mature onMay 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2027 Notes were not convertible as ofDecember 31, 2021 . InApril 2020 , we entered into a purchase agreement for the sale of an aggregate of$1.0 billion principal amount of the 2025 Notes. The net proceeds from the issuance of the 2025 Notes were$888.6 million , net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2025 Capped Call Transactions, discussed further in Note 7. The 2025 Notes mature onMay 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The sale price requirement for conversion was satisfied as ofDecember 31, 2021 and as a result, the 2025 Notes will continue to be eligible for optional conversion during the first quarter of 2022. InAugust 2019 , we entered into a purchase agreement for the sale of an aggregate of$1.265 billion principal amount of the 2026 Notes. The net proceeds from the issuance of the 2026 Notes were$1.15 billion , net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2026 Capped Call Transactions, discussed further in Note 7. The 2026 Notes mature onAugust 1, 2026 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The sale price requirement for conversion was satisfied as ofDecember 31, 2021 and as a result, the 2026 Notes will continue to be eligible for optional conversion during the first quarter of 2022. InJuly 2016 , we entered into a senior unsecured revolving credit facility, or the Credit Facility, with certain lenders, some of which are affiliated with certain members of the underwriting syndicate for our Convertible Notes offerings, to fund working capital and general corporate-purpose expenditures. SinceJuly 2016 , we have amended the Credit Facility multiple times. As ofDecember 31, 2021 , the Credit Facility has a maximum borrowing amount of$1.05 billion , bears interest at LIBO plus 0.75%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility and terminates inAugust 2023 . As ofDecember 31, 2021 , no amounts were outstanding under the Credit Facility. As ofDecember 31, 2021 , we had$23.9 million in the form of outstanding standby letters of credit. We believe our existing cash balance is sufficient to fund our ongoing working capital, investing, and financing requirements for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, headcount, sales and marketing activities, research and development efforts, the introduction of new features, products, and acquisitions, and continued user engagement. We continually evaluate opportunities to issue or repurchase equity or debt securities, obtain, retire, or restructure credit facilities or financing arrangements, or declare dividends for strategic reasons or to further strengthen our financial position. As ofDecember 31, 2021 , approximately 6% of our cash, cash equivalents, and marketable securities was held outsidethe United States . These amounts were primarily held in theUnited Kingdom and are utilized to fund our foreign operations. Cash held outsidethe United States may be repatriated, subject to certain limitations, and would be available to be used to fund our domestic operations. However, repatriation of funds may result in additional tax liabilities. We believe our existing cash balance inthe United States is sufficient to fund our working capital needs.
The following table sets forth the major components of our consolidated statements of cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Net cash provided by (used in) operating
activities $ 292,880 $ (167,644 ) $ (304,958 )
Net cash provided by (used in) investing
activities 90,227 (729,864 ) (728,608 )
Net cash provided by financing activities 1,065,073 922,791 1,165,852
Change in cash, cash equivalents, and restricted cash$ 1,448,180 $ 25,283 $ 132,286 Free Cash Flow (1)$ 223,005 $ (225,476 ) $ (341,436 ) (1) For information on how we define and calculate Free Cash Flow and a
reconciliation to net cash used in operating activities to Free Cash Flow,
see "Non-GAAP Financial Measures."
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Net Cash Provided By (Used In) Operating Activities
2021 compared to 2020
Net cash provided by operating activities was$292.9 million in the year endedDecember 31, 2021 , as compared to net cash used in operations of$167.6 million in the year endedDecember 31, 2020 , resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of$1.1 billion and depreciation and amortization expense of$119.1 million , partially offset by gains on debt and equity securities, net of$289.1 million . Net cash provided by operating activities for the year endedDecember 31, 2021 was also impacted by an increase in the accounts receivable balance of$333.0 million due to an increase in revenue compared to the prior period.
Net Cash Provided By (Used In) Investing Activities
2021 compared to 2020
Net cash provided by investing activities was$90.2 million for the year endedDecember 31, 2021 , compared to net cash used in investing activities of$729.9 million for the same period in 2020. Our investing activities in the year endedDecember 31, 2021 consisted of cash provided by the sales and maturities of marketable securities of$2.9 billion , partially offset by the purchase of marketable securities of$2.4 billion and cash paid for acquisitions of$310.9 million . Net cash used in investing activities for the year endedDecember 31, 2020 consisted of cash used in the purchase of marketable securities of$3.5 billion , cash paid for acquisitions of$168.9 million , and cash used in strategic investments of$111.6 million , partially offset by the sales and maturities of marketable securities of$3.1 billion .
Net Cash Provided By Financing Activities
2021 compared to 2020
Net cash provided by financing activities was$1.1 billion and$0.9 billion for the years endedDecember 31, 2021 and 2020, respectively. Our financing activities for the year endedDecember 31, 2021 consisted primarily of net proceeds of$1.1 billion from the issuance of the 2027 Notes, offset by the purchase of the 2027 Capped Call Transactions of$86.8 million . Our financing activities for the year endedDecember 31, 2020 consisted primarily of net proceeds of$988.6 million from the issuance of the 2025 Notes, offset by the purchase of the 2025 Capped Call Transactions of$100.0 million . Net cash provided by financing activities in all periods presented includes proceeds from the exercise of stock options.
Free Cash Flow
2021 compared to 2020
Free Cash Flow was$223.0 million for the year endedDecember 31, 2021 and was composed of net cash provided by operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital. Free Cash Flow also included purchases of property and equipment of$69.9 million for the year endedDecember 31, 2021 . See "Non-GAAP Financial Measures." Free Cash Flow was$(225.5) million for the year endedDecember 31, 2020 and was composed of net cash used in operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital. Free Cash Flow also included purchases of property and equipment of$57.8 million for the year endedDecember 31, 2020 . See "Non-GAAP Financial Measures."
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and
presented in accordance with GAAP, we use certain non-GAAP financial measures,
as described below, to understand and evaluate our core operating performance.
These non-GAAP financial measures, which may be different than similarly titled
measures used by other companies, are presented to enhance investors' overall
understanding of our financial performance and should not be considered a
substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP.
We use the non-GAAP financial measure of Free Cash Flow, which is defined as net
cash provided by (used in) operating activities, reduced by purchases of
property and equipment. We believe Free Cash Flow is an important liquidity
measure of the cash that is available, after capital expenditures, for
operational expenses and investment in our business and is a key financial
indicator used by management. Additionally, we believe that Free Cash Flow is an
important measure since we use
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third-party infrastructure partners to host our services and therefore we do not
incur significant capital expenditures to support revenue generating activities.
Free Cash Flow is useful to investors as a liquidity measure because it measures
our ability to generate or use cash. Once our business needs and obligations are
met, cash can be used to maintain a strong balance sheet and invest in future
growth.
We use the non-GAAP financial measure of Adjusted EBITDA, which is defined as
net income (loss); excluding interest income; interest expense; other income
(expense), net; income tax benefit (expense); depreciation and amortization;
stock-based compensation expense; and payroll and other tax expense related to
stock-based compensation; and certain other non-cash or non-recurring items
impacting net income (loss) from time to time. We believe that Adjusted EBITDA
helps identify underlying trends in our business that could otherwise be masked
by the effect of the expenses that we exclude in Adjusted EBITDA.
We believe that both Free Cash Flow and Adjusted EBITDA provide useful
information about our financial performance, enhance the overall understanding
of our past performance and future prospects, and allow for greater transparency
with respect to key metrics used by our management for financial and operational
decision-making. We are presenting the non-GAAP measures of Free Cash Flow and
Adjusted EBITDA to assist investors in seeing our financial performance through
the eyes of management, and because we believe that these measures provide an
additional tool for investors to use in comparing our core financial performance
over multiple periods with other companies in our industry.
These non-GAAP financial measures should not be considered in isolation from, or
as substitutes for, financial information prepared in accordance with GAAP.
There are a number of limitations related to the use of these non-GAAP financial
measures compared to the closest comparable GAAP measure. Some of these
limitations are that:
• Free Cash Flow does not reflect our future contractual commitments.
• Adjusted EBITDA excludes certain recurring, non-cash charges such as
depreciation of fixed assets and amortization of acquired intangible assets
and, although these are non-cash charges, the assets being depreciated and
amortized may have to be replaced in the future;
• Adjusted EBITDA excludes stock-based compensation expense and payroll and
other tax expense related to stock-based compensation, which have been, and
will continue to be for the foreseeable future, significant recurring
expenses in our business and an important part of our compensation strategy;
and
• Adjusted EBITDA excludes income tax expense.
The following table presents a reconciliation of Free Cash Flow to net cash used
in operating activities, the most comparable GAAP financial measure, for each of
the periods presented:
Year Ended December 31,
2021 2020 2019
(in thousands)
Free Cash Flow reconciliation:
Net cash provided by (used in)
operating activities $ 292,880 $ (167,644 ) $ (304,958 )
Less:
Purchases of property and equipment (69,875 ) (57,832 ) (36,478 )
Free Cash Flow $ 223,005 $ (225,476 ) $ (341,436 )
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The following table presents a reconciliation of Adjusted EBITDA to net loss,
the most comparable GAAP financial measure, for each of the periods presented:
Year Ended December 31,
2021 2020 2019
(in thousands)
Adjusted EBITDA reconciliation:
Net loss (487,955 ) (944,839 ) (1,033,660 )
Add (deduct):
Interest income (5,199 ) (18,127 ) (36,042 )
Interest expense 17,676 97,228 24,994
Other (income) expense, net (240,175 ) (14,988 ) (59,013 )
Income tax (benefit) expense 13,584 18,654 393
Depreciation and amortization 119,141 86,744 87,245
Stock-based compensation expense 1,092,135 770,182 686,013
Payroll and other tax expense related 107,479 50,309
27,840
to stock-based compensation Securities class actions legal - - 100,000 charges(1) Adjusted EBITDA$ 616,686 $ 45,163 $ (202,230 ) Securities class actions legal charges in the fourth quarter of 2019 were related to a preliminary agreement to settle the securities class actions that arose following our initial public offering in 2017. The preliminary settlement agreement was signed inJanuary 2020 and provided for a resolution of all of the pending claims in the stockholder class actions for$187.5 million . We recorded legal settlement expense, net of amounts directly covered by insurance, of$100.0 million . These charges are non-recurring and not reflective of underlying trends in our business. Contingencies We are involved in claims, lawsuits, tax matters, government investigations, and proceedings arising in the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. We also disclose material contingencies when we believe that a loss is not probable but reasonably possible. Significant judgment is required to determine both probability and the estimated amount. Such claims, suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Many of these legal and tax contingencies can take years to resolve. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
Commitments
We have non-cancelable contractual agreements primarily related to the hosting of our data storage processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments. We had$2.7 billion in commitments, as ofDecember 31, 2021 , primarily due within three years. 60 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with GAAP. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our consolidated financial statements are described below. Revenue Recognition Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine collectability by performing ongoing credit evaluations and monitoring customer accounts receivable balances. Sales tax, including value added tax, is excluded from reported revenue. We determine revenue recognition by first identifying the contract or contracts with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when, or as, we satisfy a performance obligation. We generate substantially all of our revenues by offering various advertising products onSnapchat , which include Snap Ads and AR Ads, referred to as advertising revenue. AR Ads include Sponsored Filters and Sponsored Lenses. Sponsored Filters allow users to interact with an advertiser's brand by enabling stylized brand artwork to be overlaid on a Snap. Sponsored Lenses allow users to interact with an advertiser's brand by enabling branded augmented reality experiences. The substantial majority of advertising revenue is generated from the display of advertisements onSnapchat through contractual agreements that are either on a fixed fee basis over a period of time or based on the number of advertising impressions delivered. Revenue related to agreements based on the number of impressions delivered is recognized when the advertisement is displayed. Revenue related to fixed fee arrangements is recognized ratably over the service period, typically less than 30 days in duration, and such arrangements do not contain minimum impression guarantees. In arrangements where another party is involved in providing specified services to a customer, we evaluate whether we are the principal or agent. In this evaluation, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. For advertising revenue arrangements where we are not the principal, we recognize revenue on a net basis. For the periods presented, revenue for arrangements where we are the agent was not material.
Stock-Based Compensation
In the year endedDecember 31, 2021 , total stock-based compensation expense recognized was$1.1 billion . We have granted stock-based awards consisting primarily of restricted stock units, or RSUs, restricted stock awards, or RSAs, and to a lesser extent, stock options to employees, members of our board of directors, and non-employee advisors. The substantial majority of our stock-based awards have been made to employees. RSUs vest and RSAs lapse to a forfeiture condition on the satisfaction of service conditions. The service conditions for RSUs and RSAs granted prior toFebruary 2018 is generally satisfied over four years, 10% after the first year of service, 20% over the second year, 30% over the third year, and 40% over the fourth year. The service condition for RSUs and RSAs granted afterFebruary 2018 is generally satisfied in equal monthly or quarterly installments over three or four years. We account for stock-based employee compensation under the fair value recognition and measurement provisions, in accordance with applicable accounting standards, which requires stock-based awards to be measured based on the grant date fair value. Stock-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of operations. Accordingly, stock-based compensation expense is only recorded for those potential stock-based awards that we expect to vest. We estimate the forfeiture rate using historical forfeitures of equity awards and other expected changes in facts and circumstances, if any. We will re-evaluate our estimated forfeiture rate if actual forfeitures differ from our initial estimates. A modification of the terms of a stock-based award is treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value of the modification to the award. 61 --------------------------------------------------------------------------------
Restricted Stock Units and Restricted Stock Awards
As of
Business Combinations and Valuation of
We estimate the fair value of assets acquired and liabilities assumed in a business combination.Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology, useful lives, and discount rates. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Convertible Notes
Prior toJanuary 1, 2021 , we accounted for the 2025 Notes and the 2026 Notes as separate liability and equity components. On issuance, the carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole. We estimated the fair value of the liability and equity components using a convertible bond model, which includes subjective assumptions such as the expected term, expected volatility, and the interest rate of a similar non-convertible debt instrument. These assumptions involved inherent uncertainties and management judgement. EffectiveJanuary 1, 2021 , we early adopted Accounting Standards Update, or ASU, 2020-06 using the modified retrospective approach. As a result, the 2025 Notes and 2026 Notes are each accounted for as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives. Adoption of the new standard resulted in a decrease to accumulated deficit of$95.0 million , a decrease to additional paid-in capital of$664.0 million , and an increase to convertible senior notes, net of$569.0 million . Loss Contingencies We are involved in claims, lawsuits, tax matters, government investigations, and proceedings arising in the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. When there appears to be a range of possible costs with equal likelihood, a liability is recorded based on the low-end of such range. However, the likelihood of a loss is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available, the potential effect of future events, and decisions by third parties impacting the ultimate resolution of the contingency. It is also not uncommon for such matters to be resolved over multiple reporting periods. During this time, relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of potential loss. We also disclose material contingencies when we believe that a loss is reasonably possible. Significant judgment is required to determine both probability and the estimated amounts of loss contingencies. Such claims, suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change, it could have a material impact on our results of operations, financial position, and cash flows. Income Taxes
We are subject to income taxes in
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We recognize tax benefits from uncertain tax positions only if we believe that
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the
position. Although we believe that we have adequately reserved for our uncertain
tax positions, we can provide no assurance that the final tax outcome of these
matters will not be materially different. We make adjustments to these reserves
when facts and circumstances change, such as the closing of a tax audit or the
refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences may affect the
provision for income taxes in the period in which such determination is made and
could have a material impact on our financial condition and results of
operations.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included in "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.
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