DoorDash, Inc. (DASH) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Overview
We have built a logistics and technology platform that enables local businesses to address consumers’ expectations of ease and immediacy. We built our products to serve the needs of three key constituents: merchants, consumers, and Dashers. We do this primarily through our Marketplace, which offers a broad array of services that enable merchants to solve mission-critical challenges such as customer acquisition and demand generation, order fulfillment, merchandising, payment processing, and customer support. Our Marketplace enables merchants to establish an online presence and expand their reach by connecting them with millions of consumers. Merchants can fulfill this demand through delivery, generally facilitated by our local logistics platform, or in-person pickup by consumers. We also enable merchants to advertise and promote on our platform in order to acquire new consumers and drive incremental sales.
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In addition to our Marketplace, which accounts for the vast majority of our revenue today, our Platform Services business, which primarily consists of Drive and Storefront, offers services to help merchants facilitate sales through their own channels. Drive, our white-label logistics service, enables merchants to fulfill consumer demand generated through their own channels using our local logistics platform. Storefront enables merchants to create their own branded online ordering experience, providing them with a turnkey solution to offer consumers on-demand access to e-commerce without investing in in-house engineering or logistics capabilities.
We currently operate our business in the U.S., Canada, Australia, Japan, and Germany.
Initial Public Offering
On December 9, 2020, we completed our IPO in which we issued and sold 33,000,000 shares of Class A common stock at the public offering price of $102 per share. We received net proceeds of $3.3 billion from sales of our shares in the IPO, after deducting underwriting discounts and commissions and offering expenses. For additional information, see Note 1 - Organization and Description of Business included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Recent Developments
On November 9, 2021, we entered into a definitive agreement to acquire Wolt. Headquartered in Helsinki, Finland, Wolt is a leading local commerce platform with operations in 23 countries across Europe, Japan, and Israel. We expect the acquisition of Wolt will increase our international scale, accelerate our product development, and improve our investment efficiency. The closing is expected in the first half of 2022, subject to customary regulatory approvals and other closing conditions. We expect the acquisition of Wolt to increase our Marketplace GOV and revenue, as well as our costs and expenses.
On February 14, 2022, we entered into a definitive agreement to acquire an ordering and payment platform company domiciled in the United States for approximately $90 million in cash, subject to customary adjustments. The transaction is subject to customary closing conditions and is expected to close in the first quarter of 2022.
Key Business and Non-GAAP Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key business and non-GAAP metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | ||||||||
| Total Orders | 263 | 816 | 1,390 | ||||||||
| Marketplace GOV | $ | 8,039 | $ | 24,664 | $ | 41,944 | |||||
| Contribution Profit (Loss)(1) | $ | (200) | $ | 663 | $ | 1,071 | |||||
| Contribution Margin(1) | (23) | % | 23 | % | 22 | % | |||||
| Contribution Profit (Loss) as a % of Marketplace GOV | (2) | % | 3 | % | 3 | % | |||||
| Adjusted EBITDA(1) | $ | (475) | $ | 189 | $ | 289 | |||||
| Adjusted EBITDA Margin(1) | (54) | % | 7 | % | 6 | % | |||||
| Adjusted EBITDA as a % of Marketplace GOV | (6) | % | 1 | % | 1 | % |
(1)Contribution Profit (Loss), Contribution Margin, Adjusted EBITDA, and Adjusted EBITDA Margin are non-GAAP financial measures. For more information regarding our use of these measures and reconciliations to the most directly comparable financial measures calculated in accordance with GAAP, see the section titled “Non-GAAP Financial Measures."
Total Orders. We define Total Orders as all orders completed on the DoorDash platform, including those completed through our Marketplace and Platform Services businesses, over the period of measurement.
In the year ended December 31, 2021, Total Orders increased to 1.4 billion, or 70% growth compared to the year ended December 31, 2020. The increase in Total Orders was driven by increased engagement of existing consumers, the addition of new consumers, and an increase in the number of orders completed through Platform Services businesses.
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Marketplace GOV. We define Marketplace GOV as the total dollar value of orders completed on our Marketplace, including taxes, tips3, and any applicable consumer fees, including membership fees related to DashPass. Marketplace orders include orders completed through Pickup and DoorDash for Work. Marketplace GOV does not include the dollar value of orders, taxes and tips, or fees charged to merchants, for orders fulfilled through Drive and Storefront.
In the year ended December 31, 2021, Marketplace GOV increased to $41.9 billion, or 70% growth compared to the year ended December 31, 2020, consistent with the growth in Total Orders.
Contribution Profit (Loss).4 We define Contribution Profit (Loss) as our gross profit (loss) less sales and marketing expense plus (i) depreciation and amortization expense related to cost of revenue, (ii) stock-based compensation expense and certain payroll tax expense included in cost of revenue and sales and marketing expenses, and (iii) allocated overhead included in cost of revenue and sales and marketing expenses. Gross profit (loss) is defined as revenue less (i) cost of revenue, exclusive of depreciation and amortization and (ii) depreciation and amortization related to cost of revenue. We define Contribution Margin as Contribution Profit (Loss) as a percentage of revenue for the same period.
We use Contribution Profit (Loss) to evaluate our operating performance and trends. We believe that Contribution Profit (Loss) is a useful indicator of the economic impact of orders fulfilled through DoorDash as it takes into account the direct expenses associated with generating and fulfilling orders.
In the year ended December 31, 2021, Contribution Profit improved to $1.1 billion, compared to a Contribution Profit of $663 million in the year ended December 31, 2020, driven primarily by the growth in Marketplace GOV. In the year ended December 31, 2021, Contribution Margin decreased to 22%, compared to 23% in the year ended December 31, 2020, due to increases in Adjusted Cost of Revenue and Dasher acquisition costs.
Contribution Profit (Loss) is a non-GAAP financial measure with certain limitations regarding its usefulness. It does not reflect our financial results in accordance with GAAP as it does not include the impact of certain expenses that are reflected in our consolidated statements of operations. Accordingly, Contribution Profit (Loss) is not indicative of our overall results or an indicator of past or future financial performance. Further, it is not a financial measure of total company profitability and it is neither intended to be used as a proxy for total company profitability nor does it imply profitability for our business.
Adjusted EBITDA.5 We define Adjusted EBITDA as net income (loss), adjusted to exclude (i) certain legal, tax, and regulatory settlements, reserves, and expenses, (ii) a one-time non-cash change in fair value of a forward contract related to the issuance of our Series F redeemable convertible preferred stock, (iii) loss on disposal of property and equipment, (iv) transaction-related expense, (v) impairment expenses, (vi) provision for income taxes, (vii) interest income and expense, (viii) other income (expense), net, (ix) stock-based compensation expense and certain payroll tax expense, and (x) depreciation and amortization expense. Adjusted EBITDA is a performance measure that we use to assess our operating performance and the operating leverage in our business. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue for the same period.
In the year ended December 31, 2021, Adjusted EBITDA increased to $289 million, compared to Adjusted EBITDA of $189 million in the year ended December 31, 2020, driven primarily by the growth in Marketplace GOV. In the year ended December 31, 2021, Adjusted EBITDA Margin decreased to 6%, compared to 7% in the year ended December 31, 2020, due primarily to increases in Adjusted Cost of Revenue and Dasher acquisition costs.
Components of Results of Operations
Revenue
We generate a substantial majority of our revenue from orders completed through our Marketplace and the related commissions charged to partner merchants and fees charged to consumers. Commissions from partner merchants are based on an agreed-upon rate applied to the total dollar value of goods ordered in exchange for using our Marketplace to sell the partner merchants’ products. Fees from consumers are for use of our Marketplace to arrange for delivery services.
3 Dashers receive 100% of tips.
4 For more information about Contribution Profit (Loss) and Contribution Margin, including the limitations of such measures, and a reconciliation of Contribution Profit (Loss) to gross profit (loss), the most directly comparable financial measure calculated in accordance with GAAP, see the section titled “Non-GAAP Financial Measures.”
5 For more information about Adjusted EBITDA and Adjusted EBITDA Margin, including the limitations of such measures and more detail on the specific adjustments, and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP, as well as a calculation of Adjusted EBITDA Margin, see the section titled “Non-GAAP Financial Measures."
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We recognize revenue from Marketplace orders on a net basis as we are an agent for both partner merchants and consumers. Our revenue therefore reflects commissions charged to partner merchants and fees charged to consumers less (i) Dasher payout and (ii) refunds, credits, and promotions, which includes certain discounts and incentives provided to consumers, including those for referring a new customer. Revenue from our Marketplace is recognized at the point in time when the consumer obtains control of the merchant’s products.
We also generate revenue from membership fees paid by consumers for DashPass, which is recognized as part of our Marketplace revenue. Revenue generated from our DashPass memberships is recognized on a ratable basis over the contractual period, which is generally one month to one year depending on the type of membership purchased by the consumer.
In addition, we generate revenue from other sources, including from our Platform Services business, which primarily consists of our Drive and Storefront offerings. We generate revenue from Drive by collecting per-order fees from merchants that use our local logistics platform to arrange for delivery services that fulfill demand generated through their own channels. Revenue from Drive is recognized at the point in time when the consumer obtains control of the merchant’s products.
Cost of Revenue, Exclusive of Depreciation and Amortization
Cost of revenue primarily consists of (i) order management costs, which include payment processing charges, net of rebates issued from payment processors, costs associated with cancelled orders, insurance expenses, and costs related to placing orders with non-partner merchants, and costs related to first party product sales, for which we take control of inventory (ii) platform costs, which include costs for onboarding merchants and Dashers, costs for providing support for consumers, merchants, and Dashers, and technology platform infrastructure costs, and (iii) personnel costs, which include personnel-related compensation expenses related to our local operations, support, and other teams, and allocated overhead. Personnel-related compensation expenses primarily include salary, bonus, benefits, and stock-based compensation expense. Allocated overhead is determined based on an allocation of shared costs, such as facilities (including rent and utilities) and information technology costs, among all departments based on employee headcount.
Sales and Marketing
Sales and marketing expenses primarily consist of advertising and other ancillary expenses related to merchant, consumer, and Dasher acquisition, including certain consumer referral credits and Dasher referral fees paid to the referrers to the extent they represent fair value of acquiring a new consumer or a new Dasher, brand marketing expenses, personnel-related compensation expenses for sales and marketing employees, and commissions expense including amortization of deferred contract costs, as well as allocated overhead.
Research and Development
Research and development expenses primarily consist of personnel-related compensation expenses related to data analytics and the design of, product development of, and improvements to our platform, as well as expenses associated with the licensing of third-party software and allocated overhead.
General and Administrative
General and administrative expenses primarily consist of legal, tax, and regulatory expenses, which include litigation settlement expenses and sales and indirect taxes, personnel-related compensation expenses related to administrative employees, which include finance and accounting, human resources and legal, chargebacks associated with fraudulent credit card transactions, professional services fees, transaction-related expenses, bad debt expense, and allocated overhead.
Depreciation and Amortization
Depreciation and amortization expenses primarily consist of depreciation and amortization expenses associated with our property and equipment and intangible assets. Depreciation primarily includes expenses associated with equipment for merchants, computer equipment and software, office equipment, and leasehold improvements. Amortization includes expenses associated with our capitalized software and website development costs, as well as acquired intangible assets.
Interest Income
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Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.
Interest Expense
Interest expense consists of interest costs related to our revolving credit facility and payment-in-kind interest on our Convertible Notes issued in February 2020.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains and losses from transactions denominated in a currency other than the functional currency and non-cash change in fair value of a forward contract liability (entered into and settled in the year ended December 31, 2019) in connection with the issuance of shares of our Series F redeemable convertible preferred stock.
Provision for Income Taxes
Provision for income taxes primarily consists of U.S. federal and state income tax and franchise tax, as well as international taxes from foreign operations.
Results of Operations
The following table summarizes our historical consolidated statements of operations data:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Revenue | $ | 885 | $ | 2,886 | $ | 4,888 | |||||
| Costs and expenses:(1) | |||||||||||
| Cost of revenue, exclusive of depreciation and amortization | 523 | 1,368 | 2,338 | ||||||||
| Sales and marketing | 594 | 957 | 1,619 | ||||||||
| Research and development | 107 | 321 | 430 | ||||||||
| General and administrative | 245 | 556 | 797 | ||||||||
| Depreciation and amortization(2) | 32 | 120 | 156 | ||||||||
| Total costs and expenses | 1,501 | 3,322 | 5,340 | ||||||||
| Loss from operations | (616) | (436) | (452) | ||||||||
| Interest income | 18 | 7 | 3 | ||||||||
| Interest expense | — | (32) | (14) | ||||||||
| Other (expense) income, net | (68) | 3 | — | ||||||||
| Loss before income taxes | (666) | (458) | (463) | ||||||||
| Provision for income taxes | 1 | 3 | 5 | ||||||||
| Net loss | $ | (667) | $ | (461) | $ | (468) |
(1)Costs and expenses include stock-based compensation expense as follows:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Cost of revenue, exclusive of depreciation and amortization | $ | 2 | $ | 31 | $ | 46 | |||||
| Sales and marketing | 2 | 37 | 52 | ||||||||
| Research and development | 8 | 171 | 182 | ||||||||
| General and administrative | 6 | 83 | 206 | ||||||||
| Total stock-based compensation expense | $ | 18 | $ | 322 | $ | 486 |
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(2)Depreciation and amortization related to the following:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Cost of revenue | $ | 27 | $ | 97 | $ | 98 | |||||
| Sales and marketing | 3 | 14 | 20 | ||||||||
| Research and development | 1 | 6 | 30 | ||||||||
| General and administrative | 1 | 3 | 8 | ||||||||
| Total depreciation and amortization | $ | 32 | $ | 120 | $ | 156 |
The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:
| Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | |||||||
| Revenue | 100 | % | 100 | % | 100 | % | |||
| Costs and expenses: | |||||||||
| Cost of revenue, exclusive of depreciation and amortization | 59 | % | 47 | % | 48 | % | |||
| Sales and marketing | 67 | % | 33 | % | 33 | % | |||
| Research and development | 12 | % | 11 | % | 9 | % | |||
| General and administrative | 28 | % | 20 | % | 16 | % | |||
| Depreciation and amortization | 4 | % | 4 | % | 3 | % | |||
| Total costs and expenses | 170 | % | 115 | % | 109 | % | |||
| Loss from operations | (70) | % | (15) | % | (9) | % | |||
| Interest income | 2 | % | — | % | — | % | |||
| Interest expense | — | % | (1) | % | — | % | |||
| Other (expense) income, net | (7) | % | — | % | — | % | |||
| Loss before income taxes | (75) | % | (16) | % | (9) | % | |||
| Provision for income taxes | — | % | — | % | — | % | |||
| Net loss | (75) | % | (16) | % | (9) | % |
Comparison of the Years Ended 2021 and 2020
Revenue
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Revenue | $ | 885 | $ | 2,886 | $ | 4,888 | $ | 2,001 | 226 | % | $ | 2,002 | 69 | % |
Revenue increased by $2.0 billion, or 69%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by a 70% increase in Total Orders to 1.4 billion, which led to a 70% increase in Marketplace GOV to $41.9 billion. The increase in Total Orders was primarily driven by increased engagement of existing consumers, the addition of new consumers, and an increase in the number of orders completed through Platform Services businesses.
Cost of Revenue, Exclusive of Depreciation and Amortization
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Cost of revenue, exclusive of depreciation and amortization | $ | 523 | $ | 1,368 | $ | 2,338 | $ | 845 | 162 | % | $ | 970 | 71 | % |
Cost of revenue, exclusive of depreciation and amortization, increased by $970 million, or 71%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily attributable to an increase in Total Orders and Marketplace GOV, as well as an increase in costs associated with our first-party distribution
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business. Order management costs increased by $638 million and platform costs increased by $273 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.
Sales and Marketing
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Sales and marketing | $ | 594 | $ | 957 | $ | 1,619 | $ | 363 | 61 | % | $ | 662 | 69 | % |
Sales and marketing expenses increased by $662 million, or 69%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by an increase of $529 million in consumer, Dasher, and merchant advertising expenses and an increase of $87 million in personnel-related compensation expenses and allocated overhead due to increased headcount.
Research and Development
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Research and development | $ | 107 | $ | 321 | $ | 430 | $ | 214 | 200 | % | $ | 109 | 34 | % |
Research and development expenses increased by $109 million, or 34%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by an increase of $225 million in personnel-related compensation expenses and allocated overhead due to increased headcount, partially offset by an increase in capitalized software and website development costs of $137 million.
As a percentage of revenue, research and development expenses were 9% in the year ended December 31, 2021, decreasing from 11% in the year ended December 31, 2020. The decrease in research and development expenses as a percentage of revenue was driven by increased operating leverage as a result of increasing scale in our business.
General and Administrative
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| General and administrative | $ | 245 | $ | 556 | $ | 797 | $ | 311 | 127 | % | $ | 241 | 43 | % |
General and administrative expenses increased by $241 million, or 43%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by an increase of $206 million in personnel-related compensation expenses and allocated overhead due to increased headcount.
As a percentage of revenue, general and administrative expenses were 16% in the year ended December 31, 2021, decreasing from 20% in the year ended December 31, 2020. The decrease in general and administrative expenses as a percentage of revenue was driven by increased operating leverage as a result of increasing scale in our business.
Depreciation and Amortization
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Depreciation and amortization | $ | 32 | $ | 120 | $ | 156 | $ | 88 | 275 | % | $ | 36 | 30 | % |
Depreciation and amortization expenses increased by $36 million, or 30%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by an increase of $46 million in amortization expense related to capitalized software and website development costs and an increase of $16 million in depreciation expenses related to equipment for merchants, partially offset by a decrease of $38 million in amortization expenses related to intangible assets as the existing technology acquired from Caviar was fully amortized in the fourth quarter of 2020.
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Interest Income
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||
| Interest income | $ | 18 | $ | 7 | $ | 3 | (11) | (61) | % | (4) | (57) | % |
Interest income decreased by 4 million, or 57%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease was primarily due to a reduction in average interest rates earned on our investments during 2021.
Interest Expense
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||
| Interest expense | — | $ | (32) | (14) | (32) | 100 | % | 18 | (56) | % |
Interest expense decreased by 18 million, or 56%, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease in interest expense was primarily attributable to the repayment of our Convertible Notes in February 2021.
Other (expense) income, net
| Year Ended December 31, | 2019 to 2020 | 2020 to 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Other (expense) income, net | $ | (68) | $ | 3 | $ | — | $ | 71 | (104) | % | $ | (3) | (100) | % |
Other income (expense), net was not material for the years ended December 31, 2021 and December 31, 2020.
Non-GAAP Financial Measures
We use adjusted cost of revenue, adjusted sales and marketing expense, adjusted research and development expense, adjusted general and administrative expense, Contribution Profit (Loss), Contribution Margin, Adjusted Gross Profit (Loss), Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our business and financial performance. We believe that these non-GAAP financial measures provide useful information to investors about our business and financial performance, enhance their overall understanding of our past performance and future prospects, and allow for greater transparency with respect to metrics used by our management in their financial and operational decision making. We are presenting these non-GAAP financial measures to assist investors in seeing our business and financial performance through the eyes of management, and because we believe that these non-GAAP financial measures provide an additional tool for investors to use in comparing results of operations of our business over multiple periods with other companies in our industry.
Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Further, these metrics have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statements of operations. Thus, our adjusted cost of revenue, adjusted sales and marketing expense, adjusted research and development expense, adjusted general and administrative expense, Contribution Profit (Loss), Contribution Margin, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.
We compensate for these limitations by providing a reconciliation of adjusted cost of revenue, adjusted sales and marketing expense, adjusted research and development expense, adjusted general and administrative expense, Contribution Profit (Loss), Contribution Margin, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin to their respective related GAAP financial measures. We encourage investors and others to review our business, results of operations, and financial information in its entirety, not to rely on any single financial measure, and to view adjusted cost of revenue, adjusted sales and marketing expense, adjusted research and
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development expense, adjusted general and administrative expense, Contribution Profit (Loss), Contribution Margin, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin in conjunction with their respective related GAAP financial measures.
Adjusted Cost of Revenue
We define adjusted cost of revenue as cost of revenue, exclusive of depreciation and amortization, excluding stock-based compensation expense and certain payroll tax expense, and allocated overhead. We exclude stock-based compensation as it is non-cash in nature and we exclude allocated overhead as it is generally a fixed cost and is not directly impacted by Total Orders.
The following table provides a reconciliation of cost of revenue, exclusive of depreciation and amortization, to adjusted cost of revenue:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Cost of revenue, exclusive of depreciation and amortization | $ | 523 | $ | 1,368 | $ | 2,338 | |||||
| Adjusted to exclude the following | |||||||||||
| Stock-based compensation expense and certain payroll tax expense | (2) | (32) | (48) | ||||||||
| Allocated overhead | (17) | (18) | (25) | ||||||||
| Adjusted cost of revenue | $ | 504 | $ | 1,318 | $ | 2,265 |
Adjusted Sales and Marketing Expense
We define adjusted sales and marketing expense as sales and marketing expenses excluding stock-based compensation expense and certain payroll tax expense and allocated overhead. We exclude stock-based compensation as it is non-cash in nature and we exclude allocated overhead as it is generally a fixed cost and is not directly impacted by Total Orders.
The following table provides a reconciliation of sales and marketing expense to adjusted sales and marketing expense:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Sales and marketing | $ | 594 | $ | 957 | $ | 1,619 | |||||
| Adjusted to exclude the following | |||||||||||
| Stock-based compensation expense and certain payroll tax expense | (2) | (38) | (53) | ||||||||
| Allocated overhead | (11) | (14) | (14) | ||||||||
| Adjusted sales and marketing | $ | 581 | $ | 905 | $ | 1,552 |
Adjusted Research and Development Expense
We define adjusted research and development expense as research and development expenses excluding stock-based compensation expense and certain payroll tax expense and allocated overhead. We exclude stock-based compensation as it is non-cash in nature and we exclude allocated overhead as it is generally a fixed cost and is not directly impacted by Total Orders.
The following table provides a reconciliation of research and development expense to adjusted research and development expense:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Research and development | $ | 107 | $ | 321 | $ | 430 | |||||
| Adjusted to exclude the following: | |||||||||||
| Stock-based compensation expense and certain payroll tax expense | (8) | (177) | (186) | ||||||||
| Allocated overhead | (12) | (14) | (13) | ||||||||
| Adjusted research and development | $ | 87 | $ | 130 | $ | 231 |
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Adjusted General and Administrative Expense
We define adjusted general and administrative expense as general and administrative expenses excluding stock-based compensation expense and certain payroll tax expense, certain legal, tax, and regulatory settlements, reserves, and expenses, transaction-related costs, impairment expenses, and including allocated overhead from cost of revenue, sales and marketing, and research and development. We exclude stock-based compensation as it is non-cash in nature and we exclude certain legal, tax, and regulatory settlements, reserves, and expenses, transaction-related costs, as well as impairment expenses, as these costs are not indicative of our operating performance.
The following table provides a reconciliation of general and administrative expense to adjusted general and administrative expense:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| General and administrative | $ | 245 | $ | 556 | $ | 797 | |||||
| Adjusted to exclude the following: | |||||||||||
| Stock-based compensation expense and certain payroll tax expense | (6) | (86) | (210) | ||||||||
| Certain legal, tax, and regulatory settlements, reserves, and expenses(1) | (86) | (160) | (77) | ||||||||
| Transaction-related costs | (5) | (1) | (10) | ||||||||
| Impairment expenses(2) | — | (11) | (1) | ||||||||
| Allocated overhead from cost of revenue, sales and marketing, and research and development | 40 | 46 | 52 | ||||||||
| Adjusted general and administrative | $ | 188 | $ | 344 | $ | 551 |
(1)We exclude certain costs and expenses from our calculation of adjusted general and administrative expense because management believes that these costs and expenses are not indicative of our core operating performance, do not reflect the underlying economics of our business, and are not necessary to operate our business. These excluded costs and expenses consist of (i) certain legal costs primarily related to worker classification matters, (ii) reserves for the collection of sales and indirect taxes that we do not expect to incur on a recurring basis, (iii) costs related to the settlement of an intellectual property matter, (iv) expenses related to supporting various policy matters, including those related to worker classification and price controls, and (v) donations as part of our COVID-19 pandemic relief efforts. We believe it is appropriate to exclude the foregoing matters from our calculation of adjusted general and administrative expense because (1) the timing and magnitude of such expenses are unpredictable and thus not part of management’s budgeting or forecasting process, and (2) with respect to worker classification matters, management currently expects such expenses will not be material to our results of operations over the long term as a result of increasing legislative and regulatory certainty in this area, including as a result of Proposition 22 and similar legislation.
(2)Consists of impairment expense related to an operating lease right-of-use asset associated with our former headquarters.
Contribution Profit (Loss)
We use Contribution Profit (Loss) to evaluate our operating performance and trends. We believe that Contribution Profit (Loss) is a useful indicator of the economic impact of orders fulfilled through DoorDash as it takes into account the direct expenses associated with generating and fulfilling orders. We define Contribution Profit (Loss) as our gross profit (loss) less sales and marketing expense plus (i) depreciation and amortization expense related to cost of revenue, (ii) stock-based compensation expense and certain payroll tax expense included in cost of revenue and sales and marketing expenses, and (iii) allocated overhead included in cost of revenue and sales and marketing expenses. We define gross margin as gross profit (loss) as a percentage of revenue for the same period and we define Contribution Margin as Contribution Profit (Loss) as a percentage of revenue for the same period.
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Gross profit (loss) is the most directly comparable financial measure to Contribution Profit (Loss). The following table provides a reconciliation of gross profit to Contribution Profit (Loss):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | ||||||||
| Revenue | $ | 885 | $ | 2,886 | $ | 4,888 | |||||
| Less: Cost of revenue, exclusive of depreciation and amortization | (523) | (1,368) | (2,338) | ||||||||
| Less: Depreciation and amortization related to cost of revenue | (27) | (97) | (98) | ||||||||
| Gross profit | $ | 335 | $ | 1,421 | $ | 2,452 | |||||
| Gross Margin | 38 | % | 49 | % | 50 | % | |||||
| Less: Sales and marketing | $ | (594) | $ | (957) | $ | (1,619) | |||||
| Add: Depreciation and amortization related to cost of revenue | 27 | 97 | 98 | ||||||||
| Add: Stock-based compensation expense and certain payroll tax expense included in cost of revenue and sales and marketing | 4 | 70 | 101 | ||||||||
| Add: Allocated overhead included in cost of revenue and sales and marketing | 28 | 32 | 39 | ||||||||
| Contribution Profit (Loss) | $ | (200) | $ | 663 | $ | 1,071 | |||||
| Contribution Margin | (23) | % | 23 | % | 22 | % |
Adjusted Gross Profit (Loss)
We define Adjusted Gross Profit (Loss) as gross profit (loss) plus (i) depreciation and amortization expense related to cost of revenue, (ii) stock-based compensation expense and certain payroll tax expense included in cost of revenue, and (iii) allocated overhead included in cost of revenue. Gross profit (loss) is defined as revenue less (i) cost of revenue, exclusive of depreciation and amortization and (ii) depreciation and amortization related to cost of revenue. Adjusted Gross Margin is defined as Adjusted Gross Profit (Loss) as a percentage of revenue for the same period.
The following table provides a reconciliation of gross profit to Adjusted Gross Profit:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | ||||||||
| Gross profit | $ | 335 | $ | 1,421 | $ | 2,452 | |||||
| Add: Depreciation and amortization related to cost of revenue | 27 | 97 | 98 | ||||||||
| Add: Stock-based compensation expense and certain payroll tax expense | 2 | 32 | 48 | ||||||||
| Add: Allocated overhead | 17 | 18 | 25 | ||||||||
| Adjusted Gross Profit | $ | 381 | $ | 1,568 | $ | 2,623 | |||||
| Adjusted Gross Margin | 43 | % | 54 | % | 54 | % |
Adjusted EBITDA
Adjusted EBITDA is a measure that we use to assess our operating performance and the operating leverage in our business. We define Adjusted EBITDA as net income (loss), adjusted to exclude (i) certain legal, tax, and regulatory settlements, reserves, and expenses, (ii) a one-time non-cash change in fair value of a forward contract related to the issuance of our Series F redeemable convertible preferred stock, (iii) loss on disposal of property and equipment, (iv) transaction-related costs, (v) impairment expenses, (vi) provision for income taxes, (vii) interest income and expense, (viii) other income (expense), net, (ix) stock-based compensation expense and certain payroll tax expense, and (x) depreciation and amortization expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue for the same period.
The following tables provide a reconciliation of net loss to Adjusted EBITDA and a calculation of net margin and Adjusted EBITDA Margin:
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| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2020 | 2021 | ||||||||
| Net loss | $ | (667) | $ | (461) | $ | (468) | |||||
| Certain legal, tax, and regulatory settlements, reserves, and expenses(1) | 86 | 160 | 77 | ||||||||
| Transaction-related costs | 5 | 1 | 10 | ||||||||
| Impairment expenses(2) | — | 11 | 1 | ||||||||
| Provision for income taxes | 1 | 3 | 5 | ||||||||
| Interest income and expense | (18) | 25 | 11 | ||||||||
| Other (income) expense, net(3) | 68 | (3) | — | ||||||||
| Stock-based compensation expense and certain payroll tax expense | 18 | 333 | 497 | ||||||||
| Depreciation and amortization expense | 32 | 120 | 156 | ||||||||
| Adjusted EBITDA | $ | (475) | $ | 189 | $ | 289 |
(1)We exclude certain costs and expenses from our calculation of Adjusted EBITDA because management believes that these costs and expenses are not indicative of our core operating performance, do not reflect the underlying economics of our business, and are not necessary to operate our business. These excluded costs and expenses consist of (i) certain legal costs primarily related to worker classification matters, (ii) reserves for the collection of sales and indirect taxes that we do not expect to incur on a recurring basis, (iii) costs related to the settlement of an intellectual property matter, (iv) expenses related to supporting various policy matters, including those related to worker classification and price controls, and (v) donations as part of our COVID-19 pandemic relief efforts. We believe it is appropriate to exclude the foregoing matters from our calculation of Adjusted EBITDA because (1) the timing and magnitude of such expenses are unpredictable and thus not part of management’s budgeting or forecasting process, and (2) with respect to worker classification matters, management currently expects such expenses will not be material to our results of operations over the long term as a result of increasing legislative and regulatory certainty in this area, including as a result of Proposition 22 and similar legislation.
(2)Consists of impairment expense related to an operating lease right-of-use asset associated with our former headquarters.
(3)In connection with the issuance of shares of our Series F redeemable convertible preferred stock, we committed to sell an existing investor shares of our Series F redeemable convertible preferred stock in a subsequent closing at the initial issuance price of the Series F redeemable convertible preferred stock. We determined this commitment to be a forward contract, classified as a liability and measured at fair value on a recurring basis, with changes in fair value recognized in other expense, net in the consolidated statements of operations. This forward contract was entered into and settled during the year ended December 31, 2019.
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | ||||||||
| Revenue | $ | 885 | $ | 2,886 | $ | 4,888 | |||||
| Net loss | $ | (667) | $ | (461) | $ | (468) | |||||
| Net margin | (75) | % | (16) | % | (10) | % |
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except percentages) | 2019 | 2020 | 2021 | ||||||||
| Revenue | $ | 885 | $ | 2,886 | $ | 4,888 | |||||
| Adjusted EBITDA | $ | (475) | $ | 189 | $ | 289 | |||||
| Adjusted EBITDA Margin | (54) | % | 7 | % | 6 | % |
Credit Facilities
On November 19, 2019, we entered into a revolving credit and guaranty agreement with JPMorgan Chase Bank, N.A., an affiliate of J.P. Morgan Securities LLC, and Goldman Sachs Lending Partners LLC, an affiliate of Goldman Sachs & Co. LLC, which, as amended and restated on August 7, 2020, provides for a $300 million unsecured revolving credit facility maturing on August 7, 2025, increasing to $400 million in aggregate revolving commitments upon the consummation of an IPO of our common stock on or prior to August 7, 2021. Loans under the credit facility bear interest, at our option, at (i) a base rate equal to the highest of (A) the prime rate, (B) the higher of the federal funds rate or a composite overnight bank borrowing rate plus 0.50%, or (C) an adjusted LIBOR rate for a one-month interest period plus 1.00%, or (ii) an adjusted LIBOR rate plus a margin equal to 1.00%. We are also obligated to pay other customary fees for a credit facility of this size and type, including letter of credit fees, an upfront fee, and an unused commitment fee. As of December 31, 2021, we were in compliance with the covenants under the revolving credit and guaranty agreement. As of December 31, 2021 and 2020, no amounts were drawn from the credit facility.
We maintain letters of credit established primarily for real estate leases and insurance policies. As of December 31, 2020 and 2021, we had $66 million and $60 million of issued letters of credit outstanding, respectively, of which $44 million and $39 million were issued from the revolving credit and guaranty agreement.
Convertible Notes
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On February 19, 2020, we issued $340 million aggregate principal amount of Convertible Notes pursuant to the Convertible Note Purchase Agreement, dated February 19, 2020, among us, Caviar, and the investors party thereto, or the Note Investors. We received net proceeds of $333 million, net of $2 million in debt issuance costs and an original issue discount of $5 million. The interest rate under the Convertible Notes was 10.00% per annum, payable quarterly in arrears. In February 2021, we repaid the outstanding principal and accrued interest of the Convertible Notes in full for $375 million.
Liquidity and Capital Resources
In December 2020, we completed our IPO in which we received net proceeds of $3.3 billion from sales of shares of our Class A common stock in the IPO, after deducting underwriting discounts and commissions.
As of December 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $4.4 billion, which consisted of cash and cash equivalents of $2.5 billion, and short-term marketable securities of $1.3 billion and long-term marketable securities of $650 million. Additionally, funds held at payment processors of $320 million represent cash due from our payment processors for cleared transactions with merchants and consumers, as well as funds remitted to payment processors for Dasher payout. Cash and cash equivalents consisted of cash on deposit with banks as well as institutional money market funds and U.S. Treasury securities. Marketable securities consisted of commercial paper, corporate bonds, U.S. government agency securities, and U.S. Treasury securities.
We have generated significant operating losses from our operations as reflected in our accumulated deficit of $2.1 billion as of December 31, 2021. To execute on our strategic initiatives to continue to grow our business, we may incur operating losses and generate negative cash flows from operations in the future, and as a result, we may require additional capital resources. We believe our existing cash, cash equivalents, and marketable securities, along with the $400 million in available borrowings under our unsecured revolving credit facility, will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months and beyond.
Our material cash requirements relate to operating lease obligations for corporate office facility leases and purchase commitments for purchase of onboarding, technology platform infrastructure services and advertising services. For Information on contractual obligations for operating leases, see Note 8 - Leases included in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. For information on non-cancellable purchase commitments as of December 31, 2021, see "Non-cancelable Purchase Commitments" section of Note 10 - Commitments and Contingencies included in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Our future capital requirements will depend on many factors, including, but not limited to our growth, our ability to attract and retain merchants, consumers, and Dashers that utilize our platform, the continuing market acceptance of our offerings, the timing and extent of spending to support our efforts to develop our platform, and the expansion of sales and marketing activities, the timing and extent of spending for policy and worker classification initiatives. Further, we may in the future enter into arrangements to acquire or invest in businesses, products, services, and technologies. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, and results of operations could be adversely affected.
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2019 | 2020 | 2021 | ||||||||
| Net cash (used in) provided by operating activities | $ | (467) | $ | 252 | $ | 692 | |||||
| Net cash used in investing activities | (570) | (192) | (2,047) | ||||||||
| Net cash provided by (used in) financing activities | 1,109 | 3,996 | (483) | ||||||||
| Foreign currency effect on cash, cash equivalents, and restricted cash | — | 2 | (1) | ||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 72 | $ | 4,058 | $ | (1,839) |
Operating Activities
Cash provided by operating activities was $692 million for the year ended December 31, 2021. This consisted of a net loss of $468 million, offset by non-cash stock-based compensation expense of $486 million, non-cash depreciation and amortization expense of $156 million, non-cash reduction of operating lease right-of-use assets and accretion of operating lease liabilities of $52 million, non-cash bad debt expense of $36 million, non-cash interest expense of $11 million related
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to the convertible notes, and other non-cash expenses of $28 million. The net changes in operating assets and liabilities was the result of an increase of $595 million in accrued expenses and other current liabilities, primarily related to Dasher and merchant payable, insurance reserves, accrued operations related expenses, contract liabilities, and accrued advertising, an decrease of $85 million in prepaid expenses and other current assets, and an increase of $79 million in accounts payable, offset by an increase of $174 million in funds held at payment processors, an increase of $94 in accounts receivable, net, a decrease of $44 million for payments for operating lease liabilities, an increase of $51 in other assets and an decrease of $5 million in other liabilities. The increase in cash provided by operating activities for the year ended December 31, 2021 compared to the year ended December 31, 2020 was mainly due to the decrease in net loss and increases in non-cash expenses for the year ended December 31, 2021.
Cash provided by operating activities was $252 million for the year ended December 31, 2020. This consisted of a net loss of $461 million, offset by non-cash stock-based compensation expense of $322 million, non-cash depreciation and amortization expense of $120 million, non-cash reduction of operating lease right-of-use assets and accretion of operating lease liabilities of $40 million, non-cash interest expense of $31 million related to the convertible notes, non-cash bad debt expense of $16 million, and other non-cash expenses of $18 million. The net changes in operating assets and liabilities was the result of an increase of $587 million in accrued expenses and other current liabilities, primarily related to litigation reserves, sales tax payable and accrued sales and indirect taxes, accrued operations related expenses, Dasher and merchant payable, and contract liabilities, an increase of $54 million in accounts payable, and an increase of $11 million in other liabilities, offset by an increase of $248 million in accounts receivable, net, an increase of $96 million in funds held at payment processors, an increase of $96 million in prepaid expenses and other current assets, a decrease of $26 million for payments for operating lease liabilities, and an increase of $20 million in other assets.
Investing Activities
Cash used in investing activities was $2,047 million for the year ended December 31, 2021, which primarily consisted of purchases of marketable securities of $2,344 million, purchases of non-marketable equity securities of $409 million, purchases of property and equipment of $129 million, and cash outflows for capitalized software and website development costs of $108 million, offset by proceeds from the sales and maturities of marketable securities of $944 million.
Cash used in investing activities was $192 million for the year ended December 31, 2020, which primarily consisted of purchases of marketable securities of $593 million, purchases of property and equipment of $106 million, cash outflows for capitalized software and website development costs of $53 million, and cash paid for acquisitions, net of cash acquired, of $28 million, offset by proceeds from the sales and maturities of marketable securities of $587 million.
Financing Activities
Cash used by financing activities was $483 million for the year ended December 31, 2021, which consisted of $333 million of repayment of the convertible promissory notes, $172 million of cash outflows for taxes paid related to net share settlement of equity awards, and $10 million of payment of deferred offering costs, partially offset by $32 million of proceeds from the exercise of stock options.
Cash provided by financing activities was $4.0 billion for the year ended December 31, 2020, which consisted of $3.3 billion of proceeds from issuance of common stock upon our IPO, net of underwriter discounts, $382 million of net proceeds from the issuance of redeemable convertible preferred stock, $333 million of net proceeds from the issuance of convertible promissory notes, and $5 million of proceeds from the exercise of stock options, offset by $7 million of cash outflows for taxes paid related to net share settlement of equity awards, and $6 million of payment of deferred offering costs.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements in accordance with GAAP requires us to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the period presented. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows could be affected.
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We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
We recognize revenue in accordance with ASC 606. We generate a substantial majority of our revenue from orders completed through our Marketplace and the related commissions charged to partner merchants and fees charged to consumers. A partner merchant represents a merchant that has entered into a contractual agreement with DoorDash. Revenue from our Marketplace is recognized at the point in time when the consumer obtains control of the merchant’s products. We also generate revenue from membership fees paid by consumers for DashPass, which is recognized as part of our Marketplace. Revenue generated from DashPass memberships is recognized on a ratable basis over the contractual period, which is generally one month to one year depending on the type of membership purchased by the consumer. In addition, we also generate revenue from our Drive offering by collecting per-order fees from merchants that use our local logistics platform to arrange for delivery services that fulfill demand generated through their own channels. Revenue from Drive is recognized at the point in time when the consumer obtains control of the merchant’s products.
Our local logistics platform facilitates orders between consumers and partner merchants. Separately, the platform arranges for consumers to obtain delivery service from Dashers. We determined that the order facilitation service and delivery facilitation service are distinct performance obligations and therefore considered whether it is a principal or agent separately for each of these items. The order facilitation service and the delivery facilitation service are distinct given that the consumer can benefit from each item separately. Further, the order facilitation service and delivery facilitation service are separately identifiable as the nature of the promises are to transfer the order facilitation service and delivery facilitation service individually, rather than as a combined item.
Principal vs. Agent Considerations
Judgment is required in determining whether we are is the principal or the agent in transactions with partner merchants, consumers, and Dashers. As it relates to the accounting for order facilitation services and delivery facilitation services, we evaluated whether to present revenue on a gross versus net basis based on whether we control each specified good or service before it is provided to the consumer in Marketplace transactions.
With respect to order facilitation services, we have has determined that we are an agent for partner merchants in facilitating the sale of products to the consumer through our Marketplace. The consumer accesses the our local logistics platform to identify merchants and places an order for merchants’ products. These orders are picked up from partner merchants and delivered to consumers by Dashers. We do not control the products prior to them being transferred to the consumer as it neither has the ability to redirect the products to another consumer nor does it obtain any economic benefit from the products.
With respect to the vast majority of our delivery facilitation services, we have determined that we are acting as an agent for the consumer in facilitating the delivery of products by connecting consumers with Dashers. As our role with the delivery facilitation service is only to arrange for a delivery opportunity to be offered to prospective Dashers, we do not control how the delivery service is ultimately provided to the consumer.
In the vast majority of our transactions with end-users, we are an agent in facilitating the sale of products and delivery services, thus we report revenue on a net basis, reflecting amounts collected from consumers, less amounts remitted to merchants and Dashers.
We recognize revenue from both partner merchants and consumers for each successfully completed transaction. We satisfy our performance obligations to a partner merchant when there is a successful sale of the merchant’s products and we meet our performance obligation to a consumer once the Dasher has picked up the products from the merchant for delivery to the consumer.
Gift Cards
We sell gift cards to consumers that can be redeemed through its Marketplace. Those gift cards have no expiration date and administrative fees are not charged on unused gift cards. In prior periods, with limited history as to consumers' redemption patterns, proceeds from the sale of gift cards were fully deferred and recorded as contract liabilities until consumers use the card to place orders on its platform. When gift cards are redeemed, revenue is recognized on a net
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basis as the difference between the amounts collected from consumers less amounts remitted to merchants and Dashers. During the year ended December 31, 2021, we concluded that we had developed sufficient historical evidence regarding the pattern of consumer redemptions of gift cards to have the ability to estimate the portion of outstanding gift cards that will never be redeemed (“breakage”) and for which there is no legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. We recognize the breakage amounts as revenue, proportionate to the pattern of revenue recognition for the gift card redemptions. As a result of this change in estimate, we recorded $48 million of gift card breakage revenue during the year ended December 31, 2021. Estimating future breakage rates requires judgment based on current and historical patterns of redemption, and the actual breakage rates may vary from the estimate.
Dasher Incentives and Referrals
We offer various incentives to Dashers, which are primarily recorded within Dasher payout and reduce revenue. These are offered in various forms and include:
Peak pay: We make additional payments to Dashers to incentivize them to accept delivery opportunities during peak demand time.
Dasher referrals: We offer referral bonuses to referring Dashers, as well as to referred Dashers, once the new Dasher has met certain qualifying conditions. We expense the fair value of payments made to the referring Dashers as incurred in sales and marketing expenses in our consolidated statements of operations, since the marketing of our platform to acquire new Dashers represents a distinct benefit to us. The portion of these referral bonuses in excess of the fair value of payments made to the referring Dashers is accounted for as a reduction of revenue. Payments made to the referred Dashers are recorded within Dasher payout and reduce revenue at the time the corresponding revenue transaction is recorded.
Business Combinations
We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
Insurance Reserves
We utilize third-party insurance which include retained insurance deductibles to insure costs including auto liability related to both bodily injury and physical damage, and uninsured and underinsured motorists up to a certain dollar retention limit. The recorded insurance reserves reflect the estimated cost for claims incurred but not paid and claims that have been incurred but not yet reported. The estimate of our ultimate deductible obligation utilizes actuarial techniques applied to historical claim and loss experience. Given our limited operational history, we use assumptions based on actuarial judgments with consideration toward relevant industry claim and loss development factors, which includes the development time frame and settlement patterns, and expected loss rates. Reserves are periodically reviewed and adjusted as necessary as experience develops or new information becomes known. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts.
Loss Contingencies
We are involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is both probable that a loss has been incurred and the amount or range can be reasonably estimated. We disclose material contingencies when we believe that a loss is not probable but reasonably possible. Significant judgment is required to determine both probability and the estimated amount. We review these provisions on a
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quarterly basis and adjust these provisions accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
The outcome of legal matters and litigation is inherently uncertain. Therefore, if one or more of these legal 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, could be materially adversely affected.
Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.