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Facebook Inc (FB) SEC Filing 10-Q Quarterly report for the period ending Tuesday, March 31, 2020

SEC Filings

META Quarterly Reports

Meta Platforms, Inc.

CIK: 1326801 Ticker: META
Facebook Reports First Quarter 2020 Results

MENLO PARK, Calif. – April 29, 2020 – Facebook, Inc. (Nasdaq: FB) today reported financial results for the quarter ended March 31, 2020.

"Our work has always been about helping you stay connected with the people you care about," said Mark Zuckerberg, Facebook founder and CEO. "With people relying on our services more than ever, we're focused on keeping people safe, informed and connected."

Response to COVID-19 Pandemic

In response to the COVID-19 pandemic, Facebook is supporting the global public health community's work to ensure everyone has access to accurate information. We are also working to address the long-term impacts of the crisis by supporting industries in need and making it easier for people to find and offer help in their communities. We have committed over $300 million to date in investments to help our broader community during the crisis, including creating a $100 million grant program to help small businesses and investing $100 million to support the news industry.

We launched a COVID-19 information center on Facebook to provide real-time information, health and well-being tips, and the ability to offer and ask for help. We are also matching $20 million in donations to support COVID-19 relief efforts, providing health organizations with free ads and tools to track the pandemic, offering Workplace to government and emergency organizations for free, and donating $25 million to support healthcare workers on the front lines.

To help people stay connected as a record number of people use our services, we are making our apps more efficient and adding capacity, while also prioritizing enhancements in key services, such as real-time video experiences and live game-streaming.

First Quarter 2020 Financial Highlights
 
Three Months Ended March 31,
 
Year-over-Year % Change
In millions, except percentages and per share amounts
2020
 
2019 (1)
 
Revenue:
 
 
 
 
 
Advertising
$
17,440

 
$
14,912

 
17%
Other
297

 
165

 
80%
Total revenue
17,737

 
15,077

 
18%
Total costs and expenses
11,844

 
11,760

 
1%
Income from operations
$
5,893

 
$
3,317

 
78%
Operating margin
33
%
 
22
%
 

Provision for income taxes
$
959

 
$
1,053

 
(9)%
Effective tax rate
16
%
 
30
%
 

Net income
$
4,902

 
$
2,429

 
102%
Diluted earnings per share (EPS)
$
1.71

 
$
0.85

 
101%
_________________________
(1) Includes a $3.0 billion legal expense accrued in the first quarter of 2019 related to our settlement with the U.S. Federal Trade Commission (FTC).





1


The following information was filed by Meta Platforms, Inc (META) on Wednesday, April 29, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
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 March 31, 2020
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: 001-35551
____________________________________________ 
Facebook, Inc.
(Exact name of registrant as specified in its charter)
____________________________________________ 
Delaware
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)

(650543-4800
(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
Class A Common Stock, par value $0.000006
FB
The Nasdaq Stock Market LLC

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 (§ 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
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
$0.000006 par value
2,404,551,860

shares outstanding as of April 24, 2020
Class B Common Stock
$0.000006 par value
444,551,440

shares outstanding as of April 24, 2020



FACEBOOK, INC.
TABLE OF CONTENTS

 
 
Page 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 

2


NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless expressly indicated or the context requires otherwise, the terms "Facebook," "company," "we," "us," and "our" in this document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Facebook" may also refer to our products, regardless of the manner in which they are accessed. The term "Family" refers to our Facebook, Instagram, Messenger, and WhatsApp products. For references to accessing Facebook or our other products on the "web" or via a "website," such terms refer to accessing such products on personal computers. For references to accessing Facebook or our other products on "mobile," such term refers to accessing such products via a mobile application or via a mobile-optimized version of our websites such as m.facebook.com, whether on a mobile phone or tablet.

3


LIMITATIONS OF KEY METRICS AND OTHER DATA

The numbers for our key metrics are calculated using internal company data based on the activity of user accounts. We have historically reported the numbers of our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU) (collectively, our "Facebook metrics") based on user activity only on Facebook and Messenger and not on our other products. Beginning with our Annual Report on Form 10-K for the year ended December 31, 2019, we also report our estimates of the numbers of our daily active people (DAP), monthly active people (MAP), and average revenue per person (ARPP) (collectively, our "Family metrics") based on the activity of users who visited at least one of Facebook, Instagram, Messenger, and WhatsApp (collectively, our "Family" of products) during the applicable period of measurement. We believe our Family metrics better reflect the size of our community and the fact that many people are using more than one of our products. As a result, over time we intend to report our Family metrics as our key metrics in place of DAUs, MAUs, and ARPU in our periodic reports filed with the Securities and Exchange Commission.

While these numbers are 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 usage of our products across large online and mobile populations around the world. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology. We regularly review our processes for calculating these metrics, and from time to time we discover inaccuracies in our metrics or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments. We generally do not intend to update previously disclosed Family metrics for any such inaccuracies or adjustments that are within the error margins disclosed below.

In addition, our Facebook metrics and Family metrics estimates will differ from estimates published by third parties due to differences in methodology.

Facebook Metrics

We regularly evaluate our Facebook metrics to estimate the number of "duplicate" and "false" accounts among our MAUs. A duplicate account is one that a user maintains in addition to his or her principal account. We divide "false" accounts into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) violating accounts, which represent user profiles that we believe are intended to be used for purposes that violate our terms of service, such as bots and spam. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as identical IP addresses and similar user names, and to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Any loss of access to data signals we use in this process, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, limitations while our personnel work remotely during the COVID-19 pandemic, or other factors, also may impact the stability or accuracy of our estimates of duplicate and false accounts. Our estimates also may change as our methodologies evolve, including through the application of new data signals or technologies or product changes that may allow us to identify previously undetected duplicate or false accounts and may improve our ability to evaluate a broader population of our users. Duplicate and false accounts are very difficult to measure at our scale, and it is possible that the actual number of duplicate and false accounts may vary significantly from our estimates.

In the fourth quarter of 2019, we estimated that duplicate accounts may have represented approximately 11% of our worldwide MAUs. We believe the percentage of duplicate accounts is meaningfully higher in developing markets such as the Philippines and Vietnam, as compared to more developed markets. In the fourth quarter of 2019, we estimated that false accounts may have represented approximately 5% of our worldwide MAUs. Our estimation of false accounts can vary as a result of episodic spikes in the creation of such accounts, which we have seen originate more frequently in specific countries such as Indonesia and Vietnam. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of duplicate or false accounts among our users, which may also reduce our DAU and MAU estimates in a particular period. We intend to disclose our estimates of the number of duplicate and false accounts among our MAUs on an annual basis.

The numbers of DAUs and MAUs discussed in this Quarterly Report on Form 10-Q, as well as ARPU, do not include users on Instagram, WhatsApp, or our other products, unless they would otherwise qualify as DAUs or MAUs, respectively, based on their other activities on Facebook.

4



Family Metrics

Many people in our community have user accounts on more than one of our products, and some people have multiple user accounts within an individual product. Accordingly, for our Family metrics, we do not seek to count the total number of user accounts across our products because we believe that would not reflect the actual size of our community. Rather, our Family metrics represent our estimates of the number of unique people using at least one of Facebook, Instagram, Messenger, and WhatsApp. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. To calculate these metrics, we rely upon complex techniques, algorithms and machine learning models that seek to count the individual people behind user accounts, including by matching multiple user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. These techniques and models require significant judgment, are subject to data and other limitations discussed below, and inherently are subject to statistical variances and uncertainties. We estimate the potential error in our Family metrics primarily based on user survey data, which itself is subject to error as well. While we expect the error margin for our Family metrics to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. As a result, it is also possible that our Family metrics may indicate changes or trends in user numbers that do not match actual changes or trends.

To calculate our estimates of Family DAP and MAP, we currently use a series of machine learning models that are developed based on internal reviews of limited samples of user accounts and calibrated against user survey data. We apply significant judgment in designing these models and calculating these estimates. For example, to match user accounts within individual products and across multiple products, we use data signals such as similar device information, IP addresses, and user names. We also calibrate our models against data from periodic user surveys of varying sizes and frequency across our products, which are inherently subject to error. In addition, our data limitations may affect our understanding of certain details of our business and increase the risk of error for our Family metrics estimates. Our techniques and models rely on a variety of data signals from different products, and we rely on more limited data signals for some products compared to others. For example, as a result of limited visibility into encrypted products, we have fewer data signals from WhatsApp user accounts and primarily rely on phone numbers and device information to match WhatsApp user accounts with accounts on our other products. Similarly, although Messenger Kids users are included in our Family metrics, we do not seek to match their accounts with accounts on our other applications for purposes of calculating DAP and MAP. Any loss of access to data signals we use in our process for calculating Family metrics, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, limitations while our personnel work remotely during the COVID-19 pandemic, or other factors, also may impact the stability or accuracy of our reported Family metrics. Our estimates of Family metrics also may change as our methodologies evolve, including through the application of new data signals or technologies, product changes, or other improvements in our user surveys, algorithms, or machine learning that may improve our ability to match accounts within and across our products or otherwise evaluate the broad population of our users. In addition, such evolution may allow us to identify previously undetected violating accounts (as defined below).

We regularly evaluate our Family metrics to estimate the percentage of our MAP consisting solely of "violating" accounts. We define "violating" accounts as accounts which we believe are intended to be used for purposes that violate our terms of service, including bots and spam. In the fourth quarter of 2019, we estimated that approximately 3% of our worldwide MAP consisted solely of violating accounts. Such estimation is based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, we look for account information and behaviors associated with Facebook and Instagram accounts that appear to be inauthentic to the reviewers, but we have limited visibility into WhatsApp user activity due to encryption. In addition, if we believe an individual person has one or more violating accounts, we do not include such person in our violating accounts estimation as long as we believe they have one account that does not constitute a violating account. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of violating accounts among our users, which may also reduce our DAP and MAP estimates in a particular period. We intend to disclose our estimates of the percentage of our MAP consisting solely of violating accounts on an annual basis. Violating accounts are very difficult to measure at our scale, and it is possible that the actual number of violating accounts may vary significantly from our estimates.

The numbers of Family DAP and MAP discussed in this Quarterly Report on Form 10-Q, as well as ARPP, do not include users on our other products, unless they would otherwise qualify as DAP or MAP, respectively, based on their other activities on our Family products.


5


User Geography

Our data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure our metrics are also susceptible to algorithm or other technical errors, and our estimates for revenue by user location and revenue by user device are also affected by these factors.


6


PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
FACEBOOK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for number of shares and par value)
(Unaudited)
 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,618

 
$
19,079

Marketable securities
36,671

 
35,776

Accounts receivable, net of allowances of $370 and $206 as of March 31, 2020 and December 31, 2019, respectively
7,289

 
9,518

Prepaid expenses and other current assets
1,771

 
1,852

Total current assets
69,349

 
66,225

Property and equipment, net
37,127

 
35,323

Operating lease right-of-use assets, net
9,359

 
9,460

Intangible assets, net
838

 
894

Goodwill
18,811

 
18,715

Other assets
2,887

 
2,759

Total assets
$
138,371

 
$
133,376

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
829

 
$
1,363

Partners payable
712

 
886

Operating lease liabilities, current
835

 
800

Accrued expenses and other current liabilities
12,446

 
11,735

Deferred revenue and deposits
247

 
269

Total current liabilities
15,069

 
15,053

Operating lease liabilities, non-current
9,509

 
9,524

Other liabilities
8,489

 
7,745

Total liabilities
33,067

 
32,322

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,406 million and 2,407 million shares issued and outstanding, as of March 31, 2020 and December 31, 2019, respectively; 4,141 million Class B shares authorized, 445 million shares issued and outstanding, as of March 31, 2020 and December 31, 2019

 

Additional paid-in capital
46,688

 
45,851

Accumulated other comprehensive loss
(544
)
 
(489
)
Retained earnings
59,160

 
55,692

Total stockholders' equity
105,304

 
101,054

Total liabilities and stockholders' equity
$
138,371

 
$
133,376


See Accompanying Notes to Condensed Consolidated Financial Statements.

7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2020
 
2019
Revenue
$
17,737

 
$
15,077

Costs and expenses:
 
 
 
Cost of revenue
3,459

 
2,816

Research and development
4,015

 
2,860

Marketing and sales
2,787

 
2,020

General and administrative
1,583

 
4,064

Total costs and expenses
11,844

 
11,760

Income from operations
5,893

 
3,317

Interest and other income (expense), net
(32
)
 
165

Income before provision for income taxes
5,861

 
3,482

Provision for income taxes
959

 
1,053

Net income
$
4,902

 
$
2,429

Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
Basic
$
1.72

 
$
0.85

Diluted
$
1.71

 
$
0.85

Weighted-average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
Basic
2,851

 
2,856

Diluted
2,868

 
2,869

Share-based compensation expense included in costs and expenses:
 
 
 
Cost of revenue
$
94

 
$
87

Research and development
999

 
723

Marketing and sales
149

 
113

General and administrative
93

 
87

Total share-based compensation expense
$
1,335

 
$
1,010

See Accompanying Notes to Condensed Consolidated Financial Statements.


8


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
Three Months Ended March 31,
 
2020
 
2019
Net income
$
4,902

 
$
2,429

Other comprehensive income (loss):
 
 
 
Change in foreign currency translation adjustment, net of tax
(376
)
 
(175
)
Change in unrealized gain/loss on available-for-sale investments and other, net of tax
321

 
154

Comprehensive income
$
4,847

 
$
2,408

See Accompanying Notes to Condensed Consolidated Financial Statements.

9


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited) 

 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Class A and Class B Common Stock
 
Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders' Equity
 
Class A and Class B Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders' Equity
 
Shares
 
Par 
Value
 
 
Shares
 
Par 
Value
 
Balances at beginning of period
2,852

 
$

 
$
45,851

 
$
(489
)
 
$
55,692

 
$
101,054

 
2,854

 
$

 
$
42,906

 
$
(760
)
 
$
41,981

 
$
84,127

Issuance of common stock
8

 

 

 

 

 

 
8

 

 
4

 

 

 
4

Shares withheld related to net share settlement
(3
)
 

 
(498
)
 

 
(192
)
 
(690
)
 
(3
)
 

 
(387
)
 

 
(125
)
 
(512
)
Share-based compensation

 

 
1,335

 

 

 
1,335

 

 

 
1,010

 

 

 
1,010

Share repurchases
(6
)
 

 

 

 
(1,242
)
 
(1,242
)
 
(3
)
 

 

 

 
(521
)
 
(521
)
Other comprehensive loss

 

 

 
(55
)
 

 
(55
)
 

 

 

 
(21
)
 

 
(21
)
Net income

 

 

 

 
4,902

 
4,902

 

 

 

 

 
2,429

 
2,429

Balances at end of period
2,851

 
$

 
$
46,688

 
$
(544
)
 
$
59,160

 
$
105,304

 
2,856

 
$

 
$
43,533

 
$
(781
)
 
$
43,764

 
$
86,516



See Accompanying Notes to Condensed Consolidated Financial Statements.

10


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities
 
 
 
Net income
$
4,902

 
$
2,429

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
   Depreciation and amortization
1,597

 
1,355

   Share-based compensation
1,335

 
1,010

   Deferred income taxes
477

 
183

   Other
6

 
6

Changes in assets and liabilities:
 
 
 
   Accounts receivable
2,046

 
1,070

   Prepaid expenses and other current assets
(29
)
 
84

   Other assets
(16
)
 
41

   Accounts payable
(44
)
 
(96
)
   Partners payable
(169
)
 
(1
)
   Accrued expenses and other current liabilities
980

 
3,154

   Deferred revenue and deposits
(16
)
 
(4
)
   Other liabilities
(68
)
 
77

Net cash provided by operating activities
11,001

 
9,308

Cash flows from investing activities
 
 
 
Purchases of property and equipment, net
(3,558
)
 
(3,837
)
Purchases of marketable securities
(7,884
)
 
(6,603
)
Sales of marketable securities
2,764

 
1,512

Maturities of marketable securities
4,644

 
2,210

Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(33
)
 
(50
)
Other investing activities, net
(42
)
 

Net cash used in investing activities
(4,109
)
 
(6,768
)
Cash flows from financing activities
 
 
 
Taxes paid related to net share settlement of equity awards
(690
)
 
(512
)
Repurchases of Class A common stock
(1,250
)
 
(613
)
Principal payments on finance leases
(100
)
 
(125
)
Net change in overdraft in cash pooling entities
(80
)
 
(177
)
Other financing activities, net
98

 
4

Net cash used in financing activities
(2,022
)
 
(1,423
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(222
)
 
(44
)
Net increase in cash, cash equivalents, and restricted cash
4,648

 
1,073

Cash, cash equivalents, and restricted cash at beginning of the period
19,279

 
10,124

Cash, cash equivalents, and restricted cash at end of the period
$
23,927

 
$
11,197

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
23,618

 
$
11,076

Restricted cash, included in prepaid expenses and other current assets
137

 
10

Restricted cash, included in other assets
172

 
111

Total cash, cash equivalents, and restricted cash
$
23,927

 
$
11,197


See Accompanying Notes to Condensed Consolidated Financial Statements.

11


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Supplemental cash flow data
 
 
 
Cash paid for income taxes, net
$
209

 
$
682

Non-cash investing activities:
 
 
 
Acquisition of businesses in accrued expenses and other liabilities
$
148

 
$

Property and equipment in accounts payable and accrued liabilities
$
1,603

 
$
1,617


See Accompanying Notes to Condensed Consolidated Financial Statements.

12


FACEBOOK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

The condensed consolidated financial statements include the accounts of Facebook, Inc., subsidiaries where we have controlling financial interests, and any variable interest entities for which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year ending December 31, 2020.

Reclassifications

Certain prior year amounts on the condensed consolidated statements of cash flow have been reclassified to conform to the current year presentation. A reclassification was made to net the changes in operating lease right-of use assets with operating lease liabilities. This net change was not material and was included within the changes in other liabilities in cash flows from operating activities on the condensed consolidated statement of cash flow for the three months ended March 31, 2019. This change does not affect previously reported cash flows from operating activities in the condensed consolidated statements of cash flows. This reclassification had no effect on our other condensed consolidated financial statements for the periods ended March 31, 2020 and 2019.

Use of Estimates

Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to income taxes, loss contingencies, fair value of acquired intangible assets and goodwill, collectibility of accounts receivable, fair value of financial instruments, credit losses of available-for-sale (AFS) debt securities, leases, useful lives of intangible assets and property and equipment, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for our advertising business, and adversely impact our results of operations. During the three months ended March 31, 2020, we faced increasing uncertainties around our estimates of revenue collectibility and accounts receivable credit losses. We expect uncertainties around our key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements.

13



Recently Adopted Accounting Pronouncements

Fair Value Measurements

On January 1, 2020, we adopted Accounting Standards Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

Credit Losses

On January 1, 2020, we adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Upon adoption, we changed our impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss methodology for financial instruments measured at amortized cost, including our accounts receivable. In addition, we modified our impairment model to the CECL model for AFS debt securities and discontinued using the concept of "other than temporary" impairment on AFS debt securities. CECL estimates on accounts receivable are recorded as general and administrative expenses on our condensed consolidated statements of income. CECL estimates on AFS debt securities are recognized in interest and other income (expense), net on our condensed consolidated statements of income. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements.

Significant Accounting Policies

There have been no material changes to our significant accounting policies from our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except for the policies noted below which changed as a result of the adoption of Topic 326.

Cash and Cash Equivalents, Marketable Securities, and Restricted Cash

Cash and cash equivalents consist of cash on deposit with banks and highly liquid investments with maturities of 90 days or less from the date of purchase.

We hold investments in marketable securities, consisting of U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. We classify our marketable securities as AFS investments in our current assets because they represent investments of cash available for current operations. Our AFS investments are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income (loss) in stockholders' equity. AFS debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on AFS debt securities are recognized in interest and other income (expense), net on our condensed consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in stockholders' equity. The amount of credit losses recorded for the three months ended March 31, 2020 was not material. We have not recorded any impairment charge for unrealized losses in the periods presented. We determine realized gains or losses on sale of marketable securities on a specific identification method, and record such gains or losses as interest and other income (expense), net.

Accounts Receivable and Allowances

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make estimates of expected credit losses for the allowance for doubtful accounts and allowance for unbilled receivables based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. The estimated credit loss allowance is recorded as general and administrative expenses on our condensed consolidated statements of income. As of March 31, 2020, we reported $7.29 billion of accounts receivable, net of an allowance of $370 million.


14


Credit Risk and Concentration

Our financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities, and accounts receivable. The majority of cash equivalents consists of money market funds that primarily invest in U.S. government and agency securities. Marketable securities consist of investments in U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. Our investment portfolio in corporate debt securities is highly liquid and diversified among individual issuers.

AFS debt securities with an amortized cost basis in excess of estimated fair value are assessed using the CECL model to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on AFS debt securities are recognized in interest and other income (expense), net on our condensed consolidated statements of income.

Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industries and countries. We generated 43% and 42% of our revenue for the three months ended March 31, 2020 and 2019, respectively, from marketers and developers based in the United States, with the majority of revenue outside of the United States coming from customers located in western Europe, China, Canada, Japan, Brazil, and Vietnam.
 
We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain an allowance for estimated credit losses. Bad debt expense was $197 million and $4 million during the three months ended March 31, 2020 and 2019, respectively. In the event that accounts receivable collection cycles deteriorate, our operating results and financial position could be adversely affected.

Accounting Pronouncements Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, with early adoption permitted. We will adopt the new standard effective January 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In January 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (ASU 2020-01), which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, with early adoption permitted. We are currently evaluating the impact of the new guidance, but based upon our current portfolio of investments, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Note 2. Revenue

Revenue disaggregated by revenue source consists of the following (in millions):
 
Three Months Ended March 31,
 
2020
 
2019
Advertising
$
17,440

 
$
14,912

Other revenue
297

 
165

Total revenue
$
17,737

 
$
15,077


15



Revenue disaggregated by geography, based on the billing address of our customers, consists of the following (in millions):
 
Three Months Ended March 31,
 
2020
 
2019
United States and Canada(1)
$
8,012

 
$
6,777

Europe(2)
4,150

 
3,624

Asia-Pacific
3,971

 
3,337

Rest of World(2)
1,604

 
1,339

Total revenue
$
17,737

 
$
15,077

____________________________________
(1)
United States revenue was $7.55 billion and $6.36 billion for the three months ended March 31, 2020 and 2019, respectively.
(2)
Europe includes Russia and Turkey, and Rest of World includes Africa, Latin America, and the Middle East.

Deferred revenue and deposits consists of the following (in millions):
 
March 31, 2020
 
December 31, 2019
Deferred revenue
$
210

 
$
234

Deposits
37

 
35

Total deferred revenue and deposits
$
247

 
$
269





16


Note 3. Earnings per Share
We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method.
Basic EPS is computed by dividing net income by the weighted-average number of shares of our Class A and Class B common stock outstanding.
For the calculation of diluted EPS, net income for basic EPS is adjusted by the effect of dilutive securities under our equity compensation plans. In addition, the computation of the diluted EPS of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares to Class A common stock. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income by the weighted-average number of fully diluted common shares outstanding.
Restricted stock units (RSUs) with anti-dilutive effect were excluded from the EPS calculation and they were not material for the three months ended March 31, 2020 and March 31, 2019.

Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.

The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per share amounts): 
 
Three Months Ended March 31,
 
2020
 
2019
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
Net income
$
4,138

 
$
764

 
$
2,038

 
$
391

Denominator
 
 
 
 
 
 
 
Weighted-average shares outstanding
2,407

 
444

 
2,396

 
460

Basic EPS
$
1.72

 
$
1.72

 
$
0.85

 
$
0.85

Diluted EPS:
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
Net income
$
4,138

 
$
764

 
$
2,038

 
$
391

Reallocation of net income as a result of conversion of Class B to Class A common stock
764

 

 
391

 

Reallocation of net income to Class B common stock

 
(5
)
 

 

Net income for diluted EPS
$
4,902

 
$
759

 
$
2,429

 
$
391

Denominator
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
2,407

 
444

 
2,396

 
460

Conversion of Class B to Class A common stock
444

 

 
460

 

Weighted-average effect of dilutive RSUs and employee stock options
17

 

 
13

 
2

Number of shares used for diluted EPS computation
2,868

 
444

 
2,869

 
462

Diluted EPS
$
1.71

 
$
1.71

 
$
0.85

 
$
0.85



17


Note 4. Cash and Cash Equivalents, and Marketable Securities
The following table sets forth the cash and cash equivalents and marketable securities (in millions):
 
March 31, 2020
 
December 31, 2019
Cash and cash equivalents:
 
 
 
Cash
$
4,657

 
$
4,735

Money market funds
18,155

 
12,787

U.S. government securities
287

 
815

U.S. government agency securities
217

 
444

Certificate of deposits and time deposits
203

 
217

Corporate debt securities
99

 
81

Total cash and cash equivalents
23,618

 
19,079

Marketable securities:
 
 
 
U.S. government securities
19,331

 
18,679

U.S. government agency securities
6,617

 
6,712

Corporate debt securities
10,723

 
10,385

Total marketable securities
36,671

 
35,776

Total cash and cash equivalents and marketable securities
$
60,289

 
$
54,855

The gross unrealized gains on our marketable securities were $631 million and $205 million as of March 31, 2020 and December 31, 2019, respectively. The gross unrealized losses on our marketable securities were $44 million and $24 million as of March 31, 2020 and December 31, 2019, respectively. The allowance for credit losses was not material as of March 31, 2020.
The following table classifies our marketable securities by contractual maturities (in millions):
 
March 31, 2020
Due in one year
$
13,070

Due after one year to five years
23,601

Total
$
36,671



18


Note 5. Fair Value Measurement
The following table summarizes our cash equivalents and marketable securities measured at fair value and the classification by level of input within the fair value hierarchy (in millions): 
 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
 
March 31, 2020
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
18,155

 
$
18,155

 
$

 
$

U.S. government securities
 
287

 
287

 

 

U.S. government agency securities
 
217

 
217

 

 

Certificate of deposits and time deposits
 
203

 

 
203

 

Corporate debt securities
 
99

 

 
99

 

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
19,331

 
19,331

 

 

U.S. government agency securities
 
6,617

 
6,617

 

 

Corporate debt securities
 
10,723

 

 
10,723

 

Total cash equivalents and marketable securities
 
$
55,632

 
$
44,607

 
$
11,025

 
$

 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
 
December 31, 2019
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
12,787

 
$
12,787

 
$

 
$

U.S. government securities
 
815

 
815

 

 

U.S. government agency securities
 
444

 
444

 

 

Certificate of deposits and time deposits
 
217

 

 
217

 

Corporate debt securities
 
81

 

 
81

 

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
18,679

 
18,679

 

 

U.S. government agency securities
 
6,712

 
6,712

 

 

Corporate debt securities
 
10,385

 

 
10,385

 

Total cash equivalents and marketable securities
 
$
50,120

 
$
39,437

 
$
10,683

 
$


We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.
Beginning in the three months ended March 31, 2020, we had other assets and liabilities classified within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The aggregate absolute value of these Level 3 assets and liabilities was not material to our condensed consolidated financial statements as of March 31, 2020.

19


Note 6. Property and Equipment

Property and equipment, net consists of the following (in millions): 
 
March 31, 2020
 
December 31, 2019
Land
$
1,138

 
$
1,097

Buildings
11,908

 
11,226

Leasehold improvements
3,382

 
3,112

Network equipment
17,764

 
17,004

Computer software, office equipment and other
1,951

 
1,813

Finance lease right-of-use assets
1,688

 
1,635

Construction in progress
10,908

 
10,099

    Total
48,739

 
45,986

Less: Accumulated depreciation
(11,612
)
 
(10,663
)
Property and equipment, net
$
37,127

 
$
35,323



Depreciation expense on property and equipment was $1.49 billion and $1.20 billion for the three months ended March 31, 2020 and 2019, respectively. Construction in progress includes costs mostly related to construction of data centers, network equipment infrastructure to support our data centers around the world, and office buildings. No interest was capitalized for any period presented.
Note 7. Leases

We have entered into various non-cancelable operating lease agreements for certain of our offices, data centers, land, colocations, and equipment. We have also entered into various non-cancelable finance lease agreements for certain network equipment. Our leases have original lease periods expiring between the remainder of 2020 and 2093. Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
The components of lease costs, lease term and discount rate are as follows (in millions):
 
Three Months Ended
 
March 31, 2020

March 31, 2019
Finance lease cost
 
 
 
     Amortization of right-of-use assets
$
60

 
$
42

     Interest
3

 
2

Operating lease cost
340

 
246

Variable lease cost and other, net
60

 
49

       Total lease cost
$
463

 
$
339

 
 
 
 
Weighted-average remaining lease term
 
 
 
     Operating leases
12.8 years

 
13.1 years

     Finance leases
15.2 years

 
15.1 years

 
 
 
 
Weighted-average discount rate
 
 
 
     Operating leases
3.2
%
 
3.6
%
     Finance leases
3.1
%
 
3.2
%


20


The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2020 (in millions):
 
Operating Leases
 
Finance Leases
The remainder of 2020
$
795

 
$
45

2021
1,281

 
49

2022
1,198

 
38

2023
1,137

 
36

2024
1,061

 
36

Thereafter
7,657

 
386

Total undiscounted cash flows
13,129

 
590

Less: Imputed interest
(2,785
)
 
(120
)
Present value of lease liabilities
$
10,344

 
$
470

 
 
 
 
Lease liabilities, current
$
835

 
$
44

Lease liabilities, non-current
9,509

 
426

Present value of lease liabilities
$
10,344

 
$
470



As of March 31, 2020, we have additional operating and finance leases for facilities and network equipment that have not yet commenced with lease obligations of approximately $5.07 billion and $332 million, respectively. These operating and finance leases will commence between the remainder of 2020 and 2023 with lease terms of greater than one year to 25 years. This table does not include lease payments that were not fixed at commencement or modification.

Supplemental cash flow information related to leases are as follows (in millions):
 
Three Months Ended
 
March 31, 2020
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
     Operating cash flows from operating leases
$
276

 
$
188

     Operating cash flows from finance leases
$
3

 
$
2

     Financing cash flows from finance leases
$
100

 
$
125

Lease liabilities arising from obtaining right-of-use assets:
 
 
 
     Operating leases
$
304

 
$
1,383

     Finance leases
$
25

 
$
35


   

21


Note 8. Goodwill and Intangible Assets

During the three months ended March 31, 2020, we completed business acquisitions that were not material to our condensed consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma historical results of operations related to these business acquisitions during the three months ended March 31, 2020 have not been presented. We have included the financial results of these business acquisitions in our condensed consolidated financial statements from their respective dates of acquisition.
The changes in the carrying amount of goodwill for the three months ended March 31, 2020 are as follows (in millions): 
Balance as of December 31, 2019
$
18,715

Goodwill acquired
98

Effect of currency translation adjustment
(2
)
Balance as of March 31, 2020
$
18,811


The following table sets forth the major categories of the intangible assets and the weighted‑average remaining useful lives for those assets that are not already fully amortized (in millions):
 
 
 
March 31, 2020
 
December 31, 2019
 
Weighted-Average Remaining Useful Lives (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Acquired users
1.5
 
$
2,056

 
$
(1,622
)
 
$
434

 
$
2,056

 
$
(1,550
)
 
$
506

Acquired technology
2.5
 
1,213

 
(1,007
)
 
206

 
1,158

 
(986
)
 
172

Acquired patents
4.4
 
805

 
(638
)
 
167

 
805

 
(625
)
 
180

Trade names
1.8
 
635

 
(609
)
 
26

 
635

 
(604
)
 
31

Other
3.1
 
162

 
(157
)
 
5

 
162

 
(157
)
 
5

    Total intangible assets
 
 
$
4,871

 
$
(4,033
)
 
$
838

 
$
4,816

 
$
(3,922
)
 
$
894


Amortization expense of intangible assets was $111 million and $156 million for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2020
$
329

2021
335

2022
87

2023
33

2024
23

Thereafter
31

Total
$
838




22


Note 9. Long-term Debt
In May 2016, we entered into a $2.0 billion senior unsecured revolving credit facility, and any amounts outstanding under this facility will be due and payable on May 20, 2021. As of March 31, 2020, no amounts had been drawn down, and we were in compliance with the covenants under this facility.

Note 10. Commitments and Contingencies

Guarantee

In 2018, we established a multi-currency notional cash pool for certain of our entities with a third-party bank provider. Actual cash balances are not physically converted and are not commingled between participating legal entities. As part of the notional cash pool agreement, the bank extends overdraft credit to our participating entities as needed, provided that the overall notionally pooled balance of all accounts in the pool at the end of each day is at least zero. In the unlikely event of a default by our collective entities participating in the pool, any overdraft balances incurred would be guaranteed by Facebook, Inc.

Other contractual commitments

We also have $7.62 billion of non-cancelable contractual commitments as of March 31, 2020, the majority of which is related to network infrastructure and our data center operations. These commitments are primarily due within five years.

Legal Matters

Beginning on March 20, 2018, multiple putative class actions and derivative actions were filed in state and federal courts in the United States and elsewhere against us and certain of our directors and officers alleging violations of securities laws, breach of fiduciary duties, and other causes of action in connection with our platform and user data practices as well as the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies, and seeking unspecified damages and injunctive relief. Beginning on July 27, 2018, two putative class actions were filed in federal court in the United States against us and certain of our directors and officers alleging violations of securities laws in connection with the disclosure of our earnings results for the second quarter of 2018 and seeking unspecified damages. These two actions subsequently were transferred and consolidated in the U.S. District Court for the Northern District of California with the putative securities class action described above relating to our platform and user data practices. On September 25, 2019, the district court granted our motion to dismiss the consolidated putative securities class action, with leave to amend. On November 15, 2019, an amended complaint was filed in the consolidated putative securities class action. We believe these lawsuits are without merit, and we are vigorously defending them. In addition, our platform and user data practices, as well as the events surrounding the misuse of certain data by a developer, became the subject of U.S. Federal Trade Commission (FTC), state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions. In July 2019, we entered into a settlement and modified consent order to resolve the FTC inquiry, which was approved by the federal court and took effect in April 2020. Among other matters, our settlement with the FTC requires us to pay a penalty of $5.0 billion and to significantly enhance our practices and processes for privacy compliance and oversight. This penalty is reflected in accrued expenses and other current liabilities on our condensed consolidated balance sheet as of March 31, 2020. We paid the penalty in April 2020 upon the effectiveness of the modified consent order.

On April 1, 2015, a putative class action was filed against us in the U.S. District Court for the Northern District of California by Facebook users alleging that the "tag suggestions" facial recognition feature violates the Illinois Biometric Information Privacy Act, and seeking statutory damages and injunctive relief. On April 16, 2018, the district court certified a class of Illinois residents, and on May 14, 2018, the district court denied both parties' motions for summary judgment. On May 29, 2018, the U.S. Court of Appeals for the Ninth Circuit granted our petition for review of the class certification order and stayed the proceeding. On August 8, 2019, the Ninth Circuit affirmed the class certification order. On December 2, 2019, we filed a petition with the U.S. Supreme Court seeking review of the decision of the Ninth Circuit, which was denied. On January 15, 2020, the parties agreed to a settlement in principle to resolve the lawsuit, which will require a payment of $550 million by us and is subject to approval by the district court. This settlement amount is reflected in accrued expenses and other current liabilities on our condensed consolidated balance sheet as of March 31, 2020.

Beginning on September 28, 2018, multiple putative class actions were filed in state and federal courts in the United States and elsewhere against us alleging violations of consumer protection laws and other causes of action in connection with

23


a third-party cyber-attack that exploited a vulnerability in Facebook's code to steal user access tokens and access certain profile information from user accounts on Facebook, and seeking unspecified damages and injunctive relief. The actions filed in the United States were consolidated in the U.S. District Court for the Northern District of California. On November 26, 2019, the district court certified a class for injunctive relief purposes, but denied certification of a class for purposes of pursuing damages. On January 16, 2020, the parties agreed to a settlement in principle to resolve the lawsuit. We believe the remaining lawsuits are without merit, and we are vigorously defending them. In addition, the events surrounding this cyber-attack became the subject of Irish Data Protection Commission (IDPC) and other government inquiries.

From time to time we also notify the IDPC, our designated European privacy regulator under the General Data Protection Regulation, of certain other personal data breaches and privacy issues, and are subject to inquiries and investigations regarding various aspects of our regulatory compliance. Although we are vigorously defending our regulatory compliance, we believe there is a reasonable possibility that the ultimate potential loss related to the inquiries and investigations by the IDPC could be material in the aggregate.

In addition, from time to time, we are subject to litigation and other proceedings involving law enforcement and other regulatory agencies, including in particular in Brazil and Europe, in order to ascertain the precise scope of our legal obligations to comply with the requests of those agencies, including our obligation to disclose user information in particular circumstances. A number of such instances have resulted in the assessment of fines and penalties against us. We believe we have multiple legal grounds to satisfy these requests or prevail against associated fines and penalties, and we intend to vigorously defend such fines and penalties.

With respect to the cases, actions, and inquiries described above, we evaluate the associated developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. In addition, we believe there is a reasonable possibility that we may incur a loss in some of these matters. With respect to the matters described above that do not include an estimate of the amount of loss or range of possible loss, such losses or range of possible losses either cannot be estimated or are not individually material, but we believe there is a reasonable possibility that they may be material in the aggregate.

We are also party to various other legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these other matters, we evaluate the associated developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. In addition, we believe there is a reasonable possibility that we may incur a loss in some of these other matters. We believe that the amount of losses or any estimable range of possible losses with respect to these other matters will not, either individually or in the aggregate, have a material adverse effect on our business and condensed consolidated financial statements.

However, the outcome of the legal matters described in this section is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.

For information regarding income tax contingencies, see Note 12 — Income Taxes.

Note 11. Stockholders' Equity

Share Repurchase Program

Our board of directors has authorized a share repurchase program of our Class A common stock, which commenced in January 2017 and does not have an expiration date. As of December 31, 2019, $4.90 billion remained available and authorized for repurchases. In January 2020, an additional $10.0 billion of repurchases was authorized under this program. During the three months ended March 31, 2020, we repurchased and subsequently retired 6 million shares of our Class A common stock for an aggregate amount of $1.24 billion. As of March 31, 2020, $13.66 billion remained available and authorized for repurchases.

The timing and actual number of shares repurchased under the repurchase program depend on a variety of factors, including price, general business and market conditions, and other investment opportunities, and shares may be repurchased through open

24


market purchases or privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

Share-based Compensation Plans

We maintain two share-based employee compensation plans: the 2012 Equity Incentive Plan, which was amended in each of June 2016 and February 2018 (Amended 2012 Plan), and the 2005 Stock Plan (collectively, Stock Plans). Our Amended 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares, and stock bonuses to qualified employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. Shares that are withheld in connection with the net settlement of RSUs or forfeited under our Stock Plans are added to the reserves of the Amended 2012 Plan. We account for forfeitures as they occur.

Share-based compensation expense consists of our RSU expense. RSUs granted to employees are measured based on the grant-date fair value. In general, our RSUs vest over a service period of four years. Share-based compensation expense is generally recognized based on the straight-line basis over the requisite service period.

Effective January 1, 2020, there were 171 million shares of our Class A common stock reserved for future issuance under our Amended 2012 Plan. The number of shares reserved for issuance under our Amended 2012 Plan increases automatically on January 1 of each of the calendar years during the term of the Amended 2012 Plan, which will continue through April 2026, by a number of shares of Class A common stock equal to the lesser of (i) 2.5% of the total issued and outstanding shares of our Class A common stock as of the immediately preceding December 31st or (ii) a number of shares determined by our board of directors.

The following table summarizes the activities for our unvested RSUs for the three months ended March 31, 2020:
 
Unvested RSUs
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2019
78,851

 
$
165.74

Granted
39,387

 
$
155.99

Vested
(8,388
)
 
$
155.51

Forfeited
(1,629
)
 
$
159.15

Unvested at March 31, 2020
108,221

 
$
163.08



The fair value as of the respective vesting dates of RSUs that vested during the three months ended March 31, 2020 and 2019 was $1.80 billion and $1.31 billion, respectively.

As of March 31, 2020, there was $16.76 billion of unrecognized share-based compensation expense related to RSUs awards. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years based on vesting under the award service conditions.
Note 12. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to significant volatility due to several factors, including our ability to accurately predict the proportion of our income (loss) before provision for income taxes in multiple jurisdictions, the U.S. tax benefits from foreign derived intangible income, the effects of acquisitions, and the integration of those acquisitions.
Our gross unrecognized tax benefits were $8.15 billion and $7.86 billion on March 31, 2020 and December 31, 2019, respectively. If the gross unrecognized tax benefits as of March 31, 2020 were realized in a subsequent period, this would result in a tax benefit of $4.86 billion within our provision of income taxes at such time. The amount of interest and penalties accrued was $789 million and $747 million as of March 31, 2020 and December 31, 2019, respectively. We expect to continue to accrue

25


unrecognized tax benefits for certain recurring tax positions.

On July 27, 2015, the United States Tax Court issued a decision (Tax Court Decision) in Altera Corp. v. Commissioner, which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to the Ninth Circuit Court of Appeals (Ninth Circuit). On June 7, 2019, the Ninth Circuit issued an opinion (Altera Ninth Circuit Opinion) that reversed the Tax Court Decision. Based on the Altera Ninth Circuit Opinion, we recorded a cumulative income tax expense of $1.11 billion in the second quarter of 2019. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019. The taxpayer has requested a hearing before the Supreme Court of the United States. As a result, the final outcome of the case is uncertain. In November 2019, we made a $1.64 billion payment related to this matter and recorded the payment to net against the related tax liability included within other liabilities in our consolidated balance sheets. If the Altera Ninth Circuit Opinion is reversed, we would anticipate recording an income tax benefit at that time.
 
We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2014 through 2016 tax years and by the Ireland tax authorities for our 2012 through 2015 tax years. Our 2017 and subsequent tax years remain open to examination by the IRS. Our 2016 and subsequent tax years remain open to examination in Ireland.
In July 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS stated that it will also apply its position for tax years subsequent to 2010. We do not agree with the position of the IRS and have filed a petition in the Tax Court challenging the Notice. On January 15, 2020, the IRS filed its Pretrial Memorandum in the case stating that it planned to assert at trial an adjustment that is higher than the adjustment stated in the Notice. The first session of the trial began in February 2020 and a second session is expected to continue later in the year. It is not clear how the IRS intends to apply the revised adjustment to future years. Based on the information provided, we believe that, if the IRS prevails in its updated position, this could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately $9.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted.
In March 2018, we received a second Notice from the IRS in conjunction with the examination of our 2011 through 2013 tax years. The IRS applied its position from the 2010 tax year to each of these years and also proposed new adjustments related to other transfer pricing with our foreign subsidiaries and certain tax credits that we claimed. If the IRS prevails in its position for these new adjustments, this could result in an additional federal tax liability of up to approximately $680 million in excess of the amounts in our originally filed U.S. returns, plus interest and any penalties asserted. We do not agree with the positions of the IRS in the second Notice and have filed a petition in the Tax Court challenging the second Notice.
We have previously accrued an estimated unrecognized tax benefit consistent with the guidance in ASC 740, Income Taxes, that is lower than the potential additional federal tax liability from the positions taken by the IRS in the two Notices and its Pretrial Memorandum. In addition, if the IRS prevails in its positions related to transfer pricing with our foreign subsidiaries, the additional tax that we would owe would be partially offset by a reduction in the tax that we owe under the mandatory transition tax on accumulated foreign earnings from the 2017 Tax Cuts and Jobs Act (Tax Act). As of March 31, 2020, we have not resolved these matters and proceedings continue in the Tax Court.
We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from these examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, and cash flows.


26


Note 13. Geographical Information

The following table sets forth our long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets, net (in millions):
 
March 31, 2020
 
December 31, 2019
United States
$
37,390

 
$
35,858

Rest of the world (1)
9,096

 
8,925

Total long-lived assets
$
46,486

 
$
44,783


____________________________________
(1)
No individual country, other than disclosed above, exceeded 10% of our total long-lived assets for any period presented.

Note 14. Subsequent Event

On April 21, 2020, we entered into a definitive agreement to invest in Jio Platforms Limited, a subsidiary of Reliance Industries Limited, for approximately $5.7 billion at the current exchange rate.



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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, "Risk Factors." For a discussion of limitations in the measurement of certain of our community metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.

Certain revenue information in the section entitled "—Three Months Ended March 31, 2020 and 2019—RevenueForeign Exchange Impact on Revenue" is presented on a constant currency basis. This information is a non-GAAP financial measure. To calculate revenue on a constant currency basis, we translated revenue for the three months ended March 31, 2020 using the prior year's monthly exchange rates for our settlement or billing currencies other than the U.S. dollar. This non-GAAP financial measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We believe this non-GAAP financial measure provides investors with useful supplemental information about the financial performance of our business, enables comparison of financial results between periods where certain items may vary independent of business performance, and allows for greater transparency with respect to key metrics used by management in operating our business.

Executive Overview of First Quarter Results

Our key community metrics and financial results for the first quarter of 2020 are as follows:

Community growth:

Facebook daily active users (DAUs) were 1.73 billion on average for March 2020, an increase of 11% year-over-year.
Facebook monthly active users (MAUs) were 2.60 billion as of March 31, 2020, an increase of 10% year-over-year.
Family daily active people (DAP) was 2.36 billion on average for March 2020, an increase of 12% year-over-year.
Family monthly active people (MAP) was 2.99 billion as of March 31, 2020, an increase of 11% year-over-year.

Financial results:

Revenue was $17.74 billion, up 18% year-over-year, and advertising revenue was $17.44 billion, up 17% year-over‑year.
Total costs and expenses were $11.84 billion.
Income from operations was $5.89 billion and operating margin was 33%.
Net income was $4.90 billion with diluted earnings per share of $1.71.
Capital expenditures, including principal payments on finance leases, were $3.66 billion.
Effective tax rate was 16%.
Cash and cash equivalents and marketable securities were $60.29 billion as of March 31, 2020.
Headcount was 48,268 as of March 31, 2020, an increase of 28% year-over-year.

In the first quarter of 2020, we continued to focus on our main revenue growth priorities: (i) helping marketers use our products to connect with consumers where they are and (ii) making our ads more relevant and effective.

In response to the COVID-19 pandemic, we have focused on helping people stay connected, assisting the public health response, and working on the economic recovery. We have also continued to invest based on the following company priorities that we believe will further our mission to give people the power to build community and bring the world closer together: (i) continue making progress on the major social issues facing the internet and our company, including privacy, safety, and security; (ii) build new experiences that meaningfully improve people's lives today and set the stage for even bigger improvements in the future; (iii) keep building our business by supporting the millions of businesses that rely on our services to grow and create jobs; and (iv) communicate more transparently about what we're doing and the role our services play in the world.


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Our business has been impacted by the COVID-19 pandemic, which has resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have significantly impacted our business and results of operations. We have seen a significant increase in the size of our user base and user engagement as a result of these preventative measures. At the same time, we experienced a significant reduction in the demand for advertising, as well as a related decline in the pricing of our ads, over the last three weeks of the first quarter of 2020. After the initial steep decrease in our advertising revenue growth rates in March compared to earlier in the first quarter of 2020, we have seen signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020. We expect that we will lose at least some of the increased user engagement when various shelter-in-place restrictions are relaxed in the future. In addition, the demand for and pricing of our advertising services, as well as our overall results of operations, may be materially and adversely impacted by the pandemic for the duration of 2020 or longer, and we are unable to predict the duration or degree of such impact with any certainty. We also intend to continue to invest in our business based on our company priorities, and we anticipate that additional investments in our data center capacity, network infrastructure, and office facilities, as well as scaling our headcount to support our growth and certain initiatives related to the COVID-19 pandemic, will continue to drive expense growth in 2020.

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Trends in Our Facebook User Metrics
The numbers for our key Facebook metrics, our DAUs, MAUs, and average revenue per user (ARPU), do not include users on Instagram, WhatsApp, or our other products, unless they would otherwise qualify as DAUs or MAUs, respectively, based on their other activities on Facebook.
Trends in the number of users affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, the volume of Payments transactions, as well as our expenses and capital expenditures. Substantially all of our daily and monthly active users (as defined below) access Facebook on mobile devices.
Daily Active Users (DAUs). We define a daily active user as a registered and logged-in Facebook user who visited Facebook through our website or a mobile device, or used our Messenger application (and is also a registered Facebook user), on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement on Facebook.
daua09.jpg

Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes all users in Africa, Latin America, and the Middle East.

Worldwide DAUs increased 11% to 1.73 billion on average during March 2020 from 1.56 billion during March 2019. Users in India, Indonesia, and the Philippines represented key sources of growth in DAUs during March 2020, relative to the same period in 2019.

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Monthly Active Users (MAUs). We define a monthly active user as a registered and logged-in Facebook user who visited Facebook through our website or a mobile device, or used our Messenger application (and is also a registered Facebook user), in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community on Facebook.
maujpeg.jpg
As of March 31, 2020, we had 2.60 billion MAUs, an increase of 10% from March 31, 2019. Users in India, Indonesia, and the Philippines represented key sources of growth in the first quarter of 2020, relative to the same period in 2019.

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Trends in Our Monetization by Facebook User Geography
We calculate our revenue by Facebook user geography based on our estimate of the geography in which ad impressions are delivered, virtual and digital goods are purchased, or consumer hardware devices are shipped. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. While ARPU includes all sources of revenue, the number of MAUs used in this calculation only includes users of Facebook and Messenger as described in the definition of MAU above. The share of revenue from users who are not also Facebook or Messenger MAUs was not material. The geography of our users affects our revenue and financial results because we currently monetize users in different geographies at different average rates. Our revenue and ARPU in regions such as United States & Canada and Europe are relatively higher primarily due to the size and maturity of those online and mobile advertising markets. For example, ARPU in the first quarter of 2020 in the United States & Canada region was more than 11 times higher than in the Asia-Pacific region.
revenuea03.jpg
adrevenueandotherrevenuea02.jpg
Note: Our revenue by Facebook user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our Facebook users when they perform a revenue-generating activity. This allocation differs from our revenue disaggregated by geography disclosure in our condensed consolidated financial statements where revenue is geographically apportioned based on the billing address of the customer.

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During the first quarter of 2020, worldwide ARPU was $6.95, an increase of 8% from the first quarter of 2019. Over this period, ARPU increased by 13% in United States & Canada, 11% in Europe, 10% in Asia-Pacific and 5% in Rest of World. In addition, user growth was more rapid in geographies with relatively lower ARPU, such as Asia-Pacific and Rest of World. We expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.

33


Trends in Our Family Metrics
 
The numbers for our key Family metrics, our DAP, MAP, and average revenue per person (ARPP), do not include users on our other products unless they would otherwise qualify as MAP or DAP, respectively, based on their other activities on our Family products.
 
Trends in the number of people in our community affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, the volume of Payments transactions, as well as our expenses and capital expenditures. Substantially all of our daily and monthly active people (as defined below) access our Family products on mobile devices.

Daily Active People (DAP). We define a daily active person as a registered and logged-in user of Facebook, Instagram, Messenger, and/or WhatsApp (collectively, our "Family" of products) who visited at least one of these Family products through a mobile device application or using a web or mobile browser on a given day. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. Our calculations of DAP rely upon complex techniques, algorithms, and machine learning models that seek to estimate the underlying number of unique people using one or more of these products, including by matching user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. As these techniques and models require significant judgment, are developed based on internal reviews of limited samples of user accounts, and are calibrated against user survey data, there is necessarily some margin of error in our estimates. We view DAP, and DAP as a percentage of MAP, as measures of engagement across our products. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.

dapa05.jpg

Note: We report the numbers of DAP and MAP as specific amounts, but these numbers are estimates of the numbers of unique people using our products and are subject to statistical variances and errors. While we expect the error margin for these estimates to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.

Worldwide DAP increased 12% to 2.36 billion on average during March 2020 from 2.10 billion during March 2019.



34


Monthly Active People (MAP). We define a monthly active person as a registered and logged-in user of one or more Family products who visited at least one of these Family products through a mobile device application or using a web or mobile browser in the last 30 days as of the date of measurement. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. Our calculations of MAP rely upon complex techniques, algorithms, and machine learning models that seek to estimate the underlying number of unique people using one or more of these products, including by matching user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. As these techniques and models require significant judgment, are developed based on internal reviews of limited samples of user accounts, and are calibrated against user survey data, there is necessarily some margin of error in our estimates. We view MAP as a measure of the size of our global active community of people using our products. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.

mapa02.jpg

Note: We report the numbers of DAP and MAP as specific amounts, but these numbers are estimates of the numbers of unique people using our products and are subject to statistical variances and errors. While we expect the error margin for these estimates to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.

As of March 31, 2020, we had 2.99 billion MAP, an increase of 11% from 2.69 billion as of March 31, 2019.



35


Average Revenue Per Person (ARPP). We define ARPP as our total revenue during a given quarter, divided by the average of the number of MAP at the beginning and end of the quarter. While ARPP includes all sources of revenue, the number of MAP used in this calculation only includes users of our Family products as described in the definition of MAP above. The share of revenue from users who are not also MAP was not material.

arppa02.jpg
adrevenueandotherrevenuea03.jpg

During the first quarter of 2020, worldwide ARPP was $6.03, an increase of 7% from the first quarter of 2019.

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Components of Results of Operations
Revenue
Advertising. We generate substantially all of our revenue from advertising. Our advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users.
We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to a user. We recognize revenue from the delivery of action-based ads in the period in which a user takes the action the marketer contracted for. The number of ads we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. We calculate price per ad as total ad revenue divided by the number of ads delivered, representing the effective price paid per impression by a marketer regardless of their desired objective such as impression or action. For advertising revenue arrangements where we are not the principal, we recognize revenue on a net basis.
Other revenue. Other revenue consists of revenue from the delivery of consumer hardware devices and net fees we receive from developers using our Payments infrastructure, as well as revenue from various other sources.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers and technical infrastructure, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including traffic acquisition and content acquisition costs, credit card and other transaction fees related to processing customer transactions, and cost of consumer hardware devices sold.
Research and development. Research and development expenses consist primarily of salaries and benefits, share-based compensation, and facilities-related costs for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We currently expense all of our research and development costs as they are incurred.
Marketing and sales. Marketing and sales expenses consist of salaries and benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include marketing and promotional expenditures and professional services such as content reviewers to support our community and product operations.
General and administrative. General and administrative expenses consist of legal-related costs; salaries and benefits, and share-based compensation for certain of our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees; and professional services.

37


Results of Operations

The following table sets forth our condensed consolidated statements of income data:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in millions)
Revenue
$
17,737

 
$
15,077

Costs and expenses:
 
 
 
Cost of revenue
3,459

 
2,816

Research and development
4,015

 
2,860

Marketing and sales
2,787

 
2,020

General and administrative
1,583

 
4,064

Total costs and expenses
11,844

 
11,760

Income from operations
5,893

 
3,317

Interest and other income (expense), net
(32
)
 
165

Income before provision for income taxes
5,861

 
3,482

Provision for income taxes
959

 
1,053

Net income
$
4,902

 
$
2,429


The following table sets forth our condensed consolidated statements of income data (as a percentage of revenue)(1): 
 
Three Months Ended March 31,
 
2020
 
2019
Revenue
100
%
 
100
%
Costs and expenses:
 
 
 
Cost of revenue
20

 
19

Research and development
23

 
19

Marketing and sales
16

 
13

General and administrative
9

 
27

Total costs and expenses
67

 
78

Income from operations
33

 
22

Interest and other income (expense), net

 
1

Income before provision for income taxes
33

 
23

Provision for income taxes
5

 
7

Net income
28
%
 
16
%
____________________________________
(1)
Percentages have been rounded for presentation purposes and may differ from unrounded results.
Share-based compensation expense included in costs and expenses:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in millions)
Cost of revenue
$
94

 
$
87

Research and development
999

 
723

Marketing and sales
149

 
113

General and administrative
93

 
87

Total share-based compensation expense
$
1,335

 
$
1,010


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Share-based compensation expense included in costs and expenses (as a percentage of revenue)(1): 
 
Three Months Ended March 31,
 
2020
 
2019
Cost of revenue
1
%
 
1
%
Research and development
6

 
5

Marketing and sales
1

 
1

General and administrative
1

 
1

Total share-based compensation expense
8
%
 
7
%
____________________________________
(1)
Percentages have been rounded for presentation purposes and may differ from unrounded results.

Three Months Ended March 31, 2020 and 2019
Revenue 
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Advertising
$
17,440

 
$
14,912

 
17
%
Other revenue
297

 
165

 
80
%
Total revenue
$
17,737

 
$
15,077

 
18
%
Revenue in the three months ended March 31, 2020 increased $2.66 billion, or 18%, compared to the same period in 2019. The increase was almost entirely due to an increase in advertising revenue as a result of an increase in the number of ads delivered, partially offset by a decrease in the average price per ad.
During the three months ended March 31, 2020, the number of ads delivered increased by 39%, as compared with approximately 32% in the same period in 2019. The increase in the ads delivered was driven by an increase in the number and frequency of ads displayed across our products, and an increase in users and their engagement. During the three months ended March 31, 2020, the average price per ad decreased by 16%, as compared with a decrease of approximately 4%, in the same period in 2019. The decrease in average price per ad was primarily driven by a decrease in advertising demand globally due to the COVID-19 pandemic over the last three weeks of the quarter. To a lesser extent, the decrease in average price per ad was also caused by an increasing proportion of the number of ads delivered as Stories ads and in geographies that monetize at lower rates. In the near-term, we anticipate that future advertising revenue growth will be determined primarily by the extent to which the COVID-19 pandemic and related economic slowdown result in a decrease in advertising demand.
Foreign Exchange Impact on Revenue
The general strengthening of the U.S. dollar relative to certain foreign currencies in the three months ended March 31, 2020 compared to the same period in 2019 had an unfavorable impact on revenue. If we had translated revenue for the three months ended March 31, 2020 using the prior year's monthly exchange rates for our settlement or billing currencies other than the U.S. dollar, our total revenue and advertising revenue would have been $18.01 billion and $17.71 billion, respectively. Using these constant rates, total revenue and advertising revenue would have been $275 million and $274 million higher than actual total revenue and advertising revenue, respectively, for the three months ended March 31, 2020.

39


Cost of revenue
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Cost of revenue
$
3,459

 
$
2,816

 
23
%
Percentage of revenue
20
%
 
19
%
 
 
Cost of revenue in the three months ended March 31, 2020 increased $643 million, or 23%, compared to the same period in 2019. The increase was primarily due to an increase in operational expenses related to our data centers and technical infrastructure and, to a lesser extent, higher cost of consumer hardware devices sold and traffic acquisition costs.
Research and development
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Research and development
$
4,015

 
$
2,860

 
40
%
Percentage of revenue
23
%
 
19
%
 
 
Research and development expenses in the three months ended March 31, 2020 increased $1.15 billion, or 40%, compared to the same period in 2019. The increase was primarily due to increases in payroll and benefits expenses and facilities-related costs as a result of a 35% growth in employee headcount from March 31, 2019 to March 31, 2020 in our engineering and other technical functions.
Marketing and sales
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Marketing and sales
$
2,787

 
$
2,020

 
38
%
Percentage of revenue
16
%
 
13
%
 
 
Marketing and sales expenses in the three months ended March 31, 2020 increased $767 million, or 38%, compared to the same period in 2019. The increase was primarily driven by increases in marketing expenses and payroll and benefits expenses. Our payroll and benefits expenses increased as a result of a 20% increase in employee headcount from March 31, 2019 to March 31, 2020 in our marketing and sales functions.
General and administrative
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Legal accrual related to FTC settlement
$

 
$
3,000

 
NM

Other general and administrative
1,583

 
1,064

 
49
 %
General and administrative
$
1,583

 
$
4,064

 
(61
)%
Percentage of revenue
9
%
 
27
%
 
 
General and administrative expenses in the three months ended March 31, 2020 decreased $2.48 billion, or 61%, compared to the same period in 2019. The decrease was mostly due to the $3.0 billion legal accrual recorded in the first quarter of 2019 related to our FTC settlement, partially offset by an increase of $193 million in bad debt expense, a majority of which was due to an increase in our estimated credit losses as the result of economic slowdown caused by the COVID-19 pandemic. In addition, our payroll and benefits expenses increased as a result of a 29% increase in employee headcount from March 31, 2019 to March 31, 2020 in our general and administrative functions.

40


Interest and other income (expense), net
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Interest income, net
$
228

 
$
198

 
15
 %
Other expense, net
(260
)
 
(33
)
 
NM

Interest and other income (expense), net
$
(32
)
 
$
165

 
(119
)%
Interest and other income (expense), net in the three months ended March 31, 2020 decreased $197 million, or 119%, compared to the same period in 2019. The decrease was due to an increase in other expense, net which was mostly related to higher foreign exchange losses, compared to the same period in 2019, as a result of foreign currency transactions and re‑measurement. This decrease was partially offset by an increase in interest income, net due to higher investment balances.
Provision for income taxes
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
% change
 
(in millions, except for percentages)
Provision for income taxes
$
959

 
$
1,053

 
(9
)%
Effective tax rate
16
%
 
30
%
 
 
Our provision for income taxes in the first quarter of 2020 decreased $94 million, or 9%, com