TWITTER, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1 "Financial Statements" in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q.
Highlights of Quarterly Results
Revenue for the three months ended
•Advertising revenue totaled
•Subscription and other revenue totaled
•U.S. revenue totaled
•International revenue totaled
•Total ad engagements increased 7% year over year.
•Cost per engagement decreased 5% year over year.
Average monetizable daily active usage (mDAU)(1) for the three months ended
Loss from operations was$343.8 million , or 29% of total revenue, for the three months endedJune 30, 2022 , compared to income from operations of$30.3 million , or 3% of total revenue, for the three months endedJune 30, 2021 .
Net loss was
Cash, cash equivalents and short-term investments in marketable securities
totaled
(1) In March of 2019, we launched a feature that allowed people to link multiple separate accounts together in order to conveniently switch between accounts. An error was made at that time, such that actions taken via the primary account resulted in all linked accounts being counted as mDAU. This resulted in an overstatement of mDAU from the first quarter of 2019 through the fourth quarter of 2021. See the section titled, "mDAU Recast" in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2022 filed onMay 2, 2022 for more information. 34
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Pending Merger
OnApril 25, 2022 , we entered into an agreement and plan of merger (the Merger Agreement) withX Holdings I, Inc. (Parent),X Holdings II, Inc. (Acquisition Sub), and, solely for the purpose of certain provisions of the Merger Agreement,Elon Musk . Parent and Acquisition Sub are affiliates ofElon Musk . The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Acquisition Sub will merge with and into Twitter (the Merger), with Twitter surviving the Merger and becoming a wholly owned subsidiary of Parent. Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock (subject to certain exceptions set forth in the Merger Agreement) will be canceled and converted into the right to receive$54.20 in cash, without interest. The Merger Agreement contains certain termination rights for Twitter and Parent. Upon termination of the Merger Agreement under specified limited circumstances, we will be required to pay Parent a termination fee of$1.0 billion . Specifically, this termination fee is payable by us to Parent if (1) we terminate the Merger Agreement in order to be able to enter into a definitive agreement for a competing acquisition proposal that constitutes a Superior Proposal (as defined in the Merger Agreement); or (2) Parent terminates the Merger Agreement because our board of directors recommends that our stockholders vote against the adoption of the Merger Agreement or in favor of any competing acquisition proposal. This termination fee will also be payable by us to Parent in the event that (1) a competing acquisition proposal for 50% or more of our stock or consolidated assets has been publicly announced and not withdrawn, (2) the Merger Agreement is terminated because our stockholders fail to adopt the Merger Agreement or because we materially breach the Merger Agreement, and (3) within twelve months of such termination of the Merger Agreement, we enter into a definitive agreement providing for a competing acquisition proposal for 50% or more of our stock or consolidated assets and such acquisition is subsequently consummated. Upon termination of the Merger Agreement under other specified limited circumstances, Parent will be required to pay us a termination fee of$1.0 billion . Specifically, this termination fee is payable by Parent to us if the Merger Agreement is terminated by us because (1) Parent and Acquisition Sub failed to consummate the Merger as required pursuant to, and in the circumstances specified in, and subject to the terms of, the Merger Agreement while Twitter stood ready, willing and able to consummate the Merger and the other transactions contemplated by the Merger Agreement; or (2) Parent, Acquisition Sub orMr. Musk breaches its or his representations, warranties or covenants in a manner that would cause the related closing conditions to not be satisfied.Mr. Musk has provided Twitter with a limited guarantee in our favor, which guarantees, among other things, the payment of the termination fee payable by Parent to us, subject to the conditions set forth therein. In addition to the foregoing termination rights, and subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated byOctober 24, 2022 (the Termination Date). The Termination Date will be extended for six months if the closing conditions related to applicable antitrust and foreign investment clearances and the absence of any applicable law or order making illegal or prohibiting the Merger have not been satisfied as of such date. In addition, if a party to the Merger Agreement brings litigation to enforce the performance of the Merger Agreement, the Termination Date will be extended to (i) the 20th business day following the resolution of such litigation or (ii) such other time period established by the court in such litigation. OnJuly 8, 2022 , representatives ofMr. Musk delivered a notice purporting to terminate the Merger Agreement. We believe thatMr. Musk's purported termination is invalid and wrongful, and the Merger Agreement remains in effect. OnJuly 12, 2022 , we commenced litigation againstMr. Musk , Parent and Acquisition Sub to cause them to perform their obligations under the Merger Agreement and consummate the closing in accordance with the terms of the Merger Agreement. OnJuly 19, 2022 , theDelaware Court of Chancery granted Twitter's motion to expedite proceedings and scheduled a five day trial to begin inOctober 2022 . As of the date hereof, all required regulatory clearances and approvals have been obtained and stockholder approval of the Merger Agreement is the only remaining approval or regulatory condition to consummating the closing of the Merger under the Merger Agreement. The exact timing of completion of the Merger, if at all, cannot be predicted because the Merger is subject to ongoing litigation, adoption of the Merger Agreement by our stockholders and the satisfaction of the other remaining closing conditions. We are subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, subject to customary exceptions. For further discussion about the Merger and the litigation relating to the Merger, see the section titled "Proposed Transaction withElon Musk " in Note 1 - Summary of Significant Accounting Policies and the section titled "Legal Proceedings" in Note 15 - Commitments and Contingencies in the notes to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Form 8-K filed with theSEC onApril 26, 2022 , and our revised preliminary proxy statement in connection with the solicitation of proxies to approve the Merger filed with theSEC onJuly 15, 2022 , as well as the definitive proxy statement and any other documents or materials related to the Merger we may file when they become available. 35 --------------------------------------------------------------------------------
Current Economic Conditions and COVID-19
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the Russian invasion ofUkraine , and actions taken to counter inflation. Supply chain constraints, labor shortages, inflation, and rising interest rates and reduced consumer confidence have caused advertisers in a variety of industries to be cautious in their spending and to either pause or slow their campaigns. In 2021 and the first half of 2022, these macro factors had a negative impact on, and may negatively impact in future periods, our advertising revenue. In order to manage our cost structure in light of the current macroeconomic environment, we are seeking opportunities to reduce our expense growth. We significantly slowed hiring in the second quarter of 2022 and are being more selective about the roles that we are filling, and we have simultaneously seen our attrition rate increase. We have also reduced non-labor spend in areas such as travel and marketing. The extent of the ongoing impact of these macroeconomic events on our business and on global economic activity is uncertain and may continue to adversely affect our business, operations and financial results. Our past results may not be indicative of our future performance, and historical trends in revenue, income (loss) from operations, net income (loss), and net income (loss) per share may differ materially. The risks related to our business are further described in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. 36 --------------------------------------------------------------------------------
Key Metrics
We review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Monetizable Daily Active Usage or Users (mDAU). We define mDAU as people, organizations, or other accounts who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that are able to show ads, or paid Twitter products, including subscriptions. We believe that mDAU, and its related growth, is the best way to measure our success against our objectives and to show the size of our audience and engagement. Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in or otherwise authenticated active total accounts. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three months ended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU for the three months ended in the previous year. Additionally, our calculation of mDAU is not based on any standardized industry methodology and is not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. In the three months endedJune 30, 2022 , we had 237.8 million average mDAU**, which represents an increase of 16.6% from the three months endedJune 30, 2021 . The increase was driven by ongoing product improvements and global conversation around current events. In the three months endedJune 30, 2022 , we had 41.5 million average mDAU inthe United States and 196.3 million average mDAU in the rest of the world, which represent increases of 14.7% and 17.0%, respectively, from the three months endedJune 30, 2021 .
For additional information on how we calculate changes in mDAU and factors that can affect this metric, see the section titled "Note Regarding Key Metrics."
[[Image Removed: twtr-20220630_g1.jpg]][[Image Removed: twtr-20220630_g2.jpg]][[Image Removed: twtr-20220630_g3.jpg]]
* Please note the sum of average mDAU in
** An error introduced in March of 2019 resulted in an overstatement of mDAU from the first quarter of 2019 through the fourth quarter of 2021. The charts above provide updated values for mDAU from the fourth quarter of 2020 to the fourth quarter of 2021. See the section titled "mDAU Recast" in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2022 filed onMay 2, 2022 for more information. 37 -------------------------------------------------------------------------------- Changes in Ad Engagements and Changes in Cost perAd Engagement . We define an ad engagement as an interaction with one of our pay-for-performance advertising products. Ad engagements with our advertising products are based on the completion of an objective set out by an advertiser such as expanding, Retweeting, liking or replying to a Promoted Ad, viewing an embedded video, downloading or engaging with a promoted mobile application, clicking on a website link, signing up for marketing emails from advertisers, following the account that Tweets a Promoted Ad, or completing a transaction on an external website. We believe changes in ad engagements is one way to measure engagement with our advertising products. Cost per ad engagement is an output of our ads auction process, and will vary from one period to another based on geographic performance, auction dynamics, the strength of demand for various ad formats, and campaign objectives. In the three months endedJune 30, 2022 , ad engagements increased 7% from the three months endedJune 30, 2021 , due to our growing audience and increased demand for video ads on a year-over-year basis, offset in part by a mix shift to lower funnel ad formats, which generally have lower engagement rates and higher cost per ad engagement. In the three months endedJune 30, 2022 , cost per ad engagement decreased by 5% compared to the three months endedJune 30, 2021 , primarily driven by ad impression growth outpacing demand across most ad formats.
[[Image Removed: twtr-20220630_g4.jpg]][[Image Removed: twtr-20220630_g5.jpg]]
38
--------------------------------------------------------------------------------Results of Operations
The following tables set forth our consolidated statements of operations data for each of the periods presented (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue
Advertising services $ 1,076,003 $ 1,053,411 $ 2,182,581 $ 1,952,251
Subscription and other 100,657 137,016 195,063 274,194
Total revenue 1,176,660 1,190,427 2,377,644 2,226,445
Costs and expenses (1)
Cost of revenue 540,676 416,932 1,048,126 797,940
Research and development 454,859 299,859 826,554 550,568
Sales and marketing 308,301 301,902 608,110 536,494
General and administrative 216,586 141,482 366,449 259,009
Total costs and expenses 1,520,422 1,160,175 2,849,239 2,144,011
Income (loss) from operations (343,762) 30,252 (471,595) 82,434
Interest expense (23,342) (13,893) (38,786) (27,078)
Interest income 13,595 9,202 21,557 20,203
Other income, net 17,616 55,739 11,110 55,745
Gain (loss) on sale of asset group (11) - 970,463 -
Income (loss) before income taxes (335,904) 81,300 492,749 131,304
Provision (benefit) for income taxes (65,897) 15,651 249,470 (2,350)
Net income (loss) $ (270,007) $ 65,649 $ 243,279 $ 133,654
(1)Costs and expenses include stock-based compensation expense as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Cost of revenue $ 19,813 $ 13,120 $ 32,693 $ 21,852
Research and development 167,403 103,312 274,007 168,468
Sales and marketing 50,792 36,371 79,956 57,542
General and administrative 44,182 25,399 72,797 41,213
Total stock-based compensation expense $ 282,190 $ 178,202 $ 459,453 $ 289,075
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The following table sets forth 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 June 30,
2022 2021 2022 2021
Revenue
Advertising services 91 % 88 % 92 % 88 %
Subscription and other 9 12 8 12
Total revenue 100 100 100 100
Costs and expenses
Cost of revenue 46 35 44 36
Research and development 39 25 35 25
Sales and marketing 26 25 26 24
General and administrative 18 12 15 12
Total costs and expenses 129 97 120 96
Income (loss) from operations (29) 3 (20) 4
Interest expense (2) (1) (2) (1)
Interest income 1 1 1 1
Other income, net 1 5 - 3
Gain (loss) on sale of asset group - - 41 -
Income (loss) before income taxes (29) 7 21 6
Provision (benefit) for income taxes (6) 1 10 -
Net income (loss) (23) % 6 % 10 % 6 %
Revenue
We generate the substantial majority of our revenue from the sale of advertising
services. We also generate revenue by licensing our data to third parties and
providing mobile advertising exchange services.
Advertising Services
We generate most of our advertising revenue by selling our Promoted Products. Currently, our Promoted Products consist of the following:
•Promoted Ads and Twitter Amplify. Promoted Ads, which are labeled as "promoted," appear within a timeline, search results or profile pages just like an ordinary Tweet regardless of device, whether it be desktop or mobile. Using our proprietary algorithms and understanding of the interests of each account, we can deliver Promoted Ads that are intended to be relevant to a particular account. We enable our advertisers to target an audience based on an individual account's interest graph. Our Promoted Ads are pay-for-performance or pay-for-impression delivered advertising that are priced through an auction. Our Promoted Ads include objective-based features that allow advertisers to pay only for the types of engagement selected by the advertisers, such as Tweet engagements (e.g., Retweets, replies and likes), website clicks, mobile application installs or engagements, obtaining new followers, or video views.
•Follower Ads. Follower Ads, which are labeled as "promoted," provide a way for our advertisers to build and grow an audience that is interested in their business, product or service. Our Follower Ads are pay-for-performance advertising priced through an auction.
•Twitter Takeover. Twitter Takeover, which are labeled as "promoted," appear at the top of the list of trending topics or timeline for an entire day in a particular country or on a global basis. We sell our Twitter Takeover on a fixed-fee-per-day basis.
While the majority of the Promoted Products we sell to our advertisers are placed on Twitter, we also generate advertising revenue by placing advertising products that we sell to advertisers on third-party publishers' websites, applications or other offerings.
40
--------------------------------------------------------------------------------Subscription and other
To better reflect our business opportunities, including the sale of MoPub and the launch of Twitter Blue, we updated the name of "Data Licensing and Other Revenue" to "Subscription and Other Revenue" in the first quarter of 2022. We generate subscription and other revenue by (i) offering data products and data licenses that allow our data partners to access, search and analyze historical and real-time data on our platform, which consists of public Tweets and their content, through the Twitter Developer Platform, and (ii) providing subscription-related offerings such as Twitter Blue, which allows accounts to pay for exclusive features on Twitter. Our data partners generally purchase licenses to access all or a portion of our data for a fixed period. We recognize data licensing revenue as our data partners consume and benefit from their use of the licensed data. "Subscription and Other Revenue" includes revenue from our mobile advertising exchange services through our MoPub exchange until the completion of its sale onJanuary 1, 2022 . Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change (in thousands) (in thousands) Advertising services$ 1,076,003 $ 1,053,411 $ 22,592 2 %$ 2,182,581 $ 1,952,251 $ 230,330 12 % Subscription and other 100,657 137,016 (36,359) (27) % 195,063 274,194 (79,131) (29) % Total revenue$ 1,176,660 $ 1,190,427 $ (13,767) (1) %$ 2,377,644 $ 2,226,445 $ 151,199 7 %
Revenue in the three months ended
Advertising revenue in the three months endedJune 30, 2022 increased by$22.6 million , or 2%, and advertising revenue in the six months endedJune 30, 2022 increased by$230.3 million , or 12%, compared to the three and six months endedJune 30, 2021 , respectively. The increases in advertising revenue in the three and six months endedJune 30, 2022 reflect ongoing product improvements, advertising industry headwinds associated with the macroeconomic environment and uncertainty related to the Merger. The increase in advertising revenue in the three months endedJune 30, 2022 was attributable to an increase in the number of ad engagements of 7%, partially offset by a decrease in cost per ad engagement of 5%, compared to the same period in 2021. The increase in advertising revenue in the six months endedJune 30, 2022 was attributable to an increase in the number of ad engagements of 9% and an increase in cost per ad engagement of 2%, compared to the same period in 2021. The increase in the number of ad engagements in the three and six months endedJune 30, 2022 was due to our growing audience and increased demand for video ads on a year-over-year basis, offset in part by a mix shift to lower funnel ad formats, which generally have lower engagement rates and higher cost per ad engagement. The decrease in cost per ad engagement in the three months endedJune 30, 2022 compared to the same period in 2021 was primarily driven by ad impression growth outpacing demand across most ad formats. The increase in cost per ad engagement in the six months endedJune 30, 2022 compared to the same period in 2021 was primarily driven by a mix shift toward performance products, which are lower funnel ad formats, and 15-second video views, partially offset by like-for-like price decreases across most ad formats due to slow demand growth. In the three and six months endedJune 30, 2022 , subscription and other revenue decreased by 27% and 29%, respectively, compared to the three and six months endedJune 30, 2021 . The decrease was primarily attributable to the sale of our MoPub business to AppLovin onJanuary 1, 2022 . MoPub and MoPub Acquire generated approximately$52.9 million and$104.2 million in revenue in the three and six months endedJune 30, 2021 , respectively, the significant majority of which was reflected in "Subscription and Other Revenue" (previously named "Data Licensing and Other Revenue"). In the near term, we continue to expect our revenues to be impacted by headwinds associated with the macroeconomic environment and uncertainty related to the Merger. 41
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Cost of Revenue
Cost of revenue includes infrastructure costs, revenue share expenses,
amortization of acquired intangible assets, amortization of capitalized labor
costs for internally developed software, allocated facilities costs, as well as
traffic acquisition costs (TAC). Infrastructure costs consist primarily of data
center costs related to our co-located facilities, which include lease and
hosting costs, related support and maintenance costs and energy and bandwidth
costs, public cloud hosting costs, as well as depreciation of servers and
networking equipment; and personnel-related costs, including salaries, benefits
and stock-based compensation, for our operations teams. TAC consists of costs we
incur with third parties in connection with the sale to advertisers of our
advertising products that we place on third-party publishers' websites, and
applications or other offerings collectively resulting from acquisitions.
Certain elements of our cost of revenue are fixed and cannot be quickly reduced
in the near term in response to market conditions.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(in thousands) (in thousands)
Cost of revenue $ 540,676 $ 416,932 $ 123,744 30 % $ 1,048,126 $ 797,940 $ 250,186 31 %
Cost of revenue as a 46 % 35 % 44 % 36 %
percentage of revenue
In the three months ended June 30, 2022 , cost of revenue increased by $123.7
million compared to the three months ended June 30, 2021 . The increase was
attributable to a $62.0 million increase in infrastructure costs, a $34.3
million increase in depreciation and amortization expense, and a $27.4 million
increase driven primarily by revenue share expenses and personnel-related costs
due to an increase in employee headcount.
In the six months ended
We plan to continue to scale the capacity and enhance the capability and
reliability of our infrastructure to support mDAU growth and increased activity
on our platform. We expect that cost of revenue will vary as a percentage of
revenue over time.
Research and Development
Research and development expenses consist primarily of personnel-related costs,
including salaries, benefits and stock-based compensation, for our engineers and
other employees engaged in the research and development of our products and
services. In addition, research and development expenses include amortization of
acquired intangible assets, allocated facilities costs, and other supporting
overhead costs.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(in thousands) (in thousands)
Research and
development $ 454,859 $ 299,859 $ 155,000 52 % $ 826,554 $ 550,568 $ 275,986 50 %
Research and 39 % 25 % 35 % 25 %
development as a
percentage of
revenue
In the three months ended June 30, 2022 , research and development expenses
increased by $155.0 million compared to the three months ended June 30, 2021 .
The increase was driven by a $100.2 million increase in personnel-related costs
mainly driven by an increase in employee headcount as we continued to invest in
engineering, product, design, and research. Personnel-related costs included
$13.1 million of severance-related costs incurred in the second quarter of 2022.
The increase in research and development expenses was also driven by a $20.3
million net increase in facilities costs and other administrative expenses and a
$34.5 million decrease in the capitalization of costs associated with developing
software for internal use due to reprioritization efforts.
In the six months ended June 30, 2022 , research and development expenses
increased by $276.0 million compared to the six months ended June 30, 2021 . The
increase was driven by a $217.2 million increase in personnel-related costs
mainly driven by an increase in employee headcount as we continued to invest in
engineering, product, design, and research. Personnel-related costs included
$13.1 million of severance-related costs incurred in the second quarter of 2022.
The increases in research and development expenses were also driven by a $36.0
million increase in facilities costs and other administrative expenses, and a
$22.8 million decrease in the capitalization of costs associated with developing
software for internal use due to reprioritization efforts.
42
--------------------------------------------------------------------------------We are moderating our investments and striving to be even more focused on limiting our investments in engineering, product, design, and research. As we look to manage our cost structure, we will see a reduction in research and development expense growth in the near future. We expect that research and development expenses will vary as a percentage of revenue over time.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs,
including salaries, commissions, benefits and stock-based compensation for our
employees engaged in sales, sales support, business development and media,
marketing, corporate communications and customer service functions. In addition,
marketing and sales-related expenses also include advertising costs, market
research, trade shows, branding, marketing, public relations costs, amortization
of acquired intangible assets, allocated facilities costs, and other supporting
overhead costs.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(in thousands) (in thousands)
Sales and marketing $ 308,301 $ 301,902 $ 6,399 2 % $ 608,110 $ 536,494 $ 71,616 13 %
Sales and marketing 26 % 25 % 26 % 24 %
as a percentage of
revenue
In the three months ended June 30, 2022 , sales and marketing expenses increased
by $6.4 million compared to the three months ended June 30, 2021 . The increase
was attributable to a $11.0 million increase in facilities costs and other
administrative expenses and a $11.0 million increase in personnel-related costs,
offset by a $15.6 million decrease in marketing and sales-related expenses. The
increase in personnel-related costs was mainly driven by an increase in employee
headcount, and it included $2.9 million of severance-related costs incurred in
the second quarter of 2022.
In the six months ended June 30, 2022 , sales and marketing expenses increased by
$71.6 million compared to the six months ended June 30, 2021 . The increase was
attributable to a $46.7 million increase in personnel-related costs, a $21.1
million net increase in facilities costs and other administrative expenses, and
a $3.8 million increase in marketing and sales-related expenses. The increase in
personnel-related costs was mainly driven by an increase in employee headcount,
and it included $2.9 million of severance-related costs incurred in the second
quarter of 2022.
We are moderating our investments and striving to be even more focused on
limiting our investments in sales and marketing. As we look to manage our cost
structure, we will see a reduction in sales and marketing expense growth in the
near future. We expect that sales and marketing expenses will vary as a
percentage of revenue over time.
General and Administrative
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include fees and costs for professional services, including consulting, third-party legal and accounting services and facilities costs and other supporting overhead costs that are not allocated to other departments.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(in thousands) (in thousands)
General and
administrative $ 216,586 $ 141,482 $ 75,104 53 % $ 366,449 $ 259,009 $ 107,440 41 %
General and 18 % 12 % 15 % 12 %
administrative as a
percentage of revenue
In the three months ended June 30, 2022 , general and administrative expenses
increased by $75.1 million compared to the three months ended June 30, 2021 . The
increase was primarily attributable to a $49.2 million increase in
personnel-related costs, mainly driven by an increase in employee headcount.
Personnel-related costs included $2.8 million of severance-related costs
incurred in the second quarter of 2022. The increase in general and
administrative expenses was also driven by $33.1 million of transaction expenses
associated with the proposed Merger incurred in the second quarter of 2022 and a
$4.7 million increase in other professional service fees, offset by a $11.9
million decrease in facilities costs and other administrative expenses.
43
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In the six months ended June 30, 2022 , general and administrative expenses
increased by $107.4 million compared to the six months ended June 30, 2021 . The
increase was primarily attributable to a $67.1 million increase in
personnel-related costs, mainly driven by an increase in employee headcount.
Personnel-related costs included $2.8 million of severance-related costs
incurred in the second quarter of 2022. The increase in general and
administrative expenses was also driven by $33.1 million of transaction expenses
associated with the proposed Merger incurred in the second quarter of 2022 and a
$9.7 million increase in other professional service fees, offset by a $2.5
million net decrease in facilities costs and other administrative expenses.
We plan to continue to invest in general and administrative functions to ensure
we have an appropriate level of support for our key objectives. We expect that
general and administrative expenses will vary as a percentage of revenue over
time. As we look to manage our cost structure, we will see a reduction in
certain general and administrative expenses; however, in the near term, general
and administrative expenses will likely increase in absolute terms due to costs
related to the Merger and related litigation.
Interest Expense
Interest expense consists primarily of interest expense incurred in connection with the$1.15 billion principal amount of 0.25% convertible senior notes due in 2024 (the 2024 Notes), the$1.0 billion principal amount of 0.375% convertible senior notes due in 2025 (the 2025 Notes), the$700.0 million principal amount of 3.875% senior notes due in 2027 (the 2027 Notes), and the$1.0 billion principal amount of 5.000% senior notes due in 2030 (the 2030 Notes). Three Months Ended June 30, Six Months Ended June 30, 2022 2021 % Change 2022 2021 % Change (in thousands) (in thousands) Interest expense$ 23,342 $ 13,893 68 %$ 38,786 $ 27,078 43 % In the three and six months endedJune 30, 2022 , interest expense increased by$9.4 million and$11.7 million compared to the three and six months endedJune 30, 2021 , respectively. The increase was primarily attributable to the issuance of the 2030 Notes inFebruary 2022 , offset by the repayment of the 2021 Notes at their maturity inSeptember 2021 .
Interest Income
Interest income is generated from our cash equivalents and short-term
investments net of the related amortization of premium paid on such investments.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Interest income $ 13,595 $ 9,202 48 % $ 21,557 $ 20,203 7 %
In the three and six months ended June 30, 2022 , interest income increased by
$4.4 million and $1.4 million compared to the three and six months ended
June 30, 2021 , respectively. The increase was primarily attributable to higher
interest rates.
Other Income (Expense), Net
Other income (expense), net, consists primarily of unrealized foreign exchange
gains and losses due to re-measurement of monetary assets and liabilities
denominated in non-functional currencies and realized foreign exchange gains and
losses on foreign exchange transactions, and gains and losses on investments in
privately-held companies. We expect our foreign exchange gains and losses will
vary depending upon movements in the underlying exchange rates.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Other income, net $ 17,616 $ 55,739 (68) % $ 11,110 $ 55,745 (80) %
In the three and six months ended June 30, 2022 , other income, net decreased by
$38.1 million and $44.6 million compared to the three and six months ended
June 30, 2021 , respectively. The change was primarily attributable to a $22.6
million gain on investments in privately-held companies in the three and six
months ended June 30, 2022 , compared to a $51.9 million gain on investments in
privately-held companies in the three and six months ended June 30, 2021 .
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Gain on Sale of
On
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes consists of federal and state income taxes inthe United States and income taxes in certain foreign jurisdictions. Our provision (benefit) for income taxes for interim periods has generally been determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any. Under certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, the accounting guidance permits the use of the actual effective tax rate for the year-to-date period. We used this approach for all periods presented because we were unable to reasonably estimate our annual effective tax rate due to the variability of the rate as a result of fluctuations in forecasted income and the effects of being taxed in multiple tax jurisdictions. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) (in thousands)
Provision (benefit) for income taxes
In the three and six months endedJune 30, 2022 , we recorded a benefit from income taxes of$65.9 million and a provision for income taxes of$249.5 million , compared to a provision for income taxes of$15.7 million and a benefit from income taxes of$2.4 million for the three and six months endedJune 30, 2021 , respectively. The change for the three months endedJune 30, 2022 was primarily due to changes in our income (loss) before income taxes, tax deductions for stock-based compensation and research and development credits. The change for the six months endedJune 30, 2022 was primarily due to the gain on the sale of MoPub, described in Note 10 - Sale ofAsset Group , which was subject to higher foreign tax rates and tax onU.S. global intangible low-taxed income, and other changes in our income (loss) before income taxes. As ofJune 30, 2022 , we had$997.9 million of deferred tax assets for which we had not established a valuation allowance. We had a valuation allowance of$1.43 billion , primarily related to deferred tax assets of a foreign subsidiary, California andMassachusetts , andU.S. federal unrealized capital losses. We completed our reassessment of the ability to realize these assets and concluded that a valuation allowance was not required for the other jurisdictions. However, if the current macroeconomic environment continues, our forecasted earnings and expectations may change. This could result in a material non-cash income tax expense to record an additional valuation allowance to further reduce our deferred tax assets to the net amount we believe is more-likely-than-not to be realized. There is a possibility that within the next several quarters, sufficient negative evidence could become available to reach a conclusion that an additional valuation allowance is required. Our effective tax rate could be affected by our jurisdictional mix of income (loss) before taxes, including our allocation of centrally incurred costs to foreign jurisdictions, changes in tax rates and tax regulations, the impact of tax examinations, the impact of business combinations, changes in our corporate structure, changes in the geographic location of business functions or assets, tax effects of stock-based compensation, and changes in management's assessment of the ability to realize deferred tax assets. In addition, the provision is impacted by deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 45 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Six Months Ended June 30,
2022 2021
(in thousands)
Net income $ 243,279 $ 133,654
Net cash provided by operating activities $ 155,787 $ 772,151
Net cash provided by investing activities $ 1,402,205 Our principal sources of liquidity are our cash, cash equivalents, and short-term investments in marketable securities. Our cash equivalents and marketable securities are invested primarily in short-term fixed income securities, including government and investment-grade debt securities and money market funds. InFebruary 2022 , we received net proceeds of approximately$988.7 million from the issuance of the 2030 Notes, after deducting the debt issuance costs. InMarch 2020 , our Board of Directors authorized a program to repurchase up to$2.0 billion of our common stock over time (the 2020 Repurchase Program). InFebruary 2022 , our board of directors authorized a$4.0 billion share repurchase program (the 2022 Repurchase Program), which replaces the 2020 Repurchase Program. In connection with the 2022 Repurchase Program, onFebruary 10, 2022 we entered into accelerated share repurchase agreements (the ASR Agreements) to repurchase$2.0 billion of our common stock. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The 2022 Repurchase Program does not obligate us to acquire any particular amount of our common stock and may be suspended at any time at our discretion. The 2022 Repurchase Program does not have an expiration date. In the six months endedJune 30, 2022 , we repurchased 1.9 million shares for an aggregate amount of$71.5 million under the 2020 Repurchase Program. In connection with the ASR Agreements, we made a prepayment of$2.0 billion and received an initial delivery of approximately 37.8 million shares of our common stock. The ASR Agreements are expected to settle during the third quarter of 2022. As ofJune 30, 2022 , we had$6.12 billion of cash, cash equivalents and short-term investments in marketable securities, of which$217.3 million was held by our foreign subsidiaries. We do not plan to indefinitely reinvest these funds held by our foreign subsidiaries and have accrued the incremental taxes due as part of repatriation. We believe that our existing cash, cash equivalents and short-term investment balances, and our credit facility, together with cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
Merger Agreement
The Merger Agreement contains customary covenants regarding the conduct of our business prior to the closing of the Merger and contains certain termination rights for Twitter and Parent which require us or Parent to pay a termination fee of$1.0 billion under specified limited circumstances. In addition, pursuant to the Merger Agreement, we have agreed, subject to certain exceptions, not to take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including incurring indebtedness (other than under existing credit facilities or to replace existing indebtedness) or materially amending the terms of existing indebtedness. We do not believe that the restrictions in the Merger Agreement will prevent us from meeting our debt obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. For further discussion about the terms of the Merger Agreement, the Merger and the litigation relating to the Merger, see the section titled "Pending Merger" above, the section titled "Proposed Transaction withElon Musk " in Note 1 - Summary of Significant Accounting Policies, and the section titled "Legal Proceedings" in Note 15 - Commitments and Contingencies in the notes to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Credit Facility We have a revolving credit agreement with certain lenders which provides for a$500.0 million revolving unsecured credit facility maturing onAugust 7, 2023 . We are obligated to pay interest on loans under the credit facility and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee. The interest rate for the credit facility is determined based on calculations using certain market rates as set forth in the credit agreement. In addition, the credit facility contains restrictions on payments including cash payments of dividends. InFebruary 2022 , we entered into an amendment to the revolving credit facility to permit the repurchase of our common stock in an aggregate amount not to exceed$4.0 billion . As ofJune 30, 2022 , no amounts had been drawn under the credit facility.
Operating Activities
Cash provided by operating activities consists of net income (loss) adjusted for
certain non-cash items including depreciation and amortization, stock-based
compensation, deferred income taxes, impairment of (gain on) on investments in
privately-held companies, gain on the sale of an asset group, as well as the
effect of changes in working capital and other activities. We expect that cash
provided by operating activities will fluctuate in future periods as a result of
a number of factors, including fluctuations in our revenue, increases in
operating expenses and costs related to acquisitions. For additional discussion,
see the section titled "Risk Factors" in Part II, Item 1A of this Quarterly
Report on Form 10-Q.
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Cash provided by operating activities in the six months ended June 30, 2022 was
$155.8 million , a decrease of $616.4 million compared to the six months ended
June 30, 2021 . Cash provided by operating activities was driven by net income of
$243.3 million , as adjusted for the exclusion of non-cash expenses and other
adjustments totaling $68.3 million , including a gain on the sale of our MoPub
asset group of $970.5 million , stock-based compensation expense of $459.5
million , depreciation and amortization expense of $333.6 million , and deferred
income taxes of $131.1 million , and the effect of changes in assets and
liabilities, net of asset acquired and liabilities assumed from acquisitions,
that resulted in cash outflows of $19.2 million .
Investing Activities
Our primary investing activities consist of purchases of property and equipment, particularly purchases of servers and networking equipment, leasehold improvements for our facilities, purchases and disposals of marketable securities, strategic investments in privately-held companies, acquisitions of businesses and other activities. Cash provided by investing activities in the six months endedJune 30, 2022 increased by$931.6 million compared to the six months endedJune 30, 2021 . The increase was primarily due to$1.05 billion of proceeds from the sale of our MoPub asset group, a$521.8 million decrease in purchases of marketable securities, a$142.7 million decrease in purchases of property and equipment, a$25.0 million decrease in purchases of investments in privately-held companies, a$13.6 million decrease in business combinations, an$8.4 million absence of other investing activities, offset by a$502.2 million decrease in proceeds from sales of marketable securities, a$318.2 million decrease in proceeds from maturities of marketable securities, a$7.8 million increase in investments in theFinance Justice Fund , and a$1.5 million decrease in proceeds from sales of property and equipment. Financing Activities Our primary financing activities consist of issuances of securities, including common stock issued under our employee stock purchase plan and issuances of our Notes, repurchases of common stock under our share repurchase program, repayment of Convertible Notes, payments of finance lease obligations, and stock option exercises by employees and other service providers. Cash used in financing activities in the six months endedJune 30, 2022 was$1.05 billion , compared to cash provided by financing activities of$898.5 million in the six months endedJune 30, 2021 . The change was primarily due to a$1.58 billion increase in repurchases of common stock, including a$2.0 billion prepayment we made in connection with accelerated share repurchase agreements inFebruary 2022 ,$988.7 million of net proceeds from the issuance of the 2030 Notes net of issuance costs in the six months endedJune 30, 2022 , compared to$1.42 billion of net proceeds from the issuance of the 2026 Notes net of issuance costs, which was reduced by a net cash outflow of$52.3 million for the purchase of convertible note hedges and sale of warrants entered into in connection with the issuance of the 2026 Notes in the six months endedJune 30, 2021 , and a$1.7 million decrease in proceeds from option exercises, offset by a$9.9 million increase in proceeds from the issuance of shares of stock from the ESPP, a$2.4 million decrease in tax payments related to net share settlements of equity awards, and the absence of$0.6 million of payments of finance lease obligations. Contractual Obligations Our principal commitments consist of obligations under the Notes (including principal and coupon interest), finance and operating leases for equipment, office space and co-located data center facilities, as well as non-cancelable contractual commitments. In addition, under the Merger Agreement, we may in certain circumstances be obligated to pay a termination fee of$1.0 billion . Refer to Note 6 - Leases; Note 11 - Convertible Notes and Senior Notes; and Note 15 - Commitments and Contingencies in the notes to the consolidated financial statements under Part I, Item 1 of this Quarterly Report on Form 10-Q for more details.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements and did not have any such
arrangements as of
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
We prepare our consolidated financial statements and related notes in accordance with GAAP. In doing so, we make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 for a more complete discussion of our critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our consolidated financial statements, see Note 1 -
Summary of Significant Accounting Policies in the notes to the consolidated
financial statements included in Part I of this Quarterly Report on Form 10-Q.
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