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 First Quarter 2023 Results
Our key user metrics and financial results for the first quarter of 2023 were as follows:
User Metrics
•Daily Active Users, or DAUs, increased 15% year-over-year to 383 million in Q1 2023.
•Average revenue per user, or ARPU, was
Financial Results
•Revenue was
•Total costs and expenses were
•Net loss was
•Diluted net loss per share was
•Adjusted EBITDA was
•Cash provided by operating activities was
•Free Cash Flow was
•Cash, cash equivalents, and marketable securities were
Business and Macroeconomic Conditions
In 2022 we realigned our priorities and we expect to continue to focus on our three strategic priorities: growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth, and investing in the future of augmented reality. We believe that we can be successful in our current operating environment, with various macroeconomic factors impacting our business, by rigorously prioritizing our investments and continuing to engage our community with our products while driving success for our advertising partners. However, the impact of this strategic reprioritization is difficult to predict. Macroeconomic factors such as labor shortages, supply chain disruptions, inflation, changes in interest and foreign currency exchange rates, banking instability, and other risks and uncertainties, including the persisting effects of the COVID-19 pandemic and the conflict inUkraine , continue to cause logistical challenges, increased input costs, and inventory constraints for our advertisers, which in turn may cause our advertisers to halt or decrease advertising spending on our platform. Such macroeconomic factors may also negatively impact, in the short-term or long-term, the global economy, advertising ecosystem, our customers and their budgets with us, user engagement, other user metrics, and our business, financial condition, and results of operations. In addition, competition for advertising dollars has increased and demand growth on our advertising platform has slowed. We expect to continue to experience increased competition, which may result in reduced advertising demand, and could adversely affect our revenue growth, pricing, business, financial condition, and results of operations. Demand has also been disrupted by recent changes we made to our advertising platform, and, in the future, we may continue to experience adverse impacts to our revenue growth as a result of these changes. 24
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Our revenue, particularly inNorth America , has further been impacted by platform policy changes and restrictions that affected our targeting, measurement, and optimization capabilities, and in turn our ability to measure the effectiveness of advertisements on our services. This has resulted in, and in the future is likely to continue to result in, reduced advertising revenue, especially if we are unable to mitigate these developments. We compete with other companies in every aspect of our business. We must compete effectively for users and advertisers to grow our business and increase our revenue. These and other risks and uncertainties are further described in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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 383 million DAUs on average in the first quarter of 2023, an increase of 51 million, or 15%, from the first quarter of 2022. Quarterly Average Daily Active Users (in millions) Global [[Image Removed: 549755816458]] YOY growth: 20% 17% 18% 22% 22% 23% 23% 20% 18% 18% 19% 17% 15% 25
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North America (1) Europe (2)
[[Image Removed: 549755816464]][[Image Removed: 549755816465]]
YOY growth: 10% 9% 7% 6% 5% 6% 7% 6% 5% 4% 4% 3% 3% 14% 12% 10% 10% 9% 10% 11% 11% 10% 10% 11% 12% 10%
(1)
Rest of World
[[Image Removed: 549755817157]]
YOY growth: 45 % 37 % 43 % 55 % 57 % 55 % 49 % 41 % 36 % 35 % 34 % 31 % 27 %
Monetization
We recorded revenue of $988.6 million for the three months ended March 31, 2023 ,
compared to revenue of $1,062.7 million for the same period in 2022, a decrease
of 7% 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 $2.58 in the first quarter
of 2023, compared to $3.20 in the first quarter of 2022. 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.
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Quarterly Average Revenue per User
Global
[[Image Removed: 549755816935]]
North America (1) Europe (2)
[[Image Removed: 549755816939]][[Image Removed: 549755816940]]
(1)
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Rest of World
[[Image Removed: 549755816946]]
Results of Operations
The following table summarizes certain selected historical financial results:
Three Months Ended March 31,
2023 2022
(in thousands)
Revenue $ 988,608 $ 1,062,727
Operating loss $ (365,264) $ (271,527)
Net loss $ (328,674) $ (359,624)
Adjusted EBITDA (1) $ 813 $ 64,468 (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, and 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.
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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 convertible notes and commitment fees related to our revolving credit facility.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains and losses on strategic investments, marketable securities, and foreign currency transactions.
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; 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. See "Non-GAAP Financial Measures" for additional information and a reconciliation of net loss to Adjusted EBITDA. 29
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Discussion of Results of Operations
The following table sets forth our consolidated statements of operations data:
Three Months Ended March 31,
2023 2022
(in thousands)
Consolidated Statements of Operations Data:
Revenue $ 988,608 $ 1,062,727
Costs and expenses (1) (2):
Cost of revenue 439,986 420,897
Research and development 455,112 455,563
Sales and marketing 268,433 241,886
General and administrative 190,341 215,908
Total costs and expenses 1,353,872 1,334,254
Operating loss (365,264) (271,527)
Interest income 37,948 3,123
Interest expense (5,885) (5,173)
Other income (expense), net 11,372 (77,537)
Loss before income taxes (321,829) (351,114)
Income tax benefit (expense) (6,845) (8,510)
Net loss $ (328,674) $ (359,624)
Adjusted EBITDA (3) $ 813 $ 64,468 (1)Stock-based compensation expense included in the above line items:
Three Months Ended March 31,
2023 2022
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 1,885 $ 2,446
Research and development 219,850 182,866
Sales and marketing 54,939 42,071
General and administrative 38,257 48,061
Total $ 314,931 $ 275,444 (2)Depreciation and amortization expense included in the above line items:
Three Months Ended March 31,
2023 2022
(in thousands)
Depreciation and amortization expense:
Cost of revenue $ 3,226 $ 5,512
Research and development 24,139 22,123
Sales and marketing 5,073 7,392
General and administrative 2,782 3,073
Total $ 35,220 $ 38,100 (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 March 31,
2023 2022
Consolidated Statements of Operations Data:
Revenue 100 % 100 %
Costs and expenses:
Cost of revenue 45 40
Research and development 46 43
Sales and marketing 27 23
General and administrative 19 20
Total costs and expenses 137 126
Operating loss (37) (26)
Interest income 4 -
Interest expense - -
Other income (expense), net 1 (7)
Loss before income taxes (32) (33)
Income tax benefit (expense) (1) (1)
Net loss (33) % (34) %
Three Months Ended
Revenue
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Revenue $ 988,608 $ 1,062,727
Revenue as a dollar change $ (74,119)
Revenue as a percentage change (7) %
Revenue for the three months ended
Cost of Revenue
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Cost of Revenue $ 439,986 $ 420,897
Cost of Revenue as a dollar change $ 19,089
Cost of Revenue as a percentage change
5 %
Cost of revenue for the three months endedMarch 31, 2023 increased$19.1 million compared to the same period in 2022. The increase was primarily driven by the growth in revenue share due to the higher mix of revenue subject to revenue share and increased infrastructure costs attributable to DAU growth. The increase was partially offset by infrastructure cost efficiencies and lower content, advertising partner, and other costs. 31
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Research and Development Expenses
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Research and Development Expenses $ 455,112 $ 455,563
Research and Development Expenses as a dollar change $ (451)
Research and Development Expenses as a percentage change - %
Research and development expenses for the three months ended March 31, 2023
decreased $0.5 million compared to the same period in 2022. The decrease was
primarily driven by lower cash-based compensation expenses due to decreased
headcount compared to the prior period, offset by higher stock-based
compensation expenses.
Sales and Marketing Expenses
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Sales and Marketing Expenses $ 268,433 $ 241,886
Sales and Marketing Expenses as a dollar change $ 26,547
Sales and Marketing Expenses as a percentage change 11 %
Sales and marketing expenses for the three months ended March 31, 2023 increased
$26.5 million compared to the same period in 2022. The increase was primarily
driven by marketing investments and higher stock-based compensation expenses,
partially offset by lower cash-based compensation expenses due to decreased
headcount compared to the prior period.
General and Administrative Expenses
Three Months Ended March 31,
2023 2022
(dollars in thousands)
General and Administrative Expenses $ 190,341 $ 215,908
General and Administrative Expenses as a dollar change $ (25,567)
General and Administrative Expenses as a percentage change (12) %
General and administrative expenses for the three months ended March 31, 2023
decreased $25.6 million compared to the same period in 2022. The decrease was
primarily driven by lower personnel expenses due to decreased headcount,
including lower cash- and stock-based compensation expense.
Interest Income
Three Months Ended March 31,
2023 2022
(dollars in thousands)
(NM = Not Meaningful)
Interest Income $ 37,948 $ 3,123
Interest Income as a dollar change $ 34,825
Interest Income as a percentage change
NM
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Interest income for the three months endedMarch 31, 2023 increased$34.8 million compared to the same period in 2022. The increase was primarily a result of higher interest rates onU.S. government-backed securities, offset by a lower overall invested cash balance. Interest Expense Three Months Ended March 31, 2023 2022 (dollars in thousands) Interest Expense$ (5,885) $ (5,173) Interest Expense as a dollar change $
(712)
Interest Expense as a percentage change
14 %
Interest expense for the three months ended
Other Income (Expense), Net
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Other Income (Expense), Net $ 11,372 $ (77,537)
Other Income (Expense), Net as a dollar change $ 88,909
Other Income (Expense), Net as a percentage change 115 %
Other income, net for the three months ended March 31, 2023 was $11.4 million
compared to other expense, net of $77.5 million in the same period in 2022.
Other income, net for the three months ended March 31, 2023 was primarily a
result of $10.7 million total gains on publicly traded securities classified as
marketable securities and $1.1 million unrealized gains on strategic
investments. Other expense, net for the three months ended March 31, 2022 was
primarily a result of a $92.1 million unrealized loss on publicly traded
securities classified as marketable securities, offset by a $13.3 million
unrealized gain on strategic investments.
Income Tax Benefit (Expense)
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Income Tax Benefit (Expense) $ (6,845) $ (8,510)
Income Tax Benefit (Expense) as a dollar change $ 1,665
Income Tax Benefit (Expense) as a percentage change 20 %
Effective Tax Rate (2.1) % (2.4) %
Income tax expense for the three months ended March 31, 2023 was $6.8 million
compared to $8.5 million for the same period in 2022. Our effective tax rate
differs from the U.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.
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Net Loss and Adjusted EBITDA
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Net Loss $ (328,674) $ (359,624)
Net Loss as a dollar change $ 30,950
Net Loss as a percentage change 9 %
Adjusted EBITDA $ 813 $
64,468
Adjusted EBITDA as a dollar change $
(63,655)
Adjusted EBITDA as a percentage change
(99) %
Net loss for the three months endedMarch 31, 2023 was$328.7 million compared to$359.6 million for the same period in 2022. Adjusted EBITDA for the three months endedMarch 31, 2023 was$0.8 million compared to$64.5 million for the same period in 2022. The decrease in Adjusted EBITDA was attributable to decreased revenues and increased cost of revenue and sales and marketing expenses, partially offset by decreased research and development expenses and general and administrative expenses.
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$4.1 billion as ofMarch 31, 2023 , 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. Deferred purchase consideration of$238.4 million for our 2021 acquisition ofWave Optics Limited is due inMay 2023 and is included in accrued expenses and other current liabilities on our consolidated balance sheets. The payment is due in either cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election. We currently intend to make this payment in cash. InMay 2022 , we entered into a five-year senior unsecured revolving credit facility, or Credit Facility, with certain lenders that allows us to borrow up to$1.05 billion to fund working capital and general corporate-purpose expenditures. Loans bear interest, at our option, at a rate equal to (i) a term secured overnight financing rate, or SOFR, plus 0.75% or the base rate, if selected by us, for loans made inU.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) theWall 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 ofMarch 31, 2023 , we had$32.1 million in the form of outstanding standby letters of credit, with no amounts outstanding under the Credit Facility. InFebruary 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 onMarch 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 ofMarch 31, 2023 and as a result, the 2028 Notes will not be eligible for optional conversion during the second quarter of 2023. 34
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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 ofMarch 31, 2023 and as a result, the 2027 Notes will not be eligible for optional conversion during the second quarter of 2023. 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 ofMarch 31, 2023 and as a result, the 2025 Notes will not be eligible for optional conversion during the second quarter of 2023. 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 ofMarch 31, 2023 and as a result, the 2026 Notes will not be eligible for optional conversion during the second quarter of 2023. 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 ofMarch 31, 2023 , approximately 5% 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:
Three Months Ended
2023 2022
(in thousands)
Net cash provided by (used in) operating activities $ 151,102 $ 127,459
Net cash provided by (used in) investing activities 5,838 (1,017,665)
Net cash provided by (used in) financing activities (1,999) 1,308,766
Change in cash, cash equivalents, and restricted cash $ 154,941 $ 418,560
Free Cash Flow (1) $ 103,472 $ 106,284 (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."
Three Months Ended
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was$151.1 million for the three months endedMarch 31, 2023 , compared to$127.5 million for the same period in 2022, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of$314.9 million . Net cash provided by operating activities for the three months endedMarch 31, 2023 was also driven by a decrease in the accounts receivable balance of$288.4 million due to 35
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higher collections and a reduction in billings in the period, partially offset by a$90.2 million decrease in accrued expenses and other current liabilities, primarily due to the timing of payments.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was$5.8 million for the three months endedMarch 31, 2023 , compared to net cash used in investing activities of$1.0 billion for the same period in 2022. Our investing activities for the three months endedMarch 31, 2023 primarily consisted of maturities of marketable securities of$924.3 million , partially offset by purchases of marketable securities of$874.1 million . Net cash used in investing activities for the three months endedMarch 31, 2022 consisted mainly of the purchase of marketable securities of$1.3 billion , partially offset by maturities of marketable securities of$342.5 million .
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was$2.0 million for the three months endedMarch 31, 2023 compared to net cash provided by financing activities of$1.3 billion for the same period in 2022. Our financing activities for the three months endedMarch 31, 2023 were not material. Our financing activities for the three months endedMarch 31, 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 .
Free Cash Flow
Free Cash Flow was$103.5 million for the three months endedMarch 31, 2023 , compared to$106.3 million for the same period in 2022, and was composed of net cash provided by (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$47.6 million for the three months endedMarch 31, 2023 compared to$21.2 million for the same period in 2022. 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; 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 benefit (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 March 31,
2023 2022
(in thousands)
Free Cash Flow reconciliation:
Net cash provided by (used in) operating activities $ 151,102 $ 127,459
Less:
Purchases of property and equipment (47,630) (21,175)
Free Cash Flow $ 103,472 $ 106,284
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 March 31,
2023 2022
(in thousands)
Adjusted EBITDA reconciliation:
Net loss $ (328,674) $ (359,624)
Add (deduct):
Interest income (37,948) (3,123)
Interest expense 5,885 5,173
Other (income) expense, net (11,372) 77,537
Income tax (benefit) expense 6,845 8,510
Depreciation and amortization 35,220 38,100
Stock-based compensation expense 314,931 275,444
Payroll and other tax expense related to stock-based compensation 15,926 22,451
Adjusted EBITDA $ 813 $ 64,468
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
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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$3.5 billion in commitments, as ofMarch 31, 2023 , 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.
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