Twitter, Inc.
TWITTER, INC. (Form: 10-Q, Received: 08/01/2016 17:10:31)

 

 

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, 2016

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 26, 2016 was 707,726,943.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

6

 

 

Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

 

6

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and June 30, 2015

 

7

 

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and June 30, 2015

 

8

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and June 30, 2015

 

9

 

 

Notes to Consolidated Financial Statements

 

10

Item 2.

 

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

  

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

36

Item 4.

 

Controls and Procedures

  

37

 

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal Proceedings

  

38

Item 1A.

 

Risk Factors

  

38

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, product features and services, improve our existing products and services, including with respect to video and performance advertising, and increase the value of our products and services;

 

·

our business strategies, plans and priorities, including our plans for growth, investment and refinement of our core service;

 

·

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.

3


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 obl igation 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, exc ept 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 t he 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 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, 2015. 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 discernible user-initiated 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. As of December 31, 2015, less than 8.5% of users used third-party applications that may have automatically contacted our servers for regular updates without any discernible 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 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.

We present and discuss our total audience based on both internal metrics and relying on data from Google Analytics, which measures logged out visitors to our properties.  

 

 

 

5


P ART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

TWITTER, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

947,710

 

 

$

911,471

 

Short-term investments

 

 

2,640,448

 

 

 

2,583,877

 

Accounts receivable, net of allowance for doubtful accounts of $8,894 and $8,121

   as of June 30, 2016 and December 31, 2015, respectively

 

 

556,781

 

 

 

638,694

 

Prepaid expenses and other current assets

 

 

237,100

 

 

 

247,750

 

Total current assets

 

 

4,382,039

 

 

 

4,381,792

 

Property and equipment, net

 

 

758,837

 

 

 

735,299

 

Intangible assets

 

 

127,770

 

 

 

141,015

 

Goodwill

 

 

1,186,303

 

 

 

1,122,728

 

Other assets

 

 

161,865

 

 

 

61,605

 

Total assets

 

$

6,616,814

 

 

$

6,442,439

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

91,415

 

 

$

134,081

 

Accrued and other current liabilities

 

 

277,188

 

 

 

283,792

 

Capital leases, short-term

 

 

81,035

 

 

 

88,166

 

Total current liabilities

 

 

449,638

 

 

 

506,039

 

Convertible notes

 

 

1,496,440

 

 

 

1,455,095

 

Capital leases, long-term

 

 

43,253

 

 

 

59,695

 

Deferred and other long-term tax liabilities, net

 

 

7,769

 

 

 

2,978

 

Other long-term liabilities

 

 

62,861

 

 

 

50,585

 

Total liabilities

 

 

2,059,961

 

 

 

2,074,392

 

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; 706,300 and 694,132 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

6,881,778

 

 

 

6,507,087

 

Accumulated other comprehensive loss

 

 

(44,503

)

 

 

(45,566

)

Accumulated deficit

 

 

(2,280,425

)

 

 

(2,093,477

)

Total stockholders' equity

 

 

4,556,853

 

 

 

4,368,047

 

Total liabilities and stockholders' equity

 

$

6,616,814

 

 

$

6,442,439

 

 

 

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

601,958

 

 

$

502,383

 

 

$

1,196,479

 

 

$

938,322

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

202,966

 

 

 

167,623

 

 

 

401,371

 

 

 

311,098

 

Research and development

 

 

178,511

 

 

 

198,907

 

 

 

334,305

 

 

 

388,653

 

Sales and marketing

 

 

236,619

 

 

 

201,948

 

 

 

472,790

 

 

 

385,505

 

General and administrative

 

 

70,238

 

 

 

64,909

 

 

 

133,505

 

 

 

130,686

 

Total costs and expenses

 

 

688,334

 

 

 

633,387

 

 

 

1,341,971

 

 

 

1,215,942

 

Loss from operations

 

 

(86,376

)

 

 

(131,004

)

 

 

(145,492

)

 

 

(277,620

)

Interest expense

 

 

(24,934

)

 

 

(24,437

)

 

 

(49,827

)

 

 

(48,756

)

Other income (expense), net

 

 

6,734

 

 

 

(695

)

 

 

13,040

 

 

 

8,430

 

Loss before income taxes

 

 

(104,576

)

 

 

(156,136

)

 

 

(182,279

)

 

 

(317,946

)

Provision (benefit) for income taxes

 

 

2,641

 

 

 

(19,473

)

 

 

4,669

 

 

 

(18,841

)

Net loss

 

$

(107,217

)

 

$

(136,663

)

 

$

(186,948

)

 

$

(299,105

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.15

)

 

$

(0.21

)

 

$

(0.27

)

 

$

(0.46

)

Diluted

 

$

(0.15

)

 

$

(0.21

)

 

$

(0.27

)

 

$

(0.46

)

Weighted-average shares used to compute net loss

   per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

698,326

 

 

 

655,721

 

 

 

694,959

 

 

 

648,143

 

Diluted

 

 

698,326

 

 

 

655,721

 

 

 

694,959

 

 

 

648,143

 

 

 

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

 

 

 

7


TWITTER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(107,217

)

 

$

(136,663

)

 

$

(186,948

)

 

$

(299,105

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on investments in available-for-sale securities, net of tax

 

 

(961

)

 

 

(515

)

 

 

3,481

 

 

 

55

 

Change in foreign currency translation adjustment

 

 

(13,052

)

 

 

10,637

 

 

 

(2,418

)

 

 

(22,865

)

Net change in accumulated other comprehensive loss

 

 

(14,013

)

 

 

10,122

 

 

 

1,063

 

 

 

(22,810

)

Comprehensive loss

 

$

(121,230

)

 

$

(126,541

)

 

$

(185,885

)

 

$

(321,915

)

 

 

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,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(186,948

)

 

$

(299,105

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

181,904

 

 

 

143,913

 

Stock-based compensation expense

 

 

318,611

 

 

 

357,948

 

Amortization of discount on convertible notes

 

 

36,940

 

 

 

33,644

 

Changes in bad debt provision

 

 

2,573

 

 

 

3,345

 

Deferred income tax

 

 

45

 

 

 

(24,306

)

Other adjustments

 

 

5,268

 

 

 

(5,197

)

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

86,213

 

 

 

(43,944

)

Prepaid expenses and other assets

 

 

(16,985

)

 

 

(7,861

)

Accounts payable

 

 

(37,085

)

 

 

(11,437

)

Accrued and other liabilities

 

 

(13,216

)

 

 

35,160

 

Net cash provided by operating activities

 

 

377,320

 

 

 

182,160

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(98,235

)

 

 

(160,340

)

Purchases of marketable securities

 

 

(1,330,946

)

 

 

(2,235,497

)

Proceeds from maturities of marketable securities

 

 

1,232,249

 

 

 

1,342,137

 

Proceeds from sales of marketable securities

 

 

42,416

 

 

 

335,261

 

Changes in restricted cash

 

 

(590

)

 

 

(3,797

)

Purchases of investments in privately-held companies

 

 

(78,002

)

 

 

(5,500

)

Business combinations, net of cash acquired

 

 

(80,142

)

 

 

(26,300

)

Other investing activities

 

 

(81

)

 

 

(1,500

)

Net cash used in investing activities

 

 

(313,331

)

 

 

(755,536

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(6,994

)

 

 

(6,480

)

Repayments of capital lease obligations

 

 

(48,740

)

 

 

(62,934

)

Proceeds from exercise of stock options

 

 

6,208

 

 

 

6,962

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

15,821

 

 

 

21,600

 

Other financing activities

 

 

22

 

 

 

 

Net cash used in financing activities

 

 

(33,683

)

 

 

(40,852

)

Net increase (decrease) in cash and cash equivalents

 

 

30,306

 

 

 

(614,228

)

Foreign exchange effect on cash and cash equivalents

 

 

5,933

 

 

 

(13,189

)

Cash and cash equivalents at beginning of period

 

 

911,471

 

 

 

1,510,724

 

Cash and cash equivalents at end of period

 

$

947,710

 

 

$

883,307

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisitions

 

$

644

 

 

$

516,538

 

Equipment purchases under capital leases

 

$

25,922

 

 

$

10,544

 

Changes in accrued property and equipment purchases

 

$

10,938

 

 

$

9,087

 

 

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.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. 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, 2015.

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. 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 GAAP guidance on this topic and eliminate 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. In March 2016, April 2016 and May 2016, the FASB further amended the guidance to clarify the implementation on principal versus agent considerations, the identification of performance obligation and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients. The Company has not yet selected a transition method and is evaluating the impact of adopting these new accounting standard updates 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. The Company adopted this guidance prospectively during the three months ended March 31, 2016, and the adoption had no impact to the Company’s financial statements.

10


In February 2015, the FASB issued a new accounting standard update on consolidation analysis. The new guidance amends the current consolidation guidance with respect to the analysis that a reporting ent ity must perform to determine whether it should consolidate certain types of legal entities. This guidance became effective for reporting periods beginning after December 15, 2015. The Company adopted this guidance retrospectively during the three months e nded March 31, 2016, and the adoption had no 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. The Company adopted this guidance retrospectively during the three months ended March 31, 2016 and the adoption had an immaterial impact on the Company’s financial statements.

In September 2015, the FASB issued a new accounting standard update on simplifying the accounting for measurement-period adjustments in business combinations. The new guidance requires that the adjustments to provisional amounts that are identified during the measurement period be recognized in the reporting period when the adjustments are determined. In addition, the effect on earnings of changes as a result of the change to the provisional amounts is required to be recorded in the same period’s financial statements. The Company adopted this guidance prospectively on January 1, 2016, and the adoption had no impact on the Company’s financial statements.

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. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

In February 2016, the FASB issued a new accounting standard update on leases. The new guidance requires lessees to recognize right-of-use assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. In addition, it requires lessees to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. 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 the financial statements and related disclosures and anticipates this new guidance will materially impact the Company’s financial statements given the Company has a significant number of operating leases.

In March 2016, the FASB issued a new accounting standard update on simplifying the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance also allows an entity to account for forfeitures when they occur. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

In June 2016, the FASB issued a new accounting standard update on measurement of credit losses on financial instruments. The new guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected and available-for-sale debt securities to record credit losses through an allowance for credit losses. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted as early as of the fiscal years beginning after December 15, 2018. The Company is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

 

11


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,

 

 

 

2016

 

 

2015

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

247,449

 

 

$

300,363

 

Money market funds

 

 

288,807

 

 

 

141,700

 

Commercial paper and certificates of deposit

 

 

411,454

 

 

 

469,408

 

Total cash and cash equivalents

 

$

947,710

 

 

$

911,471

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities including treasury bills

 

$

1,122,988

 

 

$

1,156,418

 

Corporate notes, commercial paper and certificates of deposit

 

 

1,517,460

 

 

 

1,427,459

 

Total short-term investments

 

$

2,640,448

 

 

$

2,583,877

 

 

The contractual maturities of securities classified as available-for-sale as of June 30, 2016 were as follows (in thousands):

 

 

 

June 30,

 

 

 

2016

 

Due within one year

 

$

2,228,799

 

Due after one year through two years

 

 

411,649

 

Total

 

$

2,640,448

 

 

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, 2016

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including

   treasury bills

 

$

1,122,272

 

 

$

759

 

 

$

(43

)

 

$

1,122,988

 

Corporate notes, commercial paper and

   certificates of deposit

 

 

1,516,626

 

 

 

943

 

 

 

(109

)

 

 

1,517,460

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,638,898

 

 

$

1,702

 

 

$

(152

)

 

$

2,640,448

 

 

 

 

December 31, 2015

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including

   treasury bills

 

$

1,158,479

 

 

$

6

 

 

$

(2,067

)

 

$

1,156,418

 

Corporate notes, commercial paper and

   certificates of deposit

 

 

1,429,374

 

 

 

21

 

 

 

(1,936

)

 

 

1,427,459

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,587,853

 

 

$

27

 

 

$

(4,003

)

 

$

2,583,877

 

 

 

There were immaterial securities in a continuous loss position for 12 months or longer as of June 30, 2016 and no securities in a continuous loss position for 12 months or longer as of December 31, 2015.

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.

 

12


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, 2016 and December 31, 2015 based on the three-tier fair value hierarchy (in thousands):

 

 

June 30, 2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

288,807

 

 

$

 

 

$

 

 

$

288,807

 

Commercial paper

 

 

 

 

408,536

 

 

 

 

 

 

408,536

 

Certificates of deposit

 

 

 

 

2,918

 

 

 

 

 

 

2,918

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

 

 

517,536

 

 

 

 

 

 

517,536

 

Agency securities

 

 

 

 

605,452

 

 

 

 

 

 

605,452

 

Corporate notes

 

 

 

 

688,720

 

 

 

 

 

 

688,720

 

Commercial paper

 

 

 

 

248,663

 

 

 

 

 

 

248,663

 

Certificates of deposit

 

 

 

 

580,077

 

 

 

 

 

 

580,077

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

1,592

 

 

 

 

 

 

1,592

 

Total

$

288,807

 

 

$

3,053,494

 

 

$

 

 

$

3,342,301

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

5,306

 

 

 

 

 

 

5,306

 

Total

$

 

 

$

5,306

 

 

$

 

 

$

5,306

 

 

 

December 31, 2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

141,700

 

 

$

 

 

$

 

 

$

141,700

 

Commercial paper

 

 

 

 

419,110

 

 

 

 

 

 

419,110

 

Certificates of deposit

 

 

 

 

50,298

 

 

 

 

 

 

50,298

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

29,953

 

 

 

 

 

 

 

 

 

29,953

 

U.S. government securities

 

 

 

 

537,168

 

 

 

 

 

 

537,168

 

Agency securities

 

 

 

 

589,297

 

 

 

 

 

 

589,297

 

Corporate notes

 

 

 

 

693,593

 

 

 

 

 

 

693,593

 

Commercial paper

 

 

 

 

229,965

 

 

 

 

 

 

229,965

 

Certificates of deposit

 

 

 

 

503,901

 

 

 

 

 

 

503,901

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

6,804

 

 

 

 

 

 

6,804

 

Total

$

171,653

 

 

$

3,030,136

 

 

$

 

 

$

3,201,789

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

 

 

3,005

 

 

 

 

 

 

3,005

 

Total

$

 

 

$

3,005

 

 

$

 

 

$

3,005

 

 

 

   

13


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 bu yers 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, 2016 w as approximately $857.4 million and $852.8 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, 2016.

 

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 $324.3 million and $425.2 million at June 30, 2016 and December 31, 2015, respectively.  

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

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments

 

Other current assets

 

$

1,592

 

 

 

6,804

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments

 

Other current liabilities

 

 

5,306

 

 

 

3,005

 

Total fair value of derivative instruments

 

 

 

$

(3,714

)

 

$

3,799

 

 

The Company recognized $6.5 million and $4.7 million of losses on the foreign currency contracts in the three and six months ended June 30, 2016, respectively. The recognized gains and losses on the foreign currency forward contracts were not material in the three and six months ended June 30, 2015.

 

 

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,

 

 

 

2016

 

 

2015

 

Property and equipment, net

 

 

 

 

 

 

 

 

Equipment

 

$

803,247

 

 

$

720,421

 

Furniture and leasehold improvements

 

 

323,088

 

 

 

297,274

 

Capitalized software

 

 

257,667

 

 

 

211,241

 

Construction in progress

 

 

95,674

 

 

 

85,073

 

Total

 

 

1,479,676

 

 

 

1,314,009

 

Less: Accumulated depreciation and amortization

 

 

(720,839

)

 

 

(578,710

)

Property and equipment, net

 

$

758,837

 

 

$

735,299

 

 

 

14


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, 2015

 

$

1,122,728

 

Acquisitions

 

 

69,744

 

Foreign currency translation adjustment

 

 

(6,169

)

Balance as of June 30, 2016

 

$

1,186,303

 

 

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, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

 

$

144,708

 

 

$

(60,160

)

 

$

84,548

 

Publisher and advertiser relationships

 

 

75,300

 

 

 

(32,195

)

 

 

43,105

 

Assembled workforce

 

 

1,960

 

 

 

(1,843

)

 

 

117

 

Other intangible assets

 

 

2,100

 

 

 

(2,100

)

 

 

 

Total

 

$

224,068

 

 

$

(96,298

)

 

$

127,770

 

December 31, 2015: