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 Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report. 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 Quarterly Report on Form 10-Q, particularly in "Risk Factors," "Note Regarding Forward-Looking Statements," and "Note Regarding User Metrics and Other Data."
Overview of Second Quarter 2022 Results
Our key user metrics and financial results for the second quarter of 2022 were as follows:
User Metrics
• Daily Active Users, or DAUs, increased 18% year-over-year to 347 million in
Q2 2022.
• Average revenue per user, or ARPU, decreased 4% year-over-year to
Q2 2022.
Financial Results
• Revenue increased 13% year-over-year to
• Total costs and expenses, excluding stock-based compensation and other
payroll related tax expense, increased 32% to $1,183.0 million in Q2 2022.
• Net loss was $422.1 million in Q2 2022, compared to $151.7 million in Q22021.
• Diluted net loss per share was
2021.
• Adjusted EBITDA was
Q2 2021.
• Cash used in operating activities was
• Free Cash Flow was
in Q2 2021.
• Cash, cash equivalents, and marketable securities were
June 30, 2022 . 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 347 million DAUs on average in the second quarter of 2022, an increase of 54 million, or 18%, from the second quarter of 2021. Quarterly Average Daily Active Users (in millions) [[Image Removed]] [[Image Removed]]
(1)
(2)
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--------------------------------------------------------------------------------Monetization
We recorded revenue of$1,110.9 million for the three months endedJune 30, 2022 , compared to revenue of$982.1 million for the same period in 2021, an increase of 13% 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're monetizing our daily user base. ARPU was$3.20 in the second quarter of 2022, down from$3.35 in the second quarter of 2021. 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)
(2)
advertising sales to Russian and Belarusian entities.
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--------------------------------------------------------------------------------Results of Operations
The following table summarizes certain selected historical financial results:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Revenue $ 1,110,909 $ 982,108 $ 2,173,636 $ 1,751,692
Operating loss (400,940 ) (192,512 ) (672,467 ) (496,118 )
Net loss (422,067 ) (151,664 ) (781,691 ) (438,546 )
Adjusted EBITDA(1) 7,190 117,403 71,658 115,694
(1) For information on how we define and calculate Adjusted EBITDA, and a
reconciliation of net loss to Adjusted EBITDA, see "Non-GAAP Financial
Measures."
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 sales of hardware products. This revenue is reported net of allowances for returns.
Cost of Revenue
Cost of revenue consists 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 and 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.
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Interest Expense
Interest expense consists primarily of interest expense associated with 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 losses 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 inthe 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 other payroll related tax expense; 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. 32 --------------------------------------------------------------------------------
Discussion of Results of Operations
The following table sets forth our consolidated statements of operations data:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Consolidated Statements of Operations Data:
Revenue $ 1,110,909 $ 982,108 $ 2,173,636 $ 1,751,692
Costs and expenses(1) (2):
Cost of revenue 446,377 445,021 867,274 857,622
Research and development 505,037 370,671 960,600 719,251
Sales and marketing 311,374 179,724 553,260 330,010
General and administrative 249,061 179,204 464,969 340,927
Total costs and expenses 1,511,849 1,174,620 2,846,103 2,247,810
Operating loss (400,940 ) (192,512 ) (672,467 ) (496,118 )
Interest income 8,331 1,251 11,454 2,388
Interest expense (5,549 ) (4,564 ) (10,722 ) (9,595 )
Other income (expense), net (16,910 ) 42,282 (94,447 ) 64,340
Loss before income taxes (415,068 ) (153,543 ) (766,182 ) (438,985 )
Income tax benefit (expense) (6,999 ) 1,879 (15,509 ) 439
Net loss $ (422,067 ) $ (151,664 ) $ (781,691 ) $ (438,546 )
Adjusted EBITDA(3) $ 7,190 $ 117,403 $ 71,658 $ 115,694 (1) Stock-based compensation expense included in the above line items:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Stock-based compensation expense:
Cost of revenue $ 2,849 $ 2,847 $ 5,295 $ 5,503
Research and development 221,650 174,491 404,516 338,284
Sales and marketing 48,577 37,491 90,648 66,575
General and administrative 45,734 41,771 93,795 83,311
Total $ 318,810 $ 256,600 $ 594,254 $ 493,673 (2) Depreciation and amortization expense included in the above line items:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Depreciation and amortization expense:
Cost of revenue $ 5,061 $ 4,727 $ 10,573 $ 10,003
Research and development 22,362 14,358 44,485 25,394
Sales and marketing 49,061 5,162 56,453 8,348
General and administrative 2,807 4,023 5,880 8,023
Total $ 79,291 $ 28,270 $ 117,391 $ 51,768 (3) See "Non-GAAP Financial Measures" 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.
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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:
Three Months Ended June 30 ,
Six Months Ended
2022 2021 2022 2021
Consolidated Statements of
Operations Data:
Revenue 100 % 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 40 45 40 49
Research and development 45 38 44 41
Sales and marketing 28 18 25 19
General and administrative 22 18 21 19
Total costs and expenses 136 120 131 128
Operating loss (36 ) (20 ) (31 ) (28 )
Interest income 1 - 1 -
Interest expense - - - (1 )
Other income (expense), net (2 ) 4 (4 ) 4
Loss before income taxes (37 ) (16 ) (35 ) (25 )
Income tax benefit (expense) (1 ) - (1 ) -
Net loss (38 )% (16 )% (36 )% (25 )%
For Three and Six Months Ended
Revenue
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Revenue $ 1,110,909 $ 982,108 $ 2,173,636 $ 1,751,692
Revenue as a dollar change $ 128,801 $ 421,944
Revenue as a percentage change 13 % 24 %
Revenue for the three and six months ended
Cost of Revenue
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Cost of Revenue $ 446,377 $ 445,021 $ 867,274 $ 857,622
Cost of Revenue as a dollar change $ 1,356 $ 9,652
Cost of Revenue as a percentage change 0 % 1 %
Cost of revenue for the three and six months ended June 30, 2022 increased $1.4
million and $9.7 million compared to the same periods in 2021. The changes were
primarily driven by the growth in revenue share due to the overall increase in
revenue and higher mix of revenue subject to revenue share, increased
infrastructure costs attributable to DAU growth net of infrastructure cost
efficiencies and content review costs across the platform, offset by lower
content costs.
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Research and Development Expenses
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Research and Development Expenses $ 505,037 $ 370,671 $ 960,600 $ 719,251
Research and Development Expenses as a $ 134,366 $ 241,349
dollar change
Research and Development Expenses as a 36 % 34 %
percentage change
Research and development expenses for the three and six months ended June 30,
2022 increased $134.4 million and $241.3 million compared to the same periods in
2021. The increases were primarily driven by higher personnel expenses due to
growth in research and development headcount, including increased cash- and
stock-based compensation expenses.
Sales and Marketing Expenses
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Sales and Marketing Expenses $ 311,374 $ 179,724 $ 553,260 $ 330,010
Sales and Marketing Expenses as a dollar $ 131,650 $ 223,250 change
Sales and Marketing Expenses as a 73 % 68 % percentage change Sales and marketing expenses for the three and six months endedJune 30, 2022 increased$131.7 million and$223.3 million compared to the same periods in 2021. The increases were primarily driven by higher personnel expenses due to growth in sales and marketing headcount, including increased cash- and stock-based compensation expense, and marketing investments. These increases were also due to higher amortization expense, which resulted from our revision of the useful lives of certain customer relationships and trademarks.
General and Administrative Expenses
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
General and Administrative Expenses $ 249,061 $ 179,204 $ 464,969 $ 340,927
General and Administrative Expenses as a $ 69,857 $ 124,042
dollar change
General and Administrative Expenses as a 39 % 36 %
percentage change
General and administrative expenses for the three and six months endedJune 30, 2022 increased$69.9 million and$124.0 million compared to the same periods in 2021. These increases were primarily driven by higher personnel expenses due to growth in headcount, including increased cash- and stock-based compensation expense, as well as an increase in other administrative expenses. Interest Income Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (dollars in thousands) Interest Income$ 8,331 $ 1,251 $ 11,454 $ 2,388 Interest Income as a dollar change$ 7,080 $ 9,066 Interest Income as a percentage change 566 % 380 % Interest income for the three and six months endedJune 30, 2022 increased$7.1 million and$9.1 million compared to the same periods in 2021. The increases were primarily a result of higher interest rates onU.S. government-backed securities and a higher overall invested cash balance. 35
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Interest Expense
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars in thousands)
Interest Expense $ (5,549 ) $ (4,564 ) $ (10,722 ) $ (9,595 )
Interest Expense as a dollar change $ (985 ) $ (1,127 )
Interest Expense as a percentage change 22 % 12 %
Interest expense for the three and six months ended June 30, 2022 increased $1.0
million and $1.1 million compared to the same periods in 2021, primarily due to
the increases in amortization of debt issuance costs, partially offset by lower
contractual interest expense.
Other Income (Expense), Net
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars inthousands)
Other Income (Expense), Net$ (16,910 ) $ 42,282 $ (94,447 ) $ 64,340 Other Income (Expense), Net as a$ (59,192 ) $ (158,787 ) dollar change Other Income (Expense), Net as a (140 )% (247 )%
percentage change
Other expense, net for the three and six months endedJune 30, 2022 was$16.9 million and$94.4 million compared to other income, net of$42.3 million and$64.3 million in the same periods in 2021. Other expense, net for the three months endedJune 30, 2022 was primarily a result of a$63.9 million unrealized loss on publicly traded securities classified as marketable securities, offset by a$6.4 million unrealized gain and$45.9 million realized gain on strategic investments. Other income, net for the three months endedJune 30, 2021 was primarily a result of a$52.1 million unrealized gain and a$27.8 million realized gain on strategic investments offset by induced conversion expense related to the Convertible Notes. Other expense, net for the six months endedJune 30, 2022 was primarily a result of$156.0 million unrealized loss on publicly traded securities classified as marketable securities, offset by a$19.7 million unrealized gain and a$45.9 million realized gain on strategic investments. Other income, net for the six months endedJune 30, 2021 was primarily a result of a$75.4 million unrealized gain and a$27.8 million realized gain on strategic investments offset by induced conversion expense related to the Convertible Notes.
Income Tax Benefit (Expense)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars inthousands)
Income Tax Benefit (Expense)$ (6,999 ) $ 1,879 $ (15,509 ) $ 439 Income Tax Benefit (Expense) as a$ (8,878 ) $ (15,948 ) dollar change Income Tax Benefit (Expense) as a (472 )% (3633 )% percentage change Effective Tax Rate (1.7 )% 1.2 % (2.0 )% 0.1 % 36
-------------------------------------------------------------------------------- Income tax expense for the three and six months endedJune 30, 2022 was$7.0 million and$15.5 million , respectively, compared to an income tax benefit of$1.9 million and$0.4 million , respectively, for the same periods in 2021. This change was primarily attributable to the partial valuation allowance releases on our deferred tax assets in the prior period due to deferred tax liabilities acquired in business acquisitions. Our effective tax rate differs from theU.S. statutory tax rate primarily due to valuation allowances on our deferred tax assets as it is more likely than not that some or all of the deferred tax assets will not be realized. Net Loss and Adjusted EBITDA Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (dollars in thousands) Net Loss$ (422,067 ) $ (151,664 ) $ (781,691 ) $ (438,546 ) Net Loss as a dollar change$ (270,403 ) $ (343,145 ) Net Loss as a percentage change (178 )% (78 )% Adjusted EBITDA$ 7,190 $ 117,403 $ 71,658 $ 115,694 Adjusted EBITDA as a dollar change$ (110,213 ) $ (44,036 ) Adjusted EBITDA as a percentage change 94 % 38 % Net loss for the three and six months endedJune 30, 2022 was$422.1 million and$781.7 million , respectively, compared to$151.7 million and$438.5 million , respectively, for the same periods in 2021. Adjusted EBITDA for the three and six months endedJune 30, 2022 was$7.2 million and$71.7 million , respectively, compared to$117.4 million and$115.7 million , respectively, for the same periods in 2021. These decreases in Adjusted EBITDA were driven by increased overall operating expenses, partially offset by higher revenue, stock-based compensation expense, depreciation and amortization, and other (income) expense, net.
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."
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 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.
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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 provided by (used in) operating activities, the most comparable GAAP financial measure, for each of the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars inthousands)
Free Cash Flow reconciliation: Net cash provided by (used in) operating activities$ (124,081 ) $ (101,086 ) $ 3,378 $ 35,800 Less: Purchases of property and equipment (23,370 ) (14,623 ) (44,545 ) (25,474 ) Free Cash Flow$ (147,451 ) $ (115,709 ) $ (41,167 ) $ 10,326 The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (dollars in thousands) Adjusted EBITDA reconciliation: Net loss$ (422,067 ) $ (151,664 ) $ (781,691 ) $ (438,546 ) Add (deduct): Interest income (8,331 ) (1,251 ) (11,454 ) (2,388 ) Interest expense 5,549 4,564 10,722 9,595 Other (income) expense, net 16,910 (42,282 ) 94,447 (64,340 ) Income tax expense (benefit) 6,999 (1,879 ) 15,509 (439 ) Depreciation and amortization 79,291 28,270 117,391 51,768 Stock-based compensation expense 318,810 256,600 594,254 493,673 Payroll and other tax expense related to stock-based compensation 10,029 25,045 32,480 66,371 Adjusted EBITDA$ 7,190 $ 117,403 $ 71,658 $ 115,694
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities were$4.9 billion as ofJune 30, 2022 , 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
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prior revolving credit facility entered into in July 2016 (as amended) was
terminated concurrently with the entry into the Credit Facility. Loans bear
interest, at our option, at a rate equal to (i) a term secured overnight
financing rate ("SOFR") plus 0.75% or the base rate, if selected by us, for
loans made in U.S. dollars, (ii) the Sterling overnight index average plus
0.7826% for loans made in Sterling, and (iii) foreign indices as stated in the
credit agreement plus 0.75% for loans made in other permitted foreign
currencies. The base rate is defined as the greatest of (i) the Wall Street
Journal prime rate, (ii) the greater of the (a) federal funds rate and (b) the
overnight bank funding rate, plus 0.50%, and (iii) the applicable SOFR for a
period of one month (but not less than zero) plus 1.00. The Credit Facility also
contains an annual commitment fee of 0.10% on the daily undrawn balance of the
facility. As of June 30, 2022 , we had $26.6 million in the form of outstanding
standby letters of credit, with no amounts outstanding under the Credit
Facility.
In February 2022 , we entered into a purchase agreement for the sale of an
aggregate of $1.5 billion principal amount of convertible senior notes due in
2028. The net proceeds from the issuance of the 2028 Notes were $1.31 billion ,
net of debt issuance costs and the 2028 Capped Call Transactions discussed
further in Note 7. The 2028 Notes mature on March 1, 2028 unless repurchased,
redeemed, or converted in accordance with their terms prior to such date. The
sale price requirement for conversion was not satisfied as of June 30, 2022 and
as a result, the 2028 Notes will not be eligible for optional conversion during
the third quarter of 2022.
In 2021, we entered into the Exchange Agreements with certain holders of the
2025 Notes and the 2026 Notes pursuant to which we exchanged approximately
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. The net proceeds from the issuance of the 2027 Notes were$1.05 billion , net of debt issuance costs and 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 sale price requirement for conversion was not satisfied as ofJune 30, 2022 and as a result, the 2027 Notes will not be eligible for optional conversion during the third quarter of 2022. InApril 2020 , we entered into a purchase agreement for the sale of an aggregate of$1.0 billion principal amount of convertible senior notes due in 2025. The net proceeds from the issuance of the 2025 Notes were$888.6 million , net of debt issuance costs and 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 not satisfied as ofJune 30, 2022 and as a result, the 2025 Notes will not be eligible for optional conversion during the third quarter of 2022. InAugust 2019 , we entered into a purchase agreement for the sale of an aggregate of$1.265 billion principal amount of convertible senior notes due in 2026. The net proceeds from the issuance of the 2026 Notes were$1.15 billion , net of debt issuance costs and 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 not satisfied as ofJune 30, 2022 and as a result, the 2026 Notes will not be eligible for optional conversion during the third quarter of 2022. 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 ofJune 30, 2022 , approximately 7% 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. 39
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The following table sets forth the major components of our consolidated statements of cash flows for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(dollars inthousands)
Net cash provided by (used in) operating activities$ (124,081 ) $ (101,086 ) $ 3,378 $ 35,800 Net cash provided by (used in) investing activities 11,439 131,869 (1,006,226 ) 412,424 Net cash provided by (used in) financing activities (1,618 ) 1,053,659 1,307,148 1,058,112 Change in cash, cash equivalents, and restricted cash$ (114,260 ) $ 1,084,442 $ 304,300 $ 1,506,336 Free Cash Flow (1)$ (147,451 ) $ (115,709 ) $ (41,167 ) $ 10,326
(1) For information on how we define and calculate Free Cash Flow and a
reconciliation to net cash provided by (used in) operating activities to Free
Cash Flow, see "Non-GAAP Financial Measures."
For Three and Six Months Ended
Net Cash Provided by (Used in) Operating Activities
Net cash used in operating activities was$124.1 million in the three months endedJune 30, 2022 , as compared to net cash used in operations of$101.1 million in the three months endedJune 30, 2021 , resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of$318.8 million , depreciation and amortization expense of$79.3 million and losses on debt and equity securities, net of$12.2 million . Net cash used in operating activities for the three months endedJune 30, 2022 was also driven by an increase in the accounts receivable balance of$81.0 million due to an increase in revenue in the period and a$14.4 million decrease in accrued expenses and other current liabilities, primarily due to the timing of payments. Net cash provided by operating activities was$3.4 million in the six months endedJune 30, 2022 , as compared to net cash provided by operating activities of$35.8 million in the six months endedJune 30, 2021 , resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of$594.3 million , depreciation and amortization expense of$117.4 million and losses on debt and equity securities, net of$91.3 million .
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was$11.4 million for the three months endedJune 30, 2022 , compared to net cash provided by investing activities of$131.9 million for the same period in 2021. Our investing activities in the three months endedJune 30, 2022 primarily consisted of maturities of marketable securities of$544.0 million and sales of strategic investments of$63.3 million , partially offset by purchases of marketable securities of$568.1 million . Net cash provided by investing activities for the three months endedJune 30, 2021 consisted of cash provided by sales and maturities of marketable securities of$936.4 million , partially offset by purchases of marketable securities of$764.4 million . Net cash used in investing activities was$1.0 billion for the six months endedJune 30, 2022 , compared to net cash provided by investing activities of$412.4 million for the same period in 2021. Our investing activities in the six months endedJune 30, 2022 consisted mainly of purchases of marketable securities of$1.9 billion , partially offset by maturities of marketable securities of$896.6 million . Net cash provided by investing activities for the six months endedJune 30, 2021 consisted of cash provided by sales and maturities of marketable securities of$1.9 billion , partially offset by purchases of marketable securities of$1.3 billion and cash paid for acquisitions of$139.2 million .
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was$1.6 million for the three months endedJune 30, 2022 and net cash provided by financing activities was$1.3 billion for the six months endedJune 30, 2022 , compared to net cash provided by financing activities of$1.1 billion and$1.1 billion for the same periods in 2021, respectively. Our financing activities for the three months endedJune 30, 2022 were not material. Our financing activities for the six months endedJune 30, 2022 consisted primarily of net proceeds of$1.5 billion from the issuance of the 2028 Notes, offset by the purchase of the 2028 Capped Call Transactions of$177.0 million . Our financing activities for the three and six months endedJune 30, 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 .
Free Cash Flow
40
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Free Cash Flow was $(147.5) million and $(41.2) million for the three and six
months ended June 30, 2022 , respectively, compared to ($115.7) million and $10.3
million for the three and six months ended June 30, 2021 , respectively. Free
Cash Flow in all periods was composed of net cash provided by (used in)
operating activities, resulting primarily from net loss, adjusted for non-cash
items as well as changes in working capital and other operating assets and
liabilities. Free Cash Flow also included purchases of property and equipment of
$23.4 million and $44.5 million for the three and six months ended June 30,
2022 , respectively, compared to $14.6 million and $25.5 million for the three
and six months ended June 30, 2021 , respectively. See "Non-GAAP Financial
Measures."
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 processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments. We had$4.2 billion in commitments, as ofJune 30, 2022 , primarily due within three years. For additional discussion on our leases see Note 9 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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 revenue recognition, stock-based compensation, business combinations and valuation of goodwill and other acquired intangible assets, loss contingencies, and income taxes.
There have been no material changes to our critical accounting policies and estimates as described in our Annual Report.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.
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