SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  FACEBOOK INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[April 25, 2014]

FACEBOOK INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto 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, 2013, as filed with the Securities and Exchange Commission. In addition to 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.


Overview Our mission is to give people the power to share and make the world more open and connected.

We build products that support our mission by creating utility for users, marketers, and developers: Users. We enable people who use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

Marketers. We enable marketers to engage with more than 1.2 billion monthly active users (MAUs) on Facebook or subsets of our users based on information they have chosen to share with us such as their age, location, gender, or interests.

Developers. We enable developers to use Facebook's developer services to build, grow and monetize their mobile and web applications more rapidly and successfully.

We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from developers. In the first quarter of 2014, we recorded revenue of $2.5 billion, income from operations of $1.08 billion and net income of $642 million.

18 -------------------------------------------------------------------------------- Trends in Our User Metrics The numbers for our key metrics, our daily active users (DAUs), mobile DAUs, MAUs, mobile MAUs and average revenue per user (ARPU), and certain other metrics such as mobile-only DAUs and mobile-only MAUs, do not include Instagram 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 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.

• 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, used our Messenger app, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.

[[Image Removed]]Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey, Asia includes all users in Australia and New Zealand, and Rest of World includes all users in Africa, Latin America, and the Middle East.

19 -------------------------------------------------------------------------------- Worldwide DAUs increased 21% to 802 million on average during March 2014 from 665 million during March 2013. We experienced growth in DAUs across major markets including Brazil, India, and the United States. Overall growth in DAUs was driven largely by increased mobile usage of Facebook. The number of DAUs accessing Facebook on personal computers decreased in March 2014 compared to the same period in 2013.

• Mobile DAUs. We define a mobile DAU as a user who accessed Facebook via a mobile application or via versions of our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger app on a given day.

Worldwide mobile DAUs increased 43% to 609 million on average during March 2014 from 425 million during March 2013. In all regions, an increasing number of our DAUs are accessing Facebook through mobile devices, with users in Brazil, India, and the United States representing key sources of mobile DAU growth on average during March 2014 as compared to the same period during 2013. There were 439 million mobile DAUs who accessed Facebook solely through mobile applications or our mobile website on average during the month ended March 31, 2014, increasing 58% from 277 million during the same period in 2013. The remaining 170 million mobile DAUs accessed Facebook from both personal computers and mobile devices on average during March 2014. We anticipate that mobile usage will continue to be the primary driver of our user growth for the foreseeable future and that usage through personal computers will decline worldwide, including in key markets such as the United States and other developed markets in Europe and Asia.

[[Image Removed]] 20 -------------------------------------------------------------------------------- • 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, used our Messenger app, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community.

[[Image Removed]] As of March 31, 2014, we had 1.28 billion MAUs, an increase of 15% from March 31, 2013. Users in India and Brazil represented key sources of growth in the first quarter of 2014 relative to the same period in 2013.

• Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile application or via versions of our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger app during the period of measurement.

21-------------------------------------------------------------------------------- Worldwide mobile MAUs increased 34% to 1.01 billion as of March 31, 2014 from 751 million as of March 31, 2013. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in India, Brazil, and the United States representing key sources of mobile MAU growth over the first quarter of 2014 as compared to the same period in 2013. There were 341 million mobile MAUs who accessed Facebook solely through mobile applications or our mobile website during the month ended March 31, 2014, increasing 80% from 189 million during the same period in 2013. The remaining 667 million mobile MAUs accessed Facebook from both personal computers and mobile devices during March 2014. We anticipate that mobile usage will continue to be the primary driver of our user growth for the foreseeable future and that usage through personal computers will decline worldwide, including in key markets such as the United States and other developed markets in Europe and Asia.

[[Image Removed]] 22 -------------------------------------------------------------------------------- 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 or virtual and digital goods are purchased. 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. 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 due to the size and maturity of those advertising markets as well as our greater sales presence and the number of payment methods that we make available to marketers and users. For example, ARPU for an average user in the first quarter of 2014 in United States & Canada is more than six times higher than for an average user in Asia.

[[Image Removed]] [[Image Removed]] 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 by geography disclosure in our condensed consolidated financial statements where revenue is geographically apportioned based on the location of the marketer or developer.

23 -------------------------------------------------------------------------------- During the first quarter of 2014, worldwide ARPU was $2.00, an increase of 48% from the first quarter of 2013. Over this period, ARPU increased by approximately 67% in the United States & Canada, 53% in Europe, 45% in Asia, and 40% in Rest of World. ARPU in the first quarter of 2014 declined 7% from the fourth quarter of 2013. We believe the sequential quarterly decline was driven by seasonal trends, which also affected ARPU trends from the fourth quarter of 2012 to the first quarter of 2013, during which period ARPU declined by 12%.

User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. We expect that user growth in the future will continue to be higher in those regions where ARPU is relatively lower, such as Asia and Rest of World, 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.

Components of Results of Operations Revenue We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our developers with applications on the Facebook website.

Advertising. Our advertising revenue is generated by displaying ad products on Facebook properties, including our mobile applications and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by our users, the number of actions taken by our users or the number of impressions delivered. We recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content, and action-based ads in the period in which a user takes the action the marketer contracted for. 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 users. 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. Whether we count the initial display only or every display of an ad as an impression is dependent on where the ad is displayed. For example, an individual ad in News Feed that is purchased on an impression basis may be displayed to users more than once during a day; however, only the initial display of the ad is considered an impression, regardless of how many times the ad is actually displayed within the News Feed to a particular user. 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, click, or action.

Payments and other fees. We enable Payments from our users to purchase virtual and digital goods from our developers with applications on the Facebook website.

Our users can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards or other methods. We receive a fee from developers when users make purchases in these applications using our Payments infrastructure. We recognize revenue net of amounts remitted to our developers. We have mandated the use of our Payments infrastructure for game applications on Facebook, and fees related to Payments are generated almost exclusively from games. Our other fees revenue, which has not been significant in recent periods, consists primarily of user paid services and our ad serving and measurement products.

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, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions.

Research and development. Research and development expenses consist primarily of salaries, benefits, and share-based compensation 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 primarily of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include user-, marketer-, and developer-facing marketing and promotional expenditures.

General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include outside consulting fees, and legal and accounting services. General and administrative expenses also include legal settlements and amortization of patents we acquired.

24 -------------------------------------------------------------------------------- Results of Operations The following tables set forth our condensed consolidated statements of income data: Three Months Ended March 31, 2014 2013 (in millions) Revenue $ 2,502 $ 1,458 Costs and expenses: Cost of revenue 462 413 Research and development 455 293 Marketing and sales 323 203 General and administrative 187 176 Total costs and expenses 1,427 1,085 Income from operations 1,075 373 Interest and other income/(expense), net - (20 ) Income before provision for income taxes 1,075 353 Provision for income taxes 433 134 Net income $ 642 $ 219 Share-based compensation expense included in costs and expenses: Three Months Ended March 31, 2014 2013 (in millions) Cost of revenue $ 12 $ 8 Research and development 181 117 Marketing and sales 43 24 General and administrative 38 21 Total share-based compensation expense $ 274 $ 170 25 -------------------------------------------------------------------------------- The following table set forth our condensed consolidated statements of income data (as a percentage of revenue): Three Months Ended March 31, 2014 2013 Revenue 100 % 100 % Costs and expenses: Cost of revenue 18 28 Research and development 18 20 Marketing and sales 13 14 General and administrative 7 12 Total costs and expenses 57 74 Income from operations 43 26 Interest and other income/(expense), net - (1 ) Income before provision for income taxes 43 24 Provision for income taxes 17 9 Net income 26 % 15 % Share-based compensation expense included in costs and expenses (as a percentage of revenue): Three Months Ended March 31, 2014 2013 Cost of revenue - % 1 % Research and development 7 8 Marketing and sales 2 2 General and administrative 2 1 Total share-based compensation expense 11 % 12 % Three Months Ended March 31, 2014 and 2013 Revenue Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) Revenue: Advertising $ 2,265 $ 1,245 82 % Payments and other fees 237 213 11 % Total revenue $ 2,502 $ 1,458 72 % Revenue in the first quarter of 2014 increased $1.04 billion, or 72%, compared to the same period in 2013. The increase was due primarily to increase in advertising revenue.

Advertising revenue increased $1.02 billion, or 82%, in the first quarter of 2014, compared to the same period in 2013. The primary factor driving advertising revenue growth in this period was an increase in revenue from ads in News Feed on both mobile devices and personal computers. News Feed ads are displayed more prominently, have significantly higher levels of engagement and a higher price per ad relative to our other ad placements. For the first quarter of 2014, we estimate that advertising revenue from News Feed ads on mobile devices represented approximately 59% of total advertising revenue, as compared with approximately 30% in the same period in 2013.

Other factors that influenced our advertising revenue growth in this period included: (i) an increase in the number of marketers actively advertising on Facebook, which we believe increased demand for our ads; and (ii) 21% growth in average DAUs and 15% growth in MAUs from March 31, 2013 to March 31, 2014, which increased the number of ads we delivered.

26 -------------------------------------------------------------------------------- During the first quarter of 2014, as compared to the same period in 2013, the average price per ad increased by 118% and the number of ads delivered decreased by 17%. The increase in average price per ad was driven by a mix shift towards a greater percentage of our ads being shown in News Feed. The reduction in ads delivered was driven by factors including a shift in usage towards mobile devices where users are shown fewer ads as compared to personal computers.

Payments and other fees revenue in the first quarter of 2014 increased $24 million, or 11%, compared to the same period in 2013. Payments and other fees revenue is currently based predominantly on Payments revenue from games played on personal computers. We expect Facebook usage on personal computers to decline in the future, negatively affecting our Payments revenue.

Cost of revenue Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) Cost of revenue $ 462 $ 413 12 % Percentage of revenue 18 % 28 % Cost of revenue in the first quarter of 2014 increased $49 million, or 12%, compared to the same period in 2013. The increase was primarily due to operational expenses related to our data centers and technical infrastructure, partially offset by a reversal of lease abandonment liability of $18 million due to our decision to re-occupy and utilize a previously exited data center.

Research and development Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) Research and development $ 455 $ 293 55 % Percentage of revenue 18 % 20 % Research and development expenses increased $162 million, or 55%, in the first quarter of 2014 compared to the same period in 2013. The increase in the first quarter of 2014 was primarily due to a $64 million increase in share-based compensation expense compared to the same period in 2013. Other payroll and benefits expense also increased due to a 45% growth in employee headcount from March 31, 2013 to March 31, 2014 in engineering and other technical functions.

This investment supported our efforts to improve existing products and build new products for users, marketers, and developers.

Marketing and sales Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) Marketing and sales $ 323 $ 203 59% Percentage of revenue 13 % 14 % Marketing and sales expenses increased $120 million, or 59%, in the first quarter of 2014 compared to the same period in 2013. The increase in the first quarter of 2014 was primarily due to an increase in payroll and benefits expenses resulting from a 43% increase in employee headcount from March 31, 2013 to March 31, 2014 to support global sales, business development and customer service. Additionally, our user-, marketer-, and developer-facing marketing expenses increased $27 million and share-based compensation expenses increased $19 million in the first quarter of 2014 compared to the same period in 2013.

27 -------------------------------------------------------------------------------- General and administrative Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) General and administrative $ 187 $ 176 6 % Percentage of revenue 7 % 12 % General and administrative expenses increased $11 million, or 6%, in the first quarter of 2014 compared to the same period in 2013. The increase in the first quarter of 2014 was primarily due to a $17 million increase in share-based compensation expense compared to the same period in 2013. Other payroll and benefits expenses also increased due to a 23% increase in employee headcount from March 31, 2013 to March 31, 2014. These increases were partially offset by a decrease in legal settlement costs.

Interest and other income/(expense), net Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) Interest income/(expense), net $ - $ (10 ) (100 )% Other income/(expense), net - (10 ) (100 )% Interest and other income/(expense), net $ - $ (20 ) (100 )% Interest and other income/(expense), net was immaterial in the first quarter of 2014 as compared to a $20 million expense during the same period in 2013.

Interest income/(expense), net was immaterial in the first quarter of 2014 as compared to a $10 million expense during the same period in 2013 due to lower long-term debt balances and capital lease payments, partially offset by an increase in interest income. Other income/(expense), net immaterial in the first quarter of 2014 as compared to a $10 million expense during the same period in 2013 primarily due to the recognition of foreign exchange losses in the first quarter of 2013 resulting from the periodic re-measurement of our foreign currency balances.

Provision for income taxes Three Months Ended March 31, 2014 2013 % change (in millions, except for percentages) Provision for income taxes $ 433 $ 134 223 % Effective tax rate 40 % 38 % Our provision for income taxes in the first quarter of 2014 increased $299 million compared to the same period in 2013 primarily due to an increase in income before provision for income taxes.

Our effective tax rate increased in the first quarter 2014 compared to the same period in 2013 primarily due to the non-recurring tax benefit related to the reinstatement of the federal credit for research and development activities applicable to the year-ended December 31, 2012 that was recorded in the first quarter 2013.

Our effective tax rate has exceeded the U.S. statutory rate primarily because of the effect of non-deductible share-based compensation and the impact of acquiring intellectual property and integrating it into our business. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.

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 primarily of cash on deposit with banks and investments in money market funds and U.S. government and U.S. government agency securities. Cash and cash equivalents and marketable securities were $12.63 billion as of March 31, 2014, an increase of $1.18 billion from December 31, 2013, primarily due to $1.29 billion of cash generated from operations and $348 million in excess tax benefits from share-based award activity, offset by $363 million for purchases of property and equipment.

28 -------------------------------------------------------------------------------- In February 2014, we entered into an agreement to acquire WhatsApp Inc.

(WhatsApp), a privately-held cross-platform mobile messaging company, for 183,865,778 shares of our Class A common stock and approximately $4 billion in cash, subject to certain adjustments such that the cash paid will comprise at least 25% of the aggregate transaction consideration. Upon closing, we will also grant 45,966,445 RSUs to WhatsApp employees. This acquisition is subject to customary closing conditions, including certain regulatory approvals, and is expected to close later in 2014. We have agreed to pay a termination fee to WhatsApp of $1 billion in cash and issue a number of shares of our Class A common stock equal to $1 billion, based on the average closing price of the ten trading days preceding such termination, if the closing of this acquisition has not occurred by August 19, 2014 (or August 19, 2015, if as of August 19, 2014, all closing conditions have been completed except for the receipt of certain regulatory approvals).

In March 2014, we entered into an agreement to acquire Oculus VR, Inc. (Oculus), a privately-held company developing virtual reality technology, for 23,071,377 shares of our Class B common stock and approximately $400 million in cash.

Further, up to an additional 3,460,706 shares of our Class B common stock and $60 million in cash would be payable upon the completion of certain milestones.

The earn-out portion that would be payable to employee stockholders is also subject to continuous employment through the applicable payment dates. This acquisition is subject to customary closing conditions, including certain regulatory approvals, and is expected to close in the second quarter of 2014.

In January 2014, we began requiring that employees sell a portion of the shares that they receive upon the vesting of RSUs in order to cover any required withholding taxes ("sell-to-cover"), rather than our previous approach of net share settlement. We expect this sell-to-cover approach will reduce our cash outflows compared to the net share settlement approach.

In August 2013, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that allows us to borrow up to $6.5 billion to fund working capital and general corporate purposes with interest payable on the borrowed amounts set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We paid origination fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility. Any amounts outstanding under this facility will be due and payable on August 15, 2018. As of March 31, 2014, no amounts had been drawn down and we were in compliance with the covenants under this credit facility.

As of March 31, 2014, $658 million of the $12.63 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. We have provided for the additional taxes that would be due if we repatriated these funds for use in our operations in the United States.

We currently anticipate that our available funds, credit facilities, 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 2014 primarily consisted of net income, adjusted for certain non-cash items, including share-based compensation expense of $274 million and total depreciation and amortization of $264 million. The increase in cash flow from operating activities during the first quarter of 2014 compared to the same period in 2013 was mainly due to an increase in net income, as adjusted for certain non-cash items described above.

Cash Used in Investing Activities Cash used in investing activities during the first quarter of 2014 primarily resulted from $1.51 billion of net purchases of marketable securities and $363 million for capital expenditures related to the purchase of servers, network infrastructure, and the construction of data centers and buildings.

We anticipate making capital expenditures in 2014 of approximately $2.0 billion to $2.5 billion. We also anticipate spending approximately $4.4 billion in cash as part of the purchase prices for the acquisitions of WhatsApp and Oculus. The cash purchase price related to WhatsApp acquisition is subject to certain adjustments such that the cash paid will comprise at least 25% of the aggregate transaction consideration. These acquisitions are still subject to customary closing conditions but expected to close in 2014.

We have agreed to pay WhatsApp a $1 billion termination fee in cash if the closing of this acquisition has not occurred by August 19, 2014 (or August 19, 2015 if, as of August 19, 2014, all closing conditions have been completed except for the receipt of certain regulatory approvals). We have also agreed to pay Oculus up to an additional $60 million in cash upon completion of certain milestones. The earn-out portion that would be payable to Oculus employee stockholders is also subject to continuous employment through the applicable payment dates.

29 -------------------------------------------------------------------------------- Cash Provided by (Used in) Financing Activities Cash provided by financing activities was $262 million for the first quarter of 2014, which primarily resulted from $348 million of excess tax benefit from stock award activities, offset by $84 million of payments related to our capital lease transactions.

Cash used in financing activities was $444 million for the first quarter of 2013, which primarily resulted from $405 million of tax payments related to the net share settlement of equity awards.

Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of March 31, 2014.

Contractual Obligations There were no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, except as noted in "Cash Used in Investing Activities" above.

Contingencies We are involved in claims, lawsuits, government investigations, and proceedings.

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. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings 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 8 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 U.S. generally accepted accounting principles (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.

We believe that the assumptions and estimates associated with revenue recognition for Payments and other fees, income taxes and share-based compensation 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, 2013.

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, will 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 gain recognized in the first quarter of 2014 was not material. We recognized foreign currency loss of $11 million in the first quarter of 2013.

30 -------------------------------------------------------------------------------- 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 and U.S. government and U.S. government agency 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 result in a decrease of approximately $61 million and $73 million in the market value of our available-for-sale debt securities as of March 31, 2014 and December 31, 2013, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.

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, 2014, 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.

31 --------------------------------------------------------------------------------

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy