Documentfalse2019Q3000141809112/3131P3YP4YP2Y
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, 2019
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)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.000005 per share | TWTR | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☐ | | 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 24, 2019 was 776,356,684.
TABLE OF CONTENTS
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 and its impact on revenue;
•our plans regarding health and user safety, including our expectations regarding the impact on our reported metrics, policies, enforcement and preventing manipulation of our platform;
•our expectations regarding monetizable DAU (mDAU), changes in cost per ad engagement and changes in ad engagements;
•our ability to develop or acquire new products, product features and services, improve our existing products and services, including with respect to Promoted Tweet product features, video and performance advertising, and increase the value of our products and services;
•our business strategies, plans and priorities, including our plans for growth and hiring, investment in our research and development efforts and our plans to scale capacity and enhance capability and reliability of our infrastructure, including capital expenditures relating to infrastructure;
•our work to increase the stability, performance and scale of our ads platform and our mobile application download product;
•our ability to provide new content from third parties, including our ability to secure live streaming video content on terms that are acceptable to us;
•our ability to attract advertisers to our platforms, products and services and increase the amount that advertisers spend with us;
•our expectations regarding our user growth and growth rates and related opportunities as well as the continued usage of our mobile applications, including the impact of seasonality;
•our ability to increase our revenue and our revenue growth rate, including advertising and data licensing and other revenue;
•our ability to improve user monetization;
•our future financial performance, including trends in cost per ad engagement, revenue (including data licensing revenue), cost of revenue, operating expenses, including stock-based compensation and income taxes;
•our expectations regarding certain deferred tax assets and fluctuations in our tax expense and cash taxes;
•the impact of the General Data Protection Regulation (GDPR) and other privacy and data protection laws and regulations;
•the impact of content- or copyright-related legislation or regulation;
•our expectations regarding outstanding litigation or the decisions of the courts;
•the effects of seasonal trends on our results of operations;
•the impact of our future transactions and corporate structuring on our income and other taxes;
•the sufficiency of our cash and cash equivalents, short-term investment balance and credit facility together with cash generated from operations to meet our working capital and capital expenditure requirements;
•our ability to timely and effectively develop, invest in, scale and adapt our existing technology and network infrastructure;
•our ability to successfully acquire and integrate companies and assets; and
•our expectations regarding international operations and foreign exchange gains and losses.
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.
NOTE REGARDING KEY METRICS
We review a number of metrics, including monetizable daily active usage or users, or mDAU, 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 mDAU, changes in ad engagements and changes in cost per ad engagement.
We define mDAU as Twitter users who logged in and accessed Twitter on any given day through Twitter.com or Twitter applications that are able to show ads. Our definition and calculation of mDAU is the same as that of the DAU data presented since the first quarter of 2016. The calculation of mDAU is not based on any standardized industry methodology and is not necessarily calculated in the same manner or comparable to similarly-titled measures presented by other companies. Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in active user base. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three months ended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU in the previous year. We believe that mDAU, and its related growth, are the best ways to measure our success against our objectives and to show the size of our audience and engagement.
The numbers of active users presented in this Quarterly Report on Form 10-Q are based on internal company data. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. Furthermore, our metrics may be impacted by our information quality efforts, which are our overall efforts to reduce malicious activity on the service, inclusive of spam, malicious automation, and fake accounts. For example, there are a number of false or spam accounts in existence on our platform. We have performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the third quarter of 2019 represented fewer than 5% of our mDAU during the quarter. The false or spam accounts for a period represents the average of false or spam accounts in the samples during each monthly analysis period during the quarter. In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users, and have made improvements in our spam detection capabilities that have resulted in the suspension of a large number of spam, malicious automation and fake accounts. We intend to continue to make such improvements. After we determine an account is spam, malicious automation or fake, we stop counting it in our mDAU or related metrics. We also treat multiple accounts held by a single person or organization as multiple users for purposes of calculating mDAU 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.
In addition, our data regarding user geographic location for purposes of reporting the geographic location of our mDAU 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, someone accessing Twitter on a mobile device may appear to be accessing Twitter from the location of the proxy server that the user connects to rather than from the 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.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TWITTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
| | | | | | | | | | | |
| September 30,
2019 | | December 31,
2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,869,444 | | | $ | 1,894,444 | |
| Short-term investments | 3,946,940 | | | 4,314,957 | |
Accounts receivable, net of allowance for doubtful accounts of $3,513 and $3,559 | 684,186 | | | 788,700 | |
| Prepaid expenses and other current assets | 123,881 | | | 112,935 | |
| Total current assets | 6,624,451 | | | 7,111,036 | |
| Property and equipment, net | 994,266 | | | 885,078 | |
| Operating lease right-of-use assets | 663,423 | | | — | |
| Intangible assets, net | 46,915 | | | 45,025 | |
| Goodwill | 1,243,472 | | | 1,227,269 | |
| Deferred tax assets, net | 1,896,340 | | | 808,459 | |
| Other assets | 132,058 | | | 85,705 | |
| Total assets | $ | 11,600,925 | | | $ | 10,162,572 | |
| Liabilities and stockholders' equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 150,785 | | | $ | 145,186 | |
| Accrued and other current liabilities | 445,676 | | | 405,751 | |
| Convertible notes, short-term | — | | | 897,328 | |
| Operating lease liabilities, short-term | 132,219 | | | — | |
| Finance lease liabilities, short-term | 33,947 | | | 68,046 | |
| Total current liabilities | 762,627 | | | 1,516,311 | |
| Convertible notes, long-term | 1,794,885 | | | 1,730,922 | |
| Operating lease liabilities, long-term | 580,976 | | | — | |
| Finance lease liabilities, long-term | 3,086 | | | 24,394 | |
| Deferred and other long-term tax liabilities, net | 20,329 | | | 17,849 | |
| Other long-term liabilities | 23,380 | | | 67,502 | |
| Total liabilities | 3,185,283 | | | 3,356,978 | |
Commitments and contingencies (Note 14) | | | |
| 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; 775,718 and 764,257 shares issued and outstanding | 4 | | | 4 | |
| Additional paid-in capital | 8,638,734 | | | 8,324,974 | |
| Accumulated other comprehensive loss | (115,909) | | | (65,311) | |
| Accumulated deficit | (107,187) | | | (1,454,073) | |
| Total stockholders' equity | 8,415,642 | | | 6,805,594 | |
| Total liabilities and stockholders' equity | $ | 11,600,925 | | | $ | 10,162,572 | |
The accompanying notes are an integral part of these consolidated financial statements.
TWITTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 823,717 | | | $ | 758,111 | | | $ | 2,451,988 | | | $ | 2,133,523 | |
| Costs and expenses | | | | | | | |
| Cost of revenue | 281,057 | | | 243,644 | | | 823,033 | | | 696,652 | |
| Research and development | 178,553 | | | 150,764 | | | 484,041 | | | 412,684 | |
| Sales and marketing | 226,204 | | | 193,496 | | | 672,252 | | | 559,587 | |
| General and administrative | 93,758 | | | 78,339 | | | 259,173 | | | 218,183 | |
| Total costs and expenses | 779,572 | | | 666,243 | | | 2,238,499 | | | 1,887,106 | |
| Income from operations | 44,145 | | | 91,868 | | | 213,489 | | | 246,417 | |
| Interest expense | (36,226) | | | (38,336) | | | (111,803) | | | (95,333) | |
| Interest income | 40,348 | | | 36,067 | | | 123,776 | | | 74,208 | |
| Other income (expense), net | (504) | | | (2,341) | | | 6,583 | | | (8,285) | |
| Income before income taxes | 47,763 | | | 87,258 | | | 232,045 | | | 217,007 | |
| Provision (benefit) for income taxes | 11,241 | | | (701,921) | | | (1,114,841) | | | (733,286) | |
| Net income | $ | 36,522 | | | $ | 789,179 | | | $ | 1,346,886 | | | $ | 950,293 | |
| Net income per share attributable to common stockholders: | | | | | | | |
| Basic | $ | 0.05 | | | $ | 1.04 | | | $ | 1.75 | | | $ | 1.26 | |
| Diluted | $ | 0.05 | | | $ | 1.02 | | | $ | 1.72 | | | $ | 1.23 | |
| Weighted-average shares used to compute net income per share attributable to common stockholders: | | | | | | | |
| Basic | 772,789 | | | 756,537 | | | 768,719 | | | 752,233 | |
| Diluted | 790,523 | | | 776,002 | | | 784,443 | | | 771,511 | |
The accompanying notes are an integral part of these consolidated financial statements.
TWITTER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Net income | $ | 36,522 | | | $ | 789,179 | | | $ | 1,346,886 | | | $ | 950,293 | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Change in unrealized gain (loss) on investments in available-for-sale securities | 1,331 | | | 594 | | | 19,285 | | | 149 | |
| Change in foreign currency translation adjustment | (70,296) | | | (7,253) | | | (69,883) | | | (31,663) | |
| Net change in accumulated other comprehensive income (loss) | (68,965) | | | (6,659) | | | (50,598) | | | (31,514) | |
| Comprehensive income (loss) | $ | (32,443) | | | $ | 782,520 | | | $ | 1,296,288 | | | $ | 918,779 | |
The accompanying notes are an integral part of these consolidated financial statements.
TWITTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | | | | | Nine Months Ended
September 30, | | | | | | |
| 2019 | | | | 2018 | | | | 2019 | | | | 2018 | | |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| Common stock | | | | | | | | | | | | | | | |
| Balance, beginning of period | 772,393 | | | $ | 4 | | | 756,956 | | | $ | 4 | | | 764,257 | | | $ | 4 | | | 746,902 | | | $ | 4 | |
| Issuance of common stock in connection with RSU vesting | 3,264 | | | — | | | 3,560 | | | — | | | 10,396 | | | — | | | 11,744 | | | — | |
| Issuance of common stock in connection with acquisitions | — | | | — | | | — | | | — | | | — | | | — | | | 119 | | | — | |
| Issuance of restricted stock in connection with acquisitions accounted for as stock-based compensation | — | | | — | | | — | | | — | | | 306 | | | — | | | 655 | | | — | |
| Exercise of stock options | 152 | | | — | | | 83 | | | — | | | 347 | | | — | | | 517 | | | — | |
| Issuance of common stock upon purchases under employee stock purchase plan | — | | | — | | | — | | | — | | | 901 | | | — | | | 990 | | | — | |
| Shares withheld related to net share settlement of equity awards | (91) | | | — | | | (196) | | | — | | | (487) | | | — | | | (516) | | | — | |
| Other activities | — | | | — | | | — | | | — | | | (2) | | | — | | | (8) | | | — | |
| Balance, end of period | 775,718 | | | $ | 4 | | | 760,403 | | | $ | 4 | | | 775,718 | | | $ | 4 | | | 760,403 | | | $ | 4 | |
| Additional paid-in capital | | | | | | | | | | | | | | | |
| Balance, beginning of period | — | | | $ | 8,535,463 | | | — | | | $ | 8,125,889 | | | — | | | $ | 8,324,974 | | | — | | | $ | 7,750,522 | |
| Issuance of common stock in connection with acquisitions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,405 | |
| Issuance of stock options in connection with acquisitions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 917 | |
| Issuance of restricted stock in connection with acquisitions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,843 | |
| Exercise of stock options | — | | | 245 | | | — | | | 155 | | | — | | | 754 | | | — | | | 3,252 | |
| Issuance of common stock upon purchases under employee stock purchase plan | — | | | — | | | — | | | — | | | — | | | 25,209 | | | — | | | 16,337 | |
| Shares withheld related to net share settlement of equity awards | — | | | (3,757) | | | — | | | (6,821) | | | — | | | (16,695) | | | — | | | (16,174) | |
| Stock-based compensation | — | | | 106,783 | | | — | | | 102,825 | | | — | | | 304,492 | | | — | | | 277,878 | |
| Equity component of the convertible note issuance, net | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 252,248 | |
| Purchase of convertible note hedge | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (267,950) | |
| Issuance of warrants | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 186,760 | |
| Other activities | — | | | — | | | — | | | 2,989 | | | — | | | — | | | — | | | 2,999 | |
| Balance, end of period | — | | | $ | 8,638,734 | | | — | | | $ | 8,225,037 | | | — | | | $ | 8,638,734 | | | — | | | $ | 8,225,037 | |
| Accumulated other comprehensive loss | | | | | | | | | | | | | | | |
| Balance, beginning of period | — | | | $ | (46,944) | | | — | | | $ | (56,434) | | | — | | | $ | (65,311) | | | — | | | $ | (31,579) | |
| Other comprehensive income (loss) | — | | | (68,965) | | | — | | | (6,659) | | | — | | | (50,598) | | | — | | | (31,514) | |
| Balance, end of period | — | | | $ | (115,909) | | | — | | | $ | (63,093) | | | — | | | $ | (115,909) | | | — | | | $ | (63,093) | |
| Accumulated deficit | | | | | | | | | | | | | | | |
| Balance, beginning of period | — | | | $ | (143,709) | | | — | | | $ | (2,498,555) | | | — | | | $ | (1,454,073) | | | — | | | $ | (2,671,729) | |
| Cumulative-effect adjustment from adoption of revenue recognition rule | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,060 | |
| Net income | — | | | 36,522 | | | — | | | 789,179 | | | — | | | 1,346,886 | | | — | | | 950,293 | |
| Balance, end of period | — | | | $ | (107,187) | | | — | | | $ | (1,709,376) | | | — | | | $ | (107,187) | | | — | | | $ | (1,709,376) | |
| Total stockholders' equity | 775,718 | | | $ | 8,415,642 | | | 760,403 | | | $ | 6,452,572 | | | 775,718 | | | $ | 8,415,642 | | | 760,403 | | | $ | 6,452,572 | |
The accompanying notes are an integral part of these consolidated financial statements.
TWITTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2019 | | 2018 |
| Cash flows from operating activities | | | |
| Net income | $ | 1,346,886 | | | $ | 950,293 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization expense | 349,076 | | | 314,775 | |
| Stock-based compensation expense | 276,729 | | | 244,341 | |
| Amortization of discount on convertible notes | 93,251 | | | 74,909 | |
| Deferred income taxes | (1,138,293) | | | (748,366) | |
| Impairment of investments in privately-held companies | 1,550 | | | 3,000 | |
| Other adjustments | (13,841) | | | (5,838) | |
| Changes in assets and liabilities, net of assets acquired and liabilities assumed from acquisitions: | | | |
| Accounts receivable | 93,932 | | | 35,389 | |
| Prepaid expenses and other assets | 83,646 | | | 103,234 | |
| Accounts payable | (12,599) | | | (22,590) | |
| Accrued and other liabilities | (54,152) | | | 58,565 | |
| Net cash provided by operating activities | 1,026,185 | | | 1,007,712 | |
| Cash flows from investing activities | | | |
| Purchases of property and equipment | (389,073) | | | (409,913) | |
| Proceeds from sales of property and equipment | 4,290 | | | 8,127 | |
| Purchases of marketable securities | (3,940,682) | | | (4,054,312) | |
| Proceeds from maturities and sales of marketable securities | 4,325,187 | | | 2,792,558 | |
| Purchases of investments in privately-held companies | (51,163) | | | | (2,175) | |
| Business combinations, net of cash acquired | (20,302) | | | (33,572) | |
| Other investing activities | 2,281 | | | — | |
| Net cash used in investing activities | (69,462) | | | (1,699,287) | |
| Cash flows from financing activities | | | |
| Proceeds from issuance of convertible notes | — | | | 1,150,000 | |
| Purchases of convertible note hedges | — | | | (267,950) | |
| Proceeds from issuance of warrants concurrent with note hedges | — | | | 186,760 | |
| Debt issuance costs | — | | | (13,483) | |
| Repayment of convertible notes | (935,000) | | | | — | |
| Taxes paid related to net share settlement of equity awards | (16,695) | | | (16,180) | |
| Payments of finance lease obligations | (53,627) | | | (69,504) | |
| Proceeds from exercise of stock options | 753 | | | 3,251 | |
| Proceeds from issuances of common stock under employee stock purchase plan | 25,209 | | | 16,337 | |
| Net cash provided by (used in) financing activities | (979,360) | | | 989,231 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (22,637) | | | 297,656 | |
| Foreign exchange effect on cash, cash equivalents and restricted cash | (1,790) | | | (15,211) | |
| Cash, cash equivalents and restricted cash at beginning of period | 1,921,875 | | | 1,673,857 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,897,448 | | | $ | 1,956,302 | |
| Supplemental disclosures of non-cash investing and financing activities | | | |
| Common stock issued in connection with acquisitions | $ | — | | | $ | 19,165 | |
| Equipment purchases under finance leases | $ | — | | | $ | 16,086 | |
| Changes in accrued property and equipment purchases | $ | 26,679 | | | $ | (28,617) | |
| Reconciliation of cash, cash equivalents and restricted cash as shown in the consolidated statements of cash flows | | | |
| Cash and cash equivalents | $ | 1,869,444 | | | $ | 1,928,929 | |
| Restricted cash included in prepaid expenses and other current assets | 1,869 | | | 1,690 | |
| Restricted cash included in other assets | 26,135 | | | 25,683 | |
| Total cash, cash equivalents and restricted cash | $ | 1,897,448 | | | $ | 1,956,302 | |
The accompanying notes are an integral part of these consolidated financial statements.
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 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, 2018.
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.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update on leases. The new guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the consolidated balance sheets. 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. The FASB has subsequently issued additional updates that allow entities to apply certain practical expedients upon transition to this new guidance. The Company adopted this guidance as of January 1, 2019 and elected to apply practical expedients permitted under the transition guidance that allow the Company to use the beginning of the period of adoption (January 1, 2019) as the date of initial application, to not separate non-lease components from lease components for lessee and lessor transactions, and to not reassess lease classification, treatment of initial direct costs, or whether an existing or expired contract contains a lease. Prior period financial statements were not recast under the new guidance. The adoption of the new lease standard resulted in the recognition of operating lease ROU assets of $737.7 million recorded in operating lease right-of-use assets and lease liabilities of $777.1 million recorded in operating lease liabilities, short-term and operating lease liabilities, long-term on the consolidated balance sheets as of January 1, 2019. In connection with the adoption of this standard, deferred rent of $53.0 million, which was previously recorded in accrued and other current liabilities and in other long-term liabilities on the consolidated balance sheets, was derecognized. Additionally, prepaid rents of $13.6 million which were previously recorded in prepaid expenses and other current assets on the consolidated balance sheets were reclassified upon adoption as a reduction to operating lease liabilities, short-term.
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. Prior to this guidance, entities generally amortized the premium as a yield adjustment over the contractual life of the security. The Company adopted this new accounting standard as of January 1, 2019 and the adoption did not have a material impact on the Company’s financial statements.
In February 2018, the FASB issued a new accounting standard update to give entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings (accumulated deficit). The new guidance also requires entities to make additional disclosures, regardless of whether reclassification of tax effects is elected. The Company adopted this new accounting standard during the three months ended March 31, 2019 and did not elect the option to reclassify tax effects as a result of tax reform and as such, adoption did not have a material impact on the Company’s 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, 2019, 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, 2018, that are of significance or potential significance to the Company.
Note 2. Revenue
Revenue Recognition
Revenue is recognized when the control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. The Company identifies its contracts with customers and all performance obligations within those contracts. The Company then determines the transaction price and allocates the transaction price to the performance obligations within the Company's contracts with customers, recognizing revenue when, or as the Company satisfies its performance obligations. While the majority of the Company's revenue transactions are based on standard business terms and conditions, the Company also enters into sales agreements with advertisers and data partners that sometimes involve multiple performance obligations and occasionally include non-standard terms or conditions.
Revenue by geography is based on the billing address of the customers. The following table sets forth revenue by services and revenue by geographic area (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Revenue by services: | | | | | | | |
| Advertising services | $ | 702,257 | | | $ | 649,816 | | | $ | 2,108,846 | | | $ | 1,826,032 | |
| Data licensing and other | 121,460 | | | 108,295 | | | 343,142 | | | 307,491 | |
| Total revenue | $ | 823,717 | | | $ | 758,111 | | | $ | 2,451,988 | | | $ | 2,133,523 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Revenue by geographic area: | | | | | | | |
| United States | $ | 465,409 | | | $ | 423,443 | | | $ | 1,352,966 | | | $ | 1,136,670 | |
| Japan | 128,797 | | | 130,425 | | | 397,539 | | | 369,470 | |
| Rest of World | 229,511 | | | 204,243 | | | 701,483 | | | 627,383 | |
| Total revenue | $ | 823,717 | | | $ | 758,111 | | | $ | 2,451,988 | | | $ | 2,133,523 | |
Contract Balances
The Company enters into contracts with its customers, which may give rise to contract liabilities (deferred revenue) and contract assets (unbilled revenue). The payment terms and conditions within the Company’s contracts vary by the type and location of its customer and products or services purchased, the substantial majority of which are due in less than one year. When the timing of revenue recognition differs from the timing of payments made by customers, the Company recognizes either unbilled revenue (its performance precedes the billing date) or deferred revenue (customer payment is received in advance of performance).
Deferred Revenue (Contract Liabilities)
The Company presents deferred revenue primarily within accrued and other current liabilities in the consolidated balance sheets and there is not expected to be any material non-current contract liabilities given the Company's contracting provisions. The Company's deferred revenue balance primarily consists of cash payments due in advance of satisfying its performance obligations relating to data licensing contracts and performance obligations given to customers based on their spend relating to advertising contracts, for which the Company defers, as they represent material rights. The Company recognizes deferred revenue relating to its data licensing contracts on a straight-line basis over the period in which the Company provides data. The Company recognizes deferred revenue relating to its advertising contracts based on the amount of customer spend and the relative standalone selling price of the material rights.
Unbilled Revenue (Contract Assets)
The Company presents unbilled revenue in the consolidated balance sheets within prepaid expenses and other current assets and within other assets. The Company’s contracts do not contain material financing components. The Company's unbilled revenue primarily consists of amounts that have yet to be billed under contracts with escalating fee structures. Specifically, because the Company generally recognizes revenue on a straight-line basis for data licensing arrangements with escalating fee structures, revenue recognized represents amounts to which the Company is contractually entitled; however, the revenue recognized exceeds the amounts the Company has a right to bill as of the period end, thus resulting in unbilled revenue.
The following table presents contract balances (in thousands):
| | | | | | | | | | | |
| September 30,
2019 | | December 31,
2018 |
| Unbilled Revenue | $ | 23,875 | | | $ | 20,786 | |
| Deferred Revenue | $ | 69,497 | | | $ | 38,949 | |
The amount of revenue recognized in the three months ended September 30, 2019 that was included in the deferred revenue balance as of June 30, 2019 was $28.6 million. The amount of revenue recognized in the nine months ended September 30, 2019 that was included in the deferred revenue balance as of December 31, 2018 was $38.9 million. This revenue consists primarily of revenue recognized as a result of the utilization of bonus media inventory earned by and material rights provided to customers in prior periods and the satisfaction of the Company’s performance obligations relating to data licensing contracts with advance cash payments.
The amount of revenue recognized from obligations satisfied (or partially satisfied) in prior periods was not material.
The increase in unbilled revenue balance from December 31, 2018 to September 30, 2019 was primarily attributable to differences between revenue recognized and amounts billed in the Company's data licensing arrangements with escalating fee structures due to recognizing such fees as revenue on a straight-line basis.
The increase in deferred revenue balance from December 31, 2018 to September 30, 2019 was primarily due to cash payments received or due in advance of satisfying the Company’s performance obligations for data licensing contracts and bonus and make good media inventory earned by and offered to customers during the period.
Remaining Performance Obligations
As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations in contracts with an original expected duration exceeding one year is $635.5 million. This total amount primarily consists of long-term data licensing contracts and excludes deferred revenue related to the Company’s short-term advertising service arrangements. The Company expects to recognize this amount as revenue over the following time periods (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Remaining Performance Obligations | | | | | | |
|
Total | | Remainder of 2019 | | 2020 | | 2021 and Thereafter |
| Revenue expected to be recognized on remaining performance obligations | $ | 635,493 | | | $ | 68,161 | | | $ | 238,345 | | | $ | 328,987 | |
Note 3. Cash, Cash Equivalents and Short-term Investments
Cash, cash equivalents and short-term investments consist of the following (in thousands):
| | | | | | | | | | | |
| September 30,
2019 | | December 31,
2018 |
| Cash and cash equivalents: | | | |
| Cash | $ | 234,918 | | | $ | 229,924 | |
| Money market funds | 891,335 | | | 861,206 | |
| Corporate notes, commercial paper and certificates of deposit | 743,191 | | | 803,314 | |
| Total cash and cash equivalents | $ | 1,869,444 | | | $ | 1,894,444 | |
| Short-term investments: | | | |
| U.S. government and agency securities including treasury bills | $ | 504,562 | | | $ | 1,053,408 | |
| Corporate notes, commercial paper and certificates of deposit | 3,442,378 | | | 3,261,549 | |
| Total short-term investments | $ | 3,946,940 | | | $ | 4,314,957 | |
The contractual maturities of securities classified as available-for-sale as of September 30, 2019 were as follows (in thousands):
| | | | | |
| September 30,
2019 |
| Due within one year | $ | 2,280,352 | |
| Due after one year through five years | 1,666,588 | |
| Total | $ | 3,946,940 | |
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, 2019 | | | | | | |
| Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Aggregated
Estimated
Fair Value |
| U.S. government and agency securities including treasury bills | $ | 503,038 | | | $ | 1,665 | | | $ | (141) | | | $ | 504,562 | |
| Corporate notes, commercial paper and certificates of deposit | 3,428,664 | | | 13,849 | | | (135) | | | 3,442,378 | |
| Total available-for-sale securities classified as short-term investments | $ | 3,931,702 | | | $ | 15,514 | | | $ | (276) | | | $ | 3,946,940 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | |
| Gross
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Aggregated
Estimated
Fair Value |
| U.S. government and agency securities including treasury bills | $ | 1,053,988 | | | $ | 41 | | | $ | (621) | | | $ | 1,053,408 | |
| Corporate notes, commercial paper and certificates of deposit | 3,265,012 | | | 713 | | | (4,176) | | | 3,261,549 | |
| Total available-for-sale securities classified as short-term investments | $ | 4,319,000 | | | $ | 754 | | | $ | (4,797) | | | $ | 4,314,957 | |
The gross unrealized loss on securities in a continuous loss position for 12 months or longer was not material as of September 30, 2019 and December 31, 2018. The proceeds from sales of marketable securities were $173.3 million and $42.1 million in the nine months ended September 30, 2019 and 2018, respectively. The resulting gains or losses in both periods were not material.
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 4. Fair Value Measurements
The Company measures its cash equivalents, short-term investments and derivative financial instruments at fair value. The Company classifies its cash equivalents, short-term investments and derivative financial instruments within Level 1 or Level 2 because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. The fair value of the Company’s Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of the Company’s Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including the readily-available pricing sources for the identical underlying security that may not be actively traded.
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 based on the three-tier fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | |
| Level 1 | | Level 2 | | Total |
| Assets | | | | | |
| Cash equivalents: | | | | | |
| Money market funds | $ | 891,335 | | | $ | — | | | $ | 891,335 | |
| Commercial paper | — | | | 720,581 | | | 720,581 | |
| Certificates of deposit | — | | | 22,610 | | | 22,610 | |
| Short-term investments: | | | | | |
| U.S. government and agency securities | — | | | 504,562 | | | 504,562 | |
| Corporate notes | — | | | 2,167,976 | | | 2,167,976 | |
| Commercial paper | — | | | 808,212 | | | 808,212 | |
| Certificates of deposit | — | | | 466,190 | | | 466,190 | |
| Other current assets: | | | | | |
| Foreign currency contracts | — | | | 3,634 | | | | 3,634 | |
| Total | $ | 891,335 | | | $ | 4,693,765 | | | $ | 5,585,100 | |
| Liabilities | | | | | |
| Other current liabilities: | | | | | |
| Foreign currency contracts | — | | | 2,802 | | | 2,802 | |
| Total | $ | — | | | $ | 2,802 | | | $ | 2,802 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | |
| Level 1 | | Level 2 | | Total |
| Assets | | | | | |
| Cash equivalents: | | | | | |
| Money market funds | $ | 861,206 | | | $ | — | | | $ | 861,206 | |
| Corporate notes | — | | | 24,537 | | | 24,537 | |
| Commercial paper | — | | | 778,777 | | | 778,777 | |
| Short-term investments: | | | | | |
| Treasury bills | — | | | 294,128 | | | 294,128 | |
| U.S. government and agency securities | — | | | 759,280 | | | 759,280 | |
| Corporate notes | — | | | 1,713,835 | | | 1,713,835 | |
| Commercial paper | — | | | 733,999 | | | 733,999 | |
| Certificates of deposit | — | | | 813,715 | | | 813,715 | |
| Other current assets: | | | | | |
| Foreign currency contracts | — | | | 1,343 | | | 1,343 | |
| Total | $ | 861,206 | | | $ | 5,119,614 | | | $ | 5,980,820 | |
| Liabilities | | | | | |
| Other current liabilities: | | | | | |
| Foreign currency contracts | — | | | 3,826 | | | 3,826 | |
| Total | $ | — | | | $ | 3,826 | | | $ | 3,826 | |
The Company has $954.0 million in aggregate principal amount of 1.00% convertible senior notes due in 2021 (the “2021 Notes”) and $1.15 billion in aggregate principal amount of 0.25% convertible senior notes due in 2024 (the “2024 Notes” and, together with the 2021 Notes, the “Notes”) outstanding as of September 30, 2019. Refer to Note 10 – Convertible Notes for further details on the Notes.
The estimated fair value of the 2021 Notes and 2024 Notes, based on a market approach as of September 30, 2019 was approximately $941.8 million and $1.26 billion, 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 in other income (expense), net in the consolidated statements of income. The notional principal of foreign currency contracts outstanding was equivalent to $518.8 million and $545.3 million at September 30, 2019 and December 31, 2018, respectively.
The fair values of outstanding derivative instruments for the periods presented on a gross basis are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | September 30,
2019 | | December 31,
2018 |
| Assets | | | | | |
| Foreign currency contracts not designated as hedging instruments | Other current assets | | $ | 3,634 | | | $ | 1,343 | |
| Liabilities | | | | | |
| Foreign currency contracts not designated as hedging instruments | Other current liabilities | | $ | 2,802 | | | $ | 3,826 | |
The Company recognized $9.6 million and $14.5 million of net losses on its foreign currency contracts in the three and nine months ended September 30, 2019, respectively. The Company recognized $1.2 million of net gains and $5.4 million of net losses on its foreign currency contracts in the three and nine months ended September 30, 2018, respectively.
Note 5.