Quarterly Report (10-q)

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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


☐	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: 001-38017

SNAP INC.

(Exact name of registrant as specified in its charter)

Delaware

45-5452795

(State or other jurisdiction of

incorporation or organizations)

(I.R.S. Employer

Identification Number)

2772 Donald Douglas Loop North

Santa Monica, California 90405

(Address of principal executive offices, including zip code)

(310) 399-3339

(Registrant's telephone, 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
Class A Common Stock, par value $0.00001 per share	SNAP	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 (Exchange Act) 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 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 ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Number of Shares Outstanding
Class A common stock, $0.00001 par value		1,138,349,322 shares outstanding as of October 17, 2019
Class B common stock, $0.00001 par value		32,056,088 shares outstanding as of October 17, 2019
Class C common stock, $0.00001 par value		229,564,537 shares outstanding as of October 17, 2019

TABLE OF CONTENTS


		Page

Note Regarding Forward-Looking Statements		3
Note Regarding User Metrics and Other Data		4

	PART I - FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	5
	Consolidated Statements of Cash Flows	5
	Consolidated Statements of Operations	6
	Consolidated Statements of Comprehensive Income (Loss)	7
	Consolidated Balance Sheets	8
	Consolidated Statements of Stockholders’ Equity	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39

	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
Signatures		71

Snap Inc., “Snapchat,” and our other registered and common-law trade names, trademarks, and service marks appearing in this Quarterly Report on Form 10-Q are the property of Snap Inc. or our subsidiaries.

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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding guidance, our future results of operations or financial condition, business strategy and plans, user growth and engagement, product initiatives, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “going to”, “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including among other things:

•

our financial performance, including our revenues, cost of revenues, operating expenses, and our ability to attain and sustain profitability;

•

our ability to generate and sustain positive cash flow;

•

our ability to attract and retain users and publishers;

•

our ability to attract and retain advertisers;

•

our ability to compete effectively with existing competitors and new market entrants;

•

our ability to effectively manage our growth and future expenses;

•

our ability to comply with modified or new laws and regulations applying to our business;

•

our ability to maintain, protect, and enhance our intellectual property;

•

our ability to successfully expand in our existing market segments and penetrate new market segments;

•

our ability to attract and retain qualified employees and key personnel; and

•

future acquisitions of or investments in complementary companies, products, services, or technologies.

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. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these 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.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (investor.snap.com), filings with the U.S. Securities and Exchange Commission, or SEC, webcasts, press releases, and conference calls. We use these mediums, including Snapchat and our website, to communicate with our members and the public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

NOTE REGARDING USER METRICS AND OTHER DATA

We define a Daily Active User, or DAU, as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. We calculate average Daily Active Users for a particular quarter by adding the number of DAUs on each day of that quarter and dividing that sum by the number of days in that quarter. We also break out Daily Active Users by geography because certain markets have a greater revenue opportunity and lower bandwidth costs. We define average revenue per user, or ARPU, as quarterly revenue divided by the average Daily Active Users. For purposes of calculating ARPU, revenue by user geography is apportioned to each region based on our determination of the geographic location in which advertising impressions are delivered, as this approximates revenue based on user activity. This allocation differs from our components of revenue disclosure in the notes to our consolidated financial statements, where revenue is based on the billing address of the advertising customer. For information concerning these metrics as measured by us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Unless otherwise stated, statistical information regarding our users and their activities is determined by calculating the daily average of the selected activity for the most recently completed quarter included in this report.

While these metrics are determined based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations globally. For example, there may be individuals who have multiple Snapchat accounts, even though we forbid that in our Terms of Service and implement measures to detect and suppress that behavior. We have not determined the number of such multiple accounts. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our Snapchat application when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such account. Changes in our products, infrastructure, mobile operating systems, or metric tracking system, or the introduction of new products, may impact our ability to accurately determine active users or other metrics and we may not determine such inaccuracies promptly. We believe that we don’t capture all data regarding all our active users. For example, technical issues may result in data not being recorded from every user’s application. While we believe this underreporting is generally immaterial, we are unable to precisely determine the level of underreporting and for some periods the underreporting may be material. We continually seek to address these technical issues and improve our accuracy, but given the complexity of the systems involved and the rapidly changing nature of mobile devices and systems, we expect underreporting to continue. We do not adjust our reported metrics to reflect this underreporting.

Some of our demographic data may be incomplete or inaccurate. For example, because users self-report their dates of birth, our age-demographic data may differ from our users’ actual ages. And because users who signed up for Snapchat before June 2013 were not asked to supply their date of birth, we exclude those users and estimate their ages based on a sample of the self-reported ages we do have. If our active users provide us with incorrect or incomplete information regarding their age or other attributes, then our estimates may prove inaccurate and fail to meet investor expectations.

In the past we have relied on third-party analytics providers to calculate our metrics, but today we rely primarily on our analytics platform that we developed and operate. We now use an analytics platform that we developed and operate and we count a Daily Active User only when a user opens the application and only once per user per day. We believe this methodology more accurately measures our user engagement. We have multiple pipelines of user data that we use to determine whether a user has opened the application during a particular day, and thus is a Daily Active User. This provides redundancy in the event one pipeline of data were to become unavailable for technical reasons, and also gives us redundant data to help measure how users interact with our application.

If we fail to maintain an effective analytics platform, our metrics calculations may be inaccurate. We regularly review, have adjusted in the past, and are likely in the future to adjust our processes for calculating our internal metrics to improve their accuracy. As a result of such adjustments, our Daily Active Users or other metrics may not be comparable to those in prior periods. Our measures of Daily Active Users may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology or data used.

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Snap Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Cash flows from operating activities
Net loss	$	(227,375	)	$	(325,148	)	$	(792,956	)	$	(1,064,243	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		20,646			24,898			66,625			68,966
Stock-based compensation		161,228			126,809			519,358			416,439
Deferred income taxes		170			(124	)		195			129
Lease exit charges		—			29,340			—			33,268
Gain on divestiture		—			—			(39,883	)		—
Amortization of debt discount and issuance costs		6,412			—			6,412			—
Other		(1,245	)		8,608			(4,561	)		(679	)
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net of allowance		(62,855	)		(18,834	)		(30,736	)		15,937
Prepaid expenses and other current assets		(490	)		(435	)		(4,980	)		(3,059	)
Operating lease right-of-use asset		35,633			—			57,254			—
Other assets		2,139			7,089			4,540			20,314
Accounts payable		4,220			2,084			28,319			(44,638	)
Accrued expenses and other current liabilities		23,243			14,841			16,655			(14,664	)
Operating lease liabilities		(36,008	)		—			(63,259	)		—
Other liabilities		(1,867	)		(1,671	)		(1,099	)		8,360
Net cash used in operating activities		(76,149	)		(132,543	)		(238,116	)		(563,870	)
Cash flows from investing activities
Purchases of property and equipment		(7,938	)		(26,285	)		(27,385	)		(97,501	)
Sales of property and equipment		—			—			29			—
Proceeds from divestiture, net		—			—			73,796			—
Non-marketable investments		(1,050	)		(250	)		(3,750	)		(21,260	)
Purchases of marketable securities		(1,115,358	)		(444,369	)		(1,924,398	)		(1,318,467	)
Sales of marketable securities		24,948			—			102,437			45,007
Maturities of marketable securities		411,079			560,465			1,193,739			1,926,802
Other		—			—			1,000			(2,565	)
Net cash provided by (used in) investing activities		(688,319	)		89,561			(584,532	)		532,016
Cash flows from financing activities
Proceeds from issuance of convertible notes, net of issuance costs		1,251,848			—			1,251,848			—
Purchase of capped calls		(102,086	)		—			(102,086	)		—
Proceeds from the exercise of stock options		7,788			142			14,726			47,865
Stock repurchases from employees for tax withholdings		—			—			—			(551	)
Net cash provided by financing activities		1,157,550			142			1,164,488			47,314
Change in cash, cash equivalents, and restricted cash		393,082			(42,840	)		341,840			15,460
Cash, cash equivalents, and restricted cash, beginning of period		337,732			395,307			388,974			337,007
Cash, cash equivalents, and restricted cash, end of period	$	730,814		$	352,467		$	730,814		$	352,467
Supplemental disclosures
Cash paid for income taxes, net	$	643		$	758		$	564		$	3,155

See Notes to Consolidated Financial Statements.

Snap Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	446,199		$	297,695		$	1,154,646		$	790,624
Costs and expenses:
Cost of revenue		223,140			197,554			642,399			585,917
Research and development		211,599			203,510			663,983			607,742
Sales and marketing		123,240			97,552			332,626			301,350
General and administrative		117,073			122,450			365,370			369,358
Total costs and expenses		675,052			621,066			2,004,378			1,864,367
Operating loss		(228,853	)		(323,371	)		(849,732	)		(1,073,743	)
Interest income		10,317			7,011			25,579			19,715
Interest expense		(8,654	)		(919	)		(10,219	)		(2,783	)
Other income (expense), net		(1,481	)		(7,625	)		41,477			(4,533	)
Loss before income taxes		(228,671	)		(324,904	)		(792,895	)		(1,061,344	)
Income tax benefit (expense)		1,296			(244	)		(61	)		(2,899	)
Net loss	$	(227,375	)	$	(325,148	)	$	(792,956	)	$	(1,064,243	)
Net loss per share attributable to Class A, Class B, and Class C common stockholders (Note 3):
Basic	$	(0.16	)	$	(0.25	)	$	(0.58	)	$	(0.83	)
Diluted	$	(0.16	)	$	(0.25	)	$	(0.58	)	$	(0.83	)
Weighted average shares used in computation of net loss per share:
Basic		1,393,358			1,309,918			1,364,327			1,277,293
Diluted		1,393,358			1,309,918			1,364,327			1,277,293

See Notes to Consolidated Financial Statements.

Snap 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 loss	$	(227,375	)	$	(325,148	)	$	(792,956	)	$	(1,064,243	)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on marketable securities, net of tax		(12	)		71			609			564
Foreign currency translation		(9,263	)		(1,808	)		(10,929	)		(8,251	)
Total other comprehensive income (loss), net of tax		(9,275	)		(1,737	)		(10,320	)		(7,687	)
Total comprehensive income (loss)	$	(236,650	)	$	(326,885	)	$	(803,276	)	$	(1,071,930	)

See Notes to Consolidated Financial Statements.

Snap Inc.

Consolidated Balance Sheets

(in thousands, except par value)

	September 30, 2019			December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	728,828		$	387,149
Marketable securities		1,531,902			891,914
Accounts receivable, net of allowance		374,090			354,965
Prepaid expenses and other current assets		42,243			41,900
Total current assets		2,677,063			1,675,928
Property and equipment, net		177,073			212,560
Operating lease right-of-use assets		250,225			—
Intangible assets, net		72,371			126,054
Goodwill		621,758			632,370
Other assets		65,882			67,194
Total assets	$	3,864,372		$	2,714,106
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	56,572		$	30,876
Operating lease liabilities		49,725			—
Accrued expenses and other current liabilities		262,766			261,815
Total current liabilities		369,063			292,691
Convertible senior notes, net		880,391			—
Operating lease liabilities, noncurrent		284,798			—
Other liabilities		5,705			110,416
Total liabilities		1,539,957			403,107
Commitments and contingencies (Note 8)
Stockholders’ equity
Class A non-voting common stock, $0.00001 par value. 3,000,000 shares authorized, 999,304 shares issued and outstanding at December 31, 2018, and 3,000,000 shares authorized, 1,132,915 shares issued and outstanding at September 30, 2019.		11			10
Class B voting common stock, $0.00001 par value. 700,000 shares authorized, 93,846 shares issued and outstanding at December 31, 2018, and 700,000 shares authorized, 32,057 shares issued and outstanding at September 30, 2019.		—			1
Class C voting common stock, $0.00001 par value. 260,888 shares authorized, 224,611 shares issued and outstanding at December 31, 2018, and 260,888 shares authorized, 229,564 shares issued and outstanding at September 30, 2019.		2			2
Additional paid-in capital		9,036,801			8,220,417
Accumulated other comprehensive income (loss)		(7,173	)		3,147
Accumulated deficit		(6,705,226	)		(5,912,578	)
Total stockholders’ equity		2,324,415			2,310,999
Total liabilities and stockholders’ equity	$	3,864,372		$	2,714,106

See Notes to Consolidated Financial Statements.

Snap 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
Class A non-voting common stock
Balance, beginning of period		1,096,653			11			958,801			10			999,304		$	10			883,022		$	9
Shares issued in connection with exercise of stock options under stock-based compensation plans		1,300			—			262			—			3,024			—			15,511			—
Issuance of Class A non-voting common stock for vesting of restricted stock units and restricted stock awards, net		19,055			(1	)		15,252			(1	)		67,336			—			42,538			—
Conversion of Class B voting common stock to Class A non-voting common stock		15,907			1			1,751			—			63,251			1			34,995			—
Balance, end of period		1,132,915		$	11			976,066		$	9			1,132,915		$	11			976,066		$	9
Class B voting common stock
Balance, beginning of period		47,582			—			94,471			1			93,846			1			122,564			1
Shares issued in connection with exercise of stock options under stock-based compensation plans		373			—			224			—			1,162			—			3,201			—
Issuance of Class B voting common stock for vesting of restricted stock units, net		9			—			717			—			300			—			2,891			—
Conversion of Class B voting common stock to Class A non-voting common stock		(15,907	)		—			(1,751	)		—			(63,251	)		(1	)		(34,995	)		—
Balance, end of period		32,057			—			93,661			1			32,057			—			93,661			1
Class C voting common stock
Balance, beginning of period		227,914			2			219,891			2			224,611			2			216,616			2
Issuance of Class C voting common stock for settlement of restricted stock units, net		1,650			—			1,600			—			4,953			—			4,875			—
Balance, end of period		229,564			2			221,491			2			229,564			2			221,491			2
Additional paid-in capital
Balance, beginning of period		—			8,592,434			—			7,971,610			—			8,220,417			—			7,634,825
Stock-based compensation expense		—			161,228			—			126,809			—			519,358			—			416,439
Shares issued in connection with exercise of stock options under stock-based compensation plans		—			7,794			—			100			—			14,768			—			47,806
Issuance of Class A non-voting common stock in connection with acquisitions and divestitures		—			—			—			—			—			6,913			—			—
Conversion of Class B voting common stock to Class A non-voting common stock		—			(1	)		—			—			—			(1	)		—			—
Stock repurchases from employees for tax withholdings		—			—			—			—			—			—			—			(551	)
Equity component of convertible senior notes, net		—			377,432			—