Quarterly Report (10-q)

Date : 07/25/2019 @ 11:05AM
Source : Edgar (US Regulatory)
Stock : Facebook Inc (FB)
Quote : 186.82  -3.11 (-1.64%) @ 9:30PM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number:  001-35551
____________________________________________ 
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)
 ____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $.000006
FB
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    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
2,405,723,136

shares outstanding as of July 19, 2019
Class B Common Stock
$0.000006 par value
447,227,362

shares outstanding as of July 19, 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. 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)
 
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,877

 
$
10,019

Marketable securities
34,719

 
31,095

Accounts receivable, net of allowances of $295 and $229 as of June 30, 2019 and December 31, 2018, respectively
7,513

 
7,587

Prepaid expenses and other current assets
1,852

 
1,779

Total current assets
57,961

 
50,480

Property and equipment, net
29,999

 
24,683

Operating lease right-of-use assets, net
7,272

 

Intangible assets, net
994

 
1,294

Goodwill
18,334

 
18,301

Other assets
2,446

 
2,576

Total assets
$
117,006

 
$
97,334

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
655

 
$
820

Partners payable
560

 
541

Operating lease liabilities, current
688

 

Accrued expenses and other current liabilities
10,878

 
5,509

Deferred revenue and deposits
198

 
147

Total current liabilities
12,979

 
7,017

Operating lease liabilities, non-current
7,122

 

Other liabilities
8,143

 
6,190

Total liabilities
28,244

 
13,207

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,407 million and 2,385 million shares issued and outstanding, as of June 30, 2019 and December 31, 2018, respectively; 4,141 million Class B shares authorized, 447 million and 469 million shares issued and outstanding, as of June 30, 2019 and December 31, 2018, respectively.

 

Additional paid-in capital
44,277

 
42,906

Accumulated other comprehensive loss
(483
)
 
(760
)
Retained earnings
44,968

 
41,981

Total stockholders' equity
88,762

 
84,127

Total liabilities and stockholders' equity
$
117,006

 
$
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
16,886

 
$
13,231

 
$
31,963

 
$
25,197

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
3,307

 
2,214

 
6,123

 
4,141

Research and development
3,315

 
2,523

 
6,175

 
4,761

Marketing and sales
2,414

 
1,855

 
4,434

 
3,450

General and administrative
3,224

 
776

 
7,288

 
1,532

Total costs and expenses
12,260

 
7,368

 
24,020

 
13,884

Income from operations
4,626

 
5,863

 
7,943

 
11,313

Interest and other income, net
206

 
5

 
371

 
165

Income before provision for income taxes
4,832

 
5,868

 
8,314

 
11,478

Provision for income taxes
2,216

 
762

 
3,269

 
1,385

Net income
$
2,616

 
$
5,106

 
$
5,045

 
$
10,093

Less: Net income attributable to participating securities

 

 

 
1

Net income attributable to Class A and Class B common stockholders
$
2,616

 
$
5,106

 
$
5,045

 
$
10,092

Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
$
0.92

 
$
1.76

 
$
1.77

 
$
3.48

Diluted
$
0.91

 
$
1.74

 
$
1.76

 
$
3.43

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
2,855

 
2,895

 
2,855

 
2,900

Diluted
2,875

 
2,930

 
2,873

 
2,939

Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
109

 
$
74

 
$
196

 
$
130

Research and development
927

 
881

 
1,650

 
1,599

Marketing and sales
160

 
139

 
273

 
248

General and administrative
107

 
92

 
194

 
164

Total share-based compensation expense
$
1,303

 
$
1,186

 
$
2,313

 
$
2,141

See Accompanying Notes to Condensed Consolidated Financial Statements.


6


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
2,616

 
$
5,106

 
$
5,045

 
$
10,093

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax
90

 
(372
)
 
(85
)
 
(278
)
Change in unrealized gain/loss on available-for-sale investments and other, net of tax
208

 
(21
)
 
362

 
(182
)
Comprehensive income
$
2,914

 
$
4,713

 
$
5,322

 
$
9,633

See Accompanying Notes to Condensed Consolidated Financial Statements.

7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited)  
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 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
2,856

 
$

 
$
43,533

 
$
(781
)
 
$
43,764

 
$
86,516

 
2,902

 
$

 
$
41,134

 
$
(294
)
 
$
36,780

 
$
77,620

Issuance of common stock
8

 

 
4

 

 

 
4

 
12

 

 
4

 

 

 
4

Shares withheld related to net share settlement and other
(4
)
 

 
(563
)
 

 
(287
)
 
(850
)
 
(5
)
 

 
(492
)
 

 
(435
)
 
(927
)
Share-based compensation

 

 
1,303

 

 

 
1,303

 

 

 
1,186

 

 

 
1,186

Share repurchases
(6
)
 

 

 

 
(1,125
)
 
(1,125
)
 
(18
)
 

 

 

 
(3,214
)
 
(3,214
)
Other comprehensive income (loss)

 

 

 
298

 

 
298

 

 

 

 
(393
)
 

 
(393
)
Net income

 

 

 

 
2,616

 
2,616

 

 

 

 

 
5,106

 
5,106

Balances at end of period
2,854

 
$

 
$
44,277

 
$
(483
)
 
$
44,968

 
$
88,762

 
2,891

 
$

 
$
41,832

 
$
(687
)
 
$
38,237

 
$
79,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 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
16

 

 
9

 

 

 
9

 
24

 

 
7

 

 

 
7

Shares withheld related to net share settlement and other
(7
)
 

 
(951
)
 

 
(411
)
 
(1,362
)
 
(10
)
 

 
(900
)
 

 
(858
)
 
(1,758
)
Share-based compensation

 

 
2,313

 

 

 
2,313

 

 

 
2,141

 

 

 
2,141

Share repurchases
(9
)
 

 

 

 
(1,647
)
 
(1,647
)
 
(29
)
 

 

 

 
(5,129
)
 
(5,129
)
Other comprehensive income (loss)

 

 

 
277

 

 
277

 

 

 

 
(460
)
 

 
(460
)
Net income

 

 

 

 
5,045

 
5,045

 

 

 

 

 
10,093

 
10,093

Balances at end of period
2,854

 
$

 
$
44,277

 
$
(483
)
 
$
44,968

 
$
88,762

 
2,891

 
$

 
$
41,832

 
$
(687
)
 
$
38,237

 
$
79,382


See Accompanying Notes to Condensed Consolidated Financial Statements.

8


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
5,045

 
$
10,093

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
   Depreciation and amortization
2,857

 
1,983

   Share-based compensation
2,313

 
2,141

   Deferred income taxes
184

 
54

   Other
14

 
18

Changes in assets and liabilities:
 
 
 
   Accounts receivable
64

 
161

   Prepaid expenses and other current assets
(168
)
 
(898
)
   Other assets
65

 
(59
)
   Operating lease right-of-use assets, net
(1,711
)
 

   Accounts payable
(87
)
 
50

   Partners payable
20

 
53

   Accrued expenses and other current liabilities
5,982

 
690

   Deferred revenue and deposits
51

 
(4
)
   Operating lease liabilities, non-current
1,638

 

   Other liabilities
1,657

 
(124
)
Net cash provided by operating activities
17,924

 
14,158

Cash flows from investing activities
 
 
 
Purchases of property and equipment, net
(7,470
)
 
(6,272
)
Purchases of marketable securities
(11,755
)
 
(8,283
)
Sales of marketable securities
4,456

 
8,612

Maturities of marketable securities
4,105

 
2,338

Other investing activities, net
(114
)
 
(66
)
Net cash used in investing activities
(10,778
)
 
(3,671
)
Cash flows from financing activities
 
 
 
Taxes paid related to net share settlement of equity awards
(1,119
)
 
(1,758
)
Repurchases of Class A common stock
(1,758
)
 
(5,123
)
Principal payments on finance leases
(267
)
 

Net change in overdraft in cash pooling entities
(119
)
 

Other financing activities, net
9

 
7

Net cash used in financing activities
(3,254
)
 
(6,874
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(18
)
 
(149
)
Net increase in cash, cash equivalents, and restricted cash
3,874

 
3,464

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
$
13,998

 
$
11,668

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
13,877

 
$
11,552

Restricted cash, included in prepaid expenses and other current assets
9

 
11

Restricted cash, included in other assets
112

 
105

Total cash, cash equivalents, and restricted cash
$
13,998

 
$
11,668

See Accompanying Notes to Condensed Consolidated Financial Statements.

9


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
6

 
$

Income taxes, net
$
1,696

 
$
2,281

Non-cash investing activities:
 
 
 
Net change in prepaids and liabilities related to property and equipment
$
(203
)
 
$
231

Property and equipment in accounts payable and accrued liabilities
$
1,667

 
$
1,146

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 (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 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., its wholly owned subsidiaries, and any variable interest entities for which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year ending December 31, 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

11


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.

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 and six months ended June 30, 2019 and 2018 , consists of the following (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Advertising
$
16,624

 
$
13,038

 
$
31,536

 
$
24,833

Payments and other fees
262

 
193

 
427

 
364

    Total revenue
$
16,886

 
$
13,231

 
$
31,963

 
$
25,197


Revenue disaggregated by geography, based on the billing address of our customer, consists of the following (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
US & Canada (1)
$
7,632

 
$
5,982

 
$
14,409

 
$
11,424

Europe (2)
4,097

 
3,307

 
7,721

 
6,334

Asia-Pacific
3,628

 
2,772

 
6,965

 
5,247

Rest of World (2)
1,529

 
1,170

 
2,868

 
2,192

Total revenue
$
16,886

 
$
13,231

 
$
31,963

 
$
25,197

(1) United States revenue was $7.14 billion and $5.60 billion for the three months ended June 30, 2019 and 2018 , respectively, and $13.51 billion and $10.69 billion for the six months ended June 30, 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):
 
June 30, 2019
 
December 31, 2018
Deferred revenue
$
164

 
$
117

Deposits
34

 
30

    Total deferred revenue and deposits
$
198

 
$
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 and six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
2,204

 
$
412

 
$
4,246

 
$
860

 
$
4,241

 
$
804

 
$
8,368

 
$
1,725

Less: Net income attributable to participating securities

 

 

 

 

 

 
1

 

Net income attributable to common stockholders
$
2,204

 
$
412

 
$
4,246

 
$
860

 
$
4,241

 
$
804

 
$
8,367

 
$
1,725

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
2,405

 
450

 
2,407

 
488

 
2,400

 
455

 
2,405

 
495

Basic EPS
$
0.92

 
$
0.92

 
$
1.76

 
$
1.76

 
$
1.77

 
$
1.77

 
$
3.48

 
$
3.48

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
2,204

 
$
412

 
$
4,246

 
$
860

 
$
4,241

 
$
804

 
$
8,367

 
$
1,725

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
412

 

 
860

 

 
804

 

 
1,725

 

Reallocation of net income to Class B common stock

 
(2
)
 

 
(4
)
 

 
(3
)
 

 
(9
)
Net income attributable to common stockholders for diluted EPS
$
2,616

 
$
410

 
$
5,106

 
$
856

 
$
5,045

 
$
801

 
$
10,093

 
$
1,716

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
2,405

 
450

 
2,407

 
488

 
2,400

 
455

 
2,405

 
495

Conversion of Class B to Class A common stock
450

 

 
488

 

 
455

 

 
495

 

Weighted average effect of dilutive RSUs and employee stock options
20

 

 
35

 
3

 
18

 
1

 
39

 
5

Number of shares used for diluted EPS computation
2,875

 
450

 
2,930

 
491

 
2,873

 
456

 
2,939

 
500

Diluted EPS
$
0.91

 
$
0.91

 
$
1.74

 
$
1.74

 
$
1.76

 
$
1.76

 
$
3.43

 
$
3.43



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):
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents:
 
 
 
Cash
$
3,380

 
$
2,713

Money market funds
10,151

 
6,792

U.S. government securities
163

 
90

U.S. government agency securities

 
54

Certificate of deposits and time deposits
163

 
369

Corporate debt securities
20

 
1

Total cash and cash equivalents
13,877

 
10,019

Marketable securities:
 
 
 
U.S. government securities
17,338

 
13,836

U.S. government agency securities
7,792

 
8,333

Corporate debt securities
9,589

 
8,926

Total marketable securities
34,719

 
31,095

Total cash and cash equivalents, and marketable securities
$
48,596

 
$
41,114


The gross unrealized gains on our marketable securities were $179 million and $24 million as of June 30, 2019 and December 31, 2018, respectively. The gross unrealized losses on our marketable securities were $69 million and $357 million as of June 30, 2019 and December 31, 2018 , respectively. In addition, gross unrealized losses that had been in a continuous loss position for 12 months or longer were $67 million and $332 million as of June 30, 2019 and December 31, 2018 , respectively. As of June 30, 2019 , we considered the decreases in market value of 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):
 
June 30, 2019
Due in one year
$
12,730

Due after one year to five years
21,989

Total
$
34,719



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
 
June 30, 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
 
$
10,151

 
$
10,151

 
$

 
$

U.S. government securities
 
163

 
163

 

 

Certificate of deposits and time deposits
 
163

 

 
163

 

Corporate debt securities
 
20

 

 
20

 

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
17,338

 
17,338

 

 

U.S. government agency securities
 
7,792

 
7,792

 

 

Corporate debt securities
 
9,589

 

 
9,589

 

Total cash equivalents and marketable securities
 
$
45,216

 
$
35,444

 
$
9,772

 
$

 
 
 
 
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):  
 
June 30, 2019
 
December 31, 2018
Land
$
1,007

 
$
899

Buildings
9,015

 
7,401

Leasehold improvements
2,301

 
1,841

Network equipment
14,559

 
13,017

Computer software, office equipment and other
1,484

 
1,187

Finance lease right-of-use assets
1,331

 

Construction in progress
9,054

 
7,228

    Total
38,751

 
31,573

Less: Accumulated depreciation
(8,752
)
 
(6,890
)
Property and equipment, net
$
29,999

 
$
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 any period 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

Six Months Ended
 
June 30, 2019

June 30, 2019
Finance lease cost

 
 
     Amortization of right-of-use assets
$
47

 
$
89

     Interest
3

 
5

Operating lease cost
274

 
520

Variable lease cost and other, net
21

 
70

       Total lease cost
$
345

 
$
684

 
 
 
 
Weighted Average Remaining Lease Term
 
 
 
     Operating leases
 
 
13.1 years

     Finance leases
 
 
15.3 years

 
 
 
 
Weighted Average Discount Rate
 
 
 
     Operating leases
 
 
3.5
%
     Finance leases
 
 
3.2
%


18


The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2019 (in millions):

 
Operating Leases
 
Finance Leases
The remainder of 2019
$
409

 
$
30

2020
1,004

 
43

2021
956

 
34

2022
877

 
30

2023
840

 
30

Thereafter
6,222

 
334

Total undiscounted cash flows
10,308

 
501

Less imputed interest
(2,498
)
 
(107
)
Present value of lease liabilities
$
7,810

 
$
394



As of June 30, 2019 , we have additional operating and finance leases for facilities and network equipment that have not yet commenced with lease obligations of $4.82 billion and $471 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):

 
Six Months Ended
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
     Operating cash flows from operating leases
$
388

     Operating cash flows from finance leases
$
5

     Financing cash flows from finance leases
$
267

Lease liabilities arising from obtaining right-of-use assets:
 
     Operating leases
$
2,203

     Finance leases
$
75


   

19


Note 8.
Goodwill and Intangible Assets

During the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 2019 are as follows (in millions):  
Balance as of December 31, 2018
$
18,301

Goodwill acquired
30

Effect of currency translation adjustment
3

Balance as of June 30, 2019
$
18,334

Intangible assets consist of the following (in millions):
 
 
 
June 30, 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
2.3
 
$
2,056

 
$
(1,405
)
 
$
651

 
$
2,056

 
$
(1,260
)
 
$
796

Acquired technology
1.3
 
1,014

 
(945
)
 
69

 
1,002

 
(871
)
 
131

Acquired patents
4.9
 
805

 
(596
)
 
209

 
805

 
(565
)
 
240

Trade names
1.3
 
629

 
(572
)
 
57

 
629

 
(517
)
 
112

Other
3.2
 
162

 
(154
)
 
8

 
162

 
(147
)
 
15

    Total intangible assets
2.7
 
$
4,666

 
$
(3,672
)
 
$
994

 
$
4,654

 
$
(3,360
)
 
$
1,294


Amortization expense of intangible assets was $156 million and $312 million for the three and six months ended June 30, 2019 , respectively, and $158 million and $327 million for the three and six months ended June 30, 2018 , respectively.
As of June 30, 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
$
245

2020
382

2021
277

2022
33

2023
26

Thereafter
31

Total
$
994



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 June 30, 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 $4.57 billion of non-cancelable contractual commitments as of June 30, 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), SEC, state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions. In July 2019, we entered into a settlement and modified consent order to resolve the FTC inquiry, and we also entered into a settlement to resolve the SEC inquiry, in each case pending federal court approval of the respective settlement. Among other matters, our settlement with the FTC requires us to pay a penalty of $5.0 billion and to significantly enhance our practices and processes for privacy compliance and oversight. In addition, our settlement with the SEC requires us to pay a penalty of $100 million .
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 (IDPC) 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.
From time to time we also notify the IDPC, our designated European privacy regulator under the General Data Protection Regulation, of certain other personal data breaches and privacy issues, and are subject to inquiries and investigations regarding various aspects of our regulatory compliance.
In connection with the aforementioned FTC inquiry, we have recorded a probable loss of $5.0 billion in accrued expenses and other current liabilities on our condensed consolidated balance sheet as of June 30, 2019, $3.0 billion of which was previously recognized in the three months ended March 31, 2019.
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

21


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.
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 six months ended June 30, 2019 , we repurchased and subsequently retired approximately 9.3 million shares of our Class A common stock for an aggregate amount of approximately $1.65 billion . As of June 30, 2019 , approximately $7.35 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 six months ended June 30, 2019 :
 
Unvested RSUs
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2018
67,298

 
$
144.77

Granted
41,695

 
$
167.10

Vested
(16,744
)
 
$
135.50

Forfeited
(5,852
)
 
$
136.21

Unvested at June 30, 2019
86,397

 
$
157.92


The fair value as of the respective vesting dates of RSUs that vested during the three and six months ended June 30, 2019 was $1.58 billion and $2.89 billion , respectively, and $2.17 billion and $4.12 billion during the three and six months ended June 30, 2018 , respectively.

22


As of June 30, 2019 , there was $12.82 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.

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 provision for income taxes recorded as a result of the developments in Altera Corp. v. Commissioner discussed below, the $5.0 billion legal accruals recorded in 2019 related to the FTC settlement 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 $ 6.84 billion and $4.68 billion on June 30, 2019 and December 31, 2018 , respectively. If the gross unrecognized tax benefits as of June 30, 2019 were realized in a subsequent period, this would result in a tax benefit of $4.07 billion within our provision of income taxes at such time. The amount of interest and penalties accrued as of June 30, 2019 and December 31, 2018 was $549 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 issued a decision (Tax Court Decision) in Altera Corp. v. Commissioner , which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to the Ninth Circuit Court of Appeals (Ninth Circuit). On June 7, 2019, a three-judge panel from the Ninth Circuit issued an opinion ( Altera Ninth Circuit Panel Opinion) that reversed the Tax Court Decision. Based on the Altera Ninth Circuit Panel Opinion, we recorded a cumulative income tax expense of $1.11 billion in the second quarter of 2019. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit and may subsequently appeal from the Ninth Circuit to the Supreme Court. As a result, the final outcome of the case is uncertain. If the Altera Ninth Circuit Panel Opinion is reversed, we would anticipate recording an income tax benefit at that time.
 
We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2014 through 2016 tax years and by the Ireland tax authorities for our 2012 through 2015 tax years. Our 2017 and subsequent tax years remain open to examination by the IRS. Our 2016 and subsequent tax years remain open to examination in Ireland.
In July 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS 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 June 30, 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

23


income taxes or other tax items that may ultimately result from these examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, and cash flows.

Note 13.
Geographical Information
The following table sets forth our long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets, net (in millions):
 
June 30, 2019
 
December 31, 2018
Long-lived assets:
 
 
 
United States
$
29,195

 
$
18,950

Rest of the world (1)
8,076

 
5,733

Total long-lived assets
$
37,271

 
$
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 and Six Months Ended June 30, 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 and six months ended June 30, 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 Second Quarter Results
Our key user metrics and financial results for the second quarter of 2019 are as follows:
User growth:
Daily active users (DAUs) were 1.59 billion on average for June 2019 , an increase of 8% year-over-year.
Monthly active users (MAUs) were 2.41 billion as of June 30, 2019 , an increase of 8% year-over-year.
Financial results:
Revenue was $16.89 billion , up 28% year-over-year, and ad revenue was $16.62 billion , up 28% year-over-year.
Total costs and expenses were $ 12.26 billion .
Income from operations was $4.63 billion .
Net income was $2.62 billion with diluted earnings per share of $0.91 .
Capital expenditures, including principal payments on finance leases, were $ <