twtr-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                    

Commission File Number 001-36164

 

Twitter, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8913779

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1355 Market Street, Suite 900

San Francisco, California 94103

(Address of principal executive offices and Zip Code)

(415) 222-9670

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES      NO  

The number of shares of the registrant’s common stock outstanding as of July 27, 2018 was 757,845,929.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

6

 

 

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

 

6

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and June 30, 2017

 

7

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and June 30, 2017

 

8

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and June 30, 2017

 

9

 

 

Notes to Consolidated Financial Statements

 

10

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

32

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

48

Item 4.

 

Controls and Procedures

  

49

 

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal Proceedings

  

50

Item 1A.

 

Risk Factors

  

50

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

79

Item 6.

 

Exhibits

  

80

 

 

Signatures

  

82

 

 

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

our ability to attract and retain users and increase the level of engagement, including ad engagement, of our users;

 

our plans regarding health and user safety, including our expectations regarding policies, enforcement and preventing manipulation of our platform;

 

our expectations regarding MAUs, changes in DAUs, changes in cost per ad engagement and changes in ad engagements;

 

our ability to develop or acquire new products, product features and services, improve our existing products and services, including with respect to Promoted Tweet product features, video and performance advertising, and increase the value of our products and services;

 

our business strategies, plans and priorities, including our plans for growth and hiring, investment in and refinement of our products and services and capital expenditures relating to infrastructure;

 

our ability to provide new content from third parties, including our ability to secure live streaming video content on terms that are acceptable to us;

 

our ability to attract advertisers to our platforms, products and services and increase the amount that advertisers spend with us;

 

our expectations regarding our user growth and growth rates and the continued usage of our mobile applications, including the impact of seasonality;

 

our ability to increase our revenue and our revenue growth rate, including by differentiating and scaling revenue products and our expectations regarding revenue mix;

 

our expectations regarding revenue growth vis-à-vis audience growth, competition and the effects of advertiser sales cycle and product deprecation;

 

our ability to improve user monetization;

 

our future financial performance, including trends in cost per ad engagement, revenue (including data licensing revenue), cost of revenue, operating expenses, including stock-based compensation and income taxes;

 

our expectations regarding our tax expense and cash taxes;

 

the impact of the 2017 Tax Cuts and Jobs Act on our results of operations;

 

our expectations regarding outstanding litigation or the decisions of the courts;

 

the effects of seasonal trends on our results of operations;

 

the impact of our recent financial results on our valuation allowance for federal and state deferred tax assets;

 

the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements;

 

our ability to timely and effectively develop, invest in, scale and adapt our existing technology and network infrastructure;

 

our ability to successfully acquire and integrate companies and assets; and

 

our expectations regarding international operations and foreign exchange gains and losses.

3


We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, cash flows or prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

 


4


NOTE REGARDING KEY METRICS

We review a number of metrics, including monthly active users, or MAUs, changes in daily active users or daily active usage, or DAUs, changes in ad engagements and changes in cost per ad engagement, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of how we calculate MAUs, changes in DAUs, changes in ad engagements and changes in cost per ad engagement.

The numbers of active users presented in this Quarterly Report on Form 10-Q are based on internal company data. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. Furthermore, our metrics may be impacted by our health efforts, which are our overall efforts to reduce malicious activity on the service, inclusive of spam, malicious automation, and fake accounts. For example, there are a number of false or spam accounts in existence on our platform. We have performed an internal review of a sample of accounts and estimate that false or spam accounts during the second quarter of 2018 continues to represent less than 5% of our MAUs during the quarter. The false or spam accounts for a period represents the average of false or spam accounts in the samples during each monthly analysis period during the quarter. In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users, and have made improvements in our spam detection capabilities that have resulted in the suspension of a large number of spam, malicious automation and fake accounts. We intend to continue to make such improvements. After we determine an account is spam, malicious automation or fake, we stop counting it in our MAU, DAU or related metrics. Additionally, we rely on third-party SMS aggregators and mobile carriers to deliver SMS messages to certain of our users when we send our SMS messages to such accounts. If, however, we are notified of material deliverability issues because of, for example, infrastructure issues at the service-provider level or governmental restrictions based on content, we do not include the affected users in MAUs. We also treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of people or organizations using our platform.

Certain metrics also include users that access Twitter through applications that automatically contact our servers for regular updates with no discernible user-initiated action involved, which we refer to as third-party auto-polling MAU. This activity causes our system to count MAUs associated with such applications as active users on the day or days such contact occurs. As of December 31, 2017, fewer than 8.5% of MAUs may have been third-party auto-polling MAU.

In addition, our data regarding user geographic location for purposes of reporting the geographic location of our MAUs is based on the IP address or phone number associated with the account when a user initially registered the account on Twitter. The IP address or phone number may not always accurately reflect a user’s actual location at the time such user engaged with our platform. For example, a mobile user may appear to be accessing Twitter from the location of the proxy server that the user connects to rather than from a user’s actual location.

We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology.

Our total audience metrics are based on both internal metrics and data from Google Analytics, which measures logged-out visitors to our properties.

 

 

 

5


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

TWITTER, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,544,641

 

 

$

1,638,413

 

Short-term investments

 

 

3,116,474

 

 

 

2,764,689

 

Accounts receivable, net of allowance for doubtful accounts of $4,779 and $5,430

 

 

614,944

 

 

 

664,268

 

Prepaid expenses and other current assets

 

 

264,445

 

 

 

254,514

 

Total current assets

 

 

6,540,504

 

 

 

5,321,884

 

Property and equipment, net

 

 

914,795

 

 

 

773,715

 

Intangible assets, net

 

 

49,190

 

 

 

49,654

 

Goodwill

 

 

1,228,993

 

 

 

1,188,935

 

Other assets

 

 

127,748

 

 

 

78,289

 

Total assets

 

$

8,861,230

 

 

$

7,412,477

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

161,300

 

 

$

170,969

 

Accrued and other current liabilities

 

 

351,061

 

 

 

327,333

 

Capital leases, short-term

 

 

82,058

 

 

 

84,976

 

Total current liabilities

 

 

594,419

 

 

 

583,278

 

Convertible notes

 

 

2,560,943

 

 

 

1,627,460

 

Capital leases, long-term

 

 

53,184

 

 

 

81,308

 

Deferred and other long-term tax liabilities, net

 

 

17,077

 

 

 

13,240

 

Other long-term liabilities

 

 

64,703

 

 

 

59,973

 

Total liabilities

 

 

3,290,326

 

 

 

2,365,259

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.000005 par value-- 200,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Common stock, $0.000005 par value-- 5,000,000 shares authorized; 756,956 and 746,902 shares issued and outstanding

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

8,125,889

 

 

 

7,750,522

 

Accumulated other comprehensive loss

 

 

(56,434

)

 

 

(31,579

)

Accumulated deficit

 

 

(2,498,555

)

 

 

(2,671,729

)

Total stockholders' equity

 

 

5,570,904

 

 

 

5,047,218

 

Total liabilities and stockholders' equity

 

$

8,861,230

 

 

$

7,412,477

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

6


TWITTER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

710,541

 

 

$

573,855

 

 

$

1,375,412

 

 

$

1,122,106

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

230,185

 

 

 

212,908

 

 

 

453,008

 

 

 

433,247

 

Research and development

 

 

138,574

 

 

 

143,171

 

 

 

261,920

 

 

 

271,899

 

Sales and marketing

 

 

188,032

 

 

 

185,296

 

 

 

366,091

 

 

 

354,890

 

General and administrative

 

 

74,126

 

 

 

70,839

 

 

 

139,844

 

 

 

140,707

 

Total costs and expenses

 

 

630,917

 

 

 

612,214

 

 

 

1,220,863

 

 

 

1,200,743

 

Income (loss) from operations

 

 

79,624

 

 

 

(38,359

)

 

 

154,549

 

 

 

(78,637

)

Interest expense

 

 

(29,982

)

 

 

(26,396

)

 

 

(56,997

)

 

 

(51,805

)

Interest income

 

 

21,960

 

 

 

10,486

 

 

 

38,141

 

 

 

19,006

 

Other expense, net

 

 

(5,735

)

 

 

(58,806

)

 

 

(5,944

)

 

 

(60,004

)

Income (loss) before income taxes

 

 

65,867

 

 

 

(113,075

)

 

 

129,749

 

 

 

(171,440

)

Provision (benefit) for income taxes

 

 

(34,250

)

 

 

3,413

 

 

 

(31,365

)

 

 

6,607

 

Net income (loss)

 

$

100,117

 

 

$

(116,488

)

 

$

161,114

 

 

$

(178,047

)

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

(0.16

)

 

$

0.21

 

 

$

(0.25

)

Diluted

 

$

0.13

 

 

$

(0.16

)

 

$

0.21

 

 

$

(0.25

)

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

752,351

 

 

 

730,069

 

 

 

750,037

 

 

 

726,083

 

Diluted

 

 

772,556

 

 

 

730,069

 

 

 

769,222

 

 

 

726,083

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

7


TWITTER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

100,117

 

 

$

(116,488

)

 

$

161,114

 

 

$

(178,047

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on investments in available-for-sale securities

 

 

1,384

 

 

 

69

 

 

 

(445

)

 

 

(160

)

Change in foreign currency translation adjustment

 

 

(35,493

)

 

 

14,462

 

 

 

(24,410

)

 

 

22,585

 

Net change in accumulated other comprehensive loss

 

 

(34,109

)

 

 

14,531

 

 

 

(24,855

)

 

 

22,425

 

Comprehensive income (loss)

 

$

66,008

 

 

$

(101,957

)

 

$

136,259

 

 

$

(155,622

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

8


TWITTER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

161,114

 

 

$

(178,047

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

202,828

 

 

 

205,855

 

Stock-based compensation expense

 

 

152,735

 

 

 

230,393

 

Amortization of discount on convertible notes

 

 

44,031

 

 

 

39,289

 

Changes in bad debt provision

 

 

885

 

 

 

1,355

 

Deferred income taxes

 

 

(597

)

 

 

(768

)

Deferred tax asset valuation allowance release

 

 

(41,688

)

 

 

 

Impairment of investments in privately-held companies

 

 

3,000

 

 

 

55,000

 

Other adjustments

 

 

(3,944

)

 

 

(4,854

)

Changes in assets and liabilities, net of assets acquired and liabilities assumed from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

46,968

 

 

 

133,026

 

Prepaid expenses and other assets

 

 

(20,302

)

 

 

(1,656

)

Accounts payable

 

 

(16,828

)

 

 

(13,616

)

Accrued and other liabilities

 

 

35,611

 

 

 

(72,822

)

Net cash provided by operating activities

 

 

563,813

 

 

 

393,155

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(289,541

)

 

 

(84,507

)

Proceeds from sales of property and equipment

 

 

4,456

 

 

 

1,290

 

Purchases of marketable securities

 

 

(1,990,868

)

 

 

(1,578,045

)

Proceeds from maturities of marketable securities

 

 

1,615,737

 

 

 

1,461,687

 

Proceeds from sales of marketable securities

 

 

22,372

 

 

 

108,817

 

Proceeds from sales of long-lived assets

 

 

 

 

 

35,000

 

Business combinations, net of cash acquired

 

 

(32,504

)

 

 

 

Other investing activities

 

 

(2,175

)

 

 

(10,531

)

Net cash used in investing activities

 

 

(672,523

)

 

 

(66,289

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes

 

 

1,150,000

 

 

 

 

Convertible notes issuance costs

 

 

(11,730

)

 

 

 

Purchases of convertible note hedges

 

 

(267,950

)

 

 

 

Proceeds from issuance of warrants concurrent with note hedges

 

 

186,760

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(9,360

)

 

 

(5,023

)

Payments of capital lease obligations

 

 

(47,282

)

 

 

(55,150

)

Proceeds from exercise of stock options

 

 

3,097

 

 

 

7,331

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

16,337

 

 

 

14,019

 

Net cash provided by (used in) financing activities

 

 

1,019,872

 

 

 

(38,823

)

Net increase in cash, cash equivalents and restricted cash

 

 

911,162

 

 

 

288,043

 

Foreign exchange effect on cash, cash equivalents and restricted cash

 

 

(12,514

)

 

 

8,440

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

1,673,857

 

 

 

1,027,633

 

Cash, cash equivalents and restricted cash at end of period

 

$

2,572,505

 

 

$

1,324,116

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisitions

 

$

19,165

 

 

$

 

Equipment purchases under capital leases

 

$

16,086

 

 

$

70,926

 

Changes in accrued property and equipment purchases

 

$

7,554

 

 

$

(1,847

)

Reconciliation of cash, cash equivalents and restricted cash as shown in the consolidated statements of cash flows

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,544,641

 

 

$

1,288,323

 

Restricted cash included in prepaid expenses and other current assets

 

 

2,261

 

 

 

7,894

 

Restricted cash included in other assets

 

 

25,603

 

 

 

27,899

 

Total cash, cash equivalents and restricted cash

 

$

2,572,505

 

 

$

1,324,116

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

9


TWITTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Description of Business and Summary of Significant Accounting Policies

Twitter, Inc. (“Twitter” or the “Company”) was incorporated in Delaware in April 2007, and is headquartered in San Francisco, California. Twitter offers products and services for users, advertisers, developers and platform and data partners.

Convertible Notes Offering

In June 2018, the Company issued $1.00 billion principal amount of 0.25% convertible senior notes due 2024 (the “2024 Notes”) in a private placement to qualified institutional buyers pursuant to Rule144A under the Securities Act of 1933, as amended. Pursuant to the exercise of the overallotment option by the initial purchasers, the Company then issued an additional $150.0 million principal amount of the 2024 Notes. The total net proceeds from this offering, after deducting debt issuance costs, were approximately $1.14 billion.

 

Concurrently with the issuance of the 2024 Notes, the Company entered into convertible note hedge transactions for which it paid $268.0 million. In addition, the Company sold warrants for which it received $186.8 million.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect, in management’s opinion, all adjustments of a normal, recurring nature that are necessary for the fair statement of the Company’s financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results expected for the full fiscal year or any other period.  

The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ materially from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard update on revenue recognition from contracts with customers (Topic 606). The new guidance replaces all current GAAP guidance on this topic and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted this new accounting standard on January 1, 2018 using the modified retrospective method. See Note 2 – Revenue for further details.

10


In January 2016, the FASB issued a new accounting standard update on the classification and measurement of financial instruments. The new guidance principally affects accounting standards for equity investments, financial liabilities where the fair value option has been elected, and the presentation and disclosure requirements for financial instruments. The Company adopted this new accounting standard prospectively for its non-marketable equity securities during the three months ended March 31, 2018. The Company has elected to use the measurement alternative for its non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The Company’s investments in privately-held companies are non-marketable equity securities without readily determinable fair values and there was no upward adjustment during the three and six months ended June 30, 2018. See Note 8 – Acquisitions and Other Investments for further details.

In August 2016, the FASB issued a new accounting standard update on the statement of cash flows. The new guidance clarifies classification of certain cash receipts and cash payments in the statement of cash flows. The Company adopted this new accounting standard retrospectively during the three months ended March 31, 2018 and the adoption did not have a material impact on the Company’s financial statements.

In October 2016, the FASB issued a new accounting standard update on simplifying the accounting for income taxes related to intra-entity asset transfers. The new guidance requires an entity to recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfers occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The Company adopted this new accounting standard on January 1, 2018 using the modified retrospective method. Upon adoption, the Company recognized an additional deferred tax asset of $29.5 million related to a prior period intra-entity transfer, which was offset by a full valuation allowance. Therefore, the recognition of the deferred tax asset upon adoption did not have an impact on the Company’s accumulated deficit. See Note 12 – Income Taxes for further details.

In November 2016, the FASB issued a new accounting standard update on the presentation of restricted cash in the statement of cash flows. The new guidance requires an entity to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows, and an entity will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted this new accounting standard retrospectively during the three months ended March 31, 2018. As a result of the adoption, net cash used by investing activities was adjusted to exclude the changes in restricted cash, resulting in an increase of $3.2 million in the previously-reported amount for the six months ended June 30, 2017. Restricted cash balances are primarily cash deposits secured against letters of credit related to certain property leases.

In January 2017, the FASB issued a new accounting standard update on narrowing the definition of a business. The new guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The Company adopted this new accounting standard retrospectively during the three months ended March 31, 2018 and the adoption did not have a material impact on the Company’s financial statements.

Recently issued accounting pronouncements not yet adopted

In February 2018, the FASB issued a new accounting standard update to give entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings (accumulated deficits). The new guidance also requires entities to make additional disclosures, regardless of whether reclassification of tax effects is elected. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard update on its financial statements and related disclosures.

With the exception of the standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2018, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, that are of significance or potential significance to the Company.

11


Note 2. Revenue

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts not yet substantially completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical accounting practices.

Revenue Recognition

Revenue is recognized when the control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. The Company identifies its contracts with customers and all performance obligations within those contracts. The Company then determines the transaction price and allocates the transaction price to the performance obligations within the Company's contracts with customers, recognizing revenue when, or as, the Company satisfies its performance obligations. While the majority of the Company's revenue transactions are based on standard business terms and conditions, the Company also enters into sales agreements with advertisers and data partners that sometimes involve multiple performance obligations and occasionally include non-standard terms or conditions.

Revenue by geography is based on the billing addresses of the customers. The following table sets forth revenue by services and revenue by geographic area (in thousands):  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017 (1)

 

 

2018

 

 

2017 (1)

 

Revenue by services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising services

 

$

601,060

 

 

$

489,148

 

 

$

1,176,216

 

 

$

962,928

 

Data licensing and other

 

 

109,481

 

 

 

84,707

 

 

 

199,196

 

 

 

159,178

 

Total revenue

 

$

710,541

 

 

$

573,855

 

 

$

1,375,412

 

 

$

1,122,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017 (1)

 

 

2018

 

 

2017 (1)

 

Revenue by geographic area:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

366,657

 

 

$

334,675

 

 

$

713,227

 

 

$

675,259

 

Japan

 

 

122,219

 

 

 

74,254

 

 

 

239,045

 

 

 

146,847

 

Rest of World

 

 

221,665

 

 

 

164,926

 

 

 

423,140

 

 

 

300,000

 

Total revenue

 

$

710,541

 

 

$

573,855

 

 

$

1,375,412

 

 

$

1,122,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Prior period amounts have not been adjusted due to adoption of the new revenue standard under the modified retrospective method.

 

Revenue Recognition Accounting Policy

The Company generates the substantial majority of its revenue from the sale of advertising services with the balance from data licensing and other arrangements.

The Company generates its advertising revenue primarily from the sale of its Promoted Products: (i) Promoted Tweets, (ii) Promoted Accounts and (iii) Promoted Trends. Promoted Tweets and Promoted Accounts are pay-for-performance advertising products or pay on impressions delivered, each priced through an auction. Promoted Trends are featured by geography and offered on a fixed-fee-per-day basis. Advertisers are obligated to pay when a user engages with a Promoted Tweet, follows a Promoted Account, when an impression is delivered, or when a Promoted Trend is displayed. These advertising services may be sold in combination as a bundled arrangement or separately on a stand-alone basis.

12


For the Company's Promoted Product arrangements, significant judgments are (i) determining whether the Company is the principal or the agent in arrangements where another party is involved in providing specified services to a customer, (ii) identifying the performance obligations in the contract, (iii) determining the basis for allocating contract consideration to performance obligations, and (iv) estimating the transaction price to be allocated for contracts with tiered rebate provisions.

The Company may generate revenue from the sale of certain Promoted Tweets through placement by Twitter of advertiser ads against third-party publisher content. The Company will pay the third-party publisher a revenue share fee for its right to monetize their content. In such transactions, advertisers are contracting to obtain a single integrated advertising service, the Promoted Tweet combined with the third-party publisher content, and the Company obtains control of the third-party publisher content displayed on Twitter that it then combines with the advertiser ads within the Promoted Tweet. Therefore, the Company reports advertising revenue generated from these transactions on a gross basis and records the related third-party content monetization fees as cost of revenue.

The Company also generates advertising revenue by selling services in which the Company places ads on third-party publishers’ websites, applications or other offerings. To fulfill these transactions, the Company purchases advertising inventory from third-party publishers’ websites and applications where the Company has identified the advertisers’ targeted audience and therefore incurs traffic acquisition costs prior to transferring the advertising service to its customers. At such point, the Company has the sole ability to monetize the third-party publishers advertising inventory. In such transactions, the Company obtains control of a right to a service to be performed by the third-party publishers, which gives the Company the ability to direct those publishers to provide the services to the Company's customers on the Company's behalf. Therefore, the Company reports advertising revenue generated from these transactions on a gross basis and records the related traffic acquisition costs as cost of revenue.

Fees for the advertising services above are recognized in the period when advertising is delivered as evidenced by a user engaging with a Promoted Tweet or an ad on a third-party publisher website or application in a manner satisfying 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, following a Promoted Account, delivery of impressions, or through the display of a Promoted Trend on the Company's platform.

The Company has concluded that data licensing arrangements, which grant customers a right to access Twitter intellectual property for a defined period of time, may contain a single performance obligation or may contain multiple performance obligations satisfied over the same period of time. In some of the Company's data licensing arrangements, pricing is a fixed monthly fee over a specified term. In such arrangements, data licensing revenue is recognized on a straight-line basis over the period in which the Company provides data access. In other data licensing arrangements, the Company charges customers based on the amount of sales they generate from downstream customers using Twitter data. Certain of those royalty-based data licensing arrangements are subject to minimum guarantees. The Company recognizes revenue for minimum guarantees on a straight-line basis over the period in which the Company provides data access. Royalties in excess of minimum guarantees, if any, are recognized as revenue in the period that the related downstream sales occur.

Other revenue is primarily generated from service fees from transactions completed on the Company's mobile ad exchange. The Company's mobile ad exchange enables buyers and sellers to purchase and sell advertising inventory by matching them in the exchange. The Company has determined it is not the principal in the purchase and sale of advertising inventory in transactions between third-party buyers and sellers on the exchange because the Company does not obtain control of the advertising inventory. The Company reports revenue related to its ad exchange services on a net basis for the fees paid by buyers, net of costs related to acquiring the advertising inventory paid to sellers.

13


Arrangements involving multiple performance obligations primarily consist of combinations of the Company's pay-for-performance products, Promoted Tweets and Promoted Accounts, which are priced through an auction, and Promoted Trends, which are priced on a fixed-fee-per day, per geography basis. For arrangements that include a combination of these products, the Company develops an estimate of the standalone selling price for these products in order to allocate any potential discount to all performance obligations in the arrangement. The estimate of standalone selling price for pay-for-performance auction based products is determined based on the winning bid price. The estimate of standalone selling price for Promoted Trends is based on Promoted Trends sold on a standalone basis and/or separately priced in a bundled arrangement by reference to a list price by geography, which is updated and approved periodically. For other arrangements involving multiple performance obligations where neither auction pricing nor standalone sales provide sufficient evidence of standalone selling price, the Company estimates standalone selling price using either an adjusted market assessment approach or an expected cost plus margin approach. The Company believes the use of its estimation approach and allocation of the transaction price on a relative standalone selling price basis to each performance obligation results in revenue recognition in a manner consistent with the underlying economics of the transaction and the allocation principle included in Topic 606.

Impact of Adoption

The Company recorded a net reduction to opening accumulated deficit of $12.1 million, an increase to unbilled revenue of $8.0 million, and a reduction to deferred revenue of $4.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to its data licensing arrangements.

As a result of applying the new standard, the impact for the three months ended June 30, 2018 was an increase to revenue of $3.7 million, an increase to unbilled revenue of $3.5 million, and a reduction to deferred revenue of $0.2 million. The impact for the six months ended June 30, 2018 was an increase to revenue of $9.6 million, an increase to unbilled revenue of $7.5 million, and a reduction to deferred revenue of $2.1 million, with the impact primarily related to the Company’s data licensing arrangements.

Practical Expedients and Exemptions

The Company expenses sales commissions as incurred when the amortization period is one year or less. Sales commission expenses are recorded within sales and marketing in the consolidated statements of operations.

The Company applied the practical expedient to not disclose the value of remaining performance obligations not yet satisfied as of period end for contracts with an original expected duration of one year or less.

The Company applied the practical expedient to not disclose the value of remaining performance obligations not yet satisfied as of period end for variable consideration in the form of sales-based royalties promised in exchange for access licenses to its intellectual property in data licensing contracts.

 

Contract Balances

 

The Company enters into contracts with its customers, which may give rise to contract liabilities (deferred revenue) and contract assets (unbilled revenue). The payment terms and conditions within the Company’s contracts vary by the type and location of its customer and products or services purchased, the substantial majority of which are due in less than one year. When the timing of revenue recognition differs from the timing of payments made by customers, the Company recognizes either unbilled revenue (its performance precedes billing date) or deferred revenue (customer payment is received in advance of performance).

 

Deferred Revenue (Contract Liabilities)

The Company records deferred revenue within accrued and other current liabilities in the consolidated balance sheets. The Company's deferred revenue balance primarily consists of cash payments due in advance of satisfying its performance obligations relating to data licensing contracts and performance obligations given to customers based on their spend relating to advertising contracts, for which the Company defers, as they represent material rights. The Company recognizes deferred revenue relating to its data licensing contracts on a straight-line basis over the period in which the Company provides data access. The Company recognizes deferred revenue relating to its advertising contracts based on the amount of customer spend and the relative standalone selling price of the material rights.

 

14


Unbilled Revenue (Contract Assets)

The Company records unbilled revenue within prepaid expenses and other current assets and other assets in the consolidated balance sheets. The Company's unbilled revenue primarily consists of amounts that have yet to be billed under contracts with escalating fee structures. Specifically, because the Company generally recognizes revenue on a straight-line basis for data licensing arrangements with escalating fee structures, revenue recognized exceeds amounts the Company has a right to bill during early portions of such contracts, resulting in unbilled revenue.

The following table presents contract balances (in thousands):

 

 

January 1,

 

 

March 31,

 

 

June 30,

 

 

 

2018

 

 

2018

 

 

2018

 

Unbilled Revenue

 

$

7,980

 

 

$

12,117

 

 

$

15,610

 

Deferred Revenue

 

$

25,869

 

 

$

29,073

 

 

$

67,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amount of revenue recognized in the three and six months ended June 30, 2018 that was included in the opening deferred revenue balance was $15.4 million and $25.7 million, respectively. This revenue consists primarily of revenue recognized as a result of the utilization of bonus media inventory earned by customers in prior periods.

The amount of revenue recognized from obligations satisfied (or partially satisfied) in prior periods was not material.

The increase in unbilled revenue balance from January 1, 2018 to June 30, 2018 was primarily attributable to differences between revenue recognized and amounts billed in the Company's data licensing arrangements with escalating fee structures due to recognizing such fees as revenue on a straight-line basis.

The increase in deferred revenue balance from January 1, 2018 to June 30, 2018 was primarily due to cash payments due in advance of satisfying our performance obligations relating to data licensing contracts and bonus and make good media inventory offered to customers during the period, offset by the utilization of such media inventory issued in prior periods.

Remaining Performance Obligations

As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations in contracts with an original expected duration exceeding one year is $480.9 million. This total amount primarily consists of long-term data licensing contracts and excludes deferred revenue related to the Company’s short-term Promoted Products arrangements. The Company expects to recognize this amount as revenue over the following time periods (in thousands):

 

 

 

Remaining Performance Obligations

 

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

2020 and

 

 

 

Total

 

 

2018

 

 

2019

 

 

Thereafter

 

Revenue expected to be recognized on remaining performance obligations

 

$

480,912

 

 

$

104,831

 

 

$

174,560

 

 

$

201,521

 

 

 

15


Note 3. Cash, Cash Equivalents and Short-term Investments

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

345,038

 

 

$

301,684

 

Money market funds

 

 

1,794,795

 

 

 

981,681

 

U.S. government and agency securities including treasury bills

 

 

24,988

 

 

 

 

Corporate notes, commercial paper and certificates of deposit

 

 

379,820

 

 

 

355,048

 

Total cash and cash equivalents

 

$

2,544,641

 

 

$

1,638,413

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities including treasury bills

 

$

1,122,105

 

 

$

1,064,957

 

Corporate notes, commercial paper and certificates of deposit

 

 

1,994,369

 

 

 

1,699,732

 

Total short-term investments

 

$

3,116,474

 

 

$

2,764,689

 

 

The contractual maturities of securities classified as available-for-sale as of June 30, 2018 were as follows (in thousands):

 

 

 

June 30,

 

 

 

2018

 

Due within one year

 

$

2,457,729

 

Due after one year through five years

 

 

658,745

 

Total

 

$

3,116,474

 

 

The following tables summarize unrealized gains and losses related to available-for-sale securities classified as short-term investments on the Company’s consolidated balance sheets (in thousands):

 

 

 

June 30, 2018

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including treasury bills

 

$

1,123,264

 

 

$

117

 

 

$

(1,276

)

 

$

1,122,105

 

Corporate notes, commercial paper and

   certificates of deposit

 

 

1,997,184

 

 

 

195

 

 

 

(3,010

)

 

 

1,994,369

 

Total available-for-sale securities classified as

   short-term investments

 

$

3,120,448

 

 

$

312

 

 

$

(4,286

)

 

$

3,116,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including treasury bills

 

$

1,067,047

 

 

$

133

 

 

$

(2,223

)

 

$

1,064,957

 

Corporate notes, commercial paper and

   certificates of deposit

 

 

1,701,168

 

 

 

72

 

 

 

(1,508

)

 

 

1,699,732

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,768,215

 

 

$

205

 

 

$

(3,731

)

 

$

2,764,689

 

 

 

The gross unrealized loss on securities in a continuous loss position for 12 months or longer was not material as of June 30, 2018 and December 31, 2017.

Investments are reviewed periodically to identify possible other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables above as the Company believes that the decrease in fair value of these securities is temporary and expects to recover the initial cost of investment for these securities.

16


 

Note 4. Fair Value Measurements

The Company measures its cash equivalents, short-term investments and derivative financial instruments at fair value. The Company classifies its cash equivalents, short-term investments and derivative financial instruments within Level 1 or Level 2 because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. The fair value of the Company’s Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of the Company’s Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including the readily-available pricing sources for the identical underlying security that may not be actively traded.

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 based on the three-tier fair value hierarchy (in thousands):

 

 

June 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

1,794,795

 

 

$

 

 

$

 

 

$

1,794,795

 

Treasury bills

 

24,988

 

 

 

 

 

 

 

 

 

24,988

 

Commercial paper

 

 

 

 

379,820

 

 

 

 

 

 

379,820

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

 

 

 

164,096

 

 

 

 

 

 

 

164,096

 

U.S. government securities

 

 

 

 

643,317

 

 

 

 

 

 

643,317

 

Agency securities

 

 

 

 

314,692

 

 

 

 

 

 

314,692

 

Corporate notes

 

 

 

 

945,563

 

 

 

 

 

 

945,563

 

Commercial paper

 

 

 

 

356,435

 

 

 

 

 

 

356,435

 

Certificates of deposit

 

 

 

 

692,371

 

 

 

 

 

 

692,371

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

1,419

 

 

 

 

 

 

1,419

 

Total

$

1,819,783

 

 

$

3,497,713

 

 

$

 

 

$

5,317,496

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

915

 

 

 

 

 

 

915

 

Total

$

 

 

$

915

 

 

$

 

 

$

915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents: