Twitter, Inc.
TWITTER, INC. (Form: 10-Q, Received: 08/07/2015 19:13:37)

 

 

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, 2015

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

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (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 28, 2015 was 676,304,418.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

5

 

 

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

 

5

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and June 30, 2014

 

6

 

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and June 30, 2014

 

7

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and June 30, 2014

 

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

  

34

Item 4.

 

Controls and Procedures

  

35

 

 

 

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

  

64

Item 6.

 

Exhibits

  

64

 

 

Signatures

  

65

 

 

 

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 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 platforms, products and services and increase the amount that advertisers spend with us;

·

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

·

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

·

our ability to improve user monetization, including of our logged out and syndicated audiences;

·

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, including our ability to operate in those countries.

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.

 

 

3


NOTE REGARDING KEY METRICS

We review a number of metrics, including monthly active users, or MAUs, 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 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. 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 as of December 31, 2014. 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 in the past have made improvements in our spam detection capabilities that have resulted in the suspension of 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 applications that automatically contact our servers for regular updates with no discernable 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. In the three months ended December 31, 2014, approximately 8.5% of users used third-party applications that may have automatically contacted our servers for regular updates without any discernable additional user-initiated action. As such, the calculations of MAUs presented in this Quarterly Report on Form 10-Q may be affected as a result of this 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 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. We present and discuss our total audience based on both internal metrics and data from Google Analytics, which measures unique visitors to our properties.

 

 

 

4


P ART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

TWITTER, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

883,307

 

 

$

1,510,724

 

Short-term investments

 

 

2,677,263

 

 

 

2,111,154

 

Accounts receivable, net of allowance for doubtful accounts of $8,229 and $5,507

   as of June 30, 2015 and December 31, 2014, respectively

 

 

475,204

 

 

 

418,454

 

Prepaid expenses and other current assets

 

 

234,653

 

 

 

215,521

 

Total current assets

 

 

4,270,427

 

 

 

4,255,853

 

Property and equipment, net

 

 

651,017

 

 

 

557,019

 

Intangible assets

 

 

156,352

 

 

 

105,011

 

Goodwill

 

 

1,102,193

 

 

 

622,570

 

Other assets

 

 

50,345

 

 

 

42,629

 

Total assets

 

$

6,230,334

 

 

$

5,583,082

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

51,614

 

 

$

53,241

 

Accrued and other current liabilities

 

 

274,621

 

 

 

228,233

 

Capital leases, short-term

 

 

98,606

 

 

 

112,320

 

Total current liabilities

 

 

424,841

 

 

 

393,794

 

Convertible notes

 

 

1,414,896

 

 

 

1,376,020

 

Capital leases, long-term

 

 

83,381

 

 

 

118,950

 

Deferred and other long-term tax liabilities, net

 

 

31,768

 

 

 

24,706

 

Other long-term liabilities

 

 

44,264

 

 

 

43,209

 

Total liabilities

 

 

1,999,150

 

 

 

1,956,679

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

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; 674,379 and

   642,385 shares issued and outstanding as of June 30, 2015 and December 31,

   2014, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

6,135,566

 

 

 

5,208,870

 

Accumulated other comprehensive loss

 

 

(32,834

)

 

 

(10,024

)

Accumulated deficit

 

 

(1,871,551

)

 

 

(1,572,446

)

Total stockholders' equity

 

 

4,231,184

 

 

 

3,626,403

 

Total liabilities and stockholders' equity

 

$

6,230,334

 

 

$

5,583,082

 

 

 

 

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue

 

$

502,383

 

 

$

312,166

 

 

$

938,322

 

 

$

562,658

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

167,623

 

 

 

100,027

 

 

 

311,098

 

 

 

185,530

 

Research and development

 

 

198,907

 

 

 

177,095

 

 

 

388,653

 

 

 

326,486

 

Sales and marketing

 

 

201,948

 

 

 

140,261

 

 

 

385,505

 

 

 

246,496

 

General and administrative

 

 

64,909

 

 

 

44,694

 

 

 

130,686

 

 

 

83,428

 

Total costs and expenses

 

 

633,387

 

 

 

462,077

 

 

 

1,215,942

 

 

 

841,940

 

Loss from operations

 

 

(131,004

)

 

 

(149,911

)

 

 

(277,620

)

 

 

(279,282

)

Interest expense

 

 

(24,437

)

 

 

(2,654

)

 

 

(48,756

)

 

 

(5,756

)

Other income (expense), net

 

 

(695

)

 

 

2,324

 

 

 

8,430

 

 

 

3,657

 

Loss before income taxes

 

 

(156,136

)

 

 

(150,241

)

 

 

(317,946

)

 

 

(281,381

)

Benefit from income taxes

 

 

(19,473

)

 

 

(5,599

)

 

 

(18,841

)

 

 

(4,377

)

Net loss

 

$

(136,663

)

 

$

(144,642

)

 

$

(299,105

)

 

$

(277,004

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.21

)

 

$

(0.24

)

 

$

(0.46

)

 

$

(0.47

)

Diluted

 

$

(0.21

)

 

$

(0.24

)

 

$

(0.46

)

 

$

(0.47

)

Weighted-average shares used to compute net loss per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

655,721

 

 

 

595,607

 

 

 

648,143

 

 

 

587,760

 

Diluted

 

 

655,721

 

 

 

595,607

 

 

 

648,143

 

 

 

587,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

 

$

(136,663

)

 

$

(144,642

)

 

$

(299,105

)

 

$

(277,004

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments in available-for-sale

   securities, net of tax

 

 

(515

)

 

 

(47

)

 

 

55

 

 

 

(78

)

Foreign currency translation adjustment

 

 

10,637

 

 

 

542

 

 

 

(22,865

)

 

 

600

 

Net change in accumulated other comprehensive loss

 

 

10,122

 

 

 

495

 

 

 

(22,810

)

 

 

522

 

Comprehensive loss

 

$

(126,541

)

 

$

(144,147

)

 

$

(321,915

)

 

$

(276,482

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(299,105

)

 

$

(277,004

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

143,913

 

 

 

85,582

 

Stock-based compensation expense

 

 

357,948

 

 

 

284,780

 

Amortization of discount on convertible notes

 

 

33,644

 

 

 

 

Provision for bad debt

 

 

3,345

 

 

 

1,436

 

Deferred income tax benefit

 

 

(24,306

)

 

 

(7,737

)

Other non-cash adjustments

 

 

(5,197

)

 

 

666

 

Changes in assets and liabilities, net of assets acquired and liabilities assumed

   from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(43,944

)

 

 

(37,213

)

Prepaid expenses and other assets

 

 

(7,861

)

 

 

(17,229

)

Accounts payable

 

 

(11,437

)

 

 

1,407

 

Accrued and other liabilities

 

 

35,160

 

 

 

89,692

 

Net cash provided by operating activities

 

 

182,160

 

 

 

124,380

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(160,340

)

 

 

(94,077

)

Purchases of marketable securities

 

 

(2,235,497

)

 

 

(1,039,014

)

Proceeds from maturities of marketable securities

 

 

1,342,137

 

 

 

1,009,926

 

Proceeds from sales of marketable securities

 

 

335,261

 

 

 

168,138

 

Changes in restricted cash

 

 

(3,797

)

 

 

(11,716

)

Business combinations, net of cash acquired

 

 

(26,300

)

 

 

(132,496

)

Purchases of cost method investments and other

 

 

(7,000

)

 

 

(400

)

Net cash used in investing activities

 

 

(755,536

)

 

 

(99,639

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(6,480

)

 

 

(16,168

)

Repayments of capital lease obligations

 

 

(62,934

)

 

 

(42,886

)

Proceeds from exercise of stock options

 

 

6,962

 

 

 

15,907

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

21,600

 

 

 

21,224

 

Other financing activities

 

 

 

 

 

(1,162

)

Net cash used in financing activities

 

 

(40,852

)

 

 

(23,085

)

Net increase (decrease) in cash and cash equivalents

 

 

(614,228

)

 

 

1,656

 

Foreign exchange effect on cash and cash equivalents

 

 

(13,189

)

 

 

2,310

 

Cash and cash equivalents at beginning of period

 

 

1,510,724

 

 

 

841,010

 

Cash and cash equivalents at end of period

 

$

883,307

 

 

$

844,976

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisitions

 

$

516,538

 

 

$

51,846

 

Equipment purchases under capital leases

 

$

10,544

 

 

$

47,739

 

Changes in accrued equipment purchases

 

$

9,087

 

 

$

43,597

 

 

 

 

 

 

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 offers products and services for users, advertisers, developers and platform and data partners.

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

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, 2014.

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. 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. 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.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“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. In July 2015, the FASB decided to delay the effective date of the guidance by one year and permit early adoption for annual and interim periods beginning after December 15, 2016.  As a result of the revision, the guidance will be effective for fiscal years, and interim periods with those fiscal years, beginning after December 15, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. 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.

In June 2014, the FASB issued a 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.

9


In February 2015, the FASB issued a new accounting standard update on consolidation analysis . T he new guidance amends the current consolidation guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance will be effective for fiscal years , and interim periods within those fiscal years , beginning after D ecember 15, 2015. Early adoption is permitted, but the guidance must be applied as of the beginning of the fiscal year con taining the adoption date. A doption of this new accounting standard update is not expected to have a material impact on the Company’s financial statements .

In April 2015, the FASB issued a new accounting standard update on the presentation of debt issuance costs. The new guidance requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Adoption of this new accounting standard update is not expected to have a material impact on 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,

 

 

 

2015

 

 

2014

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

205,861

 

 

$

147,848

 

Money market funds

 

 

284,532

 

 

 

882,443

 

U.S. government and agency securities

   including treasury bills

 

 

 

 

 

271,418

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

392,914

 

 

 

209,015

 

Total cash and cash equivalents

 

$

883,307

 

 

$

1,510,724

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities

   including treasury bills

 

$

1,264,741

 

 

$

1,009,541

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

1,412,522

 

 

 

1,101,613

 

Total short-term investments

 

$

2,677,263

 

 

$

2,111,154

 

 

Marketable securities are classified as available-for-sale for use in current operations and are presented as short-term investments in the consolidated balance sheets. The contractual maturities of securities classified as available-for-sale as of June 30, 2015 were as follows (in thousands):

 

 

 

June 30, 2015

 

Due within one year

 

$

1,951,083

 

Due after one year through two years

 

 

726,180

 

Total

 

$

2,677,263

 

 

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, 2015

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Government and agency securities including

   treasury bills

 

$

1,264,808

 

 

$

166

 

 

$

(233

)

 

$

1,264,741

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

1,413,358

 

 

 

43

 

 

 

(879

)

 

 

1,412,522

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,678,166

 

 

$

209

 

 

$

(1,112

)

 

$

2,677,263

 

10


 

 

 

December 31, 2014

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Government and agency securities including

   treasury bills

 

$

1,009,827

 

 

$

8

 

 

$

(294

)

 

$

1,009,541

 

Corporate notes, certificates of deposit and

   commercial paper

 

 

1,102,275

 

 

 

4

 

 

 

(666

)

 

 

1,101,613

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,112,102

 

 

$

12

 

 

$

(960

)

 

$

2,111,154

 

There were no securities in a continuous loss position for 12 months or longer as of June 30, 2015 and December 31, 2014.

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.

 

Note 3. 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, 2015 and December 31, 2014 based on the three-tier fair value hierarchy (in thousands):

 

 

June 30, 2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

284,532

 

 

$

 

 

$

 

 

$

284,532

 

Commercial paper

 

 

 

 

376,653

 

 

 

 

 

 

376,653

 

Certificates of deposit

 

 

 

 

16,261

 

 

 

 

 

 

16,261

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

29,365

 

 

 

 

 

 

 

 

 

29,365

 

U.S. government securities

 

 

 

 

553,237

 

 

 

 

 

 

553,237

 

Agency securities

 

 

 

 

682,139

 

 

 

 

 

 

682,139

 

Corporate notes

 

 

 

 

741,097

 

 

 

 

 

 

741,097

 

Commercial paper

 

 

 

 

301,910

 

 

 

 

 

 

301,910

 

Certificates of deposit

 

 

 

 

369,515

 

 

 

 

 

 

369,515

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

975

 

 

 

 

 

 

975

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

(979

)

 

 

 

 

 

(979

)

Total

$

313,897

 

 

$

3,040,808

 

 

$

 

 

$

3,354,705

 

11


 

 

December 31, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

882,443

 

 

$

 

 

$

 

 

$

882,443

 

Treasury bills

 

73,525

 

 

 

 

 

 

 

 

 

73,525

 

U.S. government securities

 

 

 

 

157,895

 

 

 

 

 

 

157,895

 

Agency securities

 

 

 

 

39,998

 

 

 

 

 

 

39,998

 

Corporate notes

 

 

 

 

13,684

 

 

 

 

 

 

13,684

 

Commercial paper

 

 

 

 

185,321

 

 

 

 

 

 

185,321

 

Certificates of deposit

 

 

 

 

10,010

 

 

 

 

 

 

10,010

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

167,575

 

 

 

 

 

 

 

 

 

167,575

 

U.S. government securities

 

 

 

 

746,128

 

 

 

 

 

 

746,128

 

Agency securities

 

 

 

 

95,838

 

 

 

 

 

 

95,838

 

Corporate notes

 

 

 

 

551,604

 

 

 

 

 

 

551,604

 

Commercial paper

 

 

 

 

300,589

 

 

 

 

 

 

300,589

 

Certificates of deposit

 

 

 

 

249,420

 

 

 

 

 

 

249,420

 

Total

$

1,123,543

 

 

$

2,350,487

 

 

$

 

 

$

3,474,030

 

   

In 2014, the Company issued $935.0 million principal amount of 0.25% convertible senior notes due in 2019 (the “2019 Notes”) and $954.0 million principal amount of 1.00% convertible senior notes due in 2021 (the “2021 Notes” and together with the 2019 Notes, the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Refer to Note 8 – Convertible Senior Notes for further details on the Notes. The estimated fair value of the 2019 Notes and 2021 Notes based on a market approach as of June 30, 2015 was approximately $836.9 million and $848.9 million respectively, which represents a Level 2 valuation. The estimated fair value was determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market on June 30, 2015.

 

Derivative Financial Instruments

The Company enters into foreign currency forward contracts with financial institutions to reduce the risk that its earnings may be adversely affected by the impact of exchange rate fluctuations on monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. These contracts do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the hedged foreign currency denominated assets and liabilities. These foreign currency forward contracts are not designated as hedging instruments.

The Company recognizes these derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value based on a Level 2 valuation. The Company records changes in the fair value (i.e., gains or losses) of the derivatives as other income (expense), net in the consolidated statements of operations. The notional principal of foreign currency forward contracts outstanding was equivalent to $265.6 million at June 30, 2015. There were no outstanding foreign currency forward contracts as of December 31, 2014.

The fair values of outstanding derivative instruments for the periods presented on a gross basis are as follows (in thousands):

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

Balance Sheet Location

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts not designated

   as hedging instruments

 

Other current assets

 

$

975

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts not designated

   as hedging instruments

 

Other current liabilities

 

 

979

 

 

 

 

Total

 

 

 

$

(4

)

 

$

 

12


The rea lized gains and losses on the foreign currency forward contracts were not significant in the three and six months ended June 30 , 2015. The Company did not have any derivative financial instrument s in the three and six months ended June 30 , 2014 .

 

 

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,

 

 

 

2015

 

 

2014

 

Property and equipment, net

 

 

 

 

 

 

 

 

Equipment

 

$

647,550

 

 

$

584,561

 

Furniture and leasehold improvements

 

 

212,633

 

 

 

131,851

 

Capitalized software

 

 

140,574

 

 

 

82,052

 

Construction in progress

 

 

95,773

 

 

 

89,806

 

Total

 

 

1,096,530

 

 

 

888,270

 

Less: Accumulated depreciation and

   amortization

 

 

(445,513

)

 

 

(331,251

)

Property and equipment, net

 

$

651,017

 

 

$

557,019

 

 

 

Note 5. Goodwill and Intangible Assets

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

 

Goodwill

 

 

 

 

Balance as of December 31, 2014

 

$

622,570

 

TellApart acquisition

 

 

394,989

 

Other acquisitions

 

 

84,567

 

Foreign currency translation adjustment

 

 

67

 

Balance as of June 30, 2015

 

$

1,102,193

 

 

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

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

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Value

 

 

Amortization

 

 

Value

 

June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

135,752

 

 

$

(41,710

)

 

$

94,042

 

Publisher and advertiser relationships

 

 

75,300

 

 

 

(15,410

)

 

 

59,890

 

Assembled workforce

 

 

1,960

 

 

 

(1,586

)

 

 

374

 

Other intangible assets

 

 

3,200

 

 

 

(1,154

)

 

 

2,046

 

Total

 

$

216,212

 

 

$

(59,860

)

 

$

156,352

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

105,052

 

 

$

(23,165

)

 

$

81,887

 

Publisher and advertiser relationships

 

 

32,000

 

 

 

(9,831

)

 

 

22,169

 

Assembled workforce

 

 

1,960

 

 

 

(1,457

)

 

 

503

 

Other intangible assets

 

 

1,100

 

 

 

(648

)

 

 

452

 

Total

 

$

140,112

 

 

$

(35,101

)

 

$

105,011

 

 

 

Amortization expense associated with intangible assets for the three months ended June 30, 2015 and 2014 was $14.0 million and $8.1 million, respectively, and for the six months ended June 30, 2015 and 2014 was $24.8 million and $14.3 million, respectively.

13


Estimated future amortization expense as of June 30 , 201 5 is as follows (in thousands):

 

Remainder of 2015