Analysis of Facebook IPO
Image via CrunchBase
Facebook. This one might be for real. I remember fondly the days of the dot.com bubble in the early 90's and all the unprofitable companies that went public and that eventually went out of business. Here is another internet IPO that is actually profitable and is growing fast.
Here's the executive summary from the registration statement:
FACEBOOK, INC.
Our mission is to make the world more open and connected.
People 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.
Developers can use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach our global network of users and to build products that are more personalized, social, and engaging.
Advertisers can engage with more than 900 million 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. We offer advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads.
We believe that we are at the forefront of enabling faster, easier, and richer communication between people and that Facebook has become an integral part of many of our users’ daily lives. We have experienced rapid growth in the number of users and their engagement.
•We had 901 million MAUs as of March 31, 2012, an increase of 33% as compared to 680 million MAUs as of March 31, 2011.
•We had 526 million daily active users (DAUs) on average in March 2012, an increase of 41% as compared to 372 million DAUs in March 2011.
•We had 488 million MAUs who used Facebook mobile products in March 2012.
•There were more than 125 billion friend connections on Facebook as of March 31, 2012.
•Our users generated an average of 3.2 billion Likes and Comments per day during the first quarter of 2012.
Below is an excerpt from Facebook's registration statement. As you can see, Facebook only lost money in 2007 and 2008 and has been profitable since then, recording $1 billion in net income in 2011. The year over year comparisons between March 2011 and 2012 don't show as much growth in net income as revenue, but the company is clearly spending a lot more on R&D, Marketing and G&A as it grows, a large portion of which has been paid-for by issuing equity. Facebook has an incredible 19% net profit margin for the most recent quarter (27% for the most recent fiscal year).
Year Ended December 31,Three Months
Ended March 31, 200720082009201020112011 2012 (in millions, except per share data)Consolidated Statements of Operations Data: Revenue $153 $272 $777 $1,974 $3,711 $731 $1,058 Costs and expenses(1) : Cost of revenue 41 124 223 493 860 167 277 Marketing and sales 32 76 115 184 427 68 159 Research and development 81 47 87 144 388 57 153 General and administrative 123 80 90 121 280 51 88
Total costs and expenses 277 327 515 942 1,955 343 677
Income (loss) from operations (124) (55) 262 1,032 1,756 388 381 Interest and other income (expense), net (11) (1) (8) (24) (61) 10 1
Income (loss) before provision for income taxes (135) (56) 254 1,008 1,695 398 382 Provision for income taxes 3 — 25 402 695 165 177
Net income (loss) $(138) $(56) $229 $606 $1,000 $233 $205
Net income (loss) attributable to Class A and Class B common stockholders $(138) $(56) $122 $372 $668 $153 $137
Earnings (loss) per share attributable to Class A and Class B common stockholders(2): Basic $(0.16) $(0.06) $0.12 $0.34 $0.52 $0.12 $0.10
Diluted $(0.16) $(0.06) $0.10 $0.28 $0.46 $0.11 $0.09
Pro forma earnings per share attributable to Class A and Class B common stockholders(2): Basic $0.49 $0.10
Diluted $0.43 $0.09
43
Table of Contents
(1)Costs and expenses include share-based compensation expense as follows:
Year Ended December 31, Three Months
Ended March 31, 2007 2008 2009 2010 2011 2011 2012 (in millions)Cost of revenue $1 $— $— $— $9 $— $4 Marketing and sales 3 4 2 2 43 — 23 Research and development 56 7 6 9 114 4 60 General and administrative 13 19 19 9 51 3 16
Total share-based compensation expense $ 73 $ 30 $ 27 $ 20 $217 $ 7 $103
(2)See note 2 of the notes to our consolidated financial statements for a description of how we compute basic and diluted earnings (loss) per share attributable to Class A and Class B common stockholders and pro forma basic and diluted earnings per share attributable to Class A and Class B common stockholders.
As of December 31, As of
March 31,
2012 2007 2008 2009 2010 2011 (in millions)Consolidated Balance Sheets Data: Cash, cash equivalents, and marketable securities $ 305 $ 297 $633 $1,785 $3,908 $3,910 Working capital 250 279 703 1,857 3,705 3,655 Property and equipment, net 82 131 148 574 1,475 1,855 Total assets 448 505 1,109 2,990 6,331 6,859 Total liabilities 174 170 241 828 1,432 1,587 Total stockholders’ equity 273 335 868 2,162 4,899 5,272
The statement of cash flows (below) shows that the company has strong cash flow from operations, however it makes heavy investments in property and equipment to support growth. Cash flow from operations increased 28% for the quarter Mar 12 compared to Mar 11; cash flow from operations increased 122% for the full year 2011 compared to 2010.
FACEBOOK, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions)
Year Ended December 31,Three Months
Ended
March 31, 20092010201120112012 (unaudited)Cash flows from operating activities Net income $ 229 $606 $1,000 $233 $205 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 78 139 323 51 110 Loss on write-off of assets 1 3 4 1 1 Share-based compensation 27 20 217 7 103 Tax benefit from share-based award activity 50 115 433 69 54 Excess tax benefit from share-based award activity (51) (115) (433) (69) (54) Changes in assets and liabilities: Accounts receivable (112) (209) (174) 27 65 Prepaid expenses and other current assets (30) (38) (31) (26) (28) Other assets (59) 17 (32) (10) (32) Accounts payable (7) 12 6 (3) (3) Platform partners payable — 75 96 24 7 Accrued expenses and other current liabilities 27 20 38 6 2 Deferred revenue and deposits 1 37 49 17 3 Other liabilities 1 16 53 18 8
Net cash provided by operating activities 155 698 1,549 345 441 Cash flows from investing activities Purchases of property and equipment (33) (293) (606) (153) (453) Purchases of marketable securities — — (3,025) — (876) Maturities of marketable securities — — 516 — 567 Sales of marketable securities — — 113 — 69 Investments in non-marketable equity securities — — (3) — (1) Acquisitions of business, net of cash acquired, and purchases of intangible and other assets 3 (22) (24) (1) (25) Change in restricted cash and deposits (32) (9) 6 1 (1)
Net cash used in investing activities (62) (324) (3,023) (153) (720) Cash flows from financing activities Net proceeds from issuance of convertible preferred stock 200 — — — — Net proceeds from issuance of common stock — 500 998 998 — Proceeds from exercise of stock options 9 6 28 9 5 Proceeds from (repayments of) long-term debt — 250 (250) (250) — Proceeds from sale and lease-back transactions 31 — 170 1 62 Principal payments on capital lease obligations (48) (90) (181) (29) (71) Excess tax benefit from share-based award activity 51 115 433 69 54
Net cash provided by financing activities 243 781 1,198 798 50
Effect of exchange rate changes on cash and cash equivalents — (3) 3 1 (1)
Net increase (decrease) in cash and cash equivalents 336 1,152 (273) 991 (230) Cash and cash equivalents at beginning of period 297 633 1,785 1,785 1,512
Cash and cash equivalents at end of period $633 $1,785 $1,512 $2,776 $1,282
Supplemental cash flow data Cash paid during the period for: Interest $9 $23 $28 $7 $9
Income taxes $42 $261 $197 $103 $174
Non-cash investing and financing activities: Property and equipment additions included in accounts payable and accrued expenses and other liabilities $5 $47 $135 $43 $110
Property and equipment acquired under capital leases $56 $217 $473 $211 $38
Fair value of shares issued related to acquisitions of business and other assets $20 $60 $58 $6 $6
If you watched the 30 minute "road show" video that was posted to the internet, the scale and reach of this company is impressive. For many, Facebook has pretty much replaced TV and advertisers seem to be taking notice. Of course, the big concern is that they can't keep growing at the same clip indefinitely; indeed, they may have already reached the saturation point in key markets of United States/Canada, Europe and Asia. The company sees some opportunities in the "rest of the world," but that will need to play out.
They also see a big opportunity in mobile users:
If you can pick up a few shares from your broker, it might be kind of cool to see what this does in the next few years. So far, the market is saying this will be bigger than Google. Only time will tell.
Related articles
Facebook Stock - Why it's not another Dot-Com
Yahoo, Facebook solve patent beef with closer collaboration, according to report
IPO: It's Possibly Overpriced?
