Last10K.com

Facebook Inc (FB) SEC Filing 10-Q Quarterly Report for the period ending Wednesday, March 31, 2021

Meta Platforms, Inc.

CIK: 1326801 Ticker: META

Facebook Reports First Quarter 2021 Results

MENLO PARK, Calif. – April 28, 2021 – Facebook, Inc. (Nasdaq: FB) today reported financial results for the quarter ended March 31, 2021.

"We had a strong quarter as we helped people stay connected and businesses grow," said Mark Zuckerberg, Facebook founder and CEO. "We will continue to invest aggressively to deliver new and meaningful experiences for years to come, including in newer areas like augmented and virtual reality, commerce, and the creator economy."

First Quarter 2021 Financial Highlights
Three Months Ended March 31,Year-over-Year % Change
In millions, except percentages and per share amounts20212020
Revenue:
Advertising$25,439 $17,440 46%
Other732 297 146%
Total revenue26,171 17,737 48%
Total costs and expenses14,793 11,844 25%
Income from operations$11,378 $5,893 93%
Operating margin43 %33 %
Provision for income taxes$2,006 $959 109%
Effective tax rate 17 %16 %
Net income$9,497 $4,902 94%
Diluted earnings per share (EPS)$3.30 $1.71 93%

First Quarter 2021 Operational and Other Financial Highlights

Facebook daily active users (DAUs) – DAUs were 1.88 billion on average for March 2021, an increase of 8% year-over-year.
Facebook monthly active users (MAUs) – MAUs were 2.85 billion as of March 31, 2021, an increase of 10% year-over-year.
Family daily active people (DAP) – DAP was 2.72 billion on average for March 2021, an increase of 15% year-over-year.
Family monthly active people (MAP) – MAP was 3.45 billion as of March 31, 2021, an increase of 15% year-over-year.
Capital expenditures – Capital expenditures, including principal payments on finance leases, were $4.42 billion for the first quarter of 2021.
Cash and cash equivalents and marketable securities – Cash and cash equivalents and marketable securities were $64.22 billion as of March 31, 2021.
Headcount – Headcount was 60,654 as of March 31, 2021, an increase of 26% year-over-year.
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The following information was filed by Meta Platforms, Inc (META) on Wednesday, April 28, 2021 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, 2021
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)
____________________________________________ 
Delaware20-1665019
(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)

(650) 543-4800
(Registrant's telephone number, including area code)
 ____________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.000006FBThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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.
ClassNumber of Shares Outstanding
Class A Common Stock $0.000006 par value2,396,047,121 shares outstanding as of April 23, 2021
Class B Common Stock $0.000006 par value439,417,713 shares outstanding as of April 23, 2021




FACEBOOK, INC.
TABLE OF CONTENTS

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

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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 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 2020, 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 2020, 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
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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.

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 4% 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. The timing and results of such user surveys have in the past contributed, and may in the future contribute, to changes in our reported Family metrics from period to period. 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 2020, 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
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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.

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.

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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,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$19,513 $17,576 
Marketable securities44,706 44,378 
Accounts receivable, net of allowances of $111 million and $114 million as of March 31, 2021 and December 31, 2020, respectively
10,276 11,335 
Prepaid expenses and other current assets2,827 2,381 
Total current assets77,322 75,670 
Equity investments6,342 6,234 
Property and equipment, net47,720 45,633 
Operating lease right-of-use assets, net10,202 9,348 
Intangible assets, net505 623 
Goodwill19,056 19,050 
Other assets2,376 2,758 
Total assets$163,523 $159,316 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$878 $1,331 
Partners payable1,006 1,093 
Operating lease liabilities, current1,040 1,023 
Accrued expenses and other current liabilities9,411 11,152 
Deferred revenue and deposits382 382 
Total current liabilities12,717 14,981 
Operating lease liabilities, non-current10,574 9,631 
Other liabilities6,575 6,414 
Total liabilities29,866 31,026 
Commitments and contingencies
Stockholders' equity:
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,400 million and 2,406 million shares issued and outstanding, as of March 31, 2021 and December 31, 2020, respectively; 4,141 million Class B shares authorized, 441 million and 443 million shares issued and outstanding, as of March 31, 2021 and December 31, 2020, respectively
— — 
Additional paid-in capital51,160 50,018 
Accumulated other comprehensive income154 927 
Retained earnings82,343 77,345 
Total stockholders' equity133,657 128,290 
Total liabilities and stockholders' equity$163,523 $159,316 
See Accompanying Notes to Condensed Consolidated Financial Statements.
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FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
 
 Three Months Ended March 31,
 20212020
Revenue$26,171 $17,737 
Costs and expenses:
Cost of revenue5,131 3,459 
Research and development5,197 4,015 
Marketing and sales2,843 2,787 
General and administrative1,622 1,583 
Total costs and expenses14,793 11,844 
Income from operations11,378 5,893 
Interest and other income (expense), net125 (32)
Income before provision for income taxes11,503 5,861 
Provision for income taxes2,006 959 
Net income$9,497 $4,902 
Earnings per share attributable to Class A and Class B common stockholders:
Basic$3.34 $1.72 
Diluted$3.30 $1.71 
Weighted-average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
Basic2,847 2,851 
Diluted2,882 2,868 
Share-based compensation expense included in costs and expenses:
Cost of revenue$118 $94 
Research and development1,408 999 
Marketing and sales174 149 
General and administrative130 93 
Total share-based compensation expense$1,830 $1,335 
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,
 20212020
Net income$9,497 $4,902 
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax(601)(376)
Change in unrealized gain (loss) on available-for-sale investments and other, net of tax(172)321 
Comprehensive income$8,724 $4,847 
See Accompanying Notes to Condensed Consolidated Financial Statements.
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FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited) 
Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Class A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income Retained EarningsTotal Stockholders' EquityClass A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Stockholders' Equity
SharesPar ValueSharesPar Value
Balances at beginning of period2,849 $— $50,018 $927 $77,345 $128,290 2,852 $— $45,851 $(489)$55,692 $101,054 
Issuance of common stock11 — — — — — — — — — — 
Shares withheld related to net share settlement(4)— (688)— (389)(1,077)(3)— (498)— (192)(690)
Share-based compensation— — 1,830 — — 1,830 — — 1,335 — — 1,335 
Share repurchases(15)— — — (4,110)(4,110)(6)— — — (1,242)(1,242)
Other comprehensive loss— — — (773)— (773)— — — (55)— (55)
Net income— — — — 9,497 9,497 — — — — 4,902 4,902 
Balances at end of period2,841 $— $51,160 $154 $82,343 $133,657 2,851 $— $46,688 $(544)$59,160 $105,304 
See Accompanying Notes to Condensed Consolidated Financial Statements.
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FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Three Months Ended March 31,
 20212020
Cash flows from operating activities
Net income$9,497 $4,902 
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization1,972 1,597 
   Share-based compensation1,830 1,335 
   Deferred income taxes418 477 
   Other(66)
Changes in assets and liabilities:
   Accounts receivable849 2,046 
   Prepaid expenses and other current assets(461)(29)
   Other assets(10)(16)
   Accounts payable(250)(44)
   Partners payable(72)(169)
   Accrued expenses and other current liabilities(1,681)980 
   Deferred revenue and deposits(16)
   Other liabilities210 (68)
Net cash provided by operating activities12,242 11,001 
Cash flows from investing activities
Purchases of property and equipment(4,272)(3,558)
Purchases of marketable securities(6,231)(7,884)
Sales of marketable securities1,650 2,764 
Maturities of marketable securities3,981 4,644 
Other investing activities(2)(75)
Net cash used in investing activities(4,874)(4,109)
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards(1,077)(690)
Repurchases of Class A common stock(3,939)(1,250)
Principal payments on finance leases(151)(100)
Net change in overdraft in cash pooling entities(50)(80)
Other financing activities32 98 
Net cash used in financing activities(5,185)(2,022)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(246)(222)
Net increase in cash, cash equivalents, and restricted cash1,937 4,648 
Cash, cash equivalents, and restricted cash at beginning of the period17,954 19,279 
Cash, cash equivalents, and restricted cash at end of the period$19,891 $23,927 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents$19,513 $23,618 
Restricted cash, included in prepaid expenses and other current assets257 137 
Restricted cash, included in other assets121 172 
Total cash, cash equivalents, and restricted cash$19,891 $23,927 
See Accompanying Notes to Condensed Consolidated Financial Statements.
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FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended March 31,
20212020
Supplemental cash flow data
Cash paid for income taxes$2,907 $209 
Non-cash investing and financing activities:
Property and equipment in accounts payable and accrued expenses and other current liabilities$2,198 $1,603 
Acquisition of businesses in accrued expenses and other current liabilities and other liabilities$118 $148 
Repurchases of Class A common stock in accrued expenses and other current liabilities$240 $35 
See Accompanying Notes to Condensed Consolidated Financial Statements.
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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 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, 2020.
The condensed consolidated balance sheet as of December 31, 2020 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., its 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, 2021.
Use of Estimates
Preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed 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 revenue recognition, valuation of equity investments, income taxes, loss contingencies, valuation of long-lived assets including goodwill and intangible assets and their associated estimated useful lives, collectibility of accounts receivable, credit losses of available-for-sale debt securities, fair value of financial instruments, and leases. 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.
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, 2020.
Recently Adopted Accounting Pronouncements
On January 1, 2021, we adopted 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. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for
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convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2022 on a full or modified retrospective basis, with early adoption permitted. 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,
 20212020
Advertising$25,439 $17,440 
Other revenue732 297 
Total revenue$26,171 $17,737 
Revenue disaggregated by geography, based on the addresses of our customers, consists of the following (in millions):
 Three Months Ended March 31,
 20212020
United States and Canada(1)
$11,436 $8,012 
Europe(2)
6,384 4,150 
Asia-Pacific6,101 3,971 
Rest of World(2)
2,250 1,604 
Total revenue$26,171 $17,737 
____________________________________
(1)    United States revenue was $10.75 billion and $7.55 billion for the three months ended March 31, 2021 and 2020, respectively.
(2)    Europe includes Russia and Turkey, and Rest of World includes Africa, Latin America, and the Middle East.
Our total deferred revenue was $378 million and $371 million as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, we expect $334 million of our deferred revenue to be realized in less than a year.
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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, 2021 and 2020.
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,
 20212020
 Class AClass BClass AClass B
Basic EPS:
Numerator
Net income$8,025 $1,472 $4,138 $764 
Denominator
Weighted-average shares outstanding2,406 441 2,407 444 
Basic EPS$3.34 $3.34 $1.72 $1.72 
Diluted EPS:
Numerator
Net income$8,025 $1,472 $4,138 $764 
Reallocation of net income as a result of conversion of Class B to Class A common stock1,472 — 764 — 
Reallocation of net income to Class B common stock— (18)— (5)
Net income for diluted EPS$9,497 $1,454 $4,902 $759 
Denominator
Number of shares used for basic EPS computation2,406 441 2,407 444 
Conversion of Class B to Class A common stock441 — 444 — 
Weighted-average effect of dilutive RSUs and employee stock options35 — 17 — 
Number of shares used for diluted EPS computation2,882 441 2,868 444 
Diluted EPS$3.30 $3.30 $1.71 $1.71 

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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, 2021December 31, 2020
Cash and cash equivalents:
Cash$6,391 $6,488 
Money market funds12,291 9,755 
U.S. government securities496 1,016 
Certificate of deposits and time deposits269 305 
Corporate debt securities66 12 
Total cash and cash equivalents19,513 17,576 
Marketable securities:
U.S. government securities21,747 20,921 
U.S. government agency securities11,345 11,698 
Corporate debt securities11,614 11,759 
Total marketable securities44,706 44,378 
Total cash and cash equivalents and marketable securities$64,219 $61,954 
The gross unrealized gains on our marketable securities were $492 million and $641 million as of March 31, 2021 and December 31, 2020, respectively. The gross unrealized losses on our marketable securities were not material as of March 31, 2021 and December 31, 2020. The allowance for credit losses was not material as of March 31, 2021.
The following table classifies our marketable securities by contractual maturities (in millions):
March 31, 2021
Due within one year$12,710 
Due after one year to five years31,996 
Total$44,706 

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Note 5. Equity Investments
Our equity investments are investments in equity securities of privately-held companies without readily determinable market values. The changes in the carrying value of equity investments for the three months ended March 31, 2021 are as follows (in millions): 
Balance as of December 31, 2020$6,234 
Impairment(10)
Adjustments118 
Balance as of March 31, 2021$6,342 

Note 6. Fair Value Measurement
The following table summarizes our assets 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
DescriptionMarch 31, 2021Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
 (Level 2)
Cash equivalents:
Money market funds$12,291 $12,291 $— 
U.S. government securities496 496 — 
Certificate of deposits and time deposits269 — 269 
Corporate debt securities66 — 66 
Marketable securities:
U.S. government securities21,747 21,747 — 
U.S. government agency securities11,345 11,345 — 
Corporate debt securities11,614 — 11,614 
Total cash equivalents and marketable securities$57,828 $45,879 $11,949 
  Fair Value Measurement at Reporting Date Using
DescriptionDecember 31, 2020Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
 (Level 2)
Cash equivalents:
Money market funds$9,755 $9,755 $— 
U.S. government securities1,016 1,016 — 
Certificate of deposits and time deposits305 — 305 
Corporate debt securities12 — 12 
Marketable securities:
U.S. government securities20,921 20,921 — 
U.S. government agency securities11,698 11,698 — 
Corporate debt securities11,759 — 11,759 
Total cash equivalents and marketable securities$55,466 $43,390 $12,076 
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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.
We have other assets and liabilities classified within Level 3 because 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 as of March 31, 2021 and December 31, 2020.

Note 7. Property and Equipment
Property and equipment, net consists of the following (in millions): 
March 31, 2021December 31, 2020
Land$1,360 $1,326 
Buildings18,075 17,360 
Leasehold improvements4,946 4,321 
Network equipment22,580 22,003 
Computer software, office equipment and other2,533 2,458 
Finance lease right-of-use assets2,398 2,295 
Construction in progress12,318 11,288 
Total64,210 61,051 
Less: Accumulated depreciation(16,490)(15,418)
Property and equipment, net$47,720 $45,633 
Depreciation expense on property and equipment was $1.85 billion and $1.49 billion for the three months ended March 31, 2021 and 2020, 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.

Note 8. 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 2021 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 are as follows (in millions):
Three Months Ended March 31,
20212020
Finance lease cost
     Amortization of right-of-use assets$81 $60 
     Interest
Operating lease cost362 340 
Variable lease cost and other, net66 60 
       Total lease cost$513 $463 

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Supplemental balance sheet information related to leases is as follows:
March 31, 2021December 31, 2020
Weighted-average remaining lease term
     Operating leases12.5 years12.2 years
     Finance leases14.8 years14.9 years
Weighted-average discount rate
     Operating leases2.9 %3.1 %
     Finance leases2.9 %2.9 %
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2021 (in millions):
Operating LeasesFinance Leases
The remainder of 2021$957 $53 
20221,420 52 
20231,331 44 
20241,270 42 
20251,106 42 
Thereafter8,318 413 
Total undiscounted cash flows14,402 646 
Less: Imputed interest(2,788)(119)
Present value of lease liabilities$11,614 $527 
Lease liabilities, current$1,040 $53 
Lease liabilities, non-current10,574 474 
Present value of lease liabilities$11,614 $527 
The table above does not include lease payments that were not fixed at commencement or lease modification. As of March 31, 2021, we have additional operating and finance leases, that have not yet commenced, with lease obligations of approximately $6.14 billion and $543 million, respectively, mostly for offices, data centers and network equipment. These operating and finance leases will commence between the remainder of 2021 and 2025 with lease terms of greater than one year to 30 years.
Supplemental cash flow information related to leases is as follows (in millions):
Three Months Ended March 31,
20212020
Cash paid for amounts included in the measurement of lease liabilities:
     Operating cash flows for operating leases$329 $276 
     Operating cash flows for finance leases$$
     Financing cash flows for finance leases$151 $100 
Lease liabilities arising from obtaining right-of-use assets:
     Operating leases$1,282 $304 
     Finance leases$24 $25 

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Note 9. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2021 are as follows (in millions): 
Balance as of December 31, 2020$19,050 
Effect of currency translation and other adjustments
Balance as of March 31, 2021$19,056 
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, 2021December 31, 2020
Weighted-Average Remaining Useful Lives
(in years)
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Acquired users0.5$2,057 $(1,912)$145 $2,057 $(1,840)$217 
Acquired technology2.71,297 (1,114)183 1,297 (1,088)209 
Acquired patents3.9805 (688)117 805 (677)128 
Trade names1.5636 (626)10 636 (622)14 
Other3.0223 (173)50 223 (168)55 
Total intangible assets$5,018 $(4,513)$505 $5,018 $(4,395)$623 
Amortization expense of intangible assets was $118 million and $111 million for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2021$269 
2022121 
202353 
202429 
202517 
Thereafter16 
Total$505 

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 $9.07 billion of non-cancelable contractual commitments as of March 31, 2021, which are primarily related to our investments in network infrastructure, consumer hardware and content costs. The majority of these commitments are due within five years.
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Legal and Related 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, a second amended complaint was filed in the consolidated putative securities class action. On August 7, 2020, the district court granted our motion to dismiss the second amended complaint, with leave to amend. On October 16, 2020, a third 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. We entered into a settlement and modified consent order to resolve the FTC inquiry, which took effect in April 2020. Among other matters, our settlement with the FTC required us to pay a penalty of $5.0 billion, which was paid in April 2020 upon the effectiveness of the modified consent order. The state attorneys general inquiry and certain government inquiries in other jurisdictions remain ongoing.
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 provided for a payment of $550 million by us and was subject to court approval. On or about May 8, 2020, the parties executed a formal settlement agreement, and plaintiffs filed a motion for preliminary approval of the settlement by the district court. On June 4, 2020, the district court denied the plaintiffs' motion without prejudice. On July 22, 2020, the parties executed an amended settlement agreement, which, among other terms, provides for a payment of $650 million by us. On February 26, 2021, the court granted final approval of the settlement and the payment was made in March 2021. On March 27 and March 29, 2021, objectors filed notices of appeal of the order granting final approval of the settlement.
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 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. On November 15, 2020, the court granted preliminary approval of the settlement. The settlement is subject to final court approval. 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
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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. For example, from time to time we are subject to various litigation and government inquiries and investigations, formal or informal, by competition authorities in the United States, Europe, and other jurisdictions. Such investigations, inquiries, and lawsuits concern, among other things, our business practices in the areas of social networking or social media services, digital advertising, and/or mobile or online applications, as well as past acquisitions. For example, in June 2019 we were informed by the FTC that it had opened an antitrust investigation of our company. On December 9, 2020, the FTC filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct and unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. In addition, beginning in the third quarter of 2019, we became the subject of antitrust investigations by the U.S. Department of Justice and state attorneys general. On December 9, 2020, the attorneys general from 46 states, the territory of Guam, and the District of Columbia filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct in violation of Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. The complaint also alleges that we violated Section 7 of the Clayton Act by acquiring Instagram and WhatsApp. The lawsuits of the FTC and attorneys general both seek a permanent injunction against our company's alleged violations of the antitrust laws, and other equitable relief, including divestiture or reconstruction of Instagram and WhatsApp. Multiple putative class actions have also been filed in state and federal courts in the United States against us alleging violations of antitrust laws and other causes of action in connection with these acquisitions and other alleged anticompetitive conduct, and seeking unspecified damages and injunctive relief. We believe these lawsuits are without merit, and we are vigorously defending them.
Additionally, we are required to comply with various legal and regulatory obligations around the world. The requirements for complying with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any failure to comply with such obligations could eventually lead to asserted legal or regulatory action. With respect to these other legal proceedings, claims, regulatory, tax, or government inquiries and investigations, and other matters, asserted and unasserted, 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.
The ultimate outcome of the legal and related matters described in this section, such as whether the likelihood of loss is remote, reasonably possible, or probable, or if and when the reasonably possible range of loss is estimable, is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's estimates of loss, 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.
Indemnifications
In the normal course of business, to facilitate transactions of services and products, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In
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addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our consolidated financial statements. In our opinion, as of March 31, 2021, there was not at least a reasonable possibility we had incurred a material loss with respect to indemnification of such parties. We have not recorded any liability for costs related to indemnification through March 31, 2021.

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, 2020, $8.60 billion remained available and authorized for repurchases under this program. In January 2021, an additional $25.0 billion of repurchases was authorized under this program. During the three months ended March 31, 2021, we repurchased and subsequently retired 15 million shares of our Class A common stock for an aggregate amount of $4.11 billion. As of March 31, 2021, $29.49 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 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 one active share-based employee compensation plan, the 2012 Equity Incentive Plan, which was amended in each of June 2016 and February 2018 (Amended 2012 Plan). Our Amended 2012 Plan 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. Shares that are withheld in connection with the net settlement of RSUs or forfeited under our stock plan are added to the reserves of the Amended 2012 Plan. We account for forfeitures as they occur.
Share-based compensation expense consists of the Company's RSUs 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, 2021, there were 145 million shares of our Class A common stock reserved for future issuance under our Amended 2012 Plan. Pursuant to the automatic increase provision under our Amended 2012 Plan, the number of shares reserved for issuance 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.
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The following table summarizes the activities for our unvested RSUs for the three months ended March 31, 2021:
Unvested RSUs
Number of SharesWeighted-Average Grant Date Fair Value
(in thousands)
Unvested at December 31, 202096,733 $181.88 
Granted41,138 $291.53 
Vested(10,446)$173.19 
Forfeited(2,286)$180.23 
Unvested at March 31, 2021125,139 $218.68 
The fair value as of the respective vesting dates of RSUs that vested during the three months ended March 31, 2021 and 2020 was $2.83 billion and $1.80 billion, respectively.
As of March 31, 2021, there was $26.25 billion of unrecognized share-based compensation expense related to RSU 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 tax law changes, the effects of acquisitions, and the integration of those acquisitions.
Our gross unrecognized tax benefits were $8.85 billion and $8.69 billion on March 31, 2021 and December 31, 2020, respectively. If the gross unrecognized tax benefits as of March 31, 2021 were realized in a future period, this would result in a tax benefit of $4.93 billion within our provision of income taxes at such time. The amount of interest and penalties accrued was $811 million and $774 million as of March 31, 2021 and December 31, 2020, respectively. We expect to continue to accrue unrecognized tax benefits for certain recurring tax positions.
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 and 2018 tax years and by the Irish tax authorities for our 2016 through 2018 tax years. Our 2017 and subsequent tax years remain open to examination by the IRS. Our 2019 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 and has done so in years covered by the second Notice described below. 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’s amendment to answer was filed 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 was completed in March 2020 and a second session is expected to continue beginning in October 2021. 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
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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. As of March 31, 2021, 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.

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, 2021December 31, 2020
United States$45,586 $43,128 
Rest of the world (1)
12,336 11,853 
Total long-lived assets$57,922 $54,981 
____________________________________
(1)    No individual country, other than disclosed above, exceeded 10% of our total long-lived assets for any period presented.
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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, 2020, 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, 2021 and 2020—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, 2021 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 2021 are as follows:
Community growth:
Facebook daily active users (DAUs) were 1.88 billion on average for March 2021, an increase of 8% year-over-year.
Facebook monthly active users (MAUs) were 2.85 billion as of March 31, 2021, an increase of 10% year-over-year.
Family daily active people (DAP) was 2.72 billion on average for March 2021, an increase of 15% year-over-year.
Family monthly active people (MAP) was 3.45 billion as of March 31, 2021, an increase of 15% year-over-year.
Financial results:
Revenue was $26.17 billion, up 48% year-over-year, and advertising revenue was $25.44 billion, up 46% year-over‑year.
Total costs and expenses were $14.79 billion, up 25% year-over-year.
Income from operations was $11.38 billion, and operating margin was 43%.
Net income was $9.50 billion, with diluted earnings per share of $3.30.
Capital expenditures, including principal payments on finance leases, were $4.42 billion.
Effective tax rate was 17%.
Cash and cash equivalents and marketable securities were $64.22 billion as of March 31, 2021.
Headcount was 60,654 as of March 31, 2021, an increase of 26% year-over-year.
Our mission is to give people the power to build community and bring the world closer together.
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: (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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In the first quarter of 2021, 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.
Our business and results of operations have been impacted by the COVID-19 pandemic and the preventative measures implemented by authorities to help limit the spread of the illness, which have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. Beginning in the first quarter of 2020, we experienced significant increases in the size and engagement of our active user base across a number of regions as a result of the COVID-19 pandemic. More recently, we have seen these pandemic-related trends subside, particularly in the United States & Canada region. We are unable to predict the impact of the pandemic on user growth and engagement with any certainty and we expect these trends to continue to be subject to volatility.
The COVID-19 pandemic has also previously caused a reduction in the demand for advertising, as well as a related decline in the pricing of our ads, particularly in the second quarter of 2020. More recently, we believe the pandemic has contributed to an acceleration in the shift of commerce from offline to online, as well as increasing consumer demand for purchasing products relative to services, and we experienced increasing demand for advertising as a result of these trends. However, it is possible that this increased demand may not continue in future periods and may even recede as the effects of the pandemic subside, which could adversely affect our advertising revenue growth. The impact of the pandemic on user growth and engagement, the demand for and pricing of our advertising services, as well as on our overall results of operations, remains highly uncertain for the foreseeable future. In addition, we expect that future advertising revenue growth will continue to be adversely affected by limitations on our ad targeting and measurement tools arising from changes to the regulatory environment and third-party mobile operating systems and browsers.
We intend to continue to invest in our business based on our company priorities, and we anticipate that additional investments in our data center capacity, servers, network infrastructure, and office facilities, as well as scaling our headcount to support our growth, including in our consumer hardware initiatives, will continue to drive expense growth in 2021.
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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.
fb-20210331_g1.jpg
DAU/MAU:66%66%66%66%67%66%66%66%66%
fb-20210331_g2.jpg fb-20210331_g3.jpg
DAU/MAU:77%77%77%77%77%77%77%76%75%DAU/MAU:74%74%74%75%75%74%74%74%73%
fb-20210331_g4.jpg fb-20210331_g5.jpg
DAU/MAU:61%61%62%62%62%61%62%62%62%DAU/MAU:64%64%65%65%65%65%65%65%65%
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.
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Worldwide DAUs increased 8% to 1.88 billion on average during March 2021 from 1.73 billion during March 2020. Users in India, the Philippines, and Indonesia represented the top three sources of growth in DAUs during March 2021, relative to the same period in 2020.
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.
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fb-20210331_g7.jpg fb-20210331_g8.jpg
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As of March 31, 2021, we had 2.85 billion MAUs, an increase of 10% from March 31, 2020. Users in India, Indonesia, and the Philippines represented the top three sources of growth in the first quarter of 2021, relative to the same period in 2020.
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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 products 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 2021 in the United States & Canada region was more than 12 times higher than in the Asia-Pacific region.
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ARPU:$6.42$7.05$7.26$8.52$6.95$7.05$7.89$10.14$9.27
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ARPU:$30.12$33.27$34.55$41.41$34.18$36.49$39.63$53.56$48.03ARPU:$9.55$10.70$10.68$13.21$10.64$11.03$12.41$16.87$15.49
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ARPU:$2.78$3.04$3.24$3.57$3.06$2.99$3.67$4.05$3.94ARPU:$1.89$2.13$2.24$2.48$1.99$1.78$2.22$2.77$2.64
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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 addresses of our customers.
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During the first quarter of 2021, worldwide ARPU was $9.27, an increase of 33% from the first quarter of 2020. Over this period, ARPU increased by 46% in Europe, 41% in United States & Canada, 33% in Rest of World and 29% in Asia-Pacific. 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.
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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.
fb-20210331_g17.jpg
DAP/MAP:78%78%78%78%79%79%79%79%79%
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 4% 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. In the second quarter of 2020, we updated our Family metrics calculations to reflect recent data from a periodic WhatsApp user survey and to incorporate certain methodology improvements, and we estimate such updates contributed an aggregate of approximately 40 million DAP to our reported worldwide DAP in June 2020. In the first quarter of 2021, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 60 million DAP to our reported worldwide DAP in March 2021.
Worldwide DAP increased 15% to 2.72 billion on average during March 2021 from 2.36 billion during March 2020.
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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.
fb-20210331_g18.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 4% 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. In the second quarter of 2020, we updated our Family metrics calculations to reflect recent data from a periodic WhatsApp user survey and to incorporate certain methodology improvements, and we estimate such updates contributed an aggregate of approximately 50 million MAP to our reported worldwide MAP in June 2020. In the first quarter of 2021, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 70 million MAP to our reported worldwide MAP in March 2021.
As of March 31, 2021, we had 3.45 billion MAP, an increase of 15% from 2.99 billion as of March 31, 2020.
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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.
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ARPP:$5.66$6.20$6.33$7.38$6.03$6.10$6.76$8.62$7.75
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During the first quarter of 2021, worldwide ARPP was $7.75, an increase of 29% from the first quarter of 2020.
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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 products, net fees we receive from developers using our Payments infrastructure, and 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 costs, credit card and other transaction fees related to processing customer transactions, and cost of consumer hardware products 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.
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.
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Results of Operations
The following table sets forth our condensed consolidated statements of income data:
Three Months Ended March 31,
 20212020
(in millions)
Revenue$26,171 $17,737 
Costs and expenses:
Cost of revenue5,131 3,459 
Research and development5,197 4,015 
Marketing and sales2,843 2,787 
General and administrative1,622 1,583 
Total costs and expenses14,793 11,844 
Income from operations11,378 5,893 
Interest and other income (expense), net125 (32)
Income before provision for income taxes11,503 5,861 
Provision for income taxes2,006 959 
Net income$9,497 $4,902 
The following table sets forth our condensed consolidated statements of income data (as a percentage of revenue)(1): 
 Three Months Ended March 31,
 20212020
Revenue100 %100 %
Costs and expenses:
Cost of revenue20 20 
Research and development20 23 
Marketing and sales11 16 
General and administrative
Total costs and expenses57 67 
Income from operations43 33 
Interest and other income (expense), net— — 
Income before provision for income taxes44 33 
Provision for income taxes
Net income36 %28 %
____________________________________
(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,
20212020
(in millions)
Cost of revenue$118 $94 
Research and development1,408 999 
Marketing and sales174 149 
General and administrative130 93 
Total share-based compensation expense$1,830 $1,335 
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Share-based compensation expense included in costs and expenses (as a percentage of revenue)(1): 
Three Months Ended March 31,
20212020
Cost of revenue— %%
Research and development
Marketing and sales
General and administrative— 
Total share-based compensation expense%%
____________________________________
(1)    Percentages have been rounded for presentation purposes and may differ from unrounded results.
Three Months Ended March 31, 2021 and 2020
Revenue 
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
Advertising$25,439 $17,440 46 %
Other revenue732 297 146 %
Total revenue$26,171 $17,737 48 %
Revenue in the three months ended March 31, 2021 increased $8.43 billion, or 48%, compared to the same period in 2020. The increase was mostly due to an increase in advertising revenue as a result of increases in the average price per ad and the number of ads delivered.
During the three months ended March 31, 2021, the average price per ad increased by 30%, as compared with a decrease of approximately 16% in the same period in 2020. The increase in average price per ad during the three months ended March 31, 2021 was mainly caused by a recovery from declines in advertising demand due to the COVID-19 pandemic that started in the first quarter of 2020. Additionally, overall advertising demand increased, as compared to the same period in 2020, across our ad products and in all regions in part due to increasing consumer demand for purchasing products relative to services, as well as the shift of commerce from offline to online. During the three months ended March 31, 2021, the number of ads delivered increased by 12%, as compared with an increase of approximately 39% in the same period in 2020. The increase in the ads delivered was driven by increases in users and in the number and frequency of ads displayed across our products.
In the near-term, we anticipate that future advertising revenue growth will be determined primarily by price, which will be influenced by the extent to which we continue to see increasing advertising demand as the effects of the COVID-19 pandemic subside and the related economic recovery progresses, as well as the extent to which changes to the regulatory environment and third-party mobile operating systems and browsers result in limitations on our ad targeting and measurement tools.
Other revenue in the first quarter of 2021 increased $435 million, or 146%, compared to the same period in 2020. The increase in other revenue was primarily due to increased sales in our consumer hardware products.
Foreign Exchange Impact on Revenue
The general weakening of the U.S. dollar relative to certain foreign currencies in the three months ended March 31, 2021 compared to the same period in 2020 had a favorable impact on revenue. If we had translated revenue for the three months ended March 31, 2021 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 $25.47 billion and $24.74 billion, respectively. Using these constant rates, total revenue and advertising revenue would have been $706 million and $695 million lower than actual total revenue and advertising revenue, respectively, for the three months ended March 31, 2021.
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Cost of revenue
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
Cost of revenue$5,131 $3,459 48 %
Percentage of revenue20 %20 %
Cost of revenue in the three months ended March 31, 2021 increased $1.67 billion, or 48%, compared to the same period in 2020. The increase was mostly due to an increase in operational expenses related to our data centers and technical infrastructure, an increase in cost of consumer hardware products sold and, to a lesser extent, higher cost associated with partner arrangements, including traffic acquisition and payment processing costs.
Research and development
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
Research and development$5,197 $4,015 29 %
Percentage of revenue20 %23 %
Research and development expenses in the three months ended March 31, 2021 increased $1.18 billion, or 29%, compared to the same period in 2020. The increase was mostly due to higher payroll and benefits expenses as a result of a 35% growth in employee headcount from March 31, 2020 to March 31, 2021 in engineering and other technical functions supporting our continued investment in our family of products and consumer hardware products.
Marketing and sales
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
Marketing and sales$2,843 $2,787 %
Percentage of revenue11 %16 %
Marketing and sales expenses in the three months ended March 31, 2021 increased $56 million, or 2%, compared to the same period in 2020. The majority of increase was driven by an increase in payroll and benefits expenses, partially offset by a decrease in marketing expenses. Our payroll and benefits expenses increased as a result of a 10% increase in employee headcount from March 31, 2020 to March 31, 2021 in our marketing and sales functions.
General and administrative
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
General and administrative$1,622 $1,583 %
Percentage of revenue%%
General and administrative expenses in the three months ended March 31, 2021 increased $39 million, or 2%, compared to the same period in 2020. The majority of the increase was due to an increase in payroll and benefits expenses, partially offset by lower bad debt expense due to a decrease in our estimated credit losses, compared to the same period in 2020. Our payroll and benefits expenses increased mainly due to a 23% increase in employee headcount from March 31, 2020 to March 31, 2021 in our general and administrative functions.
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Interest and other income (expense), net
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
Interest income, net$118 $228 (48)%
Foreign currency exchange losses, net(93)(251)(63)%
Other income (expense), net100 (9)NM
Interest and other income (expense), net$125 $(32)NM
Interest and other income (expense), net in the three months ended March 31, 2021 increased $157 million compared to the same period in 2020. The increase was due to a decrease in foreign currency exchange losses as a result of foreign currency transactions and re‑measurement and an increase in other income due to net unrealized gains related to our equity investments, partially offset by a decrease in interest income related to lower interest rates compared to the same period in 2020.
Provision for income taxes
 Three Months Ended March 31, 
 20212020% change
 (in millions, except for percentages)
Provision for income taxes$2,006 $959 109 %
Effective tax rate17 %16 %
Our provision for income taxes in the three months ended March 31, 2021 increased $1.05 billion, or 109%, compared to the same period in 2020, primarily due to an increase in income from operations. Our effective tax rate did not materially change in the three months ended March 31, 2021 compared to the same period in 2020.
Effective Tax Rate Items. Our effective tax rate in the future will depend upon the proportion between the following items and income before provision for income taxes: U.S. tax benefits from foreign derived intangible income, tax effects from share-based compensation, tax effects of integrating intellectual property from acquisitions, settlement of tax contingency items, tax effects of changes in our business, and the effects of changes in tax law.
The accounting for share-based compensation may increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return which depend upon the stock price at the time of employee award vesting. If our stock price remains constant to the April 23, 2021 price, we expect our effective tax rate for the full year of 2021 will be in the high-teens.
Integrating intellectual property from acquisitions into our business generally involves intercompany transactions that have the impact of increasing our provision for income taxes. Consequently, our provision for income taxes and our effective tax rate may initially increase in the period of an acquisition and integration. The magnitude of this impact will depend upon the specific type, size, and taxing jurisdictions of the intellectual property as well as the relative contribution to income in subsequent periods.
Unrecognized Tax Benefits. As of March 31, 2021, we had net unrecognized tax benefits of $3.62 billion which were accrued as other liabilities. These unrecognized tax benefits were predominantly accrued for uncertainties related to transfer pricing with our foreign subsidiaries, which includes licensing of intellectual property, providing services and other transactions, as well as for uncertainties with our research tax credits. The ultimate settlement of the liabilities will depend upon resolution of tax audits, litigation, or events that would otherwise change the assessment of such items. Based upon the status of litigation described below and the current status of tax audits in various jurisdictions, we do not anticipate a material change to such amounts within the next 12 months.
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 and has done so in years covered by the second Notice described below. 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’s amendment to answer was filed stating that it planned to assert at trial
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an adjustment that is higher than the adjustment stated in the Notice. The first session of the trial was completed in March 2020 and a second session is expected to continue beginning in October 2021. 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, 2021, 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, Income Taxes, 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 in various jurisdictions, 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 effect on our financial position, results of operations, and cash flows.
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Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist mostly of cash on deposit with banks, investments in money market funds, and investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. Cash and cash equivalents and marketable securities were $64.22 billion as of March 31, 2021, an increase of $2.27 billion from December 31, 2020. The increase was mostly due to $12.24 billion of cash generated from operations, offset by $4.42 billion for capital expenditures, including principal payments on finance leases, $3.94 billion for repurchases of our Class A common stock, $1.08 billion of taxes paid related to net share settlement of employee restricted stock unit (RSU) awards and $600 million of net purchases of marketable securities.
Cash paid for income taxes was $2.91 billion in the three months ended March 31, 2021. As of March 31, 2021, our federal net operating loss carryforward was $10.61 billion and our federal tax credit carryforward was $444 million. We anticipate the utilization of a significant portion of these net operating losses and credits within the next three years.
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, 2020, $8.60 billion remained available and authorized for repurchases under this program. In January 2021, an additional $25.0 billion of repurchases was authorized under this program. During the three months ended March 31, 2021, we repurchased and subsequently retired 15 million shares of our Class A common stock for an aggregate amount of $4.11 billion. As of March 31, 2021, $29.49 billion remained available and authorized for repurchases.
As of March 31, 2021, $8.12 billion of the $64.22 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. The Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminated U.S. taxes on foreign subsidiary distributions. As a result, earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes.
We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs and fund our share repurchase program for the foreseeable future.
Cash Provided by Operating Activities
Cash flow from operating activities during the three months ended March 31, 2021 mostly consisted of net income adjusted for certain non-cash items, such as $1.97 billion of depreciation and amortization and $1.83 billion of share-based compensation expense, offset by $1.68 billion decrease in accrued expenses and other current liabilities. The increase in cash flow from operating activities during the three months ended March 31, 2021, compared to the same period in 2020, was due to higher net income partially offset by changes in working capital such as a $2.70 billion increase in cash payments of income taxes.
Cash Used in Investing Activities
Cash used in investing activities during the three months ended March 31, 2021 was primarily from $4.27 billion of purchases of property and equipment as we continued to invest in data centers, servers, office facilities, and network infrastructure. The increase in cash used in investing activities during the three months ended March 31, 2021, compared to the same period in 2020, was mostly due to an increase in purchases of property and equipment.
We anticipate making capital expenditures of approximately $19 billion to $21 billion in 2021.
Cash Used in Financing Activities
Cash used in financing activities during the three months ended March 31, 2021 mostly consisted of $3.94 billion for repurchases of our Class A common stock and $1.08 billion of taxes paid related to net share settlement of RSUs. The increase in cash used in financing activities during the three months ended March 31, 2021, compared to the same period in 2020, was primarily due to an increase in repurchases of our Class A common stock.
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Off-Balance Sheet Arrangements
As of March 31, 2021, we did not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
Our principal commitments consist mostly of obligations under operating leases and other contractual commitments. Our obligations under operating leases include among others, certain of our offices, data centers, land, colocations, and equipment. Our other contractual commitments are primarily related to our investments in network infrastructure, consumer hardware and content costs. The following table summarizes our commitments to settle contractual obligations in cash as of March 31, 2021:
Payment Due by Period 
Total
The remainder of 20212022-20232024-2025Thereafter
(in millions)
Operating lease obligations, including imputed interest(1)
$20,548 $959 $3,007 $3,082 $13,500 
Finance lease obligations, including imputed interest(1)
1,193 241 266 117 569 
Transition tax payable1,543 — 300 1,243 — 
Other contractual commitments9,067 4,778 1,550 450 2,289 
Total contractual obligations$32,351 $5,978 $5,123 $4,892 $16,358 
____________________________________
(1)    Includes variable lease payments that were fixed subsequent to lease commencement or modification.
Additionally, as part of the normal course of the business, we may also enter into multi-year agreements to purchase renewable energy that do not specify a fixed or minimum volume commitment. These agreements are generally entered into in order to secure either volume or price. Using projected market prices or expected volume consumption, the total estimated spend is approximately $5.73 billion. The ultimate spend under these agreements may vary and will be based on prevailing market prices or actual volume purchased.
Our other liabilities also include $3.62 billion related to net uncertain tax positions as of March 31, 2021. Due to uncertainties in the timing of the completion of tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months. As a result, this amount is not included in the above contractual obligations table.
Contingencies
We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations. We record a liability when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may incur a loss and the loss or range of loss can be estimated, we disclose the possible loss in the accompanying notes to the condensed consolidated financial statements to the extent material. Significant judgment is required to determine both probability and the estimated amount of loss. Such matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
See Note 10 — Commitments and Contingencies and Note 12 — Income Taxes in the notes to the condensed consolidated financial statements included in Part I, Item 1, and "Legal Proceedings" contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contingencies.

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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates and assumptions on our condensed consolidated financial statements is material. We believe that the assumptions and estimates associated with gross vs. net in revenue recognition, valuation of equity investments, income taxes, loss contingencies, and valuation of long-lived assets including goodwill and intangible assets and their associated estimated useful lives have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including changes to foreign currency exchange rates, interest rates, equity investment risk, and inflation.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Euro. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, have in the past, and may in the future, negatively affect our revenue and other operating results as expressed in U.S. dollars.
We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing monetary asset and liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. At this time, we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. Foreign currency losses, net of $93 million and $251 million were recognized in the three months ended March 31, 2021 and 2020, respectively, as interest and other income (expense), net in our condensed consolidated statements of income.
Interest Rate Sensitivity
Our exposure to changes in interest rates relates primarily to interest earned and market value on our cash and cash equivalents and marketable securities.
Our cash and cash equivalents and marketable securities consist of cash, certificates of deposit, time deposits, money market funds, U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and marketable securities, and the market value of those securities. A hypothetical 100 basis point increase in interest rates would have resulted in a decrease of $822 million and $794 million in the market value of our available-for-sale debt securities as of March 31, 2021 and December 31, 2020, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.
Equity Investment Risk
Our equity investments are subject to a wide variety of market-related risks that could have a material impact on the carrying value of our holdings. We continually evaluate our equity investments in privately-held companies.
Our equity investments are investments in equity securities of privately-held companies without readily determinable market values. We elected to account for most of our equity investments using the measurement alternative, which is cost, less any impairment, adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. We perform a qualitative assessment at each reporting date to determine whether there are triggering events for impairment. The qualitative assessment considers factors such as, but not limited to, the investee's financial condition and business outlook; industry and sector performance; economic or technological environment; and other relevant events and factors affecting the investee. Valuations of our equity investments are complex due to the lack of readily available market data and observable transactions. Volatility in the global economic climate and financial markets, including recent and ongoing effects related to the impact of the COVID-19 pandemic, which requires significant judgments, could result in a material impairment charge on our equity investments. Equity investments accounted for under the equity method were immaterial as of March 31, 2021 and December 31, 2020. Our equity investments had a carrying value of $6.34 billion and $6.23 billion as of March 31, 2021 and December 31, 2020, respectively.
For additional information about our equity investments, see Note 5 — Equity Investments in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2021, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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PART II—OTHER INFORMATION
Item 1.Legal Proceedings
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, a second amended complaint was filed in the consolidated putative securities class action. On August 7, 2020, the district court granted our motion to dismiss the second amended complaint, with leave to amend. On October 16, 2020, a third 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. We entered into a settlement and modified consent order to resolve the FTC inquiry, which took effect in April 2020 and required us to pay a penalty of $5.0 billion and to significantly enhance our practices and processes for privacy compliance and oversight. The state attorneys general inquiry and certain government inquiries in other jurisdictions remain ongoing and could subject us to additional substantial fines and costs, require us to change our business practices, divert resources and the attention of management from our business, or adversely affect our business.
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 provided for a payment of $550 million by us and was subject to court approval. On or about May 8, 2020, the parties executed a formal settlement agreement, and plaintiffs filed a motion for preliminary approval of the settlement by the district court. On June 4, 2020, the district court denied the plaintiffs' motion without prejudice. On July 22, 2020, the parties executed an amended settlement agreement, which, among other terms, provides for a payment of $650 million by us. On February 26, 2021, the court granted final approval of the settlement, and the payment was made in March 2021. On March 27 and March 29, 2021, objectors filed notices of appeal of the order granting final approval of the settlement.
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 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. On November 15, 2020, the court granted preliminary approval of the settlement. The settlement is subject to final court approval. 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. Any such inquiries could subject us to substantial fines and costs, require us to change our business practices, divert resources and the attention of management from our business, or adversely affect our business.
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
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investigations regarding various aspects of our regulatory compliance. For example, in August 2020, we received a preliminary draft decision from the IDPC that preliminarily concluded that Facebook Ireland's reliance on Standard Contractual Clauses in respect of European user data does not achieve compliance with the GDPR and preliminarily proposed that such transfers of user data from the European Union to the United States should therefore be suspended. Facebook Ireland challenged procedural aspects of this IDPC inquiry in a judicial review commenced in the Irish High Court in September 2020, and the court ordered the IDPC not to take further steps in respect of the inquiry until the judicial review proceedings conclude (subject to the IDPC's right to apply to vary or lift this order), which we expect to occur in the first half of 2021. For additional information, see Part II, Item 1A, "Risk Factors—Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition, consumer protection, and other matters" in this Quarterly Report on Form 10-Q. Any such inquiries or investigations could subject us to substantial fines and costs, require us to change our business practices, divert resources and the attention of management from our business, or adversely affect our business.
In addition, from time to time we are subject to various litigation and government inquiries and investigations, formal or informal, by competition authorities in the United States, Europe, and other jurisdictions. Such investigations, inquiries, and lawsuits concern, among other things, our business practices in the areas of social networking or social media services, digital advertising, and/or mobile or online applications, as well as past acquisitions. For example, in June 2019 we were informed by the FTC that it had opened an antitrust investigation of our company. On December 9, 2020, the FTC filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct and unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. In addition, beginning in the third quarter of 2019, we became the subject of antitrust investigations by the U.S. Department of Justice and state attorneys general. On December 9, 2020, the attorneys general from 46 states, the territory of Guam, and the District of Columbia filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct in violation of Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. The complaint also alleges that we violated Section 7 of the Clayton Act by acquiring Instagram and WhatsApp. The lawsuits of the FTC and attorneys general both seek a permanent injunction against our company's alleged violations of the antitrust laws, and other equitable relief, including divestiture or reconstruction of Instagram and WhatsApp. Multiple putative class actions have also been filed in state and federal courts in the United States against us alleging violations of antitrust laws and other causes of action in connection with these acquisitions and other alleged anticompetitive conduct, and seeking unspecified damages and injunctive relief. We believe these lawsuits are without merit, and we are vigorously defending them. The result of such litigation, investigations or inquiries could subject us to substantial monetary remedies and costs, interrupt or require us to change our business practices, divert resources and the attention of management from our business, or subject us to other structural or behavioral remedies that adversely affect our business.
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.
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, and we may in the future be subject to additional legal proceedings and disputes.
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Item 1A.Risk Factors
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.
Summary Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks related to:
Risks Related to Our Product Offerings
our ability to add and retain users and maintain levels of user engagement with our products;
the loss of, or reduction in spending by, our marketers;
reduced availability of data signals used by our ad targeting and measurement tools;
ineffective operation with mobile operating systems or changes in our relationships with mobile operating system partners;
failure of our new products, or changes to our existing products, to attract or retain users or generate revenue;
Risks Related to Our Business Operations and Financial Results
the COVID-19 pandemic, including its impact on our advertising business;
our ability to compete effectively;
unfavorable media coverage and other risks affecting our ability to maintain and enhance our brands;
volatile or slower user and revenue growth rates in the future;
acquisitions and our ability to successfully integrate our acquisitions;
our ability to build, maintain, and scale our technical infrastructure, and risks associated with disruptions in our service;
operating our business in multiple countries around the world;
litigation, including class action lawsuits;
Risks Related to Government Regulation and Enforcement
government restrictions on access to Facebook or our other products, or other actions that impair our ability to sell advertising, in their countries;
complex and evolving U.S. and foreign privacy, data use and data protection, content, competition, consumer protection, and other laws and regulations;
the impact of government investigations, enforcement actions, and settlements, including litigation and investigations by privacy and competition authorities;
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our ability to comply with regulatory and legislative privacy requirements, including our consent order with the Federal Trade Commission;
Risks Related to Data, Security, and Intellectual Property
the occurrence of security breaches, improper access to or disclosure of our data or user data, and other cyber incidents or undesirable activity on our platform;
our ability to obtain, maintain, protect, and enforce our intellectual property rights; and
Risks Related to Ownership of Our Class A Common Stock
limitations on the ability of holders of our Class A Common Stock to influence corporate matters due to the dual class structure of our common stock and the control of a majority of the voting power of our outstanding capital stock by our founder, Chairman, and CEO.
Risks Related to Our Product Offerings
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users of our products, particularly for Facebook and Instagram. We anticipate that our active user growth rate will generally decline over time as the size of our active user base increases, and we expect that the size of our active user base will fluctuate or decline in one or more markets from time to time, particularly in markets where we have achieved higher penetration rates. For example, beginning in the first quarter of 2020, we experienced significant increases in the size and engagement of our active user base across a number of regions as a result of the COVID-19 pandemic. More recently, we have seen these pandemic-related trends subside, and in each of the third and fourth quarters of 2020, we experienced slight declines on a quarter-over-quarter basis in the number of daily active users on Facebook in the United States & Canada region. We are unable to predict the impact of the pandemic on user growth and engagement with any certainty, and we expect these trends to continue to be subject to volatility. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different products and services. Any number of factors can negatively affect user retention, growth, and engagement, including if:
users increasingly engage with other competitive products or services;
we fail to introduce new features, products, or services that users find engaging or if we introduce new products or services, or make changes to existing products and services, that are not favorably received;
users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size, and quality of ads that we display;
users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;
user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;
we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
there are decreases in user sentiment due to questions about the quality or usefulness of our products or our user data practices, concerns about the nature of content made available on our products, or concerns related to privacy, safety, security, well-being, or other factors;
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we are unable to manage and prioritize information to ensure users are presented with content that is appropriate, interesting, useful, and relevant to them;
we are unable to obtain or attract engaging third-party content;
we are unable to successfully maintain or grow usage of and engagement with mobile and web applications that integrate with Facebook and our other products;
users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;
there are changes mandated by legislation, government and regulatory authorities, or litigation that adversely affect our products or users;
we are unable to offer a number of our most significant products and services, including Facebook and Instagram, in Europe, or are otherwise limited in our business operations, as a result of European regulators, courts, or legislative bodies determining that our reliance on Standard Contractual Clauses (SCCs) or other legal bases we rely upon to transfer user data from the European Union to the United States is invalid;
there is decreased engagement with our products, or failure to accept our terms of service, as part of privacy-focused changes that we have implemented or may implement in the future, whether voluntarily, in connection with the General Data Protection Regulation (GDPR), the European Union's ePrivacy Directive, the California Consumer Privacy Act (CCPA), or other laws, regulations, or regulatory actions, or otherwise;
technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content;
we adopt terms, policies, or procedures related to areas such as sharing, content, user data, or advertising, or take actions to enforce our policies, that are perceived negatively by our users or the general public, including as a result of decisions or recommendations from the independent Oversight Board regarding content on our platform;
we elect to focus our product decisions on longer-term initiatives that do not prioritize near-term user growth and engagement;
we make changes in how we promote different products and services across our family of products;
initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties, or otherwise;
third-party initiatives that may enable greater use of our products, including low-cost or discounted data plans, are discontinued;
there is decreased engagement with our products as a result of taxes imposed on the use of social media or other mobile applications in certain countries, internet shutdowns, or other actions by governments that affect the accessibility of our products in their countries;
we fail to provide adequate customer service to users, marketers, developers, or other partners;
we, developers whose products are integrated with our products, or other partners and companies in our industry are the subject of adverse media reports or other negative publicity, including as a result of our or their user data practices; or
our current or future products, such as our development tools and application programming interfaces that enable developers to build, grow, and monetize mobile and web applications, reduce user activity on our products by making it easier for our users to interact and share on third-party mobile and web applications.
From time to time, certain of these factors have negatively affected user retention, growth, and engagement to varying degrees. If we are unable to maintain or increase our user base and user engagement, particularly for our significant
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revenue‑generating products like Facebook and Instagram, our revenue and financial results may be adversely affected. Any significant decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth.
We generate substantially all of our revenue from advertising. The loss of marketers, or reduction in spending by marketers, could seriously harm our business.
Substantially all of our revenue is currently generated from third parties advertising on Facebook and Instagram. As is common in the industry, our marketers do not have long-term advertising commitments with us. Many of our marketers spend only a relatively small portion of their overall advertising budget with us. Marketers will not continue to do business with us, or they will reduce the budgets they are willing to commit to us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives. We have implemented, and we will continue to implement, changes to our user data practices. Some of these changes reduce our ability to effectively target ads, which has to some extent adversely affected, and will continue to adversely affect, our advertising business. If we are unable to provide marketers with a suitable return on investment, the pricing of our ads may not increase, or may decline, in which case our revenue and financial results may be harmed.
Our advertising revenue can also be adversely affected by a number of other factors, including:
decreases in user engagement, including time spent on our products;
our inability to continue to increase user access to and engagement with our products;
product changes or inventory management decisions we may make that change the size, format, frequency, or relative prominence of ads displayed on our products or of other unpaid content shared by marketers on our products;
our inability to maintain or increase marketer demand, the pricing of our ads, or both;
our inability to maintain or increase the quantity or quality of ads shown to users;
changes to third-party policies that limit our ability to deliver, target, or measure the effectiveness of advertising, including changes by mobile operating system and browser providers such as Apple and Google;
adverse government actions or legislative, regulatory, or other legal developments relating to advertising, including developments that may impact our ability to deliver, target, or measure the effectiveness of advertising;
user behavior or product changes that may reduce traffic to features or products that we successfully monetize, including as a result of increased usage of the Stories format or our video or messaging products;
reductions of advertising by marketers due to our efforts to implement or enforce advertising policies that protect the security and integrity of our platform;
the availability, accuracy, utility, and security of analytics and measurement solutions offered by us or third parties that demonstrate the value of our ads to marketers, or our ability to further improve such tools;
loss of advertising market share to our competitors, including if prices to purchase our ads increase or if competitors offer lower priced, more integrated, or otherwise more effective products;
limitations on our ability to offer a number of our most significant products and services, including Facebook and Instagram, in Europe as a result of European regulators, courts, or legislative bodies determining that our reliance on SCCs or other legal bases we rely upon to transfer user data from the European Union to the United States is invalid;
changes in our marketing and sales or other operations that we are required to or elect to make as a result of risks related to complying with foreign laws or regulatory requirements or other government actions;
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decisions by marketers to reduce their advertising as a result of adverse media reports or other negative publicity involving us, our user data practices, our advertising metrics or tools, content on our products, our efforts to implement or enforce policies relating to content on our products (including as a result of decisions or recommendations from the independent Oversight Board), developers with mobile and web applications that are integrated with our products, or other companies in our industry;
reductions of advertising by marketers due to objectionable content made available on our products by third parties, questions about our user data practices, concerns about brand safety or potential legal liability, or uncertainty regarding their own legal and compliance obligations (for example, a number of marketers announced that they paused advertising with us in July 2020 due to concerns about content on our products);
the effectiveness of our ad targeting or degree to which users opt out of the use of data for ads, including as a result of product changes and controls that we have implemented or may implement in the future in connection with the GDPR, ePrivacy Directive, California Consumer Privacy Act (CCPA), other laws, regulations, or regulatory actions, or otherwise, that impact our ability to use data for advertising purposes;
the degree to which users cease or reduce the number of times they engage with our ads;
changes in the way advertising on mobile devices or on personal computers is measured or priced;
the success of technologies designed to block the display of ads or ad measurement tools;
changes in the composition of our marketer base or our inability to maintain or grow our marketer base; and
the impact of macroeconomic conditions, whether in the advertising industry in general, or among specific types of marketers or within particular geographies.
From time to time, certain of these factors have adversely affected our advertising revenue to varying degrees. The occurrence of any of these or other factors in the future could result in a reduction in demand for our ads, which may reduce the prices we receive for our ads, or cause marketers to stop advertising with us altogether, either of which would negatively affect our revenue and financial results. For example, macroeconomic conditions have affected, and may in the future affect, marketers' ability or willingness to spend with us, as we have seen with the regional and worldwide economic disruption related to the COVID-19 pandemic and associated declines in advertising activity on our products. The effects of the pandemic previously resulted in reduced demand for our ads, a related decline in pricing of our ads, and additional demands on our technical infrastructure as a result of increased usage of our services, and any similar occurrences in the future may impair our ability to maintain or increase the quantity or quality of ads shown to users and adversely affect our revenue and financial results.
Our advertising revenue is dependent on targeting and measurement tools that incorporate data signals from user activity on websites and services that we do not control, and changes to the regulatory environment, third-party mobile operating systems and browsers, and our own products have impacted, and we expect will continue to impact, the availability of such signals, which will adversely affect our advertising revenue.
We rely on data signals from user activity on websites and services that we do not control in order to deliver relevant and effective ads to our users. Our advertising revenue is dependent on targeting and measurement tools that incorporate these signals, and any changes in our ability to use such signals will adversely affect our business. For example, legislative and regulatory developments, such as the GDPR, ePrivacy Directive, and CCPA, have impacted, and we expect will continue to impact, our ability to use such signals in our ad products. In particular, we have seen an increasing number of users opt to control certain types of ad targeting in Europe following adoption of the GDPR, which will increase further with upcoming expanded control over third-party data as part of our ePrivacy Directive compliance, and we have introduced product changes that limit data signal use for certain users in California following adoption of the CCPA. Regulatory guidance or decisions or new legislation may require us to make additional changes to our products in the future that further reduce our ability to use these signals. In addition, mobile operating system and browser providers, such as Apple and Google, have announced product changes as well as future plans to limit the ability of websites and application developers to collect and use these signals to target and measure advertising. For example, in April 2021, Apple made certain changes to its products and data use policies in connection with changes to its iOS 14 operating system that will reduce our and other iOS developers' ability to target and measure advertising, which we expect will in turn reduce the budgets marketers are willing to commit to us and other advertising platforms. In addition, we have implemented, and may continue to implement, product changes that give
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users the ability to limit our use of such data signals to improve ads and other experiences on our products and services, including our Off-Facebook Activity tool and our worldwide offering of certain product changes we implemented in connection with the GDPR. These developments have limited our ability to target and measure the effectiveness of ads on our platform and negatively impacted our advertising revenue, and if we are unable to mitigate these developments as they take further effect in the future, our targeting and measurement capabilities will be materially and adversely affected, which would in turn significantly impact our future advertising revenue growth.
Our user growth, engagement, and monetization on mobile devices depend upon effective operation with mobile operating systems, networks, technologies, products, and standards that we do not control.
The substantial majority of our revenue is generated from advertising on mobile devices. There is no guarantee that popular mobile devices will continue to feature Facebook or our other products, or that mobile device users will continue to use our products rather than competing products. We are dependent on the interoperability of Facebook and our other products with popular mobile operating systems, networks, technologies, products, and standards that we do not control, such as the Android and iOS operating systems and mobile browsers. Any changes, bugs, or technical issues in such systems, or changes in our relationships with mobile operating system partners, handset manufacturers, browser developers, or mobile carriers, or in their terms of service or policies that degrade our products' functionality, reduce or eliminate our ability to update or distribute our products, give preferential treatment to competitive products, limit our ability to deliver, target, or measure the effectiveness of ads, or charge fees related to the distribution of our products or our delivery of ads could adversely affect the usage of Facebook or our other products and monetization on mobile devices. For example, Apple previously released an update to its Safari browser that limits the use of third-party cookies, which reduces our ability to provide the most relevant ads to our users and impacts monetization, and more recently released changes to iOS 14 that will limit our ability to target and measure ads effectively. We expect that any similar changes to its, Google's, or other browser or mobile platforms will further limit our ability to target and measure the effectiveness of ads and impact monetization. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, products, systems, networks, and standards that we do not control, and that we have good relationships with handset manufacturers, mobile carriers, and browser developers. We may not be successful in maintaining or developing relationships with key participants in the mobile ecosystem or in developing products that operate effectively with these technologies, products, systems, networks, or standards. In the event that it is more difficult for our users to access and use Facebook or our other products on their mobile devices, or if our users choose not to access or use Facebook or our other products on their mobile devices or use mobile products that do not offer access to Facebook or our other products, our user growth and user engagement could be harmed. From time to time, we may also take actions regarding the distribution of our products or the operation of our business based on what we believe to be in our long-term best interests. Such actions may adversely affect our users and our relationships with the operators of mobile operating systems, handset manufacturers, mobile carriers, browser developers, other business partners, or advertisers, and there is no assurance that these actions will result in the anticipated long-term benefits. In the event that our users are adversely affected by these actions or if our relationships with such third parties deteriorate, our user growth, engagement, and monetization could be adversely affected and our business could be harmed. We have in the past experienced challenges in operating with mobile operating systems, networks, technologies, products, and standards that we do not control, and any such occurrences in the future may negatively impact our user growth, engagement, and monetization on mobile devices, which may in turn materially and adversely affect our business and financial results.
Our new products and changes to existing products could fail to attract or retain users or generate revenue and profits.
Our ability to retain, increase, and engage our user base and to increase our revenue depends heavily on our ability to continue to evolve our existing products and to create successful new products, both independently and in conjunction with developers or other third parties. We may introduce significant changes to our existing products or acquire or introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. For example, we do not have significant experience with consumer hardware products or virtual or augmented reality technology, which may adversely affect our ability to successfully develop and market these products and technologies. We continue to incur substantial costs, and we may not be successful in generating profits, in connection with these efforts. In addition, the introduction of new products, or changes to existing products, may result in new or enhanced governmental or regulatory scrutiny, litigation, or other complications that could adversely affect our business and financial results. We have also invested, and expect to continue to invest, significant resources in growing our WhatsApp and Messenger products to support increasing usage of such products. We have historically monetized messaging in only a limited fashion, and we may not be successful in our efforts to generate meaningful revenue or profits from messaging over
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the long term. In addition, we are moving forward with plans to implement end-to-end encryption across our messaging services, as well as facilitate cross-app communication between these platforms, which plans have drawn governmental and regulatory scrutiny in multiple jurisdictions. If our new or enhanced products fail to engage users, marketers, or developers, or if our business plans are unsuccessful, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected.
We make product and investment decisions that may not prioritize short-term financial results and may not produce the long-term benefits that we expect.
We frequently make product and investment decisions that may not prioritize short-term financial results if we believe that the decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance over the long term. For example, we have implemented, and we will continue to implement, changes to our user data practices. Some of these changes reduce our ability to effectively target ads, which has to some extent adversely affected, and will continue to adversely affect, our advertising business. For example, our Off-Facebook Activity tool enables users to place limits on our storage and use of information about their interactions with advertisers' apps and websites, which reduces our ability to deliver the most relevant and effective ads to our users. Similarly, from time to time we update our News Feed ranking algorithm to optimize the user experience, and these changes have had, and may in the future have, the effect of reducing time spent and some measures of user engagement with Facebook, which could adversely affect our financial results. From time to time, we may also change the size, frequency, or relative prominence of ads in order to improve ad quality and overall user experience. In addition, we have made, and we expect to continue to make, other changes to our products which may adversely affect the distribution of content of publishers, marketers, and developers, and could reduce their incentive to invest in their efforts on Facebook or our other products. We also may introduce new features or other changes to existing products, or introduce new stand-alone products, that attract users away from properties, formats, or use cases where we have more proven means of monetization. For example, we previously introduced the Stories format, which we do not currently monetize at the same rate as News Feed. In addition, as we focus on growing users and engagement across our family of products, from time to time these efforts have reduced, and may in the future reduce, engagement with one or more products and services in favor of other products or services that we monetize less successfully or that are not growing as quickly. These decisions may adversely affect our business and results of operations and may not produce the long-term benefits that we expect.
If we are not able to maintain and enhance our brands, our ability to expand our base of users, marketers, and developers may be impaired, and our business and financial results may be harmed.
We believe that our brands have significantly contributed to the success of our business. We also believe that maintaining and enhancing our brands is critical to expanding our base of users, marketers, and developers. Many of our new users are referred by existing users. Maintaining and enhancing our brands will depend largely on our ability to continue to provide useful, reliable, trustworthy, and innovative products, which we may not do successfully. We may introduce new products or terms of service or policies that users do not like, which may negatively affect our brands. Additionally, the actions of our developers or advertisers may affect our brands if users do not have a positive experience using third-party mobile and web applications integrated with our products or interacting with parties that advertise through our products. We will also continue to experience media, legislative, or regulatory scrutiny of our actions or decisions regarding user privacy, data use, encryption, content, advertising, competition, and other issues, including actions or decisions in connection with elections or the COVID-19 pandemic, which has in the past adversely affected, and may in the future adversely affect, our reputation and brands. For example, in March 2018, we announced developments regarding the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies. We also may fail to respond expeditiously or appropriately to the sharing of objectionable content on our services or objectionable practices by advertisers or developers, or to otherwise address user concerns, which has occurred in the past and which could erode confidence in our brands. Our brands may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to other users, by the actions of users acting under false or inauthentic identities, by the use of our products or services to disseminate information that is deemed to be misleading (or intended to manipulate opinions), by perceived or actual efforts by governments to obtain access to user information for security-related purposes or to censor certain content on our platform, by the use of our products or services for illicit or objectionable ends, including, for example, any such actions around the pandemic or elections in the United States and around the world, by decisions or recommendations regarding content on our platform from the independent Oversight Board, or by our decisions to remove content or suspend participation on our platform by persons who violate our community standards or terms of service. Maintaining and enhancing our brands will require us to make substantial investments and these investments may not be successful. Certain of
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our past actions, such as the foregoing matter regarding developer misuse of data and concerns around our handling of political speech and advertising, hate speech, and other content, have eroded confidence in our brands, and if we fail to successfully promote and maintain our brands or if we incur excessive expenses in this effort, our business and financial results may be adversely affected.
We may not be able to continue to successfully maintain or grow usage of and engagement with mobile and web applications that integrate with Facebook and our other products.
We have made and are continuing to make investments to enable developers to build, grow, and monetize mobile and web applications that integrate with Facebook and our other products. Such existing and prospective developers may not be successful in building, growing, or monetizing mobile and/or web applications that create and maintain user engagement. Additionally, developers may choose to build on other platforms, including mobile platforms controlled by third parties, rather than building products that integrate with Facebook and our other products. We are continuously seeking to balance the distribution objectives of our developers with our desire to provide an optimal user experience, and we may not be successful in achieving a balance that continues to attract and retain such developers. For example, from time to time, we have taken actions to reduce the volume of communications from these developers to users on Facebook and our other products with the objective of enhancing the user experience, and such actions have reduced distribution from, user engagement with, and our monetization opportunities from, mobile and web applications integrated with our products. In addition, as part of our efforts related to privacy, safety, and security, we conduct investigations and audits of platform applications from time to time, and we also have announced several product changes that restrict developer access to certain user data. In some instances, these actions, as well as other actions to enforce our policies applicable to developers, have adversely affected, or will adversely affect, our relationships with developers. If we are not successful in our efforts to maintain or grow the number of developers that choose to build products that integrate with Facebook and our other products or if we are unable to continue to build and maintain good relations with such developers, our user growth and user engagement and our financial results may be adversely affected.
Risks Related to Our Business Operations and Financial Results
The COVID-19 pandemic has had, and may in the future have, a significant adverse impact on our advertising revenue and also exposes our business to other risks.
The COVID-19 pandemic 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. For example, in the second quarter of 2020, our advertising revenue grew 10% year-over-year, which was the slowest growth rate for any fiscal quarter since our initial public offering. While our advertising revenue growth rate improved in subsequent quarters, there can be no assurance that it will not decrease again as a result of the effects of the pandemic. In addition, we believe that the pandemic has contributed to an acceleration in the shift of commerce from offline to online, as well as increasing consumer demand for purchasing products relative to services, which in turn have increased demand for our advertising services; however, it is possible that this increased demand may not continue in future periods and may even recede as the effects of the pandemic subside, which could adversely affect our advertising revenue growth. The demand for and pricing of our advertising services may be materially and adversely impacted by the pandemic for the foreseeable future, and we are unable to predict the duration or degree of such impact with any certainty. In addition to the impact on our advertising business, the pandemic exposes our business, operations, and workforce to a variety of other risks, including:
volatility in the size of our user base and user engagement, particularly for our messaging products, whether as a result of shelter-in-place measures or other factors;
decreased user engagement as a result of users' inability to purchase data packs or devices to access our products and services;
interruptions in the accessibility or performance of our products and services due to capacity constraints from increased usage, or product changes we implement to maintain accessibility of our services, such as reducing the quality of video to reduce bandwidth usage;
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delays in product development or releases, or reductions in manufacturing production and sales of consumer hardware, as a result of inventory shortages, supply chain or labor shortages, or diversion of our efforts and resources to projects related to COVID-19;
increased misuse of our products and services or user data by third parties, including improper advertising practices or other activity inconsistent with our terms, contracts, or policies, misinformation or other illicit or objectionable material on our platforms, election interference, or other undesirable activity; 
adverse impacts to our efforts to combat misuse of our products and services and user data as a result of limitations on our safety, security, and content review efforts while our workforce is working remotely, such as the necessity to rely more heavily on artificial intelligence to perform tasks that our workforce is unable to perform; 
our inability to recognize revenue, collect payment, or generate future revenue from marketers, including from those that have been or may be forced to close their businesses or are otherwise impacted by the economic downturn;
increased expenses resulting from our initiatives or donations related to the pandemic;
significant volatility and disruption of global financial markets, which could cause fluctuations in currency exchange rates or negatively impact our ability to access capital in the future;
negative impact on our workforce productivity, product development, and research and development due to difficulties resulting from our personnel working remotely; 
illnesses to key employees, or a significant portion of our workforce, which may result in inefficiencies, delays, and disruptions in our business; and
increased volatility and uncertainty in the financial projections we use as the basis for estimates used in our financial statements.
Any of these developments may adversely affect our business, harm our reputation, or result in legal or regulatory actions against us. The persistence of COVID-19, and the preventative measures implemented to help limit the spread of the illness, have impacted, and will continue to impact, our ability to operate our business and may materially and adversely impact our business, financial condition, and results of operations.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
We compete with companies providing connection and communication products and services to users online, as well as companies that sell advertising to businesses looking to reach consumers and/or develop tools and systems for managing and optimizing advertising campaigns. We face significant competition in every aspect of our business, including, but not limited to, companies that facilitate the ability of users to share, communicate, and discover content and information online or enable marketers to reach their existing or prospective audiences, including, for example, Google, Apple, YouTube, Tencent, Snap, Twitter, ByteDance, Microsoft, and Amazon. We compete to attract, engage, and retain people who use our products, to attract and retain businesses that use our free or paid business and advertising services, and to attract and retain developers who build compelling mobile and web applications that integrate with our products. We also compete with companies that develop and deliver consumer hardware and virtual reality products and services. As we introduce or acquire new products, as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition.
Some of our current and potential competitors may have greater resources or stronger competitive positions in certain product segments, geographic regions, or user demographics than we do. For example, some of our competitors may be domiciled in different countries and subject to political, legal, and regulatory regimes that enable them to compete more effectively than us. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market conditions. We believe that some users, particularly younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, our products and services, and we believe that some users have reduced their use of and engagement with our products and services in favor of these other products and services. In the event that users increasingly engage with other products and services, we may experience a decline in use and
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engagement in key user demographics or more broadly, in which case our business would likely be harmed.
Our competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Some competitors may gain a competitive advantage against us in areas where we operate, including: by making acquisitions; by limiting our ability to deliver, target, or measure the effectiveness of ads; by imposing fees or other charges related to our delivery of ads; by making access to our products more difficult or impossible; by making it more difficult to communicate with our users; or by integrating competing platforms, applications, or features into products they control such as mobile device operating systems, search engines, browsers, or e-commerce platforms. For example, each of Apple and Google have integrated competitive products with iOS and Android, respectively. In addition, Apple has released changes to iOS 14 that will limit our ability, and the ability of others in the digital advertising industry, to target and measure ads effectively. As a result, our competitors may, and in some cases will, acquire and engage users or generate advertising or other revenue at the expense of our own efforts, which would negatively affect our business and financial results. In addition, from time to time, we may take actions in response to competitive threats, but we cannot assure you that these actions will be successful or that they will not negatively affect our business and financial results.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors' products;
the size and composition of our user base;
the engagement of users with our products and competing products;
our ability to attract and retain businesses who use our free or paid business and advertising services;
the timing and market acceptance of products, including developments and enhancements to our or our competitors' products;
our safety and security efforts and our ability to protect user data and to provide users with control over their data;
our ability to distribute our products to new and existing users;
our ability to monetize our products;
the frequency, size, format, quality, and relative prominence of the ads displayed by us or our competitors;
customer service and support efforts;
marketing and selling efforts, including our ability to measure the effectiveness of our ads and to provide marketers with a compelling return on their investments;
our ability to establish and maintain developers' interest in building mobile and web applications that integrate with Facebook and our other products;
our ability to establish and maintain publisher interest in integrating their content with Facebook and our other products;
changes mandated by legislation, regulatory authorities, or litigation, some of which may have a disproportionate effect on us;
acquisitions or consolidation within our industry, which may result in more formidable competitors;
our ability to attract, retain, and motivate talented employees, particularly software engineers, designers, and product managers;
our ability to cost-effectively manage and grow our operations; and
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our reputation and brand strength relative to those of our competitors.
If we are not able to compete effectively, our user base and level of user engagement may decrease, we may become less attractive to developers and marketers, and our revenue and results of operations may be materially and adversely affected.
Unfavorable media coverage negatively affects our business from time to time.
We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, our privacy practices, terms of service, advertising policies, product changes, product quality, litigation or regulatory activity, government surveillance, the actions of our advertisers, the actions of our developers whose products are integrated with our products, the use of our products or services for illicit or objectionable ends, the substance or enforcement of our community standards, the actions of our users, the quality and integrity of content shared on our platform, or the actions of other companies that provide similar services to ours, has in the past, and could in the future, adversely affect our reputation. For example, we have been the subject of significant media coverage involving concerns around our handling of political speech and advertising, hate speech, and other content, and we continue to receive negative publicity related to these topics. In addition, we have been, and may in the future be, subject to negative publicity in connection with our handling of misinformation and other illicit or objectionable use of our products or services, including in connection with the COVID-19 pandemic and elections in the United States and around the world. Any such negative publicity could have an adverse effect on the size, engagement, and loyalty of our user base and marketer demand for advertising on our products, which could result in decreased revenue and adversely affect our business and financial results, and we have experienced such adverse effects to varying degrees from time to time.
Our financial results will fluctuate from quarter to quarter and are difficult to predict.
Our quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast our future results. As a result, you should not rely upon our past quarterly financial results as indicators of future performance. You should take into account the risks and uncertainties frequently encountered by companies in rapidly evolving markets. Our financial results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:
our ability to maintain and grow our user base and user engagement;
our ability to attract and retain marketers in a particular period;
our ability to recognize revenue or collect payments from marketers in a particular period, including as a result of the effects of the COVID-19 pandemic;
fluctuations in spending by our marketers due to seasonality, such as historically strong spending in the fourth quarter of each year, episodic regional or global events, including the COVID-19 pandemic, or other factors;
the frequency, prominence, size, format, and quality of ads shown to users;
the success of technologies designed to block the display of ads;
changes to third-party policies that limit our ability to deliver, target, or measure the effectiveness of advertising, including changes by mobile operating system and browser providers such as Apple and Google;
the pricing of our ads and other products;
the diversification and growth of revenue sources beyond advertising on Facebook and Instagram;
our ability to generate revenue from Payments, or the sale of our consumer hardware products or other products we may introduce in the future;
changes to existing products or services or the development and introduction of new products or services by us or our competitors;
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user behavior or product changes that may reduce traffic to features or products that we successfully monetize;
increases in marketing, sales, and other operating expenses that we will incur to grow and expand our operations and to remain competitive, including costs related to our data centers and technical infrastructure;
costs related to our privacy, safety, security, and content review efforts, including as a result of implementing changes to our practices, whether voluntarily, in connection with laws, regulations, regulatory actions, or decisions or recommendations from the independent Oversight Board, or otherwise;
costs and expenses related to the development and delivery of our consumer hardware products;
our ability to maintain gross margins and operating margins;
costs related to acquisitions, including costs associated with amortization and additional investments to develop the acquired technologies;
charges associated with impairment of any assets on our balance sheet;
our ability to obtain equipment, components, and labor for our data centers and other technical infrastructure in a timely and cost-effective manner;
system failures or outages or government blocking, which could prevent us from serving ads for any period of time;
breaches of security or privacy, and the costs associated with any such breaches and remediation;
changes in the manner in which we distribute our products or inaccessibility of our products due to third-party actions;
fees paid to third parties for content or the distribution of our products;
refunds or other concessions provided to advertisers;
share-based compensation expense, including acquisition-related expense;
adverse litigation judgments, settlements, or other litigation-related costs;
changes in the legislative or regulatory environment, including with respect to privacy and data protection, or actions by governments or regulators, including fines, orders, or consent decrees;
the overall tax rate for our business, which is affected by the mix of income we earn in the U.S. and in jurisdictions with different tax rates, the effects of share-based compensation, the effects of integrating intellectual property from acquisitions, the effects of changes in our business or structure, and the effects of discrete items such as legal and tax settlements and tax elections;
the impact of changes in tax laws or judicial or regulatory interpretations of tax laws, which are recorded in the period such laws are enacted or interpretations are issued, and may significantly affect the effective tax rate of that period;
tax obligations that may arise from resolutions of tax examinations, including the examination we are curren