Twitter, Inc.
TWITTER, INC. (Form: 10-Q, Received: 08/11/2014 16:42:09)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2014

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   x     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   x     NO   ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of shares of the registrant’s common stock outstanding as of July 31, 2014 was 615,232,482.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

5

 

 

Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

 

5

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and June 30, 2013

 

6

 

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and June 30, 2013

 

7

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and June 30, 2013

 

8

 

 

Notes to Consolidated Financial Statements

 

9

Item 2.

 

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

  

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

35

Item 4.

 

Controls and Procedures

  

36

 

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal Proceedings

  

37

Item 1A.

 

Risk Factors

  

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

63

Item 5.

 

Other Information

 

63

Item 6.

 

Exhibits

  

63

 

 

Signatures

  

64

 

 

 

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 of our users;

·

our ability to develop or acquire new products and services, improve our existing products and services and increase the value of our products and services;

·

our business strategies, including our plans for growth;

·

our ability to attract advertisers to our platform and increase the amount that advertisers spend with us;

·

our expectations regarding our user growth rate and the usage of our mobile applications;

·

our ability to increase our revenue and our revenue growth rate;

·

our ability to improve user monetization, including advertising revenue per timeline view;

·

our future financial performance, including trends in cost per ad engagement, revenue, cost of revenue, operating expenses and income taxes;

·

our expectations regarding outstanding litigation;

·

the effects of seasonal trends on our results of operations;

·

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 scale and adapt our existing technology and network infrastructure;

·

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

·

our ability to successfully enter new markets and manage our international expansion.

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, results of operations and 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 will 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.

 

 

 

3


NOTE REGARDING KEY METRICS

We review a number of metrics, including monthly active users, or MAUs, timeline views, timeline views per MAU and advertising revenue per timeline view, 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, timeline views, timeline views per MAU and advertising revenue per timeline view.

The numbers of active users and timeline views 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. 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 represented less than 5% of our MAUs. 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. For example, we made an improvement in our spam detection capabilities in the second quarter of 2013 and suspended a large number of accounts. Spam accounts that we have identified are not included in the active user numbers presented in this Quarterly Report on Form 10-Q. We 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.

Our metrics are also affected by third-party applications that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the users associated with such applications as active users on the day or days such contact occurs.  Historically we tracked and reported in this section all users who accessed Twitter through third-party applications. We have reviewed and refined our processes, however, to calculate a new metric that is comprised of only such active users who have used applications with the capability to automatically contact our servers for regular updates where there was no discernable user action involved.  In the three months ended June 30, 2014, approximately 11% of all active users solely used third-party applications to access Twitter.  However, only up to approximately 8.5% of all active users used third party applications that may have automatically contacted our servers for regular updates without any discernable additional user-initiated action.  The calculations of MAUs presented in this Quarterly Report on Form 10-Q may be affected as a result of automated activity.

In addition, our data regarding user geographic location for purposes of reporting the geographic location of our MAUs is based on the IP address associated with the account when a user initially registered the account on Twitter. The IP address may not always accurately reflect a user’s actual location at the time such user engaged with our platform.

We present and discuss timeline views in this Quarterly Report on Form 10-Q. We have estimated a small percentage of timeline views in the three months ended September 30, 2013 to account for certain timeline views that were logged incorrectly during the quarter as a result of a product update. We believe this estimate to be reasonable, but the actual numbers could differ from our estimate. Further, timeline views in 2012 exclude an immaterial number of timeline views for our mobile applications, certain of which were not fully tracked until June 2012. We present and discuss our total audience based on both internal metrics and data from Google Analytics, which measures unique visitors to our properties.

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.

 

 

 

4


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

TWITTER, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

844,976

 

 

$

841,010

 

Short-term investments

 

 

1,252,055

 

 

 

1,393,044

 

Accounts receivable, net of allowance for doubtful accounts of $2,920 and $2,020 as

   of June 30, 2014 and December 31, 2013, respectively

 

 

287,082

 

 

 

247,328

 

Prepaid expenses and other current assets

 

 

79,773

 

 

 

93,297

 

Total current assets

 

 

2,463,886

 

 

 

2,574,679

 

Property and equipment, net

 

 

467,634

 

 

 

332,662

 

Intangible assets

 

 

105,497

 

 

 

77,627

 

Goodwill

 

 

514,601

 

 

 

363,477

 

Other assets

 

 

33,199

 

 

 

17,795

 

Total assets

 

$

3,584,817

 

 

$

3,366,240

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

23,084

 

 

$

27,994

 

Accrued and other current liabilities

 

 

247,547

 

 

 

110,310

 

Capital leases, short-term

 

 

99,744

 

 

 

87,126

 

Total current liabilities

 

 

370,375

 

 

 

225,430

 

Capital leases, long-term

 

 

101,929

 

 

 

110,520

 

Deferred and other long-term tax liabilities, net

 

 

31,929

 

 

 

59,500

 

Other long-term liabilities

 

 

33,991

 

 

 

20,784

 

Total liabilities

 

 

538,224

 

 

 

416,234

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.000005 par value-- 5,000,000 shares authorized; 612,682 and 569,922 shares

   issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

4,318,021

 

 

 

3,944,952

 

Accumulated other comprehensive income (loss)

 

 

199

 

 

 

(323

)

Accumulated deficit

 

 

(1,271,630

)

 

 

(994,626

)

Total stockholders' equity

 

 

3,046,593

 

 

 

2,950,006

 

Total liabilities and stockholders' equity

 

$

3,584,817

 

 

$

3,366,240

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

5


TWITTER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

Revenue

 

$

312,166

 

 

$

139,292

 

 

$

562,658

 

 

$

253,635

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

100,027

 

 

 

50,573

 

 

 

185,530

 

 

 

91,828

 

 

Research and development

 

 

177,095

 

 

 

64,263

 

 

 

326,486

 

 

 

111,837

 

 

Sales and marketing

 

 

140,261

 

 

 

45,258

 

 

 

246,496

 

 

 

77,697

 

 

General and administrative

 

 

44,694

 

 

 

18,114

 

 

 

83,428

 

 

 

35,096

 

 

Total costs and expenses

 

 

462,077

 

 

 

178,208

 

 

 

841,940

 

 

 

316,458

 

 

Loss from operations

 

 

(149,911

)

 

 

(38,916

)

 

 

(279,282

)

 

 

(62,823

)

 

Interest income (expense), net

 

 

(2,110

)

 

 

(1,513

)

 

 

(4,677

)

 

 

(2,746

)

 

Other income (expense), net

 

 

1,780

 

 

 

(1,019

)

 

 

2,578

 

 

 

(2,548

)

 

Loss before income taxes

 

 

(150,241

)

 

 

(41,448

)

 

 

(281,381

)

 

 

(68,117

)

 

Provision (benefit) for income taxes

 

 

(5,599

)

 

 

777

 

 

 

(4,377

)

 

 

1,134

 

 

Net loss

 

$

(144,642

)

 

$

(42,225

)

 

$

(277,004

)

 

$

(69,251

)

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.24

)

 

$

(0.32

)

 

$

(0.47

)

 

$

(0.53

)

 

Diluted

 

$

(0.24

)

 

$

(0.32

)

 

$

(0.47

)

 

$

(0.53

)

 

Weighted-average shares used to compute net loss per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

595,607

 

 

 

132,224

 

 

 

587,760

 

 

 

129,853

 

 

Diluted

 

 

595,607

 

 

 

132,224

 

 

 

587,760

 

 

 

129,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

6


TWITTER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

 

$

(144,642

)

 

$

(42,225

)

 

$

(277,004

)

 

$

(69,251

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments in available-for-sale securities, net of tax

 

 

(47

)

 

 

(19

)

 

 

(78

)

 

 

(32

)

Foreign currency translation adjustment

 

 

542

 

 

 

127

 

 

 

600

 

 

 

36

 

Net change in accumulated other comprehensive loss

 

 

495

 

 

 

108

 

 

 

522

 

 

 

4

 

Comprehensive loss

 

$

(144,147

)

 

$

(42,117

)

 

$

(276,482

)

 

$

(69,247

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

7


TWITTER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(277,004

)

 

$

(69,251

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

85,582

 

 

 

48,647

 

Stock-based compensation expense

 

 

284,780

 

 

 

35,568

 

Provision for bad debt

 

 

1,436

 

 

 

245

 

Deferred income tax benefit

 

 

(7,737

)

 

 

(508

)

Non-cash acquisition-related costs

 

 

307

 

 

 

566

 

Amortization of investment premium and other

 

 

359

 

 

 

3,045

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(37,213

)

 

 

(11,349

)

Prepaid expenses and other assets

 

 

(17,229

)

 

 

(5,301

)

Accounts payable

 

 

1,407

 

 

 

(1,923

)

Accrued and other liabilities

 

 

89,692

 

 

 

9,920

 

Net cash provided by operating activities

 

 

124,380

 

 

 

9,659

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(94,077

)

 

 

(26,761

)

Purchases of marketable securities

 

 

(1,039,014

)

 

 

(235,625

)

Proceeds from maturities of marketable securities

 

 

1,009,926

 

 

 

220,346

 

Proceeds from sales of marketable securities

 

 

168,138

 

 

 

24,300

 

Restricted cash

 

 

(11,716

)

 

 

(2,412

)

Business combinations, net of cash acquired

 

 

(132,896

)

 

 

(2,322

)

Net cash used in investing activities

 

 

(99,639

)

 

 

(22,474

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(16,168

)

 

 

 

Repayments of capital lease obligations

 

 

(42,886

)

 

 

(31,068

)

Proceeds from exercise of stock options, net of repurchase

 

 

15,907

 

 

 

5,698

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

21,224

 

 

 

 

Payments of offering costs

 

 

(1,162

)

 

 

 

Net cash used in financing activities

 

 

(23,085

)

 

 

(25,370

)

Net increase (decrease) in cash and cash equivalents

 

 

1,656

 

 

 

(38,185

)

Foreign exchange effect on cash and cash equivalents

 

 

2,310

 

 

 

(634

)

Cash and cash equivalents at beginning of period

 

 

841,010

 

 

 

203,328

 

Cash and cash equivalents at end of period

 

$

844,976

 

 

$

164,509

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common and convertible preferred stock issued in connection with acquisitions

 

$

51,846

 

 

$

109,945

 

Equipment purchases under capital leases

 

$

47,739

 

 

$

58,757

 

Changes in accrued equipment purchases

 

$

43,597

 

 

$

9,331

 

Unpaid deferred offering costs

 

$

 

 

$

1,600

 

 

 

 

 

 

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

 

 

 

8


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 is a public platform where any user can create a Tweet and any user can follow other users. Each Tweet is limited to 140 characters of text, but can also contain rich media, including photos, videos and applications.

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 (U.S. 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, 2013.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with U.S. 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.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax position is disallowed. The Company adopted this guidance prospectively for unrecognized tax benefits as of January 1, 2014. The adoption of this guidance resulted in a $15.8 million decrease in net deferred tax assets and the related liability for unrecognized tax benefits.

In May 2014, the FASB issued a new accounting standard update on revenue recognition from contracts with customers. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance.  According to the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

9


In June 2014, the FASB issued new accounting standard update on stock-based compensation when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. Adoption of this new accounting standard update is expected to have no impact to the Company’s financial statements.

 

Note 2. Cash, Cash Equivalents and Short-term Investments

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

252,977

 

 

$

164,135

 

Money market funds

 

 

258,315

 

 

 

229,529

 

U.S. government and agency securities including treasury bills

 

 

207,189

 

 

 

251,593

 

Corporate notes and commercial paper

 

 

126,495

 

 

 

195,753

 

Total cash and cash equivalents

 

$

844,976

 

 

$

841,010

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities including treasury bills

 

$

677,229

 

 

$

785,536

 

Corporate notes, certificates of deposit and commercial paper

 

 

574,826

 

 

 

607,508

 

Total short-term investments

 

$

1,252,055

 

 

$

1,393,044

 

 

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, 2014

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

US Government and agency securities including

   treasury bills

 

$

677,207

 

 

$

40

 

 

$

(18

)

 

$

677,229

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

575,002

 

 

 

7

 

 

 

(183

)

 

 

574,826

 

Total available-for-sale securities classified as

   short-term investments

 

$

1,252,209

 

 

$

47

 

 

$

(201

)

 

$

1,252,055

 

10


 

 

 

December 31, 2013

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

US Government and agency securities including

   treasury bills

 

$

785,535

 

 

$

22

 

 

$

(21

)

 

$

785,536

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

607,590

 

 

 

11

 

 

 

(93

)

 

 

607,508

 

Total available-for-sale securities classified as

   short-term investments

 

$

1,393,125

 

 

$

33

 

 

$

(114

)

 

$

1,393,044

 

 

The available-for-sale securities classified as cash and cash equivalents on the consolidated balance sheets are not included in the tables above as the gross unrealized gains and losses were immaterial for each period; their carrying value approximates fair value because of the short maturity period of these instruments.

 

The following tables show all short-term investments in an unrealized loss position for which other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

 

 

June 30, 2014

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

US Government and agency securities

   including treasury bills

 

$

230,873

 

 

$

(18

)

 

$

 

 

$

 

 

$

230,873

 

 

$

(18

)

Corporate notes, certificates of deposit

   and commercial paper

 

 

272,726

 

 

 

(183

)

 

 

 

 

 

 

 

 

272,726

 

 

 

(183

)

Total short-term investments in an

   unrealized loss position

 

$

503,599

 

 

$

(201

)

 

$

 

 

$

 

 

$

503,599

 

 

$

(201

)

 

 

 

December 31, 2013

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

 

Fair Value

 

 

Loss

 

US Government and agency securities

   including treasury bills

 

$

230,478

 

 

$

(21

)

 

$

 

 

$

 

 

$

230,478

 

 

$

(21

)

Corporate notes, certificates of deposit

   and commercial paper

 

 

171,894

 

 

 

(93

)

 

 

 

 

 

 

 

 

171,894

 

 

 

(93

)

Total short-term investments in an

   unrealized loss position

 

$

402,372

 

 

$

(114

)

 

$

 

 

$

 

 

$

402,372

 

 

$

(114

)

 

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 up to (or beyond) the initial cost of investment for these securities.

 

11


Note 3. Fair Value Measurements

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, 2014 and December 31, 2013 based on the three-tier fair value hierarchy (in thousands):

 

 

June 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

258,315

 

 

$

 

 

$

 

 

$

258,315

 

Treasury bills

 

174,097

 

 

 

 

 

 

 

 

 

174,097

 

Commercial paper

 

 

 

 

126,495

 

 

 

 

 

 

126,495

 

U.S. government securities

 

 

 

 

33,092

 

 

 

 

 

 

33,092

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

190,192

 

 

 

 

 

 

 

 

 

190,192

 

Commercial paper

 

 

 

 

181,928

 

 

 

 

 

 

181,928

 

Corporate notes

 

 

 

 

316,114

 

 

 

 

 

 

316,114

 

U.S. government securities

 

 

 

 

487,037

 

 

 

 

 

 

487,037

 

Certificates of deposit

 

 

 

 

76,784

 

 

 

 

 

 

76,784

 

Total

$

622,604

 

 

$

1,221,450

 

 

$

 

 

$

1,844,054

 

 

 

December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

229,529

 

 

$

 

 

$

 

 

$

229,529

 

Treasury bills

 

244,048

 

 

 

 

 

 

 

 

 

244,048

 

Commercial paper

 

 

 

 

194,742

 

 

 

 

 

 

194,742

 

U.S. government securities

 

 

 

 

7,545

 

 

 

 

 

 

7,545

 

Corporate notes

 

 

 

 

1,011

 

 

 

 

 

 

1,011

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

265,878

 

 

 

 

 

 

 

 

 

265,878

 

Agency securities

 

 

 

 

18,286

 

 

 

 

 

 

18,286

 

Commercial paper

 

 

 

 

272,617

 

 

 

 

 

 

272,617

 

Corporate notes

 

 

 

 

255,546

 

 

 

 

 

 

255,546

 

U.S. government securities

 

 

 

 

501,372

 

 

 

 

 

 

501,372

 

Certificates of deposit

 

 

 

 

79,345

 

 

 

 

 

 

79,345

 

Total

$

739,455

 

 

$

1,330,464

 

 

$

 

 

$

2,069,919

 

 

Note 4. Property and Equipment, Net

The following table presents the detail of property and equipment, net for the periods presented (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Property and equipment, net

 

 

 

 

 

 

 

 

Equipment

 

$

487,649

 

 

$

367,949

 

Furniture and leasehold improvements

 

 

103,744

 

 

 

54,965

 

Capitalized software

 

 

69,483

 

 

 

47,290

 

Construction in progress

 

 

44,065

 

 

 

29,523

 

Total

 

 

704,941

 

 

 

499,727

 

Less: Accumulated depreciation and amortization

 

 

(237,307

)

 

 

(167,065

)

Property and equipment, net

 

$

467,634

 

 

$

332,662

 

  

 

12


Note 5. Goodwill and Other Intangible Assets

The following table presents the goodwill activities for the periods presented (in thousands):

 

Goodwill

 

 

 

 

Balance as of December 31, 2013

 

$

363,477

 

Gnip acquisition

 

 

104,747

 

Other acquisitions

 

 

46,174

 

Foreign currency translation adjustment

 

 

203

 

Balance as of June 30, 2014

 

$

514,601

 

 

 

 

 

 

 

For each of the period presented, gross goodwill balance equaled the net balance since no impairment charges have been recorded.

The following table presents the detail of other intangible assets for the periods presented (in thousands):

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Value

 

 

Amortization

 

 

Value

 

June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

133,405

 

 

$

(55,341

)

 

$

78,064

 

Publisher and advertiser relationships

 

 

30,400

 

 

 

(5,074

)

 

 

25,326

 

Assembled workforce

 

 

1,960

 

 

 

(580

)

 

 

1,380

 

Other intangible assets

 

 

1,100

 

 

 

(373

)

 

 

727

 

Total

 

$

166,865

 

 

$

(61,368

)

 

$

105,497

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

100,553

 

 

$

(45,440

)

 

$

55,113

 

Publisher and advertiser relationships

 

 

21,100

 

 

 

(1,248

)

 

 

19,852

 

Assembled workforce

 

 

1,960

 

 

 

(300

)

 

 

1,660

 

Other intangible assets

 

 

1,100

 

 

 

(98

)

 

 

1,002

 

Total

 

$

124,713

 

 

$

(47,086

)

 

$

77,627

 

   

 

Amortization expense associated with other intangible assets for the three months ended June 30, 2014 and 2013 was $8.1 million and $3.3 million, respectively, and for the six months ended June 30, 2014 and 2013 was $14.3 million and $7.2 million, respectively.

Estimated future amortization expense as of June 30, 2014 is as follows (in thousands):

 

Remainder of 2014

 

$

16,643

 

2015

 

 

27,507

 

2016

 

 

19,971

 

2017

 

 

9,764

 

2018

 

 

9,764

 

Thereafter

 

 

21,848

 

Total

 

$

105,497

 

 

 

Note 6. Other Balance Sheet Components

Prepaid and other current assets

The following table presents the detail of prepaid and other current assets for the periods presented (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Deferred income taxes, net

 

$

33,460

 

 

$

62,122

 

Prepaid and other

 

 

46,313

 

 

 

31,175

 

Total

 

$

79,773

 

 

$

93,297

 

13


 

Accrued and other current liabilities

The following table presents the detail of accrued and other current liabilities for the periods presented (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Accrued compensation

 

$

88,779

 

 

$

29,882

 

Accrued fixed assets and maintenance

 

 

58,396

 

 

 

5,697

 

Deferred revenue

 

 

21,443

 

 

 

14,479

 

Accrued publisher payments

 

 

17,329

 

 

 

15,370

 

Accrued professional services

 

 

10,137

 

 

 

7,089

 

Accrued tax liabilities

 

 

11,845

 

 

 

9,515

 

Accrued other

 

 

39,618

 

 

 

28,278

 

Total

 

$

247,547

 

 

$

110,310

 

 

 

Note 7. Acquisitions

In May 2014, the Company completed its acquisition of privately held Gnip, Inc. (“Gnip”), a leading provider of social data and analytics headquartered in Boulder, Colorado. The acquisition is expected to allow the Company to further enhance its data analytics capabilities. Under the terms of the acquisition, the Company agreed to pay $107.3 million in cash and issue a total of 0.6 million shares of common stock including shares of restricted stock subject to continued employment in consideration of all of the issued and outstanding shares of capital stock of Gnip.  In addition, the Company agreed to issue up to 0.4 million shares of the Company’s stock as a result of assumed Gnip equity awards held by individuals, who will continue to provide services to the Company. The fair value of total consideration of $134.1 million, including the earned portion of assumed stock options and other equity awards, was preliminarily allocated to the acquired tangible and intangible assets and assumed liabilities based on their estimated fair values at closing as follows: $23.2 million to developed technology, $9.3 million to customer relationships, $9.1 million to tangible assets acquired, $5.8 million to liabilities assumed, $6.4 million to deferred tax liability recorded, and the excess $104.7 million of the purchase price over the fair value of net assets acquired was recorded as goodwill. This goodwill is primarily attributable to the potential expansion and future development of the Company’s data products, expected synergies arising from the acquisition and the value of acquired talent. Goodwill is not expected to be deductible for U.S. income tax purposes. Both developed technology and customer relationships will be amortized on a straight-line basis over their estimated useful life of 60 months. The discounted cash flow method, which calculates the fair value of an asset based on the value of cash flows that the asset is expected to generate in the future, was used to estimate the fair value of these intangible assets acquired.

During the six months ended June 30, 2014, the Company acquired four other companies, which were accounted for as business combinations. The total purchase price of $55.5 million (paid in shares of the Company’s common stock having a total fair value of $25.1 million and cash of $30.4 million) for these acquisitions was preliminarily allocated as follows: $9.2 million to developed technologies, $1.4 million to net tangible assets acquired based on their estimated fair value on the acquisition date, $1.3 million to deferred tax liability, and the excess $46.2 million of the purchase price over the fair value of net assets acquired to goodwill. Goodwill resulting from these acquisitions is not expected to be deductible for U.S. income tax purposes. Developed technologies was valued using the cost approach and will be amortized on a straight-line basis over their estimated useful lives of 12 to 18 months.

In connection with all of the acquisitions completed during the six months ended June 30, 2014, the Company also agreed to pay cash and shares of the Company’s common stock with a total fair value up to $57.8 million, which is to be paid to certain employees of the acquired entities contingent upon their continued employment with the Company. The Company recognizes compensation expense related to the cash and equity consideration over the requisite services periods of up to 48 months from the respective acquisition dates on a straight-line basis. In addition, the Company will recognize approximately $7.9 million of stock-based compensation expense in relation to these assumed stock options over the remaining requisite service periods of up to 48 months from the respective acquisition dates on a straight-line basis, excluding the fair value of the assumed stock options that was allocated and recorded as part of the purchase price for the portion of the service period completed pre-acquisition.

14


The results of operations for each of these acquisitions have been included in the Company’s consolidated statements of operations since the date of acquisition. Pro forma revenue and results of operations for these acquisitions have not been presented because they do not have a material impact to the consolidated revenue and results of operations, either individually or in aggregate.

 

 

Note 8. Net Loss per Share

The Company computes net loss per share of common stock in conformity with the two-class method required for participating securities. The Company considers the shares issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. Prior to their conversion to common stock, the Company also considered all series of the Company’s redeemable convertible preferred stock and convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a noncumulative dividend on a pari passu basis in the event that a dividend was paid on common stock. The holders of all series of convertible preferred stock and the holders of early exercised shares subject to repurchase do not have a contractual obligation to share in the losses of the Company. As such, the Company’s net losses for the three and six months ended June 30, 2014 and 2013 were not allocated to these participating securities.

Basic net loss per share is computed by dividing total net loss attributable to common stockholders by the weighted-average common shares outstanding. The weighted-average common shares outstanding is adjusted for shares subject to repurchase such as unvested restricted stock granted to employees in connection with acquisitions, contingently returnable shares and escrowed shares supporting indemnification obligations that are issued in connection with acquisitions and unvested stock options exercised. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding including potential dilutive common stock instruments. In the three and six months ended June 30, 2014 and 2013, the Company’s potential common stock instruments such as stock options, RSUs, shares to be issued under the Employee Stock Purchase Plan (“ESPP”), shares subject to repurchases and the warrant were not included in the computation of diluted loss per share as the effect of including these shares in the calculation would have been anti-dilutive.

The following table presents the calculation of basic and diluted net loss per share for periods presented (in thousands, except per share data).

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June  30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

 

$

(144,642

)

 

$

(42,225

)

 

$

(277,004

)

 

$

(69,251

)

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

604,054

 

 

 

138,839

 

 

 

596,399

 

 

 

135,914

 

Weighted-average restricted stock

   subject to repurchase

 

 

(8,447

)

 

 

(6,615

)

 

 

(8,639

)

 

 

(6,061

)

Weighted-average shares used to compute

   basic net loss per share

 

 

595,607

 

 

 

132,224

 

 

 

587,760

 

 

 

129,853

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute

   diluted net loss per share

 

 

595,607

 

 

 

132,224

 

 

 

587,760

 

 

 

129,853

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.24

)

 

$

(0.32

)

 

$

(0.47

)

 

$

(0.53

)

Diluted

 

$

(0.24

)

 

$

(0.32

)

 

$

(0.47

)

 

$

(0.53

)

 

 

15


The following number of potential common shares at the end of each period were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented (in thousands):

 

 

 

Three and Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

Stock options

 

 

27,470

 

 

 

44,157

 

RSUs

 

 

81,421

 

 

 

16,345

 

Employee stock purchase plan

 

 

1,147

 

 

 

 

Shares subject to repurchase

 

 

8,877

 

 

 

7,196

 

Warrant

 

 

 

 

 

117

 

 

 

Note 9. Common Stock and Stockholders’ Equity

Common Stock

Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding. As of June 30, 2014, no dividends have been declared.

Restricted Common Stock

The Company has granted restricted common stock to certain key continuing employees in connection with the acquisitions. Vesting of this stock is dependent on the respective employee’s continued employment at the Company during the requisite service period, which is generally two to four years from the issuance date, and the Company has the option to repurchase the unvested shares upon termination of employment. The fair value of the restricted common stock issued to employees is recorded as compensation expense on a straight-line basis over the requisite service period.

The activities for the restricted common stock issued to employees for the six months ended June 30, 2014 are summarized as follows (in thousands, except per share data):

 

 

 

 

 

 

 

Weighted-Average

 

 

 

Number of

 

 

Grant-Date Fair

 

 

 

Shares

 

 

Value Per Share

 

Unvested restricted common stock at December 31, 2013

 

 

6,866

 

 

$

17.60

 

Granted

 

 

1,089

 

 

$

35.23

 

Vested

 

 

(1,833

)

 

$

16.77

 

Canceled

 

 

(98

)

 

$

13.46

 

Unvested restricted common stock at June 30, 2014

 

 

6,024

 

 

$

21.10

 

  

During the three months ended June 30, 2014 and 2013, the Company recorded $12.9 million and $7.3 million, respectively, and recorded $24.0 million and $12.5 million during the six months ended June 30, 2014 and 2013, respectively, of compensation expense related to restricted common stock issued to employees. As of June 30, 2014, there was $94.4 million of unamortized stock-based compensation expense related to restricted common stock issued which is expected to be recognized over a weighted-average period of 2.45 years.

Equity Incentive Plans

As of June 30, 2014, the total number of RSUs outstanding under the 2013 Equity Incentive Plan was 18.2 million shares, and 82.4 million shares were available for future issuance. There were 88.7 million shares underlying options and RSUs outstanding under the 2007 Equity Incentive Plan as of June 30, 2014. No additional shares will be issued under the 2007 Equity Incentive Plan.

16


Under the 2007 Equity Incentive Plan, RSUs granted to (i) international employees; and (ii) domestic employees prior to February 2013 (“Pre-2013 RSUs”) vest upon the satisfaction of both a service condition and a performance condition. The service condition for these awards is generally satisfied over four years. The performance condition was satisfied in February 2014 pursuant to the terms of the Company’s e