Twitter, Inc.
TWITTER, INC. (Form: 10-Q, Received: 11/01/2017 17:28:24)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 001-36164

 

Twitter, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8913779

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1355 Market Street, Suite 900

San Francisco, California 94103

(Address of principal executive offices and Zip Code)

(415) 222-9670

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

The number of shares of the registrant’s common stock outstanding as of October 26, 2017 was 742,793,573.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

  

Page

Item 1.

 

Financial Statements (Unaudited)

  

6

 

 

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

 

6

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and September 30, 2016

 

7

 

 

Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and September 30, 2016

 

8

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and September 30, 2016

 

9

 

 

Notes to Consolidated Financial Statements

 

10

Item 2.

 

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

  

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

40

Item 4.

 

Controls and Procedures

  

41

 

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal Proceedings

  

42

Item 1A.

 

Risk Factors

  

42

Item 6.

 

Exhibits

  

69

 

 

Signatures

  

71

 

 

 

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

 

our ability to develop or acquire new products, product features and services, improve our existing products and services, including with respect to Promoted Tweet product features and 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 in and refinement of our products and services, including our decisions to deprecate, discontinue or not launch certain products and product features;

 

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

 

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

 

our expectations regarding our user growth and growth rates and the continued usage of our mobile applications, including the impact of seasonality and a recent change to the Safari interface;

 

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

 

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

 

our ability to improve user monetization, 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, including stock-based compensation and income taxes; our expectations regarding our tax expense and cash taxes;

 

our expectations regarding outstanding litigation;

 

the effects of seasonal trends on our results of operations;

 

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

 

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

 

our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

 

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

 

our expectations regarding international operations.

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.

3


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 s ection 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 achiev ed or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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

 

 


4


 

NOTE REGARDING KEY METRICS

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

The numbers of active users presented in this Quarterly Report on Form 10-Q are based on internal company data. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. 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, 2016. 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, 2016, approximately 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 our active users 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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,586,558

 

 

$

988,598

 

Short-term investments

 

 

2,671,538

 

 

 

2,785,981

 

Accounts receivable, net of allowance for doubtful accounts of $5,362 and $7,216

   as of September 30, 2017 and December 31, 2016, respectively

 

 

509,854

 

 

 

650,650

 

Prepaid expenses and other current assets

 

 

234,472

 

 

 

226,967

 

Total current assets

 

 

5,002,422

 

 

 

4,652,196

 

Property and equipment, net

 

 

753,317

 

 

 

783,901

 

Intangible assets, net

 

 

54,560

 

 

 

95,334

 

Goodwill

 

 

1,187,880

 

 

 

1,185,315

 

Other assets

 

 

77,610

 

 

 

153,619

 

Total assets

 

$

7,075,789

 

 

$

6,870,365

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

103,112

 

 

$

122,236

 

Accrued and other current liabilities

 

 

296,152

 

 

 

380,937

 

Capital leases, short-term

 

 

81,938

 

 

 

80,848

 

Total current liabilities

 

 

481,202

 

 

 

584,021

 

Convertible notes

 

 

1,604,932

 

 

 

1,538,967

 

Capital leases, long-term

 

 

85,622

 

 

 

66,837

 

Deferred and other long-term tax liabilities, net

 

 

11,858

 

 

 

7,556

 

Other long-term liabilities

 

 

62,769

 

 

 

68,049

 

Total liabilities

 

 

2,246,383

 

 

 

2,265,430

 

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; 741,907 and 721,572 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

7,628,966

 

 

 

7,224,534

 

Accumulated other comprehensive loss

 

 

(36,756

)

 

 

(69,253

)

Accumulated deficit

 

 

(2,762,808

)

 

 

(2,550,350

)

Total stockholders' equity

 

 

4,829,406

 

 

 

4,604,935

 

Total liabilities and stockholders' equity

 

$

7,075,789

 

 

$

6,870,365

 

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

589,633

 

 

$

615,934

 

 

$

1,711,739

 

 

$

1,812,413

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

210,016

 

 

 

225,159

 

 

 

643,263

 

 

 

626,530

 

Research and development

 

 

136,115

 

 

 

177,049

 

 

 

408,014

 

 

 

511,354

 

Sales and marketing

 

 

172,957

 

 

 

224,436

 

 

 

527,847

 

 

 

697,226

 

General and administrative

 

 

63,266

 

 

 

67,379

 

 

 

203,973

 

 

 

200,884

 

Total costs and expenses

 

 

582,354

 

 

 

694,023

 

 

 

1,783,097

 

 

 

2,035,994

 

Income (loss) from operations

 

 

7,279

 

 

 

(78,089

)

 

 

(71,358

)

 

 

(223,581

)

Interest expense

 

 

(26,732

)

 

 

(24,860

)

 

 

(78,537

)

 

 

(74,687

)

Other income (expense), net

 

 

1,922

 

 

 

6,640

 

 

 

(39,076

)

 

 

19,680

 

Loss before income taxes

 

 

(17,531

)

 

 

(96,309

)

 

 

(188,971

)

 

 

(278,588

)

Provision for income taxes

 

 

3,564

 

 

 

6,562

 

 

 

10,171

 

 

 

11,231

 

Net loss

 

$

(21,095

)

 

$

(102,871

)

 

$

(199,142

)

 

$

(289,819

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

(0.15

)

 

$

(0.27

)

 

$

(0.42

)

Diluted

 

$

(0.03

)

 

$

(0.15

)

 

$

(0.27

)

 

$

(0.42

)

Weighted-average shares used to compute net loss

   per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

736,515

 

 

 

704,359

 

 

 

729,626

 

 

 

698,104

 

Diluted

 

 

736,515

 

 

 

704,359

 

 

 

729,626

 

 

 

698,104

 

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(21,095

)

 

$

(102,871

)

 

$

(199,142

)

 

$

(289,819

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments in available-for-sale securities

 

 

564

 

 

 

594

 

 

 

404

 

 

 

4,075

 

Change in foreign currency translation adjustment

 

 

9,508

 

 

 

(2,400

)

 

 

32,093

 

 

 

(4,818

)

Net change in accumulated other comprehensive loss

 

 

10,072

 

 

 

(1,806

)

 

 

32,497

 

 

 

(743

)

Comprehensive loss

 

$

(11,023

)

 

$

(104,677

)

 

$

(166,645

)

 

$

(290,562

)

 

 

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

 

 

 

8


TWITTER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(199,142

)

 

$

(289,819

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

303,347

 

 

 

282,782

 

Stock-based compensation expense

 

 

331,352

 

 

 

477,138

 

Amortization of discount on convertible notes

 

 

59,644

 

 

 

55,590

 

Changes in bad debt provision

 

 

26

 

 

 

2,253

 

Deferred income taxes

 

 

(1,343

)

 

 

58

 

Impairment of investments in privately-held companies

 

 

62,439

 

 

 

2,000

 

Other adjustments

 

 

(1,278

)

 

 

7,374

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

155,598

 

 

 

51,191

 

Prepaid expenses and other assets

 

 

4,353

 

 

 

2,331

 

Accounts payable

 

 

(14,458

)

 

 

(26,291

)

Accrued and other liabilities

 

 

(67,436

)

 

 

1,905

 

Net cash provided by operating activities

 

 

633,102

 

 

 

566,512

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(117,800

)

 

 

(170,552

)

Purchases of marketable securities

 

 

(2,020,115

)

 

 

(2,277,727

)

Proceeds from maturities of marketable securities

 

 

2,023,778

 

 

 

2,033,257

 

Proceeds from sales of marketable securities

 

 

108,818

 

 

 

174,017

 

Proceeds from sales of long-lived assets

 

 

35,000

 

 

 

 

Changes in restricted cash

 

 

3,209

 

 

 

(6,606

)

Purchases of investments in privately-held companies

 

 

(825

)

 

 

(81,502

)

Business combinations, net of cash acquired

 

 

 

 

 

(80,142

)

Other investing activities

 

 

(10,102

)

 

 

(1,181

)

Net cash provided by (used in) investing activities

 

 

21,963

 

 

 

(410,436

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(7,049

)

 

 

(11,098

)

Payments of capital lease obligations

 

 

(80,685

)

 

 

(73,897

)

Proceeds from exercise of stock options

 

 

7,872

 

 

 

7,070

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

14,019

 

 

 

15,821

 

Other financing activities

 

 

 

 

 

570

 

Net cash used in financing activities

 

 

(65,843

)

 

 

(61,534

)

Net increase in cash and cash equivalents

 

 

589,222

 

 

 

94,542

 

Foreign exchange effect on cash and cash equivalents

 

 

8,738

 

 

 

5,944

 

Cash and cash equivalents at beginning of period

 

 

988,598

 

 

 

911,471

 

Cash and cash equivalents at end of period

 

$

1,586,558

 

 

$

1,011,957

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisitions

 

$

 

 

$

644

 

Equipment purchases under capital leases

 

$

100,633

 

 

$

63,022

 

Changes in accrued property and equipment purchases

 

$

(23,521

)

 

$

7,779

 

 

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. All significant intercompany accounts and transactions have been eliminated in consolidation.

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

The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Use of Estimates

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

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

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In March 2016, the Financial Accounting Standards Board (“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 became effective for reporting periods beginning after December 15, 2016. The Company adopted this new guidance on January 1, 2017. Upon adoption, tax benefits in excess of stock-based compensation costs, and tax deficiencies, are recorded in the consolidated statements of operations as a component of the provision for income taxes, whereas they previously were recorded in equity. The previously unrecognized excess tax benefits as of December 31, 2016 were recorded as an increase to deferred tax assets. However, given the valuation allowance placed on substantially all of the Company’s deferred tax assets, the recognition upon adoption did not have an impact on the Company’s accumulated deficit. As a result of adopting the new standard utilizing the modified retrospective approach, the Company’s deferred tax assets increased by approximately $0.93 billion with a corresponding increase in its valuation allowance. The Company also elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The adoption of this new guidance resulted in a net cumulative-effect adjustment of $13.3 million increase to accumulated deficit as of January 1, 2017, related to the accounting of forfeitures using the modified retrospective method. Additionally, the Company adopted the aspects of the guidance affecting the cash flow presentation retrospectively, which resulted in an immaterial reclassification of excess tax benefits from financing activities to operating activities in the Company’s consolidated statements of cash flows.

10


In January 2017, the FASB issued a new accounting standard update on simplif ying the accounting for goodwill impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record a n impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The Company adopted this guidance prospectively during the three months ended March 31, 2017 and the adoption had no impact on the Company’s financial statem ents.

In May 2017, the FASB issued a new accounting standard update on clarifying when changes to share-based payment awards must be accounted for as modifications. According to the new guidance, entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The Company adopted this guidance prospectively during the three months ended June 30, 2017 and the adoption had no impact on the Company’s financial statements.

Recently issued accounting pronouncements not yet adopted

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 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. 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, May 2016 and December 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 to provide narrow-scope improvements and practical expedients, and technical corrections and improvements. The Company will adopt this standard effective January 1, 2018 using the modified retrospective method. The Company is finalizing its analysis of the impact this standard will have on the consolidated financial statements and continues to validate the recognition impact on data licensing and other revenue. The Company does not expect the impact of adopting the standard to be material to the Company’s consolidated financial statements. As part of the Company’s assessment and implementation plan, the Company is finalizing changes to its policies and procedures and evaluating and implementing changes to its internal controls. The Company continues to finalize its required disclosures under the new standard.

In March 2017, the FASB issued a new accounting standard update on shortening the premium amortization period for purchased non-contingently callable debt securities. The new guidance shortens the amortization period for the premium on purchased non-contingently callable debt securities to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. This guidance will be effective for fiscal years, and interim periods within those 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.

With the exception of the standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2017, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, that are of significance or potential significance to the Company.                                                         

 

11


Note 2. Cash, Cash Equivalent s and Short-term Investments

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

279,615

 

 

$

253,808

 

Money market funds

 

 

920,105

 

 

 

422,515

 

U.S. government and agency securities including treasury bills

 

 

29,995

 

 

 

12,639

 

Corporate notes, commercial paper and certificates of deposit

 

 

356,843

 

 

 

299,636

 

Total cash and cash equivalents

 

$

1,586,558

 

 

$

988,598

 

Short-term investments:

 

 

 

 

 

 

 

 

U.S. government and agency securities including treasury bills

 

$

971,514

 

 

$

1,183,768

 

Corporate notes, commercial paper and certificates of deposit

 

 

1,700,024

 

 

 

1,602,213

 

Total short-term investments

 

$

2,671,538

 

 

$

2,785,981

 

 

The contractual maturities of securities classified as available-for-sale as of September 30, 2017 were as follows (in thousands):

 

 

 

September 30,

 

 

 

2017

 

Due within one year

 

$

2,089,071

 

Due after one year through two years

 

 

582,467

 

Total

 

$

2,671,538

 

 

 

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):

 

 

 

September 30, 2017

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including treasury bills

 

$

972,996

 

 

$

129

 

 

$

(1,611

)

 

$

971,514

 

Corporate notes, commercial paper and

   certificates of deposit

 

 

1,700,172

 

 

 

254

 

 

 

(402

)

 

 

1,700,024

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,673,168

 

 

$

383

 

 

$

(2,013

)

 

$

2,671,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Aggregated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Costs

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government and agency securities including treasury bills

 

$

1,185,274

 

 

$

136

 

 

$

(1,642

)

 

$

1,183,768

 

Corporate notes, commercial paper and

   certificates of deposit

 

 

1,603,048

 

 

 

114

 

 

 

(949

)

 

 

1,602,213

 

Total available-for-sale securities classified as

   short-term investments

 

$

2,788,322

 

 

$

250

 

 

$

(2,591

)

 

$

2,785,981

 

 

 

The gross unrealized loss on securities in a continuous loss position for 12 months or longer was not material as of September 30, 2017 and December 31, 2016.

12


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

 

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 September 30, 2017 and December 31, 2016 based on the three-tier fair value hierarchy (in thousands):

 

 

September 30, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

920,105

 

 

$

 

 

$

 

 

$

920,105

 

Treasury bills

 

29,995

 

 

 

 

 

 

 

 

 

29,995

 

Commercial paper

 

 

 

 

344,724

 

 

 

 

 

 

344,724

 

Certificates of deposit

 

 

 

 

12,119

 

 

 

 

 

 

12,119

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

 

 

593,594

 

 

 

 

 

 

593,594

 

Agency securities

 

 

 

 

377,920

 

 

 

 

 

 

377,920

 

Corporate notes

 

 

 

 

747,623

 

 

 

 

 

 

747,623

 

Commercial paper

 

 

 

 

264,822

 

 

 

 

 

 

264,822

 

Certificates of deposit

 

 

 

 

687,579

 

 

 

 

 

 

687,579

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

2,555

 

 

 

 

 

 

2,555

 

Total

$

950,100

 

 

$

3,030,936

 

 

$

 

 

$

3,981,036

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

1,353

 

 

 

 

 

 

1,353

 

Total

$

 

 

$

1,353

 

 

$

 

 

$

1,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13


 

 

December 31, 2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

422,515

 

 

$

 

 

$

 

 

$

422,515

 

Treasury bills

 

12,639

 

 

 

 

 

 

 

 

 

12,639

 

Corporate notes

 

 

 

 

7,387

 

 

 

 

 

 

7,387

 

Commercial paper

 

 

 

 

292,249

 

 

 

 

 

 

292,249

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

 

 

657,502

 

 

 

 

 

 

657,502

 

Agency securities

 

 

 

 

526,266

 

 

 

 

 

 

526,266

 

Corporate notes

 

 

 

 

689,986

 

 

 

 

 

 

689,986

 

Commercial paper

 

 

 

 

311,238

 

 

 

 

 

 

311,238

 

Certificates of deposit

 

 

 

 

600,989

 

 

 

 

 

 

600,989

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

1,955

 

 

 

 

 

 

1,955

 

Total

$

435,154

 

 

$

3,087,572

 

 

$

 

 

$

3,522,726

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

500

 

 

 

 

 

 

500

 

Total

$

 

 

$

500

 

 

$

 

 

$

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017 was approximately $887.3 million and $878.1 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 the last business day of the period.

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 contracts outstanding was equivalent to $512.7 million and $536.9 million at September 30, 2017 and December 31, 2016, respectively.

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

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

Balance Sheet Location

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts not designated as hedging instruments

 

Other current assets

 

$

2,555

 

 

$

1,955

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts not designated as hedging instruments

 

Other current liabilities

 

$

1,353

 

 

$

500

 

14


 

The Company recognized $2.7 million and $5.1 million of net gains on the foreign currency contracts in the three and nine months ended September 30, 2017, respectively. The Company recognized $0.2 million and $4.9 million of net losses on the foreign currency contracts in the three and nine months ended September 30, 2016, respectively.

 

 

Note 4. Property and Equipment, Net

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Property and equipment, net

 

 

 

 

 

 

 

 

Equipment

 

$

1,014,235

 

 

$

909,797

 

Furniture and leasehold improvements

 

 

321,853

 

 

 

304,613

 

Capitalized software

 

 

432,759

 

 

 

353,163

 

Construction in progress

 

 

65,375

 

 

 

74,255

 

Total

 

 

1,834,222

 

 

 

1,641,828

 

Less: Accumulated depreciation and amortization

 

 

(1,080,905

)

 

 

(857,927

)

Property and equipment, net

 

$

753,317

 

 

$

783,901