Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 001-35551
____________________________________________ 
FACEBOOK, INC.
(Exact name of registrant as specified in its charter)
____________________________________________ 
Delaware
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant's telephone number, including area code)
 ____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (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  x    No  ¨ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    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 definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
Class
Number of Shares Outstanding
Class A Common Stock $0.000006 par value
2,402,542,856 shares outstanding as of April 22, 2019
Class B Common Stock $0.000006 par value
451,945,880 shares outstanding as of April 22, 2019


FACEBOOK, INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 

2

NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms "Facebook," "company," "we," "us," and "our" in this document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Facebook" may also refer to our products, regardless of the manner in which they are accessed. For references to accessing Facebook on the "web" or via a "website," such terms refer to accessing Facebook on personal computers. For references to accessing Facebook on "mobile," such term refers to accessing Facebook via a mobile application or via a mobile-optimized version of our website such as m.facebook.com, whether on a mobile phone or tablet.

3

LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, which include our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU), are calculated using internal company data based on the activity of user accounts. 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. 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 evaluate these 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) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. 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 similar IP addresses or 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. Our estimates may change as our methodologies evolve, including through the application of new data signals or technologies, which 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 2018, 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 2018, 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 may make product changes or take other actions to reduce the number of duplicate or false accounts among our users, which may also reduce our DAU and MAU estimates in a particular period.
Our data limitations may affect our understanding of certain details of our business. For example, while user-provided data indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users register with an inaccurate age. Accordingly, our understanding of usage by age group may not be complete.
In addition, 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 user metrics may also be susceptible to algorithm or other technical errors. Our estimates for revenue by user location and revenue by user device are also affected by these factors.
We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated. We intend to disclose our estimates of the number of duplicate and false accounts among our MAUs on an annual basis. In addition, our DAU and MAU estimates will differ from estimates published by third parties due to differences in methodology.
The numbers of DAUs and MAUs discussed in this Quarterly Report on Form 10-Q, as well as ARPU, do not include Instagram, WhatsApp, or Oculus users unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics included herein do not include Instagram, WhatsApp, or Oculus unless otherwise specifically stated.

4

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,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,076

 
$
10,019

Marketable securities
34,167

 
31,095

Accounts receivable, net of allowances of $216 and $229 as of March 31, 2019 and December 31, 2018, respectively
6,475

 
7,587

Prepaid expenses and other current assets
1,582

 
1,779

Total current assets
53,300

 
50,480

Property and equipment, net
27,345

 
24,683

Operating lease right-of-use assets, net
6,747

 
—

Intangible assets, net
1,150

 
1,294

Goodwill
18,333

 
18,301

Other assets
2,602

 
2,576

Total assets
$
109,477

 
$
97,334

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
604

 
$
820

Partners payable
537

 
541

Operating lease liabilities, current
645

 
—

Accrued expenses and other current liabilities
7,980

 
5,509

Deferred revenue and deposits
142

 
147

Total current liabilities
9,908

 
7,017

Operating lease liabilities, non-current
6,565

 
—

Other liabilities
6,488

 
6,190

Total liabilities
22,961

 
13,207

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,404 million and 2,385 million shares issued and outstanding, as of March 31, 2019 and December 31, 2018, respectively; 4,141 million Class B shares authorized, 452 million and 469 million shares issued and outstanding, as of March 31, 2019 and December 31, 2018, respectively.
—

 
—

Additional paid-in capital
43,533

 
42,906

Accumulated other comprehensive loss
(781
)
 
(760
)
Retained earnings
43,764

 
41,981

Total stockholders' equity
86,516

 
84,127

Total liabilities and stockholders' equity
$
109,477

 
$
97,334

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
$
15,077

 
$
11,966

Costs and expenses:
 
 
 
Cost of revenue
2,816

 
1,927

Research and development
2,860

 
2,238

Marketing and sales
2,020

 
1,595

General and administrative
4,064

 
757

Total costs and expenses
11,760

 
6,517

Income from operations
3,317

 
5,449

Interest and other income, net
165

 
161

Income before provision for income taxes
3,482

 
5,610

Provision for income taxes
1,053

 
622

Net income
$
2,429

 
$
4,988

Less: Net income attributable to participating securities
—

 
1

Net income attributable to Class A and Class B common stockholders
$
2,429

 
$
4,987

Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
Basic
$
0.85

 
$
1.72

Diluted
$
0.85

 
$
1.69

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
Basic
2,856

 
2,906

Diluted
2,869

 
2,945

Share-based compensation expense included in costs and expenses:
 
 
 
Cost of revenue
$
87

 
$
56

Research and development
723

 
718

Marketing and sales
113

 
109

General and administrative
87

 
72

Total share-based compensation expense
$
1,010

 
$
955

See Accompanying Notes to Condensed Consolidated Financial Statements.


6

FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
2,429

 
$
4,988

Other comprehensive income (loss):
 
 
 
Change in foreign currency translation adjustment, net of tax
(175
)
 
94

Change in unrealized gain/loss on available-for-sale investments and other, net of tax
154

 
(161
)
Comprehensive income
$
2,408

 
$
4,921

See Accompanying Notes to Condensed Consolidated Financial Statements.

7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited) 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
Class A and Class B Common Stock
 
Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders' Equity
 
Class A and Class B Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders' Equity
 
Shares
 
Par 
Value
 
 
Shares
 
Par 
Value
 
Balances at beginning of period
2,854

 
$
—

 
$
42,906

 
$
(760
)
 
$
41,981

 
$
84,127

 
2,906

 
$
—

 
$
40,584

 
$
(227
)
 
$
33,990

 
$
74,347

Impact of the adoption of new accounting pronouncement
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
141

 
141

Issuance of common stock
8

 
—

 
4

 
—

 
—

 
4

 
12

 
—

 
3

 
—

 
—

 
3

Shares withheld related to net share settlement
(3
)
 
—

 
(387
)
 
—

 
(125
)
 
(512
)
 
(5
)
 
—

 
(408
)
 
—

 
(424
)
 
(832
)
Share-based compensation, related to employee share-based awards
—

 
—

 
1,010

 
—

 
—

 
1,010

 
—

 
—

 
955

 
—

 
—

 
955

Share repurchases
(3
)
 
—

 
—

 
—

 
(521
)
 
(521
)
 
(11
)
 
—

 
—

 
—

 
(1,915
)
 
(1,915
)
Other comprehensive loss
—

 
—

 
—

 
(21
)
 
—

 
(21
)
 
—

 
—

 
—

 
(67
)
 
—

 
(67
)
Net income
—

 
—

 
—

 
—

 
2,429

 
2,429

 
—

 
—

 
—

 
—

 
4,988

 
4,988

Balances at end of period
2,856

 
$
—

 
$
43,533

 
$
(781
)
 
$
43,764

 
$
86,516

 
2,902

 
$
—

 
$
41,134

 
$
(294
)
 
$
36,780

 
$
77,620



See Accompanying Notes to Condensed Consolidated Financial Statements.


8

FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
2,429

 
$
4,988

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
   Depreciation and amortization
1,355

 
949

   Share-based compensation
1,010

 
955

   Deferred income taxes
183

 
(47
)
   Other
6

 
8

Changes in assets and liabilities:
 
 
 
   Accounts receivable
1,070

 
788

   Prepaid expenses and other current assets
84

 
(365
)
   Other assets
41

 
22

   Operating lease right-of-use assets, net
(1,190
)
 
—

   Accounts payable
(96
)
 
1

   Partners payable
(1
)
 
2

   Accrued expenses and other current liabilities
3,154

 
707

   Deferred revenue and deposits
(4
)
 
(5
)
   Operating lease liabilities, non-current
1,083

 
—

   Other liabilities
184

 
(143
)
Net cash provided by operating activities
9,308

 
7,860

Cash flows from investing activities
 
 
 
Purchases of property and equipment, net
(3,837
)
 
(2,812
)
Purchases of marketable securities
(6,603
)
 
(4,022
)
Sales of marketable securities
1,512

 
4,330

Maturities of marketable securities
2,210

 
1,267

Other investing activities, net
(50
)
 
(50
)
Net cash used in investing activities
(6,768
)
 
(1,287
)
Cash flows from financing activities
 
 
 
Taxes paid related to net share settlement of equity awards
(512
)
 
(832
)
Repurchases of Class A common stock
(613
)
 
(1,774
)
Principal payments on finance leases
(125
)
 
—

Net change in overdraft in cash pooling entities
(177
)
 
—

Other financing activities, net
4

 
3

Net cash used in financing activities
(1,423
)
 
(2,603
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(44
)
 
36

Net increase in cash, cash equivalents, and restricted cash
1,073

 
4,006

Cash, cash equivalents, and restricted cash at beginning of the period
10,124

 
8,204

Cash, cash equivalents, and restricted cash at end of the period
$
11,197

 
$
12,210

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
11,076

 
$
12,082

Restricted cash, included in prepaid expenses and other current assets
10

 
14

Restricted cash, included in other assets
111

 
114

Total cash, cash equivalents, and restricted cash
$
11,197

 
$
12,210

See Accompanying Notes to Condensed Consolidated Financial Statements.

9

FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2

 
$
—

Income taxes, net
$
682

 
$
736

Non-cash investing activities:
 
 
 
Net change in prepaids and liabilities related to property and equipment
$
(314
)
 
$
429

Accrued property and equipment
$
1,617

 
$
1,291

See Accompanying Notes to Condensed Consolidated Financial Statements.

10

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, 2018.
The condensed consolidated balance sheet as of December 31, 2018 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. and its wholly owned subsidiaries. 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, 2019.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to income taxes, loss contingencies, fair value of acquired intangible assets and goodwill, collectability of accounts receivable, fair value of financial instruments, leases, useful lives of intangible assets and property and equipment, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
Recently Adopted Accounting Pronouncements

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. For information regarding the impact of Topic 842 adoption, see Significant Accounting Policies - Leases and Note 7— Leases.

Significant Accounting Policies - Leases

On January 1, 2019, we adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for any leases that existed prior to January 1, 2019. We also elected to combine our lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

11


Upon adoption, we recognized total ROU assets of $6.63 billion, with corresponding liabilities of $6.35 billion on the condensed consolidated balance sheets. This included $761 million of pre-existing finance lease ROU assets previously reported in the network equipment within property and equipment, net. The ROU assets include adjustments for prepayments and accrued lease payments. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements of income and statements of cash flows.

Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current on our condensed consolidated balance sheets. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities, and other liabilities on our condensed consolidated balance sheets.

12

Note 2.
Revenue
Revenue disaggregated by revenue source for the three months ended March 31, 2019 and 2018, consists of the following (in millions):
 
Three Months Ended March 31,
 
2019
 
2018
Advertising
$
14,912

 
$
11,795

Payments and other fees
165

 
171

    Total revenue
$
15,077

 
$
11,966


Revenue disaggregated by geography, based on the billing address of our customer, consists of the following (in millions):
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
US & Canada(1)
$
6,777

 
$
5,442

Europe(2)
3,624

 
3,027

Asia-Pacific
3,337

 
2,475

Rest of World(2)
1,339

 
1,022

Total revenue
$
15,077

 
$
11,966


(1) United States revenue was $6.36 billion and $5.09 billion for the three months ended March 31, 2019 and 2018, respectively.  
(2) Europe includes Russia and Turkey, and Rest of World includes Africa, Latin America, and the Middle East. 
Deferred revenue and deposits consists of the following (in millions):
 
March 31, 2019
 
December 31, 2018
Deferred revenue
$
111

 
$
117

Deposits
31

 
30

    Total deferred revenue and deposits
$
142

 
$
147




13

Note 3.
Earnings per Share
We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. We consider restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares.
Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. Basic EPS is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase.
For the calculation of diluted EPS, net income attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. In 2018, the calculation of diluted EPS also included the effect of inducement awards under separate non-plan restricted stock unit (RSU) award agreements.
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 attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.
RSUs with anti-dilutive effect were excluded from the EPS calculation and they were not material for the three months ended March 31, 2019 and 2018, respectively.
Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.

14

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,
 
 
2019
 
2018
 
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
2,038

 
$
391

 
$
4,123

 
$
865

Less: Net income attributable to participating securities
 
—

 
—

 
1

 
—

Net income attributable to common stockholders
 
$
2,038

 
$
391

 
$
4,122

 
$
865

Denominator
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
2,396

 
460

 
2,402

 
504

Basic EPS
 
$
0.85

 
$
0.85

 
$
1.72

 
$
1.72

Diluted EPS:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
2,038

 
$
391

 
$
4,122

 
$
865

Reallocation of net income attributable to participating securities
 
—

 
—

 
1

 
—

Reallocation of net income as a result of conversion of Class B to Class A common stock
 
391

 
—

 
865

 
—

Reallocation of net income to Class B common stock
 
—

 
—

 
—

 
(5
)
Net income attributable to common stockholders for diluted EPS
 
$
2,429

 
$
391

 
$
4,988

 
$
860

Denominator
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
 
2,396

 
460

 
2,402

 
504

Conversion of Class B to Class A common stock
 
460

 
—

 
504

 
—

Weighted average effect of dilutive securities:
 

 

 
 
 
 
Employee stock options
 
1

 
1

 
3

 
3

RSUs
 
12

 
1

 
36

 
1

Number of shares used for diluted EPS computation
 
2,869

 
462

 
2,945

 
508

Diluted EPS
 
$
0.85

 
$
0.85

 
$
1.69

 
$
1.69


15

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, 2019
 
December 31, 2018
Cash and cash equivalents:
 
 
 
Cash
$
3,459

 
$
2,713

Money market funds
6,969

 
6,792

U.S. government securities
239

 
90

U.S. government agency securities
54

 
54

Certificate of deposits and time deposits
355

 
369

Corporate debt securities
—

 
1

Total cash and cash equivalents
11,076

 
10,019

Marketable securities:
 
 
 
U.S. government securities
16,794

 
13,836

U.S. government agency securities
8,039

 
8,333

Corporate debt securities
9,334

 
8,926

Total marketable securities
34,167

 
31,095

Total cash and cash equivalents, and marketable securities
$
45,243

 
$
41,114

The gross unrealized losses on our marketable securities were $208 million and $357 million as of March 31, 2019 and December 31, 2018, respectively. The gross unrealized gains for both periods were not significant. In addition, gross unrealized losses that had been in a continuous loss position for 12 months or longer were $204 million and $332 million as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, we considered the decreases in market value on our marketable securities to be temporary in nature and did not consider any of our investments to be other-than-temporarily impaired.
The following table classifies our marketable securities by contractual maturities (in millions):
 
March 31, 2019
Due in one year
$
12,476

Due after one year to five years
21,691

Total
$
34,167


16

Note 5.
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
Description
 
March 31, 2019
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
6,969

 
$
6,969

 
$
—

 
$
—

U.S. government securities
 
239

 
239

 
—

 
—

U.S. government agency securities
 
54

 
54

 
—

 
—

Certificate of deposits and time deposits
 
355

 
—

 
355

 
—

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
16,794

 
16,794

 
—

 
—

U.S. government agency securities
 
8,039

 
8,039

 
—

 
—

Corporate debt securities
 
9,334

 
—

 
9,334

 
—

Total cash equivalents and marketable securities
 
$
41,784

 
$
32,095

 
$
9,689

 
$
—

 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
 
December 31, 2018
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
6,792

 
$
6,792

 
$
—

 
$
—

U.S. government securities
 
90

 
90

 
—

 
—

U.S. government agency securities
 
54

 
54

 
—

 
—

Certificate of deposits and time deposits
 
369

 
—

 
369

 
—

Corporate debt securities
 
1

 
—

 
1

 
—

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
13,836

 
13,836

 
—

 
—

U.S. government agency securities
 
8,333

 
8,333

 
—

 
—

Corporate debt securities
 
8,926

 
—

 
8,926

 
—

Total cash equivalents and marketable securities
 
$
38,401

 
$
29,105

 
$
9,296

 
$
—

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.


17

Note 6.
Property and Equipment
Property and equipment consists of the following (in millions): 
 
March 31, 2019
 
December 31, 2018
Land
$
949

 
$
899

Buildings
8,090

 
7,401

Leasehold improvements
2,019

 
1,841

Network equipment
12,964

 
13,017

Computer software, office equipment and other
1,326

 
1,187

Finance lease right-of-use assets
1,145

 
—

Construction in progress
8,509

 
7,228

    Total
35,002

 
31,573

Less: Accumulated depreciation
(7,657
)
 
(6,890
)
Property and equipment, net
$
27,345

 
$
24,683

Construction in progress includes costs mostly related to construction of data centers, network equipment infrastructure to support our data centers around the world, and office buildings. No interest was capitalized for all periods presented.

Note 7.    Leases

We have entered into various non-cancelable operating lease agreements for certain of our offices, data center, land, colocations and certain network equipment. Our leases have original lease periods expiring between 2019 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 at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease costs, lease term and discount rate are as follows (in millions):
 
Three Months Ended
 
March 31, 2019
Finance lease cost

     Amortization of right-of-use assets
$
42

     Interest
2

Operating lease cost
246

Variable lease cost and other, net
49

       Total lease cost
$
339

 
 
Weighted Average Remaining Lease Term
 
     Operating leases
13.1 years

     Finance leases
15.1 years

 
 
Weighted Average Discount Rate
 
     Operating leases
3.6
%
     Finance leases
3.2
%

18

The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2019 (in millions):

 
Operating Leases
 
Finance Leases
The remainder of 2019
$
611

 
$
53

2020
944

 
35

2021
868

 
26

2022
811

 
24

2023
776

 
24

Thereafter
5,602

 
266

Total undiscounted cash flows
9,612

 
428

Less imputed interest
(2,402
)
 
(88
)
Present value of lease liabilities
$
7,210

 
$
340


As of March 31, 2019, we have additional operating and finance leases for facilities and network equipment that have not yet commenced with lease obligations of $5.77 billion and $429 million, respectively. These operating and finance leases will commence between 2019 and 2022 with lease terms of greater than one year to 25 years. This table does not include lease payments that were not fixed at commencement or modification.

Supplemental cash flow information related to leases are as follows (in millions):

 
Three Months Ended
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
     Operating cash flows from operating leases
$
188

     Operating cash flows from finance leases
$
2

     Financing cash flows from finance leases
$
125

Lease liabilities arising from obtaining right-of-use assets:
 
     Operating leases
$
1,383

     Finance leases
$
35

   

19

Note 8.
Goodwill and Intangible Assets

During the three months ended March 31, 2019, we completed business acquisitions that were not material to our condensed consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma historical results of operations related to these business acquisitions during the three months ended March 31, 2019 have not been presented. We have included the financial results of these business acquisitions in our condensed consolidated financial statements from their respective dates of acquisition.
The changes in the carrying amount of goodwill for the three months ended March 31, 2019 are as follows (in millions): 
Balance as of December 31, 2018
$
18,301

Goodwill acquired
30

Effect of currency translation adjustment
2

Balance as of March 31, 2019
$
18,333

Intangible assets consist of the following (in millions):
 
 
 
March 31, 2019
 
December 31, 2018
 
Weighted-Average Remaining Useful Lives (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Acquired users
2.5
 
$
2,056

 
$
(1,332
)
 
$
724

 
$
2,056

 
$
(1,260
)
 
$
796

Acquired technology
1.3
 
1,014

 
(909
)
 
105

 
1,002

 
(871
)
 
131

Acquired patents
5.0
 
805

 
(580
)
 
225

 
805

 
(565
)
 
240

Trade names
1.3
 
629

 
(545
)
 
84

 
629

 
(517
)
 
112

Other
2.6
 
162

 
(150
)
 
12

 
162

 
(147
)
 
15

    Total intangible assets
2.8
 
$
4,666

 
$
(3,516
)
 
$
1,150

 
$
4,654

 
$
(3,360
)
 
$
1,294

Amortization expense of intangible assets was $156 million and $169 million for the three months ended March 31, 2019 and 2018, respectively.
As of March 31, 2019, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2019
$
400

2020
382

2021
277

2022
33

2023
26

Thereafter
32

Total
$
1,150


Note 9.
Long-term Debt
In May 2016, we entered into a $2.0 billion senior unsecured revolving credit facility, and any amounts outstanding under this facility will be due and payable on May 20, 2021. As of March 31, 2019, no amounts had been drawn down, and we were in compliance with the covenants under this facility.


20

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 $4.84 billion of non-cancelable contractual commitments as of March 31, 2019, the majority of which is related to network infrastructure and our data center operations. These commitments are primarily due within five years.
Legal Matters
Beginning on March 20, 2018, multiple putative class actions and derivative actions were filed in state and federal courts in the United States and elsewhere against us and certain of our directors and officers alleging violations of securities laws, breach of fiduciary duties, and other causes of action in connection with our platform and user data practices as well as the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies, and seeking unspecified damages and injunctive relief. Beginning on July 27, 2018, two putative class actions were filed in federal court in the United States against us and certain of our directors and officers alleging violations of securities laws in connection with the disclosure of our earnings results for the second quarter of 2018 and seeking unspecified damages. These two actions subsequently were transferred and consolidated in the U.S. District Court for the Northern District of California with the putative securities class action described above relating to our platform and user data practices. 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), Securities and Exchange Commission, state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions.
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. We believe these 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 and other government inquiries.
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.
The aforementioned inquiry of the FTC has progressed to a point that, in the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3.0 billion which is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet. We estimate that the range of loss in this matter is $3.0 billion to $5.0 billion. The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.
In addition to the FTC matter, although we believe that it is reasonably possible that we may incur a substantial loss in some of the other cases, actions, or inquiries described above, we are currently unable to estimate the amount of such losses or a range of possible losses. 
We are also party to various other legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these matters, we evaluate the developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. We believe that the amount or any estimable range of reasonably possible or probable loss will not, either individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.

21

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

Note 11.
Stockholders' Equity
Share Repurchase Program
Our board of directors has authorized a share repurchase program that commenced in 2017 and does not have an expiration date. In December 2018, our board of directors authorized an additional $9.0 billion of repurchases under this program. During the three months ended March 31, 2019, we repurchased and subsequently retired approximately 3.1 million shares of our Class A common stock for an aggregate amount of approximately $521 million. As of March 31, 2019, approximately $8.5 billion remained available and authorized for repurchases.
The timing and actual number of shares repurchased under the share 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 two share-based employee compensation plans: the 2012 Equity Incentive Plan, which was amended in each of June 2016 and February 2018 (Amended 2012 Plan), and the 2005 Stock Plan (collectively, Stock Plans). Our Amended 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares, and stock bonuses to qualified employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. Shares that are withheld in connection with the net settlement of RSUs or forfeited under our Stock Plans are added to the reserves of the Amended 2012 Plan. We account for forfeitures as they occur.
Effective January 1, 2019, there were 143 million shares of our Class A common stock reserved for future issuance under our Amended 2012 Plan. The number of shares reserved for issuance under our Amended 2012 Plan increases automatically on January 1 of each of the calendar years during the term of the Amended 2012 Plan, which will continue through April 2026 unless terminated earlier by our board of directors or a committee thereof, by a number of shares of Class A common stock equal to the lesser of (i) 2.5% of the total issued and outstanding shares of our Class A common stock as of the immediately preceding December 31st or (ii) a number of shares determined by our board of directors.
The following table summarizes the activities for our unvested RSUs for the three months ended March 31, 2019:
 
Unvested RSUs
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2018
67,298

 
$
144.77

Granted
36,626

 
$
164.68

Vested
(7,985
)
 
$
128.18

Forfeited
(1,973
)
 
$
142.67

Unvested at March 31, 2019
93,966

 
$
153.98

The fair value as of the respective vesting dates of RSUs that vested during the three months ended March 31, 2019 and 2018 was $1.31 billion and $1.95 billion, respectively.
As of March 31, 2019, there was $13.70 billion of unrecognized share-based compensation expense related to RSUs. 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.


22

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 effects of acquisitions, and the integration of those acquisitions.
Our 2019 effective tax rate differs from the U.S. statutory rate of 21% primarily due to a portion of our income before provision for income taxes being earned in jurisdictions subject to tax rates lower than 21%, the $3.0 billion legal accrual recorded in the first quarter of 2019 related to the ongoing FTC matter which is not expected to be tax-deductible, and the recognition of excess tax benefits from share-based compensation.
Our gross unrecognized tax benefits were $4.89 billion and $4.68 billion on March 31, 2019 and December 31, 2018, respectively. If the gross unrecognized tax benefits as of March 31, 2019 were realized in a subsequent period, this would result in a tax benefit of $2.94 billion within our provision of income taxes at such time. The amount of interest and penalties accrued as of March 31, 2019 and December 31, 2018 was $391 million and $340 million, respectively. We expect to continue to accrue unrecognized tax benefits for certain recurring tax positions.

On July 27, 2015, the United States Tax Court (Tax Court) issued an opinion in Altera Corp. v. Commissioner (Tax Court Opinion), which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Opinion was appealed by the Commissioner to the Ninth Circuit Court of Appeals (Ninth Circuit). On July 24, 2018, the Ninth Circuit issued an opinion (Ninth Circuit Opinion) that reversed the Tax Court Opinion. The Ninth Circuit Opinion was subsequently withdrawn and the case is in the process of being reheard. Since the Ninth Circuit Opinion was withdrawn, we continue to treat our share-based compensation expense in accordance with the Tax Court Opinion. We also continue to monitor developments in this case and any impact the final opinion could have on our consolidated financial statements.
 
We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2014 through 2016 tax years and by the Ireland tax authorities for our 2012 through 2015 tax years. Our 2017 and subsequent tax years remain open to examination by the IRS. Our 2016 and subsequent tax years remain open to examination in Ireland.
In July 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately $5.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted. We do not agree with the position of the IRS and have filed a petition in the Tax Court challenging the Notice. 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. return, 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 that is lower than the potential additional federal tax liability from the positions taken by the IRS in the two Notices. 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, 2019, 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.


23

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, 2019
 
December 31, 2018
Long-lived assets:
 
 
 
United States
$
26,474

 
$
18,950

Rest of the world(1)
7,618

 
5,733

Total long-lived assets
$
34,092

 
$
24,683

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


24

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, 2018, 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 user 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, 2019 and 2018—Revenue—Foreign 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, 2019 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 user metrics and financial results for the first quarter of 2019 are as follows:
User growth:
•
Daily active users (DAUs) were 1.56 billion on average for March 2019, an increase of 8% year-over-year.
•
Monthly active users (MAUs) were 2.38 billion as of March 31, 2019, an increase of 8% year-over-year.
Financial results:
•
Revenue was $15.08 billion, up 26% year-over-year, and ad revenue was $14.91 billion, up 26% year-over-year.
•
Total costs and expenses were $11.76 billion.
•
Income from operations was $3.32 billion.
•
Net income was $2.43 billion with diluted earnings per share of $0.85.
•
Capital expenditures, including principal payments on finance leases, were $3.96 billion.
•
Effective tax rate was 30%.
•
Cash and cash equivalents and marketable securities were $45.24 billion as of March 31, 2019.
•
Headcount was 37,773 as of March 31, 2019, an increase of 36% year-over-year.
In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3.0 billion in connection with the inquiry of the U.S. Federal Trade Commission (FTC) into our platform and user data practices, which accrual is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet. We estimate that the range of loss in this matter is $3.0 billion to $5.0 billion. The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.
In the first quarter of 2019, we also 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.
We continued to invest, based on our roadmap, in: (i) our most developed ecosystems, Facebook and Instagram, (ii) driving growth and building ecosystems around our products that already have significant user bases, such as Messenger and WhatsApp, as well as continuing to grow features like Stories, and (iii) long-term technology initiatives, such as connectivity, artificial intelligence, and augmented and virtual reality, that we believe will further our mission to give people the power to build community and bring the world closer together. We intend to continue to invest based on this roadmap and we anticipate that additional investments in the following areas will continue to drive significant year-over-year expense growth in 2019: (i) expanding our data center capacity, network infrastructure, and office facilities as well as scaling our headcount to support our growth, and (ii) investments in safety and security, marketing, video content, and our long-term technology initiatives. Expense growth exceeded revenue growth in the first quarter of 2019, which we anticipate will continue in the remainder of 2019.

25

Trends in Our User Metrics
The numbers for our key metrics, our DAUs, MAUs, and average revenue per user (ARPU), do not include Instagram, WhatsApp, or Oculus users unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics do not include Instagram, WhatsApp, or Oculus unless otherwise specifically stated.
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 Facebook user who logged in and 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.
daugraphsq119.jpg
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes all users in Africa, Latin America, and the Middle East.
Worldwide DAUs increased 8% to 1.56 billion on average during March 2019 from 1.45 billion during March 2018. Users in India, Indonesia, and the Philippines represented key sources of growth in DAUs during March 2019, relative to the same period in 2018.

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•
Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and 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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As of March 31, 2019, we had 2.38 billion MAUs, an increase of 8% from March 31, 2018. Users in India, Indonesia, and the Philippines represented key sources of growth in the first quarter of 2019, relative to the same period in 2018.

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Trends in Our Monetization by User Geography
We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered, virtual and digital goods are purchased, or consumer hardware devices are shipped. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. While ARPU includes all sources of revenue, the number of MAUs used in this calculation only includes users of Facebook and Messenger as described in the definition of MAU above. 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 2019 in the United States & Canada region was more than ten times higher than in the Asia-Pacific region.
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Note: Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our 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 location of the customer.

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During the first quarter of 2019, worldwide ARPU was $6.42, an increase of 16% from the first quarter of 2018. Over this period, ARPU increased by 28% in United States & Canada, 18% in Europe, and 13% in both Asia-Pacific and Rest of World. In addition, user growth was more rapid in geographies with relatively lower ARPU, such as Asia-Pacific and Rest of World. We expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.

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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.
Payments and other fees. Payments revenue is comprised of the net fee we receive from developers using our Payments infrastructure. Our other fees revenue consists primarily of revenue from the delivery of consumer hardware devices, as well as revenue from various other sources.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including traffic acquisition and content acquisition costs, credit card and other transaction fees related to processing customer transactions, and cost of consumer hardware device inventory sold.
Research and development. Research and development expenses consist primarily of share-based compensation, salaries, and benefits, and facilities-related costs for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense all of our research and development costs as they are incurred.
Marketing and sales. Our marketing and sales expenses consist of salaries, share-based compensation, and benefits 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.
General and administrative. General and administrative expenses consist of legal-related costs; salaries, 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 tables set forth our condensed consolidated statements of income data:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in millions)
Revenue
$
15,077

 
$
11,966

Costs and expenses:
 
 
 
Cost of revenue
2,816

 
1,927

Research and development
2,860

 
2,238

Marketing and sales
2,020

 
1,595

General and administrative
4,064

 
757

Total costs and expenses
11,760

 
6,517

Income from operations
3,317

 
5,449

Interest and other income, net
165

 
161

Income before provision for income taxes
3,482

 
5,610

Provision for income taxes
1,053

 
622

Net income
$
2,429

 
$
4,988

Share-based compensation expense included in costs and expenses:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in millions)
Cost of revenue
$
87

 
$
56

Research and development
723

 
718

Marketing and sales
113

 
109

General and administrative
87

 
72

Total share-based compensation expense
$
1,010

 
$
955


The following tables set forth our condensed consolidated statements of income data (as a percentage of revenue): 
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
100
%
 
100
%
Costs and expenses:
 
 
 
Cost of revenue
19

 
16

Research and development
19

 
19

Marketing and sales
13

 
13

General and administrative
27

 
6

Total costs and expenses
78

 
54

Income from operations
22

 
46

Interest and other income, net
1

 
1

Income before provision for income taxes
23

 
47

Provision for income taxes
7

 
5

Net income
16
%
 
42
%


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Share-based compensation expense included in costs and expenses (as a percentage of revenue): 
 
Three Months Ended March 31,
 
2019
 
2018
Cost of revenue
1
%
 
—
%
Research and development
5

 
6

Marketing and sales
1

 
1

General and administrative
1

 
1

Total share-based compensation expense
7
%
 
8
%

Three Months Ended March 31, 2019 and 2018
Revenue 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Advertising
$
14,912

 
$
11,795

 
26
 %
Payments and other fees
165

 
171

 
(4
)%
Total revenue
$
15,077

 
$
11,966

 
26
 %
Revenue in the first quarter of 2019 increased $3.11 billion, or 26%, compared to the same period in 2018. The increase was due to an increase in advertising revenue.
The most important factor driving advertising revenue growth was an increase in revenue from ads on mobile devices. For the first quarter of 2019, we estimate that mobile advertising revenue represented approximately 93% of total advertising revenue, as compared with approximately 91% in the same period in 2018. The increase in advertising revenue for the first quarter of 2019 was due to an increase in the number of ads delivered, partially offset by a slight decrease in the average price per ad.
During the first quarter of 2019, the number of ads delivered increased by 32%, as compared with approximately 8% in the same period in 2018. The increase in the ads delivered was driven by an increase in users and their engagement, and an increase in the number and frequency of ads displayed across our products. The average price per ad decreased by 4% in the first quarter of 2019, as compared with an increase of approximately 39% in the same period in 2018. The decrease in average price per ad reflects an increasing proportion of the number of ads delivered as Stories ads and in geographies that monetize at lower rates. We anticipate that future advertising revenue growth will be determined by a combination of price and the number of ads delivered.
Foreign Exchange Impact on Revenue
The general strengthening of the U.S. dollar relative to certain foreign currencies in the first quarter of 2019 compared to the same period in 2018 had an unfavorable impact on revenue. If we had translated revenue for the first quarter ended March 31, 2019 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 $15.58 billion and $15.42 billion, respectively. Using these constant rates, both revenue and advertising revenue would each have been $503 million higher than actual revenue and advertising revenue, respectively, for the first quarter of 2019.
Cost of revenue
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Cost of revenue
$
2,816

 
$
1,927

 
46
%
Percentage of revenue
19
%
 
16
%
 
 
Cost of revenue in the first quarter of 2019 increased $889 million, or 46%, compared to the same period in 2018. The increase was mostly due to an increase in operational expenses related to our data centers and technical infrastructure and higher costs associated with partnership agreements, including content and traffic acquisition costs.

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Research and development 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Research and development
$
2,860

 
$
2,238

 
28
%
Percentage of revenue
19
%
 
19
%
 
 
Research and development expenses in the first quarter of 2019 increased $622 million, or 28%, compared to the same period in 2018. The increase was primarily due to increases in payroll and benefits expense and facilities-related costs as a result of a 36% growth in employee headcount from March 31, 2018 to March 31, 2019 in engineering and other technical functions.
Marketing and sales
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Marketing and sales
$
2,020

 
$
1,595

 
27
%
Percentage of revenue
13
%
 
13
%
 
 
Marketing and sales expenses in the first quarter of 2019 increased $425 million, or 27%, compared to the same period in 2018. The increase was mostly driven by community operations and payroll and benefits expenses. Our payroll and benefits expenses increased as a result of a 32% increase in employee headcount from March 31, 2018 to March 31, 2019 in our marketing and sales functions.
General and administrative 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Legal accrual related to FTC inquiry
$
3,000

 
$
—

 
NM

Other general and administrative
1,064

 
757

 
41
%
General and administrative
$
4,064

 
$
757

 
NM

Percentage of revenue
27
%
 
6
%
 
 
General and administrative expenses in the first quarter of 2019 increased $3.31 billion compared to the same period in 2018. The increase was mostly due to a $3.0 billion legal accrual related to the ongoing FTC matter recorded in the first quarter of 2019. In addition, payroll and benefits expenses increased as a result of a 33% increase in employee headcount from March 31, 2018 to March 31, 2019 in general and administrative functions.
Interest and other income (expense), net
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Interest income, net
$
198

 
$
145

 
37
%
Other income (expense), net
(33
)
 
16

 
NM

Interest and other income, net
$
165

 
$
161

 
2
%
Interest and other income, net in the first quarter of 2019 increased $4 million compared to the same period in 2018. The increase was due to an increase in interest income driven by higher interest rates, partially offset by a foreign exchange loss in 2019 as compared to a foreign exchange gain in 2018 as a result of the periodic re-measurement of our foreign currency balances.

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Provision for income taxes
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% change
 
(in millions, except for percentages)
Provision for income taxes
$
1,053

 
$
622

 
69
%
Effective tax rate
30
%
 
11
%
 
 
Our provision for income taxes in the first quarter of 2019 increased $431 million, or 69%, compared to the same period in 2018, a majority of which is due to a decrease in excess tax benefits from share-based compensation and an increase in income prior to the effect of the $3.0 billion legal accrual related to the ongoing FTC matter that is not expected to be tax-deductible.
Our effective tax rates in the first quarter of 2019 increased compared to same period in 2018, mostly due to the legal accrual related to the ongoing FTC matter that is not expected to be tax-deductible and a decrease in excess tax benefits from share-based compensation.
Effective Tax Rate Items. Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes earned in the United States and in jurisdictions with a tax rate lower than the U.S. statutory rate, as well as a number of other factors, including excess tax benefits 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 impact of changes in tax law.
The proportion of our income before provision for income taxes earned in jurisdictions with a tax rate lower than the U.S. statutory rate will depend upon the proportion of revenue and costs associated with the respective jurisdictions.
The accounting for share-based compensation will 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 depends upon the stock price at the time of employee award vesting. If our stock price remains constant to the April 22, 2019 price, we expect our effective tax rate for the remaining quarters of the year to be in the mid-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.
On July 27, 2015, the United States Tax Court (Tax Court) issued an opinion in Altera Corp. v. Commissioner (Tax Court Opinion), which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Opinion was appealed by the Commissioner to the Ninth Circuit Court of Appeals (Ninth Circuit). On July 24, 2018, the Ninth Circuit issued an opinion (Ninth Circuit Opinion) that reversed the Tax Court Opinion. The Ninth Circuit Opinion was subsequently withdrawn and the case is in the process of being reheard. Since the Ninth Circuit Opinion was withdrawn, we continue to treat our share-based compensation expense in accordance with the Tax Court Opinion. We also continue to monitor developments in this case and any impact the final opinion could have on our consolidated financial statements. Had the Ninth Circuit not withdrawn its opinion, our effective tax rate for 2019 would have been higher.

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Unrecognized Tax Benefits. As of March 31, 2019, we had net unrecognized tax benefits of $3.23 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, the current status of tax audits in various jurisdictions, and excluding the effects of the Altera Corp. v. Commissioner case that we are monitoring, we do not anticipate a significant impact 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 states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately $5.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted. We do not agree with the position of the IRS and have filed a petition in the Tax Court challenging the Notice. 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. return, 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 that is lower than the potential additional federal tax liability from the positions taken by the IRS in the two Notices. 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, 2019, we have not resolved these matters, and proceedings continue in 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 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 $45.24 billion as of March 31, 2019, an increase of $4.13 billion from December 31, 2018, mostly due to $9.31 billion of cash generated from operations, offset by $3.96 billion for capital expenditures, including principal payments on finance leases, $613 million for repurchases of our Class A common stock, $512 million of taxes paid related to net share settlement of equity awards, and a $177 million decrease in overdraft in cash pooling entities.
Cash paid for income taxes was $682 million for the first quarter of 2019. As of March 31, 2019, our federal net operating loss carryforward was $8.07 billion, and we anticipate that none of this amount will be utilized to offset our federal taxable income in 2019. As of March 31, 2019, we had $292 million of federal tax credit carryforward, of which none will be available to offset our federal tax liabilities in 2019. In addition, we are monitoring the Altera Corp. v. Commissioner case as it applies to our facts and circumstances as it could increase our cash paid for income taxes.
In May 2016, we entered into a $2.0 billion senior unsecured revolving credit facility, and any amounts outstanding under the facility will be due and payable on May 20, 2021. As of March 31, 2019, no amounts had been drawn down and we were in compliance with the covenants under this credit facility.
Our board of directors has authorized a share repurchase program that commenced in 2017 and does not have an expiration date. In December 2018, our board of directors authorized an additional $9.0 billion of repurchases under this program. During the three months ended March 31, 2019, we repurchased and subsequently retired approximately 3.1 million shares of our Class A common stock for an aggregate amount of $521 million. As of March 31, 2019, approximately $8.5 billion remained available and authorized for repurchases.
In the first quarter of 2019, we paid $512 million of taxes related to the net share settlement of equity awards.
As of March 31, 2019, $13.95 billion of the $45.24 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, credit facility, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.
Cash Provided by Operating Activities
Cash flow from operating activities during the first quarter of 2019 primarily consisted of income prior to the effect of the $3.0 billion legal accrual related to the ongoing FTC matter, adjusted for certain non-cash items, such as total depreciation and amortization of $1.36 billion and share-based compensation expense of $1.01 billion. The majority of the increase in cash flow from operating activities during the first quarter of 2019, compared to the same period in 2018, was due to an increase in income prior to the effect of the $3.0 billion legal accrual related to the ongoing FTC matter, adjusted for certain non-cash items, such as depreciation and amortization and deferred income tax.
Cash Used in Investing Activities
Cash used in investing activities for the first quarter of 2019 mostly resulted from $3.84 billion of net purchases of property and equipment as we continued to invest in data centers, servers, office buildings, and network infrastructure, and $2.88 billion of net purchases of marketable securities. The increase in cash used in investing activities during the first quarter of 2019, compared to the same period in 2018, was mostly due to increases in the net purchases of marketable securities and property and equipment.
We anticipate making capital expenditures in 2019 of approximately $17 billion to $19 billion.
Cash Used in Financing Activities
Cash used in financing activities during the first quarter of 2019 mostly consisted of $613 million for repurchases of our Class A common stock, $512 million of taxes paid related to net share settlement of equity awards, and a $177 million decrease in overdraft in cash pooling entities. The decrease in cash used in financing activities during the first quarter of 2019, compared to the same period in 2018, was mostly due to a decrease in repurchases of our Class A common stock.

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Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2019.
Contractual Obligations
Our principal commitments consist mostly of obligations under operating leases, which include among others, certain of our offices, data centers, land, and colocation leases, as well as contractual commitments related to network infrastructure and data center operations. The following table summarizes our commitments to settle contractual obligations in cash as of March 31, 2019 (in millions):
 
 
 
Payment Due by Period 
 
Total
 
The remainder of 2019
 
2020-2021
 
2022-2023
 
Thereafter
Operating lease obligations, including imputed interest(1)
$
15,402

 
$
623

 
$
2,228

 
$
2,238

 
$
10,313

Finance lease obligations, including imputed interest(1)
862

 
199

 
151

 
75

 
437

Transition tax payable
1,587

 
—

 
—

 
324

 
1,263

Other contractual commitments(2)
4,835

 
2,609

 
1,095

 
179

 
952

Total contractual obligations
$
22,686

 
$
3,431

 
$
3,474

 
$
2,816

 
$
12,965

(1)
Includes variable lease payments that were fixed subsequent to lease commencement or modification.
(2)
Other contractual commitments primarily relate to network infrastructure and our data center operations.
As part of the normal course of the business, we may enter into multi-year agreements to purchase certain network components that do not specify a fixed or minimum price commitment or 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 $5.06 billion. The ultimate spend under these agreements may vary and will be based on prevailing market prices or actual volume purchased. 
In addition, our other liabilities also include $3.23 billion related to net uncertain tax positions as of March 31, 2019. 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 provision for 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 that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements. 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.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with 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. 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 experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

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An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that the assumptions and estimates associated with income taxes, loss contingencies, and business combinations and valuation of goodwill and other acquired intangible assets 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, 2018.

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. See Note 1 — Summary of Significant Accounting Policies and Note 7 — Leases in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional information regarding the adoption.

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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, 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. In general, we are a net receiver of currencies other than the U.S. dollar. 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 certain current asset and current 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 and gains recognized in the three months ended March 31, 2019 and 2018 were not material.
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 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 $484 million and $468 million in the market value of our available-for-sale debt securities as of March 31, 2019 and December 31, 2018, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.

39

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, 2019, 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. 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, Securities and Exchange Commission, state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions. 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.
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. We believe these 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 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.
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.
Risks Related to Our Business and Industry
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 it is possible that the size of our active user base may fluctuate or decline in one or more markets, particularly in markets where we have achieved higher penetration rates. For example, in the fourth quarter of 2017, we experienced a slight decline on a quarter-over-quarter basis in the number of daily active users on Facebook in the United States & Canada region. 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 could potentially negatively affect user retention, growth, and engagement, including if:
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users increasingly engage with other competitive products or services;
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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;
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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;
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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;
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user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;
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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;
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there are decreases in user sentiment due to questions about the quality or usefulness of our products or our user data practices, or concerns related to privacy and sharing, 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;
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we are unable to obtain or attract engaging third-party content;
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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;
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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;
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there are changes mandated by legislation, regulatory authorities, or litigation that adversely affect our products or users;

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•
there is decreased engagement with our products, or failure to accept our terms of service, as part of changes that we implemented in connection with the General Data Protection Regulation (GDPR) in Europe, other similar changes that we implemented in the United States and around the world, or other changes we have implemented or may implement in the future in connection with other regulations, regulatory actions or otherwise;
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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;
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we adopt terms, policies, or procedures related to areas such as sharing, content, user data, or advertising that are perceived negatively by our users or the general public;
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we elect to focus our product decisions on longer-term initiatives that do not prioritize near-term user growth and engagement;
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we make changes in how we promote different products and services across our family of apps;
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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;
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third-party initiatives that may enable greater use of our products, including low-cost or discounted data plans, are discontinued;
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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, or other actions by governments that may affect the accessibility of our products in their countries;
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we fail to provide adequate customer service to users, marketers, developers, or other partners;
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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
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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.
If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely affected. Any 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 recently implemented, and we will continue to implement, changes to our user data practices. Some of these changes will reduce marketers’ ability to effectively target their 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 could also be adversely affected by a number of other factors, including:
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decreases in user engagement, including time spent on our products;
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our inability to continue to increase user access to and engagement with our products;
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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;

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•
our inability to maintain or increase marketer demand, the pricing of our ads, or both;
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our inability to maintain or increase the quantity or quality of ads shown to users, including as a result of technical infrastructure constraints;
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user behavior or product changes that may reduce traffic to features or products that we successfully monetize, including as a result of our efforts to promote the Stories format or increased usage of our messaging products;
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reductions of advertising by marketers due to our efforts to implement advertising policies that protect the security and integrity of our platform;
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changes to third-party policies that limit our ability to deliver or target advertising;
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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;
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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;
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adverse government actions or legal developments relating to advertising, including legislative and regulatory developments and developments in litigation;
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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, developers with mobile and web applications that are integrated with our products, or other companies in our industry;
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reductions of advertising by marketers due to objectionable content published 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;
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the effectiveness of our ad targeting or degree to which users opt out of certain types of ad targeting, including as a result of product changes and controls that we implemented in connection with the GDPR or other similar changes that we implemented in the United States and around the world (for example, we have seen an increasing number of users opt out of certain types of ad targeting in Europe following adoption of the GDPR), or other product changes or controls we have implemented or may implement in the future, whether in connection with other regulations, regulatory actions or otherwise, that impact our ability to target ads;
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the degree to which users cease or reduce the number of times they engage with our ads;
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changes in the way advertising on mobile devices or on personal computers is measured or priced;
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changes in the composition of our marketer base or our inability to maintain or grow our marketer base; and
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the impact of macroeconomic conditions, whether in the advertising industry in general, or among specific types of marketers or within particular geographies.
The occurrence of any of these or other factors 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.
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 recently released an update to its Safari browser that limits the use of third-

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party cookies, which reduces our ability to provide the most relevant ads to our users and impacts 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, or other business partners, 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.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
We compete with companies that sell advertising, as well as with companies that provide social, media, and communication products and services that are designed to engage users on mobile devices and online. We face significant competition in every aspect of our business, including from companies that facilitate communication and the sharing of content and information, companies that enable marketers to display advertising, companies that distribute video and other forms of media content, and companies that provide development platforms for applications developers. We compete with companies that offer products across broad platforms that replicate capabilities we provide. For example, among other areas, we compete with Apple in messaging, Google and YouTube in advertising and video, Tencent in messaging and social media, and Amazon in advertising. We also compete with companies that provide regional social networks and messaging products, many of which have strong positions in particular countries. 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. In addition, we face competition from traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or develop tools and systems for managing and optimizing advertising campaigns. We also compete with companies that develop and deliver consumer hardware and virtual reality products and services.
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. 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 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. In addition, developers whose mobile and web applications are integrated with Facebook or our other products may use information shared by our users through our products in order to develop products or features that compete with us. 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. As a result, our competitors may acquire and engage users or generate advertising or other revenue at the expense of our own efforts, which may 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:
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the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors' products;
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the size and composition of our user base;
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the engagement of users with our products and competing products;

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•
the timing and market acceptance of products, including developments and enhancements to our or our competitors' products;
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our safety and security efforts and our ability to protect user data and to provide users with control over their data;
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our ability to distribute our products to new and existing users;
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our ability to monetize our products;
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the frequency, size, format, quality, and relative prominence of the ads displayed by us or our competitors;
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customer service and support efforts;
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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;
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our ability to establish and maintain developers' interest in building mobile and web applications that integrate with Facebook and our other products;
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our ability to establish and maintain publisher interest in integrating their content with Facebook and our other products;
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changes mandated by legislation, regulatory authorities, or litigation, some of which may have a disproportionate effect on us;
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acquisitions or consolidation within our industry, which may result in more formidable competitors;
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our ability to attract, retain, and motivate talented employees, particularly software engineers, designers, and product managers;
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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.
Actions by governments that restrict access to Facebook or our other products in their countries, or that otherwise impair our ability to sell advertising in their countries, could substantially harm our business and financial results.
Governments from time to time seek to censor content available on Facebook or our other products in their country, restrict access to our products from their country entirely, or impose other restrictions that may affect the accessibility of our products in their country for an extended period of time or indefinitely. For example, user access to Facebook and certain of our other products has been or is currently restricted in whole or in part in China, Iran, and North Korea. In addition, government authorities in other countries may seek to restrict user access to our products if they consider us to be in violation of their laws or a threat to public safety or for other reasons, and certain of our products have been restricted by governments in other countries from time to time. It is possible that government authorities could take action that impairs our ability to sell advertising, including in countries where access to our consumer-facing products may be blocked or restricted. For example, we generate meaningful revenue from a limited number of resellers representing advertisers based in China. In the event that content shown on Facebook or our other products is subject to censorship, access to our products is restricted, in whole or in part, in one or more countries, or other restrictions are imposed on our products, or our competitors are able to successfully penetrate new geographic markets or capture a greater share of existing geographic markets that we cannot access or where we face other restrictions, our ability to retain or increase our user base, user engagement, or the level of advertising by marketers may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected.
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, and we will incur

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increased costs in connection with the development and marketing of such products and technologies. In addition, the introduction of new products, or changes to existing products, may result in new or enhanced governmental or regulatory scrutiny 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 very limited fashion, and we may not be successful in our efforts to generate meaningful revenue from messaging over the long term. If these or other 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 recently implemented, and we will continue to implement, changes to our user data practices. Some of these changes will reduce marketers’ ability to effectively target their ads, which has to some extent adversely affected, and will continue to adversely affect, our advertising business. 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. 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 plan to continue to promote the Stories format, which is becoming increasingly popular for sharing content across our products, but our advertising efforts with this format are still under development and we do not currently monetize Stories at the same rate as News Feed. In addition, as we focus on growing users and engagement across our family of apps, 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, content, advertising, and other issues, including actions or decisions in connection with elections, which may 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, or by the use of our products or services for illicit, objectionable, or illegal ends. Maintaining and enhancing our brands will require us to make substantial investments and these investments may not be successful. Certain of our past actions, such as the foregoing matter regarding developer misuse of data, 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.
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt

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our ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information, content, or payment information from users, or information from marketers, could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry, have occurred on our systems in the past, and will occur on our systems in the future. We also regularly encounter attempts to create false or undesirable user accounts, purchase ads, or take other actions on our platform for purposes such as spamming, spreading misinformation, or other objectionable ends. As a result of our prominence, the size of our user base, the types and volume of personal data on our systems, and the evolving nature of our products and services, we believe that we are a particularly attractive target for such breaches and attacks. Our efforts to address undesirable activity on our platform may also increase the risk of retaliatory attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users or marketers to lose confidence and trust in our products, impair our internal systems, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users' data. Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, to disable undesirable accounts and activities on our platform, and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
In addition, some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive or store information provided by us or by our users through mobile or web applications integrated with Facebook. We provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our users' data may be improperly accessed, used, or disclosed.
Affected users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Such incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
For example, in September 2018, we announced our discovery of a third-party cyber-attack that exploited a vulnerability in Facebook’s code to steal user access tokens, which were then used to access certain profile information from approximately 29 million user accounts on Facebook. While we took steps to remediate the attack, including fixing the vulnerability, resetting user access tokens and notifying affected users, we may discover and announce additional developments, which could further erode confidence in our brand. In addition, the events surrounding this cyber-attack became the subject of Irish Data Protection Commission 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.
We anticipate that our ongoing investments in safety, security, and content review will identify additional instances of misuse of user data or other undesirable activity by third parties on our platform.
In addition to our efforts to mitigate cybersecurity risks, we are making significant investments in safety, security, and content review efforts to combat misuse of our services and user data by third parties, including investigations and audits of platform applications that previously accessed information of a large number of users of our services. As a result of these efforts we have discovered and announced, and anticipate that we will continue to discover and announce, additional incidents of misuse of user data or other undesirable activity by third parties. We may not discover all such incidents or activity, whether as a result of our data limitations, including our lack of visibility over our encrypted services, the scale of activity on our platform, or other factors, and we may be notified of such incidents or activity via the media or other third parties. Such incidents and activities may include the use of user data in a manner inconsistent with our terms, contracts or policies, the existence of false or undesirable user accounts, election interference, improper ad purchases, activities that threaten people’s safety on- or offline, or instances of spamming, scraping, or spreading misinformation. The discovery of the foregoing may negatively affect user trust and engagement, harm our reputation and brands, require us to change our business practices in a manner adverse to our business, and adversely affect our business and financial results. Any such discoveries may also subject us to additional litigation and regulatory inquiries, which could subject us to monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory oversight.

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Unfavorable media coverage could negatively affect our business.
We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, our privacy practices, terms of service, 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, objectionable, or illegal 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, beginning in March 2018, we were the subject of intense media coverage involving the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies, and we have continued to receive negative publicity. Such negative publicity could have an adverse effect on the size, engagement, and loyalty of our user base and result in decreased revenue, which could adversely affect our business and financial results.
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:
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our ability to maintain and grow our user base and user engagement;
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our ability to attract and retain marketers in a particular period;
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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, or other factors;
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the frequency, prominence, size, format, and quality of ads shown to users;
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the success of technologies designed to block the display of ads;
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the pricing of our ads and other products;
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the diversification and growth of revenue sources beyond advertising on Facebook and Instagram;
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our ability to generate revenue from Payments, or the sale of our consumer hardware products or other products we may introduce in the future;
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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;
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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;
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costs related to our safety, security, and content review efforts;
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costs and expenses related to the development and delivery of our consumer hardware products;
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our ability to maintain gross margins and operating margins;
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costs related to acquisitions, including costs associated with amortization and additional investments to develop the acquired technologies;
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charges associated with impairment of any assets on our balance sheet;
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our ability to obtain equipment, components, and labor for our data centers and other technical infrastructure in a timely and cost-effective manner;
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system failures or outages or government blocking, which could prevent us from serving ads for any period of time;
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breaches of security or privacy, and the costs associated with any such breaches and remediation;

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changes in the manner in which we distribute our products or inaccessibility of our products due to third-party actions;
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fees paid to third parties for content or the distribution of our products;
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share-based compensation expense, including acquisition-related expense;
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adverse litigation judgments, settlements, or other litigation-related costs;
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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;
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the overall tax rate for our business, which may be affected by the mix of income we earn in the U.S. and in jurisdictions with comparatively lower tax rates, the effects of share-based compensation, the effects of integrating intellectual property from acquisitions, and the effects of changes in our business;
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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;
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tax obligations that may arise from resolutions of tax examinations, including the examination we are currently under by the Internal Revenue Service (IRS), that materially differ from the amounts we have anticipated;