By admin February 4, 2012 Leave a Comment

Many people could not access the FaceBook IPO as the site was down.

So here is the complete Text:

 

facebook2 234x300 The FaceBook IPO

 


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DILUTION

 

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after our initial public offering.

 

Our pro forma net tangible book value as of December 31, 2011 was $         billion, or $         per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2011, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into Class B common stock in connection with our initial public offering.

 

After giving effect to (1) our sale in our initial public offering of              shares of Class A common stock at an assumed initial public offering price of the Class A common stock of $         per share, the midpoint of the price range on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (2) the exercise by Mark Zuckerberg, our founder, Chairman, and CEO, of an outstanding stock option to purchase 120,000,000 shares of our Class B common stock, our pro forma as adjusted net tangible book value as of December 31, 2011 would have been approximately $         billion, or $         per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing shares in our initial public offering.

 

The following table illustrates this per share dilution.

 

Assumed initial offering price per share       $                
Pro forma net tangible book value per share as of December 31, 2011    $                   
Increase in pro forma net tangible book value per share attributable to investors purchasing shares in our initial public offering      
Pro forma as adjusted net tangible book value per share after our initial public offering      
Dilution in pro forma net tangible book value per share to investors in this offering       $     

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma as adjusted net tangible book value per share after our initial public offering by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

 

If the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, the pro forma net tangible book value per share after giving effect to our initial public offering would be approximately $         per share, and the dilution in pro forma net tangible book value per share to investors in our initial public offering would be approximately $         per share.

 

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The following table summarizes, as of December 31, 2011, the differences between the number of shares of our common stock purchased from us, after giving effect to the conversion of our convertible preferred stock into Class B common stock, the total cash consideration paid, and the average price per share paid by our existing stockholders and by our new investors purchasing shares in our initial public offering at the assumed initial public offering price of the Class A common stock of $         per share, the midpoint of the price range on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

      

Shares Purchased

    Total Consideration     Average
Price Per
Share
 
   Number    Percent     Amount      Percent    
Existing stockholders                            $                
New investors             
Total         100   $                      100  

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) total consideration paid by new investors by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

 

Sales of shares of Class A common stock by the selling stockholders in our initial public offering will reduce the number of shares of common stock held by existing stockholders to             , or approximately     % of the total shares of common stock outstanding after our initial public offering, and will increase the number of shares held by new investors to             , or approximately     % of the total shares of common stock outstanding after our initial public offering.

 

If the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after our initial public offering.

 

The above table and discussion are based on 117,097,143 shares of our Class A common stock and 1,758,902,390 shares of our Class B common stock outstanding as of December 31, 2011, as well as the exercise by Mark Zuckerberg, our founder, Chairman, and CEO, of an outstanding stock option to purchase 120,000,000 shares of our Class B common stock, and exclude:

 

 

138,539,434 shares of Class B common stock issuable upon the exercise of options outstanding as of December 31, 2011 under our 2005 Stock Plan, with a weighted-average exercise price of approximately $0.83 per share;

 

 

378,772,184 shares of Class B common stock subject to RSUs outstanding as of December 31, 2011 under our 2005 Stock Plan;

 

 

1,947,208 shares of Class B common stock subject to RSUs granted between January 1, 2012 and January 31, 2012 under our 2005 Stock Plan; and

 

 

77,185,000 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of 25,000,000 shares of Class A common stock reserved for issuance under our 2012 Equity Incentive Plan, and 52,185,000 shares of Class B common stock reserved for issuance under our 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares to be reserved under our 2012 Equity Incentive Plan and we will cease granting awards under the 2005 Stock Plan. Our 2012 Equity Incentive Plan also provides for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

 

To the extent that any outstanding options are exercised or RSUs are settled, there will be further dilution to new investors.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The consolidated statements of income data for each of the years ended December 31, 2009, 2010, and 2011 and the consolidated balance sheets data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2007 and 2008 and the consolidated balance sheets data as of December 31, 2007, 2008, and 2009 are derived from audited consolidated financial statements that are not included in this prospectus.

 

You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Year Ended December 31,  
   2007     2008     2009      2010      2011  
     (in millions, except per share data)  
Consolidated Statements of Operations Data:             
Revenue    $ 153      $ 272      $ 777       $ 1,974       $ 3,711   
Costs and expenses(1) :             
Cost of revenue      41        124        223         493         860   
Marketing and sales      32        76        115         184         427   
Research and development      81        47        87         144         388   
General and administrative      123        80        90         121         280   
Total costs and expenses      277        327        515         942         1,955   
Income (loss) from operations      (124     (55     262         1,032         1,756   
Other expense, net      11        1        8         24         61   
Income (loss) before provision for income taxes      (135     (56     254         1,008         1695   
Provision for income taxes      3               25         402         695   
Net income (loss)    $ (138   $ (56   $ 229       $ 606       $ 1,000   
Net income (loss) attributable to Class A and Class B common stockholders    $ (138   $ (56   $ 122       $ 372       $ 668   
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   
Diluted    $ (0.16   $ (0.06   $ 0.10       $ 0.28       $ 0.46   
Pro forma earnings per share attributable to Class A and Class B common stockholders(2):             
Basic              $ 0.49   
Diluted              $ 0.43   

 

(1)  

Costs and expenses include share-based compensation expense as follows:

 

     Year Ended December 31,  
       2007          2008          2009          2010          2011    
     (in millions)  
Cost of revenue    $ 1       $       $       $       $ 9   
Marketing and sales      3         4         2         2         43   
Research and development      56         7         6         9         114   
General and administrative      13         19         19         9         51   
Total share-based compensation expense    $   73       $   30       $   27       $   20       $ 217   

 

(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.

 

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     As of December 31,  
        2007            2008            2009            2010            2011     
     (in millions)  
Consolidated Balance Sheets Data:               
Cash, cash equivalents, and marketable securities    $    305       $    297       $ 633       $ 1,785       $ 3,908   
Working capital      250         279         703         1,857         3,705   
Property and equipment, net      82         131         148         574         1,475   
Total assets      448         505         1,109         2,990         6,331   
Total liabilities      174         170         241         828         1,432   
Total stockholders’ equity      273         335         868         2,162         4,899   

 

Free Cash Flow

 

In addition to other financial measures presented in accordance with U.S. generally accepted accounting principles (GAAP), we monitor free cash flow (FCF) as a non-GAAP measure to manage our business, make planning decisions, evaluate our performance, and allocate resources. We define FCF as net cash provided by operating activities reduced by purchases of property and equipment and property and equipment acquired under capital leases.

 

We believe that FCF is one of the key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient to fund the ongoing property and equipment investments required to maintain and grow our business. We have chosen to subtract both purchases of property and equipment and property and equipment acquired under capital leases in our calculation of FCF because we believe that these two items collectively represent the amount of property and equipment we need to procure to support our business, regardless of whether we finance such property or equipment with a capital lease. The market for financing servers and other technical equipment is dynamic and we expect our use of capital leases could vary significantly from year to year.

 

We have chosen our definition for FCF because we believe that this methodology can provide useful supplemental information to help investors better understand underlying trends in our business. We present FCF in this document in the same manner it is shared with our senior management and board of directors.

 

FCF has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of FCF are:

 

 

FCF does not reflect our future contractual commitments; and

 

 

other companies in our industry present similarly titled measures differently than we do, limiting their usefulness as comparative measures.

 

Management compensates for the inherent limitations associated with using the FCF measure through disclosure of such limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of FCF to the most directly comparable GAAP measure, net cash provided by operating activities, as presented below.

 

The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:

 

     Year Ended December 31,  
        2007           2008           2009           2010           2011     
     (in millions)  
Net cash provided by operating activities    $ 11      $ 8      $ 155      $ 698      $ 1,549   
Purchases of property and equipment      (55     (70     (33     (293     (606
Property and equipment acquired under capital leases      (11     (26     (56     (217     (473
Free cash flow    $    (55   $    (88   $      66      $    188      $ 470   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical 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 prospectus, particularly in “Risk Factors.”

 

Overview

 

Our mission is to make the world more open and connected. Facebook enables you to express yourself and connect with the world around you instantly and freely.

 

We build products that support our mission by creating utility for users, developers, and advertisers:

 

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.

 

Developers. We enable developers to 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. We enable advertisers to engage with more than 800 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 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 Platform developers. For the year ended December 31, 2011, we recorded revenue of $3,711 million, operating income of $1,756 million, and net income of $1,000 million. We were incorporated in July 2004 and are headquartered in Menlo Park, California.

 

Highlights in our history are depicted in the graphic on the next page.

 

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Our History

 

g287954g71g62 The FaceBook IPO

 

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Trends in Our User Metrics

 

 

Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website 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, which has grown substantially in the past several years.

 

As of December 31, 2011, we had 845 million MAUs, an increase of 39% from December 31, 2010. We experienced growth across different geographies, with users in Brazil and India representing a key source of growth. We had 161 million MAUs in the United States as of December 31, 2011, an increase of 16% from the prior year. We had 37 million MAUs in Brazil as of December 31, 2011, an increase of 268% from the prior year. Additionally, we had 46 million MAUs in India as of December 31, 2011, an increase of 132% from the prior year.

 

g287954g05d65 The FaceBook IPO

 

Note: Rest of world includes Africa, Latin America, and the Middle East.

 

There are more than two billion global Internet users, according to an industry source, and we aim to connect all of them. We have achieved varying levels of penetration within the population of Internet users in different countries. For example, in countries such as Chile, Turkey, and Venezuela we estimate that we have penetration rates of greater than 80% of Internet users; in countries such as the United Kingdom and the United States we estimate that we have penetration rates of approximately 60%; in countries such as Brazil, Germany, and India we estimate that we have penetration rates of

 

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approximately 20-30%; in countries such as Japan, Russia, and South Korea we estimate that we have penetration rates of less than 15%; and in China, where Facebook access is restricted, we have near 0% penetration. We continue to invest in growing our user base, particularly in markets where we are relatively less penetrated. We expect MAU growth will benefit from increases in worldwide Internet users, in particular as a result of increasing broadband penetration and usage of mobile devices in developing markets. Growth in MAUs depends on our ability to retain our current users, re-engage with inactive users, and add new users, including by extending our reach across mobile platforms.

 

 

Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.

 

Worldwide DAUs increased 48% to 483 million on average during December 2011 from 327 million during December 2010. We experienced growth in DAUs across major markets including Brazil, Canada, Germany, Mexico, the United Kingdom, and the United States. Increased mobile usage was a key contributor to this growth. DAUs as a percentage of MAUs increased from 54% in December 2010 to 57% in December 2011.

 

g287954g67o43 The FaceBook IPO

 

Note: Rest of world includes Africa, Latin America, and the Middle East.

 

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We believe that we have the opportunity to continue to grow our DAUs around the world. Growth in DAUs depends on our ability to attract new users and increase the frequency of engagement for existing users. We aim to increase DAUs by developing products that are more compelling for our users, increasing the relevance of the information we display for each user, increasing the number of compelling Platform apps and website integrations, and improving the quality of our products across mobile platforms. We also believe that younger users have higher levels of engagement with the web and mobile devices in general and with Facebook specifically. We anticipate that demographic trends over the long term may contribute to growth in engagement as a greater number of users will come from demographic groups that have grown up with the web and mobile devices and who spend more time online every day.

 

 

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

 

We had more than 425 million mobile MAUs in December 2011. In 2011, mobile usage of Facebook increased in markets around the world, including major developed markets such as the United States where smartphone penetration grew rapidly. Our mobile MAU growth was also driven by product enhancements across several mobile platforms. For example, we improved our product offering on feature phones following our acquisition of Snaptu in April 2011 and we launched the Facebook app for the iPad in October 2011. Improving our mobile products and increasing mobile usage of Facebook are key company priorities that we believe are critical to help us maintain and grow our user base and engagement over the long term. We expect consumers around the world will continue to increase the amount of time they spend and the information they share and consume through mobile devices.

 

We do not currently display ads to users who access Facebook via mobile apps or our mobile website. To the extent that increasing usage of Facebook through mobile apps or our mobile website substitutes for the use of Facebook through personal computers where we do show ads, the number of ads that we deliver to users and our revenue may be negatively affected unless and until we include ads or sponsored stories on our mobile apps and mobile website. We believe that people around the world will continue to increase their use of Facebook from mobile devices, and that some of this mobile usage has been and will continue to be a substitute for use of Facebook through personal computers.

 

Factors Affecting Our Performance

 

Growth trends in MAUs, DAUs, and mobile MAUs are critical variables that affect our revenue and financial results by influencing the number of ads we are able to show, the value of those ads, the volume of Payments transactions, as well as our expenses and capital expenditures.

 

In addition, changes in user engagement patterns also affect our revenue and financial performance. We believe that overall engagement as measured by the percentage of users who create content (such as wall posts, messages, or photos) or generate feedback (such as by Liking or Commenting on the content created) has remained stable or increased as our user base has grown. Moreover, the average amount of content and feedback created by each user has continued to increase over time.

 

Our revenue trends are also affected by ad inventory management changes affecting the number, size, or prominence of ads we display. For example, in the fourth quarter of 2010, we significantly increased the number of ads on many Facebook pages. As another example, in the fourth quarter of 2011, we increased the reserve price (i.e., the minimum price threshold) in our advertising auction system in order to reduce the frequency with which low quality ads are displayed to users. This change caused a reduction in the overall number of ads shown and increased the average price per ad as a result of factors including the removal of ads with bids that were below the reserve price and some advertisers raising their bids in response to this change. For this particular

 

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change, we estimate that the decrease in the number of ads displayed and the increase in average price per ad approximately offset each other such that the impact on total revenue was minimal.

 

We make ongoing product changes intended to enhance the user experience. In September 2011, at our f8 conference, we announced the launch of Timeline as an enhanced and updated version of the Facebook Profile to enable users to better organize and access the growing quantity of their updates, photos, comments, and other content. We expect Timeline to roll out broadly around the world in the first quarter of 2012. Also in September 2011, we announced the launch of the next iteration of Open Graph APIs, which enables Platform developers to create new types of social apps that facilitate sharing, self-expression, and serendipitous discovery across a broad variety of activities and interests. We expanded the Open Graph to include more types of sharing activities in the first quarter of 2012.

 

In 2011, we continued to make significant investments in our technical infrastructure to ensure that our growing user base can access Facebook rapidly and reliably. In April 2011, we began serving user traffic out of our first owned and built data center in Prineville, Oregon. We developed designs for data centers, server hardware, and software that were optimized for use in our new data center facilities, resulting in significant increases in energy efficiency while significantly reducing our server operation costs compared to the usage of traditional servers and leased data centers. We are investing in additional Facebook-owned data centers in the United States and Europe and we aim to deliver Facebook products rapidly and reliably to all users around the world.

 

At the end of 2011, we had 3,200 full-time employees, an increase of 50% from the year prior. Our employee headcount has increased significantly and we expect this growth to continue for the foreseeable future. We have also made and intend to make acquisitions with the primary objective of adding software engineers, product designers, and other personnel with certain technology expertise. While our organization is growing rapidly, we are focused on increasing our talent base at a rate that allows us to preserve our culture.

 

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 Platform developers.

 

Advertising. Our advertising revenue is generated by displaying ad products on our website. Advertisers pay for ad products displayed on Facebook, either directly or through their relationships with advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. We recognize revenue from the display of impression-based ads on our website in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad appears in pages displayed to users. We recognize revenue from the delivery of click-based ads on our website in the period in which a user clicks on an ad.

 

Payments and other fees. We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using credit cards, PayPal or other payment methods available on our website. We receive a negotiated fee from our Platform developers when users make purchases from our Platform developers using our Payments infrastructure. We recognize revenue net of amounts remitted to our Platform developers. We have mandated the use of our Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games. To date, games from Zynga have generated the majority of our payments and other fees revenue. In addition, we generate other fees revenue in connection with arrangements related to business development transactions and fees from various mobile providers; in recent periods, other fees revenue has been immaterial.

 

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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.

 

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-, developer-, and advertiser-facing marketing and promotional expenditures.

 

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 substantially all of our research and development costs as they are incurred.

 

General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal settlements.

 

Share-based Compensation Expense

 

We have granted restricted stock units (RSUs) to our employees and members of our board of directors. RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) under our 2005 Stock Plan vest upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards is satisfied over four years. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the effective date of our initial public offering.

 

As of December 31, 2011, we have recognized no share-based compensation expense for Pre-2011 RSUs, because a qualifying event described above had not occurred. In the quarter in which our initial public offering is completed, we will begin recording share-based compensation expense using the accelerated attribution method, net of forfeitures, based on the grant date fair value of the Pre-2011 RSUs. For the Pre-2011 RSUs, if the initial public offering had been completed on December 31, 2011, we would have recognized $968 million of share-based compensation expense on that date, and would have approximately $239 million of additional future period expense to be recognized over the remaining service periods through 2018.

 

RSUs granted on or after January 1, 2011 (Post-2011 RSUs) are not subject to a liquidity condition in order to vest. Compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable service period. The majority of Post-2011 RSUs are earned over a service period of four to five years. In 2011, we recognized $189 million of share-based compensation expense related to the Post-2011 RSUs, and we anticipate recognizing $1,189 million of future period expense related to Post-2011 RSUs outstanding as of December 31, 2011.

 

As of December 31, 2011, there was $2,463 million of unrecognized share-based compensation expense, of which $2,396 million is related to RSUs and $67 million is related to restricted shares and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two years.

 

See “—Critical Accounting Policies and Estimates—Share-based Compensation” for additional information regarding our share-based compensation expense.

 

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Results of Operations

 

The following table summarizes our historical consolidated statements of income data:

 

     Year Ended December 31,  
         2009              2010              2011      
     (in millions)  
Consolidated Statements of Income Data:         
Revenue    $ 777       $ 1,974       $ 3,711   
Costs and expenses(1):         
Cost of revenue      223         493         860   
Marketing and sales      115         184         427   
Research and development      87         144         388   
General and administrative      90         121         280   
Total costs and expenses      515         942         1,955   
Income from operations      262         1,032         1,756   
Other expense, net      8         24         61   
Income before provision for income taxes      254         1,008         1,695   
Provision for income taxes      25         402         695   
Net income    $    229       $ 606       $ 1,000   

 

(1)  

Costs and expenses include share-based compensation expense as follows:

 

     Year Ended December 31,  
         2009              2010              2011      
     (in millions)  
Cost of revenue    $       $       $ 9   
Marketing and sales      2         2         43   
Research and development      6         9         114   
General and administrative      19         9         51   
Total share-based compensation expense    $   27       $   20       $ 217   

 

The following table summarizes our historical consolidated statements of income data as a percentage of revenue for the periods shown:

 

     Year Ended December 31,  
         2009             2010             2011      
Consolidated Statements of Income Data:       
Revenue      100     100     100
Costs and expenses(1):       
Cost of revenue      29        25        23   
Marketing and sales      15        9        12   
Research and development      11        7        10   
General and administrative      12        6        8   
Total costs and expenses      66        48        53   
Income from operations      34        52        47   
Other expense, net      1        1        2   
Income before provision for income taxes      33        51        46   
Provision for income taxes      3        20        19   
Net income      29     31     27

 

(1)  

Costs and expenses include the following share-based compensation expense as a percentage of revenue:

 

     Year Ended December 31,  
         2009             2010             2011      
Cost of revenue             
Marketing and sales                    1   
Research and development      1               3   
General and administrative      2               1   
Total share-based compensation expense      3     1     6

 

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Years Ended December 31, 2009, 2010, and 2011

 

Revenue

 

     Year Ended December 31,      2009 to 2010
% Change
     2010 to 2011
% Change
 
     2009      2010      2011        
     (in millions)                
Advertising revenue    $ 764       $ 1,868       $ 3,154         145%         69%   
Payments and other fees revenue      13         106         557         NM         NM   
Total revenue    $    777       $ 1,974       $ 3,711         154%         88%   

 

2011 Compared to 2010. Revenue in 2011 increased $1,737 million, or 88% compared to 2010. The increase was due primarily to a 69% increase in advertising revenue to $3,154 million. Advertising revenue grew due to a 42% increase in the number of ads delivered and an 18% increase in the average price per ad delivered. The increase in ads delivered was driven primarily by user growth. The number of ads delivered was also affected by many other factors including product changes that significantly increased the number of ads on many Facebook pages beginning in the fourth quarter of 2010, partially offset by an increase in usage of our mobile products, where we do not show ads, and by various product changes implemented in 2011 that in aggregate modestly reduced the number of ads on certain pages. The increase in average price per ad delivered was affected by factors including improvements in our ability to deliver more relevant ads to users and product changes that contributed to higher user interaction with the ads by increasing their relative prominence.

 

Payments and other fees revenue increased to $557 million in 2011 due to the adoption of Facebook Payments, which has been gradually adopted by our Platform developers and began generating significant revenue in the fourth quarter of 2010. Facebook Payments became mandatory for all game developers accepting payments on the Facebook Platform with limited exceptions on July 1, 2011. Accordingly, comparisons of payments and other fees revenue to periods before that date may not be meaningful. In 2011, other fees revenue was immaterial.

 

In 2011, we generated approximately 56% of our revenue from advertisers and Platform developers based in the United States, compared to 62% in 2010. This change is due to factors including a faster growth rate of international users and the expansion of international sales offices and payment methods. The majority of our revenue outside of the United States came from customers located in western Europe, Canada, and Australia.

 

2010 Compared to 2009. Revenue in 2010 increased $1,197 million, or 154%, compared to 2009. The increase was primarily due to a 145% increase in advertising revenue to $1,868 million in 2010. Advertising revenue grew primarily due to an increase in the number of ads delivered driven by growth in users and engagement as well as the number of ads per page. Payments and other fees revenue increased to $106 million in 2010 due to the initial adoption of Facebook Payments during the year. In 2010, we generated approximately 62% of our revenue from advertisers and Platform developers based in the United States, compared to 67% in 2009.

 

Twelve percent of our total revenue in 2011, and less than 10% in 2010 and 2009, came from a single customer, Zynga. This revenue consisted of payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015.

 

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Cost of revenue

 

     Year Ended December 31,    2009 to 2010
% Change
   2010 to 2011
% Change
       2009        2010        2011        
     (dollars in millions)          
Cost of revenue      $ 223        $ 493        $ 860          121%          74%  
Percentage of revenue        29%          25%          23%            

 

2011 Compared to 2010. Cost of revenue in 2011 increased $367 million, or 74%, compared to 2010. The increase was primarily due to an increase in expenses related to expanding our data center operations, such as depreciation and data center facility rent. These expenses supported our user growth, the increased usage of our products by users, developers, and advertisers, and the launch of new products. Credit card and other related revenue processing fees also contributed to the increase.

 

2010 Compared to 2009. Cost of revenue in 2010 increased $270 million, or 121%, compared to 2009. The increase was primarily due to an increase in expenses related to expanding our data center operations. Credit card and other related revenue processing fees also contributed to the increase.

 

We anticipate that cost of revenue will increase in dollar amount for the foreseeable future as we expand our data center capacity to support user growth, increased user engagement, and the delivery of new products. We expect costs will also rise for payment processing as we increase Payments volumes and add new payment methods. The expected increase in cost of revenue may be partially mitigated if we are able to realize improvements in server performance and the efficiency of our technical operations. We expect cost of revenue as a percentage of revenue to decline modestly over time to the extent we are successful in meeting our objective of efficiently increasing revenue.

 

Marketing and sales

 

     Year Ended December 31,    2009 to 2010
% Change
   2010 to 2011
% Change
       2009        2010        2011        
     (dollars in millions)          
Marketing and sales      $ 115        $ 184        $ 427          60%          132%  
Percentage of revenue        15%            9%          12%            

 

2011 Compared to 2010. Marketing and sales expenses in 2011 increased $243 million, or 132%, compared to 2010. The increase was primarily due to an increase in payroll and benefits expenses, resulting from a 46% increase in employee headcount to support global sales, business development, and customer service, and to a lesser extent, an increase in our user-, developer-, and advertiser-facing marketing. Additionally, share-based compensation expense increased from $2 million in 2010 to $43 million in 2011 due to recognition of expense related to Post-2011 RSUs.

 

2010 Compared to 2009. Marketing and sales expenses in 2010 increased $69 million, or 60%, compared to 2009. The increase was primarily due to an increase in payroll and benefits expenses, resulting from a 90% increase in employee headcount to support global sales, business development, and customer service. Additionally, we increased our spending to support our user-, developer-, and advertiser-facing marketing as well as our market research and analytics capabilities.

 

We anticipate that marketing and sales expenses will increase in dollar amount and as a percentage of revenue in 2012 as a result of growth in headcount and headcount-related expenses, including share-based compensation expense related to Post-2011 RSUs. We plan to add sales, business development and customer service employees, open new offices, and continue our investment in user-, developer-, and advertiser-facing marketing. Assuming we complete our initial public offering in 2012, we also anticipate a significant increase in marketing and sales expenses in 2012 due to the initial inclusion of share-based compensation expense from Pre-2011 RSUs as described in “—Critical Accounting Policies and Estimates—Share-based Compensation.”

 

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Research and development

 

     Year Ended December 31,    2009 to 2010
% Change
   2010 to 2011
% Change
       2009        2010        2011        
     (dollars in millions)          
Research and development      $   87        $ 144        $ 388          66%          169%  
Percentage of revenue        11%            7%          10%            

 

2011 Compared to 2010. Research and development expenses in 2011 increased $244 million, or 169%, compared to 2010. The increase was primarily due to an increase from $9 million in 2010 to $114 million in 2011 for share-based compensation expense related to Post-2011 RSUs. Payroll and benefits expense also increased due to a 57% growth in employee headcount in engineering, design, product management, and other technical functions. This investment supported our efforts to improve existing products and build new products for users, developers, and advertisers.

 

2010 Compared to 2009. Research and development expenses in 2010 increased $57 million, or 66%, compared to 2009. The increase was primarily due to an increase in payroll and benefits expenses, resulting from a 81% increase in employee headcount in engineering and related functions. This investment supported our efforts to improve existing products and build new products for users, developers, and advertisers.

 

We anticipate that research and development expenses will increase in dollar amount and as a percentage of revenue in 2012 as a result of growth in headcount and headcount-related expenses, including share-based compensation expense related to Post-2011 RSUs. We plan to continue rapidly hiring engineering, design, product management, and other technical employees. Assuming we complete our initial public offering in 2012, we also anticipate a significant increase in research and development expenses in 2012 due to the initial inclusion of share-based compensation expense from Pre-2011 RSUs as described in “—Critical Accounting Policies and Estimates—Share-based Compensation.”

 

General and administrative

 

     Year Ended December 31,    2009 to 2010
% Change
   2010 to 2011
% Change
       2009        2010        2011        
     (dollars in millions)          
General and administrative      $ 90        $ 121        $ 280          34%          131%  
Percentage of revenue        12%            6%            8%            

 

2011 Compared to 2010. General and administrative expenses in 2011 increased $159 million, or 131%, compared to 2010. The increase was primarily due to an increase in payroll and benefits expenses, resulting from a 54% increase in employee headcount in finance, legal, human resources, and other functions. Additionally, outside consulting and legal fees contributed to the increase. Share-based compensation expense increased from $9 million in 2010 to $51 million in 2011 due to recognition of expense related to Post-2011 RSUs.

 

2010 Compared to 2009. General and administrative expenses in 2010 increased $31 million, or 34%, compared to 2009. The increase was primarily due to an increase in payroll and benefits expenses, resulting from a 61% increase in employee headcount in general and administrative functions and, to a lesser extent, an increase in outside consulting and legal fees.

 

We anticipate that general and administrative expenses will increase in dollar amount and increase as a percentage of revenue in 2012 as a result of growth in headcount and headcount-related expenses, including share-based compensation related to the Post-2011 RSUs. We plan to increase general and administrative employee headcount to support our growth. Assuming we complete our initial public offering in 2012, we also anticipate a significant increase in general and administrative expenses in 2012 due to the initial inclusion of

 

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share-based compensation expense from Pre-2011 RSUs as described in “—Critical Accounting Policies and Estimates—Share-based Compensation.”

 

Other expense, net

 

     Year Ended December 31,   2009 to 2010
% Change
  2010 to 2011
% Change
       2009       2010       2011      
     (in millions)        
Interest expense      $ (10 )     $ (22 )     $ (42 )       120 %       91 %
Other income (expense), net        2         (2 )       (19 )       NM         NM  
Other expense, net      $ (8 )     $ (24 )     $ (61 )       200 %       154 %

 

2011 Compared to 2010. Other expense, net in 2011 increased $37 million, or 154%, compared to 2010. Interest expense increased by $20 million, driven by an increase in fees related to our credit facility as described in “—Liquidity and Capital Resources,” and the payments related to an increased volume of property and equipment financed by capital leases. The change in other expense was primarily due to $29 million in foreign exchange related losses in 2011. Foreign exchange losses in 2011 stemmed from the periodic re-measurement of our intercompany Euro balances. Foreign currency balances were immaterial in 2010. These expenses were partially offset by an increase in interest income driven by larger invested cash balances.

 

2010 Compared to 2009. Interest expense in 2010 increased as a result of an increased use of capital leases and interest payments related to our $250 million credit facility as described in “—Liquidity and Capital Resources.” This loan was repaid in full in March 2011.

 

Provision for income taxes

 

     Year Ended December 31,    2009 to 2010
% Change
   2010 to 2011
% Change
       2009        2010        2011        
     (dollars in millions)          
Provision for income taxes      $ 25        $ 402        $ 695          NM          73%  
Effective tax rate        10%          40%          41%            

 

2011 Compared to 2010. Our provision for income taxes in 2011 increased $293 million, or 73%, compared to 2010 primarily due to an increase in taxable income. Our effective tax rate increased primarily due to losses arising outside the United States in jurisdictions where we do not receive a tax benefit and the impact of certain non-deductible share-based compensation expense that was recognized during the year.

 

2010 Compared to 2009. Our provision for income taxes in 2010 increased $377 million compared to 2009 primarily due to an increase in taxable income. Our effective tax rate increased primarily due to a benefit recorded in 2009 related to the release of a valuation allowance, which did not recur in 2010.

 

Our effective tax rate has exceeded the U.S. statutory rate in part because of losses arising outside the United States in jurisdictions where we do not receive a tax benefit. These losses were primarily due to the initial start-up costs incurred by our foreign subsidiaries to operate in certain foreign markets, including the costs incurred by those subsidiaries to license, develop, and use our intellectual property. 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.

 

Assuming we complete our initial public offering in 2012, we anticipate a significant increase in share-based compensation expense from Pre-2011 RSUs, which may contribute to increasing our effective tax rate because a portion of the share-based compensation expense will not be tax deductible in the United States. In

 

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addition, our effective tax rate may fluctuate significantly in any quarter in which there is significant share-based compensation expense or significant exercises or settlements of stock awards.

 

For full details.pl. read:

 

http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm

 

 

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