Financial analysis facebook

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Financial analysis facebook

  1. 1. FACEBOOK INC. FINANCIAL ANALYSIS PROJECT REPORT Submitted By: HIMANSU BADHAI PRATIK GUPTA SAI KRISHNA KODALI 1
  2. 2. Research Summary Company Name: Facebook Inc. Industry Name: Social Media Financial Analysis: Profitability: Average As seen from the Ratio analysis, all profitability ratios have been going down gradually from the previous year into this year. The reason for this is that Facebook’s operating expenses have gone up. The major areas of spending were R&D and General and administrative expenses (mainly due to increased hiring). However, these ratios are higher than the reported Industry average. One key point to note is that while the industry profitability is negative, Facebook has positive profitability ratios. Efficiency: Weak Facebook’s Account Receivable turnover dropped by 35.88%, but it still considerably higher than the industry average. Meanwhile, Asset Turnover reflected a steep drop of 42.5% to 0.3370, much below the industry average of 1.1665. Liquidity: Strong Liquidity has increased due to the influx of equity. The Current ratio has more than doubled in the last year, and is currently at 10.7101, more than 3 times larger than the industry average. Solvency: Average The solvency scenario of Facebook is relatively acceptable as it has been just 18 months since Facebook announced its IPO. The Times interest earned fell to 10.5490 from 41.8095 opposed to the industry average of -50.7389. The debt ratio, while dropping marginally, is well below the industry average. However, the cash flow figures are very reassuring. The free cash jumped by almost 420% to $872m, completely overwhelming the industry figure of $68.58m. DuPont Analysis of ROE: ROS x Asset Turnover Profitability Efficiency Formula NI/Rev Rev/A NI/A A/SE NI/SE Facebook 0.0063 0.337 0.0021231 1.2848 0.002727759 Industry -0.1699 1.1665 -0.198193289 1.7713 -0.351059773 Ratio Type =ROA x Financial Leverage =ROE Solvency Primary Driver of ROA is Asset Turnover. Primary Driver of ROE is Financial Leverage. 2
  3. 3. Significant current events and other information of importance The recent IPO of Twitter Inc. has put the Facebook market activity into a lot of perspective. This makes Twitter only the second core social networking company to be publicly traded, the first being Facebook. Investment Decision: Invest 1. Free Cash Flow: The public trading of Facebook has brought in the equity needed to run and execute operation/investment activities which are targeted at long term profits. This profit will pay dividends to an investor. 2. Debt: With the large volume of investment from the market, the Liquid Assets of Facebook have multiplied signified significantly on account of equity. This has resulted in a lower debt ratio than before. 3. Revenue and Gross Profit The capital from the market has allowed Facebook to make large investments on assets. These assets have helped increase the COGS and generate revenue for the Company. This increased revenue has resulted in a 30% mark up on Gross Profit. Thus, we can say that the IPO has facilitated immediate growth of the company. Investment now will result in greater share prices and subsequent dividends in the long run. 4. Facebook’s investment in growth Facebook is investing significant portion of its earnings in R&D and expanding operations by increased hiring. This will help Facebook retain its first mover advantage for the near future. 5. Growth Potential Facebook’s Monthly Active Users in the highly populated Asia Pacific region are increasing steadily. This opens up new revenue streams and could mean improved profits. 3
  4. 4. Facebook Inc. Company Summary Facebook is a leading social networking website owned by Facebook, Inc. Facebook was founded by Mark Zuckerberg and his friends Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes in 2004 as a portal where Harvard students could stay connected to each other. The service was slowly extended to students of other colleges and eventually opened up for everybody over the age of 13 years. Facebook today boasts of connecting 1.26 billion users to each other. With Monthly Active Users (MAUs) standing at 1.06b, Facebook is by far the most used social networking platform. The key source of revenue for Facebook is advertising. With a huge and diversified consumer base and access to personal information that users choose to share, Facebook is an attractive advertising platform for many companies. The social networking industry is relatively young. Firms started venturing into these offerings only in mid 1990s and the industry saw a boom in early 2000s with the entry of sites like Orkut from Google and Facebook. Since then the growth has been explosive. Today this industry is extremely competitive with a wide variety of full feature offerings like Facebook and Google plus and others that offer distinguished services like Twitter and LinkedIn. As the competition in the industry shoots up, these firms find themselves entangled in battles to attract and retain consumers and in turn earn more revenue from marketers. The following Porter’s five forces analysis summarizes the industry structure: 1. Threat of new entrants: Although the possibility of a new full featured entrant stealing away customers is not feasible in the short term, there is a high threat from new entrants that could offer distinguished or individualized services like photo sharing. 2. Substitutes: Since there are a number of products that offer similar functionality, there is possibility of consumer migrating to other offerings. The major players in the industry have tried to diversify their offerings to increase switching costs for consumers. 3. Buyers: Here we need to focus on two aspects. The users that utilize/consume that social networking services are classified as consumers. And those that use these sites as a platform for marketing or running a web based business are called as customers. The competition in the industry plays a major role. Since this industry is highly competitive buyers have huge power of choice and can choose to switch to other offerings if they are not satisfied with one company’s product. 4. Suppliers: Suppliers for this industry would constitute the manufacturers and distributors of hardware. This group as such does not have much bargaining power. Another group that can be placed under suppliers is the platform/device vendors for mobile devices. The policies of these vendors regarding the inclusion of a particular company’s product are not written in stone and something that the social networking companies do not have control on. 5. Competition: The fact that this point has come up in almost every one of the other four forces implies that this is a critical issue that defines the industry. Apart from these five forces another important factor to weigh in is the regulations or controls placed by the government on players in this industry. There is a growing concern about privacy and violations of 4
  5. 5. terms laid down by the governments could result in hefty penalties that would affect the profitability of these firms. Having defined the structure of the industry, we now proceed with our analysis of Facebook Inc. Organizational Structure Facebook’s mission statement is “To make the world more open and connected.” Facebook Inc. held an IPO on May 17, 2012 at $38 per share. This values the company at $104 billion. Mark Zuckerberg remains the CEO and Chairman of the company and has control over majority of the voting stock. This concentrated control has been identified as a risk factor in organizational decision making perspective and also as a factor that could make the common stock less attractive to investors. Facebook also expects to engage in acquisitions to help maintain its dominant position in the industry and this would require Customer Dynamics As mentioned earlier Facebook is the leading social network site in terms of number of users and their activity. Facebook was able to achieve this is through engaging applications developed by third party developers that it deploys on its platforms. This helps Facebook offer a wide variety of functionality to its diversified user base while not investing heavily into application development. The developers derive profits when users of Facebook pay for their services. So Facebook classifies its users as: 1. Consumers who use the service to engage in social networking (Facebook.com) 2. Customers who use this for monetary profits: a. Marketers (Facebook Ads, Facebook Ad System, Ad analytics and Facebook insights) b. Application developers Marketers are the key source of revenue for Facebook and hence retaining them is a high priority. Application developers create and deploy engaging applications that help Facebook retain its users and increase their active time on the site. This in turn translates to higher revenues from marketers. Developers constitute the second major portion of the revenues. Facebook earns a commission whenever its consumers buy a product or service from the developers on it platform. In 2012 developers received more than $1.96 billion from transactions on Facebook’s infrastructure. The discussion above shows that Facebook is heavily reliant on advertising for its revenues. This causes seasonal fluctuations in its income statements. For example the Q4 revenues are usually higher than revenues in other quarters. Also as more and more users join Facebook, the operating costs for maintaining its application infrastructure and marketing increase while the rate of growth of users and revenues from adverting will saturate. This will have an adverse impact on its profitability. Competition Facebook classifies its competition into: 5
  6. 6. 1. Other full feature offerings like Google Plus. 2. Limited feature offerings like photo-sharing & micro blogging. 3. Regional social networking sites like Mixi in Japan and vKontakte in Russia. To address the issue of competition from small-sized limited feature offerings Facebook is planning to employ the strategy of acquisitions. Trends in Revenue     From 2011 to 2012, revenue increased to $1.38 billion or 37%. Key factor was 36% increase in advertising revenue (32% increase in # of ads delivered during 2012 and 3% increase in average price per ad in US). Payments and other fees revenue increased by 45% between 2011 and 12 to $253 million. In 2012, 51% of revenue was generated from marketers and platform developers based in US compared to 56% in 2011. Future opportunities Mobile represents a huge opportunity for Facebook in the near future. Numbers from 2012 show that the increase in MAUs on mobile channels (57%) is more than double that on the traditional web channel (25%). But the main challenge for Facebook is to effectively monetize this channel. As of 2012 Facebook was able to deploy ads in its mobile applications but it still does not have a system in place to realize earnings for purchases from developers on mobile platforms. The second emerging trend that can be seen from analysis of growth of MAUs by region presented in the Management’s discussion and analysis section of 2012 annual report shows that there is huge potential for growth in developing economies with huge population like Brazil, India and Indonesia. Facebook needs to optimize its revenue generation strategies to accommodate for growth in these international markets while keeping its US and Europe activities profitable. Conclusion Facebook has built a comfortable lead in the social networking industry due to its first mover advantage. This dominant position is however being challenged by offerings from well established companies such as Google and from smaller regionally dominant players. The summarization of trends in user activity and financial statements derived from the Form 10-K and from Facebook’s annual report paint a good picture of the company’s current position. The major risks that Facebook identified are:     Finances highly dependent on level of user engagement. Revenues dependent on marketing cycle and spending. Challenges in attracting more users and better monetizing opportunities. Action by governments to restrict Facebook in their countries. 6
  7. 7.    Securing user information. Laws and Regulation regarding privacy can cause expensive litigations and may adversely affect financial position. Substantial debt and ability to raise capital to meet business needs. The financial statement summary in the appendix section (derived from financial statements and annual report) present a detailed picture of the firm’s operations and profitability. 7
  8. 8. Facebook Inc. Stock Market Activity Facebook Inc. held its IPO on May 18, 2012. The IPO was the biggest in Internet history with peak market capitalization of $104bn. The company’s closing price on the first day of trading was $38.23.The company’s stock is currently trading at $50.4. The IPO In 2007, Microsoft purchased 1.6% of Facebook at $240 million suggesting a value of $15bn. Several other investments over the years suggested different valuations of Facebook. One latest investment in 2012 suggested a valuation as high as $50bn. Facebook filed for an IPO on February 1, 2012 and filed their S1 document with the SEC. As discussed in the previous report, the S1 document notes that the growth in their customer base and its incomes were slowing down. Facebook introduced dual class stock structure to ensure that voting rights remained in control of the early investors. The company expected to raise $5bn which would make it the largest tech company IPO in internet history. Initially the company was looking for a valuation of $28 to $35 per share. On May 14, it raised the expectations to $34 - $38 per share. The underwriters for the IPO led by Morgan Stanley eventually agreed on $38 per share. The first day’s trading was plagues with technical glitches starting with a delayed start of trading on the stock. The price of the stock shot up to $45 initially but these gains could not be sustained. The stock struggled to stay above the IPO price and underwriters bought back shares to keep the price above $38. The company was able to raise $16bn from the IPO, making It the third largest after General Motors and Visa Inc. The stock also set a new record for trading volume of an IPO with 460 million shares traded. Trends in Stock Price After the IPO, Facebook’s stock saw a steady decline over the following weeks falling as low as $27 in the third week. It rallied back to above 30 levels in July 2012 before falling to an all-time low of $17.73 in September. Despite this over selling of shares and steep fall, analysts maintained a positive outlook of the stock. A majority of these analysts predicted a medium term target of $25-$28 for the stock. Due to strong earnings in FY12 Q3 and Q4, the stock started rallying. These statements also alleviated one of the major concerns of investors that Facebook was not positioned to rake profits from its growing mobile user base. In Q4 Facebook reported that 23% of its advertising revenue was from mobile ads. Facebook's advertising revenues jumped 41% year-over-year, to $1.32 billion, beating forecast of $1.28 billion. Its earnings were also impressive, with its operating margin improving by 46.4%, exceeding the analysts’ expectation of 43.6%.The stock price fluctuated in the $25-$35 range for the first half of 2013. 8
  9. 9. Since it released the FY13 Q2 earnings in July 2013 the stock has been steadily posting gains. These earnings rekindled investor confidence. The revenues of $1.8bn were above analysts’ forecasts by $200 million. Mobile advertising contributed to 40% of the revenue and more than 50% of its users use Facebook on mobile. The net income was $333 million compared to a loss of $178 million in the same period previous year. The stock is currently trading in the $40-$50 levels. Facebook’s Stock Historical Prices Chart 9
  10. 10. Facebook Inc. Financial Statement Analysis Facebook Inc. CONDENSED MULTISTEP INCOME STATEMENT FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Sales Revenue $ 5,089.00 $ 3,711.00 Cost of goods sold $ 1,364.00 $ 860.00 Gross Profit $ 3,725.00 $ 2,851.00 Operating Expenses $ 3,187.00 $ 1,095.00 Operating Income $ 538.00 $ 1,756.00 Nonoperating revenues and expenses $ (44.00) $ (61.00) Income before income tax $ 494.00 $ 1,695.00 Minority Interest $ 21.00 $ 332.00 provision for income tax $ 441.00 $ 695.00 Income from continuing operations $ 32.00 $ 668.00 Nonrecurring items $ $ NET INCOME $ 32.00 $ 668.00 Earnings per share $ 0.01 $0.00 Facebook Inc. CONDENSED TREND ANALYSIS INCOME STATEMENT FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Sales Revenue 257.80 187.99 Cost of goods sold 276.67 174.44 Gross Profit 251.52 192.51 Operating Expenses 709.80 243.88 Operating Income 52.13 170.16 Non-operating revenues and expenses 183.33 254.17 Income before income tax 49.01 168.15 Minority Interest 8.97 141.88 provision for income tax 109.70 172.89 Income from continuing operations 8.60 179.57 Nonrecurring items 0.00 0.00 NET INCOME 8.60 179.57 10 2,010 $ $ $ $ $ $ $ $ $ $ $ $ 1,974.00 493.00 1,481.00 449.00 1,032.00 (24.00) 1,008.00 234.00 402.00 372.00 372.00 $0.00 2,010 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 0.00 100.00
  11. 11. Facebook Inc. CONDENSED COMMON-SIZE INCOME STATEMENT FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Sales Revenue 100.00 100.00 Cost of goods sold 26.80 23.17 Gross Profit 73.20 76.83 Operating Expenses 62.63 29.51 Operating Income 10.57 47.32 Non-operating revenues and expenses (0.86) (1.64) Income before income tax 9.71 45.68 Minority Interest 0.41 8.95 provision for income tax 8.67 18.73 Income from continuing operations 0.63 18.00 Nonrecurring items 0.00 0.00 NET INCOME 0.63 18.00 2,010 100.00 24.97 75.03 22.75 52.28 (1.22) 51.06 11.85 20.36 18.84 0.00 18.84 From the trend analysis we noticed a major spike in operating expenses for year 2012 (709). The above table depicts the classification of cost of revenue and various kinds of operating expenses for years 2010-2012. We can infer from this table that major increase in operating expenses is due to increase in spending on R&D. Increase in marketing and sales expense and general and administrative expense also contributed to the increase in operating expenses. General and administrative expenses increased as Facebook hired more technical employees, project managers and design engineers in the year 2012.Facebook mentions in its income statement that this trend in hiring might continue for the following few years. 11
  12. 12. ($ in millions) End Current Assets PPE, net Goodwill and Intangibles Other Assets TOTAL ASSETS Current Liabilities Noncurrent Liabilities Contributed Capital Retained Earnings Treasury stock and other SE TOTAL L & SE Facebook Inc. CONDENSED CLASSIFIED BALANCE SHEET 31-Dec Year2,012 2,011 $ 11,267.00 $ 4,604.00 $ 2,391.00 $ 1,475.00 $ 1,388.00 $ 162.00 $ 57.00 $ 90.00 $ 15,103.00 $ 6,331.00 $ 1,052.00 $ 899.00 $ 2,296.00 $ 533.00 $ 10,094.00 $ 3,299.00 $ 1,659.00 $ 1,606.00 $ 2.00 $ (6.00) $ 15,103.00 $ 6,331.00 Facebook Inc. CONDENSED TREND ANALYSIS BALANCE SHEET 31-Dec ($ in millions) YearEnd 2,012 2,011 Current Assets 501.65 204.99 PPE, net 416.55 256.97 Goodwill and Intangibles 1,445.83 168.75 Other Assets 77.03 121.62 TOTAL ASSETS 505.12 211.74 Current Liabilities 270.44 231.11 Noncurrent Liabilities 523.01 121.41 Contributed Capital 646.22 211.20 Retained Earnings 273.76 265.02 Treasury stock and other SE (33.33) 100.00 TOTAL L & SE 505.12 211.74 12 2,010 $ $ $ $ $ $ $ $ $ $ $ 2,246.00 574.00 96.00 74.00 2,990.00 389.00 439.00 1,562.00 606.00 (6.00) 2,990.00 2,010 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
  13. 13. Facebook Inc. CONDENSED COMMON SIZE BALANCE SHEET 31-Dec ($ in millions) YearEnd 2,012 2,011 Current Assets 74.60 72.72 PPE, net 15.83 23.30 Goodwill and Intangibles 9.19 2.56 Other Assets 0.38 1.42 TOTAL ASSETS 100.00 100.00 Current Liabilities 6.97 14.20 Noncurrent Liabilities 15.20 8.42 Contributed Capital 66.83 52.11 Retained Earnings 10.98 25.37 Treasury stock and other SE 0.01 -0.09 TOTAL L & SE 100.00 100.00 2,010 75.12 19.20 3.21 2.47 100.00 13.01 14.68 52.24 20.27 -0.20 100.00 The trend analysis of balance sheet reveals a huge increase in the following two accounts: Goodwill Facebook acquired Instagram in August 2012 for $521 million. It received assets worth $88 million which means that the balance of $433 million is recorded as goodwill. Other acquisitions also amounted to an increase in goodwill by $72 million. Contributed Capital We see a spike in contributed capital in 2012. This can be attributed to the IPO in 2012. From the common-size balance sheet we notice that there is a significant drop in retained earnings, This is due to the increase in operating expenses during the year 2012 (Refer to income statement analysis above). The common-size balance sheet also reveals a decrease in non-current liabilities. This is a good sign as this indicates that Facebook is doing a good job in realizing its revenues. Current assets are the major portion of Facebook’s assets. This is in line with business model of Facebook. 13
  14. 14. Facebook Inc. CONDENSED STATEMENT OF CASH FLOWS FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 Net cash from operating activities $ 1,612.00 $ 1,549.00 Net cash from investing activities $ (7,024.00) $ (3,023.00) Net cash from financing activities $ 6,283.00 $ 1,198.00 Effect of exchange rate on cash $ 1.00 $ 3.00 Net changes in cash $ 872.00 $ (273.00) Cash, beginning $ 1,512.00 $ 1,785.00 Cash, ending $ 2,384.00 $ 1,512.00 2,011 2,010 $ 698.00 $ (324.00) $ 781.00 $ (3.00) $ 1,152.00 $ 633.00 $ 1,785.00 Facebook Inc. CONDENSED TREND ANALYSIS STATEMENT OF CASH FLOWS FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Net cash from operating activities 230.95 221.92 Net cash from investing activities 2167.90 933.02 Net cash from financing activities 804.48 153.39 Effect of exchange rate on cash -33.33 -100.00 Net changes in cash 75.69 -23.70 2,010 100.00 100.00 100.00 100.00 100.00 Facebook Inc. CONDENSED COMMON-SIZE STATEMENT OF CASH FLOWS FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Net cash from operating activities 100.00 100.00 Net cash from investing activities -435.73 -195.16 Net cash from financing activities 389.76 77.34 Effect of exchange rate on cash 0.06 0.19 Net changes in cash 54.09 -17.62 2,010 100.00 -46.42 111.89 -0.43 165.04 From the trend analysis of statement of cash flows, we notice considerable rise in investing cash flows during both 2010-11 and 2011-12. We also see a significant rise in financing cash flows. This suggests that Facebook is diverting its cash and also taking loans to finance its investing activities. This is in line with its goals to drive acquisition and retention of customers by increasing investment. The numbers in common-size statement of cash flows support this trend. 14
  15. 15. Facebook Inc. Ratio Analysis Introduction Ratio Analysis helps us compare a given company with any other company in the same industry. We can also quantify the company’s performance and compare and contrast it with average in the industry. From the Wikipedia article on financial ratios, “A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements.” In the following sections we analyze Facebook’s performance in the years 2011 and 2012 using ratio analysis. Estimating Industry Averages Facebook’s SIC code is 7375 which corresponds to the Information Retrieval Services industry. But Facebook would be better categorized as a social media company that earns revenues through ads posted to its website and mobile applications. The major competitors for Facebook in the social media and advertising industry are Google, Microsoft, Twitter and Yahoo. There are many other social networking sites that offer specialized social media services like Pintrest, Quora, Tumblr etc.., which can also be classified as competitors of Facebook within the social media industry. The challenge we face when performing ratio analysis is that since most of the companies in the social media industry are not publicly traded, there is insufficient information to accurately determine industry averages. In order to proceed forward with our analysis, we decided to estimate the industry average as average of ratios calculated for twitter and Pandora, two of Facebook’s direct competitors. The details of this calculation are included in the appendix. Another important point to keep in mind when comparing Facebook’s performance with the industry average is that this is an emerging industry and most of the companies are still streamlining their operations to maximize profits and achieve business objectives. Facebook was one of the first movers on this industry and hence enjoys a larger consumer base which means better performance. 15
  16. 16. Ratio Analysis Title of Ratio Profitability Ratios Return on sales (ROS) Return on assets (ROA) Return on equity (ROE) Gross profit margin Efficiency Ratios Account receivable turnover Inventory turnover Asset turnover Liquidity Ratios Current ratio Solvency Ratios Debt ratio Financial leverage Times interest earned Free cash flow ($ in millions) Industry Ratios Average -0.1699 -0.1349 -0.2563 0.4565 Change Lower Lower Lower Slightly Lower Company Ratios Current Year Prior Year 2012 2011 0.0063 0.0021 0.0027 0.7320 0.1800 0.1055 0.1364 0.7683 3.4782 Slower 4.3496 6.7843 1.1665 Slower 0.3370 0.5862 10.7101 5.1212 0.2217 1.2848 10.5490 $ 872.00 0.2262 1.2923 41.8095 $ (273.00) 3.3794 More Liquid 0.3984 1.7713 -50.7389 $ 68.58 Slightly Lower Risk Slightly Higher Risk Higher Risk Lower Risk Profitability Ratios Analysis We can see from the above table that all the profitability ratios that measure net income as a percentage of other accounts have decreased considerably from 2011 to 2012. The main reason for this decrease is that Facebook recorded an R&D expense of $1.4b which is considerably higher than in 2011. This lowered the net income (This was discussed in financial statement analysis) and hence the ratios. The Gross margin has decreased slightly, which means that the company needs to focus on keeping its costs under control. These ratios are better than the industry averages. This can be attributed to Facebook’s dominant position in the industry and its first mover advantage. Efficiency Ratios Analysis The accounts receivable turnover and asset turnover have decreased from 2011 to 2012. This can be explained by the fact that Facebook’s assets and receivable have more than doubled from 2011 to 2012. There is a significant growth in revenues as well but it is comparatively lower than the growth in the 16
  17. 17. assets. This is expected and with time Facebook should be able to come up with strategies that efficiently utilize its assets to maximize shareholder value. Facebook’s receivable turnover is better than the industry’s but its asset turnover is lower. This is an area Facebook should focus on. Liquidity Ratio Analysis Facebook’s current ratio has improved from 5 to 10. This means that Facebook is well positioned to pay off its current liabilities. This ratio is considerably better than the industry average. Solvency Ratios Analysis Facebook’s Debt Ratio and financial leverage remained relatively stable in 2011 and 2012. But its “Times Interest Earned” ratio decreased. This means that Facebook’s interest expenses are increasing at a higher pace than its revenues. 17
  18. 18. Sources 1. Facebook’s form 10-K filed with the SEC. http://www.sec.gov/Archives/edgar/data/1326801/000132680113000003/fb12312012x10k.htm 2. Facebook’s corporate website. http://investor.fb.com/ 3. Hoovers Online http://www.hoovers.com/ 4. Wikipedia page on Facebook’s IPO http://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook 5. News article in USA Today on Facebook’s Q2 earnings http://www.usatoday.com/story/money/markets/2013/07/24/facebook-earningsquarters/2584135/ 6. Facebook’s S1 filing with the SEC http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm 7. Yahoo finance page on Facebook http://finance.yahoo.com/echarts?s=FB+Interactive#symbol=fb;range=2y;compare=;indicator=v olume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; 8. Yahoo finance analyst estimates for Facebook http://finance.yahoo.com/q/ae?s=FB+Analyst+Estimates 9. Twitter’s S2 filing with the SEC. http://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/d564001ds1.htm#fin 564001_6 10. Pandora’s financial statements on Yahoo Finance. http://finance.yahoo.com/q/bs?s=P+Balance+Sheet&annual 11. LexisNexis page on Facebook http://www.lexisnexis.com/hottopics/lnacademic/? 12. Financial statements of Facebook on Yahoo. http://finance.yahoo.com/q/bs?s=FB+Balance+Sheet&annual http://finance.yahoo.com/q/is?s=FB+Income+Statement&annual http://finance.yahoo.com/q/cf?s=FB+Cash+Flow&annual 18
  19. 19. Appendix 1 WORKSHEET A Facebook Inc. CONDENSED CLASSIFIED BALANCE SHEET 31-Dec ($ in millions) YearEnd 2,012 2,011 Current Assets $ 11,267.00 $ 4,604.00 PPE, net $ 2,391.00 $ 1,475.00 Goodwill and Intangibles $ 1,388.00 $ 162.00 Other Assets $ 57.00 $ 90.00 TOTAL ASSETS $ 15,103.00 $ 6,331.00 Current Liabilities $ 1,052.00 $ 899.00 Noncurrent Liabilities $ 2,296.00 $ 533.00 Contributed Capital $ 10,094.00 $ 3,299.00 Retained Earnings $ 1,659.00 $ 1,606.00 Treasury stock and other SE $ 2.00 $ (6.00) TOTAL L & SE $ 15,103.00 $ 6,331.00 Facebook Inc. CONDENSED TREND ANALYSIS BALANCE SHEET 31-Dec ($ in millions) YearEnd 2,012 2,011 Current Assets 501.65 204.99 PPE, net 416.55 256.97 Goodwill and Intangibles 1,445.83 168.75 Other Assets 77.03 121.62 TOTAL ASSETS 505.12 211.74 Current Liabilities 270.44 231.11 Noncurrent Liabilities 523.01 121.41 Contributed Capital 646.22 211.20 Retained Earnings 273.76 265.02 Treasury stock and other SE (33.33) 100.00 TOTAL L & SE 505.12 211.74 19 $ $ $ $ $ $ $ $ $ $ $ 2,010 2,246.00 574.00 96.00 74.00 2,990.00 389.00 439.00 1,562.00 606.00 (6.00) 2,990.00 2,010 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
  20. 20. Facebook Inc. CONDENSED COMMON SIZE BALANCE SHEET 31-Dec ($ in millions) YearEnd 2,012 2,011 Current Assets 74.60 72.72 PPE, net 15.83 23.30 Goodwill and Intangibles 9.19 2.56 Other Assets 0.38 1.42 TOTAL ASSETS 100.00 100.00 Current Liabilities 6.97 14.20 Noncurrent Liabilities 15.20 8.42 Contributed Capital 66.83 52.11 Retained Earnings 10.98 25.37 Treasury stock and other SE 0.01 -0.09 TOTAL L & SE 100.00 100.00 2,010 75.12 19.20 3.21 2.47 100.00 13.01 14.68 52.24 20.27 -0.20 100.00 WORKSHEET B ($ in millions) End Sales Revenue Cost of goods sold Gross Profit Operating Expenses Operating Income Facebook Inc. CONDENSED MULTISTEP INCOME STATEMENT FISCAL YEAR ENDED DEC-31 Year2,012 2,011 $ 5,089.00 $ 3,711.00 $ 1,364.00 $ 860.00 $ 3,725.00 $ 2,851.00 $ 3,187.00 $ 1,095.00 $ 538.00 $ 1,756.00 Non-operating revenues and expenses Income before income tax Minority Interest provision for income tax Income from continuing operations Nonrecurring items NET INCOME Earnings per share $ $ $ $ $ $ $ $ (44.00) 494.00 21.00 441.00 32.00 32.00 0.01 20 $ $ $ $ $ $ $ 2,010 1,974.00 493.00 1,481.00 449.00 1,032.00 $ $ $ $ $ $ (61.00) (24.00) 1,695.00 $ 1,008.00 332.00 $ 234.00 695.00 $ 402.00 668.00 $ 372.00 $ 668.00 $ 372.00 $0.00 $0.00
  21. 21. Facebook Inc. CONDENSED TREND ANALYSIS INCOME STATEMENT FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Sales Revenue 257.80 187.99 Cost of goods sold 276.67 174.44 Gross Profit 251.52 192.51 Operating Expenses 709.80 243.88 Operating Income 52.13 170.16 Nonoperating revenues and expenses 183.33 254.17 Income before income tax 49.01 168.15 Minority Interest 8.97 141.88 provision for income tax 109.70 172.89 Income from continuing operations 8.60 179.57 Nonrecurring items 0.00 0.00 NET INCOME 8.60 179.57 2,010 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 0.00 100.00 Facebook Inc. CONDENSED COMMON-SIZE INCOME STATEMENT FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Sales Revenue 100.00 100.00 Cost of goods sold 26.80 23.17 Gross Profit 73.20 76.83 Operating Expenses 62.63 29.51 Operating Income 10.57 47.32 Nonoperating revenues and expenses (0.86) (1.64) Income before income tax 9.71 45.68 Minority Interest 0.41 8.95 provision for income tax 8.67 18.73 Income from continuing operations 0.63 18.00 Nonrecurring items 0.00 0.00 NET INCOME 0.63 18.00 2,010 100.00 24.97 75.03 22.75 52.28 (1.22) 51.06 11.85 20.36 18.84 0.00 18.84 21
  22. 22. WORKSHEET C Facebook Inc. CONDENSED STATEMENT OF CASH FLOWS FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 $ $ Net cash from operating activities 1,612.00 1,549.00 $ $ Net cash from investing activities (7,024.00) (3,023.00) $ $ Net cash from financing activities 6,283.00 1,198.00 $ $ Effect of exchange rate on cash 1.00 3.00 $ $ Net changes in cash 872.00 (273.00) $ $ Cash, beginning 1,512.00 1,785.00 $ $ Cash, ending 2,384.00 1,512.00 2,010 $ 698.00 $ (324.00) $ 781.00 $ (3.00) $ 1,152.00 $ 633.00 $ 1,785.00 Facebook Inc. CONDENSED TREND ANALYSIS STATEMENT OF CASH FLOWS FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Net cash from operating activities 230.95 221.92 Net cash from investing activities 2167.90 933.02 Net cash from financing activities 804.48 153.39 Effect of exchange rate on cash -33.33 -100.00 Net changes in cash 75.69 -23.70 2,010 100.00 100.00 100.00 100.00 100.00 Facebook Inc. CONDENSED COMMON-SIZE STATEMENT OF CASH FLOWS FISCAL YEAR ENDED DEC-31 ($ in millions) YearEnd 2,012 2,011 Net cash from operating activities 100.00 100.00 Net cash from investing activities -435.73 -195.16 Net cash from financing activities 389.76 77.34 Effect of exchange rate on cash 0.06 0.19 Net changes in cash 54.09 -17.62 2,010 100.00 -46.42 111.89 -0.43 165.04 22
  23. 23. WORKSHEET D Title of Ratio Profitability Ratios Return on sales (ROS) Return on assets (ROA) Return on equity (ROE) Gross profit margin Efficiency Ratios Account receivable turnover Inventory turnover Asset turnover Liquidity Ratios Current ratio Solvency Ratios Debt ratio Financial leverage Times interest earned Free cash flow ($ in millions) Industry Ratios Average -0.1699 -0.1349 -0.2563 0.4565 Change Company Ratios Current Year Prior Year 2012 2011 Lower Lower Lower Slightly Lower 0.0063 0.0021 0.0027 0.7320 0.1800 0.1055 0.1364 0.7683 3.4782 Slower 4.3496 6.7843 1.1665 Slower 0.3370 0.5862 10.7101 5.1212 0.2217 1.2848 10.5490 0.2262 1.2923 41.8095 $ (273.00) 3.3794 More Liquid 0.3984 1.7713 -50.7389 $ 68.58 Slightly Lower Risk Slightly Higher Risk Higher Risk Lower Risk WORKSHEET E Included above as research summary. 23 $ 872.00
  24. 24. Appendix 2 Accounting Policies       Financial Statements prepared according to US- GAAP. Revenue recognition- sale of virtual currency to buy virtual & digital products. Subject to income tax in US. Shared based compensation- granted pre-2011 RSUs to employees and board members Loss contingencies- liability recorded when loss incurred due to lawsuits, claims Business combinations and valuation of goodwill and other acquired intangible assets- fair value of purchase allocated. Financial Statement Summary Revenue Dec 31, 2000 (millions) Dec31, 2012(millions) Dec 31, 2012(millions) Worldwide 655 943 1329 US & Canada 359 462 631 Europe 201 306 374 Asia 53 95 168 Rest of world 41 79 156 Income as percentage of revenue 2012 Net income 2011 2010 1% 27% 31% 24
  25. 25. Percentage Change in Measures of Financial Health 2011-12 2010-11 Cost of Revenue 59% 74% Research & Development 261% 169% Marketing & sales 128% 135% General & Administrative 184% 128% Interest income (28)% 154% Income Tax (37)% 73% Trends in MAUs MAU Dec 31, 2000 (millions) Dec31, 2012(millions) Dec 31, 2012(millions) Worldwide 360 845 1,056 US & Canada 112 179 193 Europe 117 229 261 Asia 62 212 298 Rest of world 69 225 304 Industry Averages Calculation Account ($ is thousands) Accounts receivable Inventory Capital expenditures Dividends paid Revenue COGS Gross Profit Net Income Total Assets Current Assets Current Liabilities Total Liabilities SE Operating Income Interest Expense Pandora $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 103,410.00 7,580.00 427,145.00 290,767.00 136,378.00 (38,148.00) 218,832.00 198,614.00 115,970.00 119,843.00 98,989.00 (37,702.00) 535.00 25 Twitter $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 112,155.00 316,933.00 128,768.00 188,165.00 (79,399.00) 831,568.00 554,466.00 109,879.00 207,204.00 624,364.00 (77,083.00) 2,486.00
  26. 26. Title of Ratio Profitability Ratios Return on sales (ROS) Return on assets (ROA) Return on equity (ROE) Gross profit margin Efficiency Ratios Account receivable turnover Inventory turnover Asset turnover Liquidity Ratios Current ratio Solvency Ratios Debt ratio Financial leverage Times interest earned Free cash flow ($ in millions) Twitter Pandora -0.25052 -0.09548 -0.12717 0.593706 2.825848 4.130597 0.381127 1.951931 5.046151 1.712633 0.249173 1.331864 -31.0068 114.55 26 -0.08931 -0.17433 -0.38538 0.319278 0.547648 2.21067 -70.471 22.6 Average -0.16992 -0.1349 -0.25627 0.456492 0 3.478222 0 1.166529 0 3.379392 0 0.398411 1.771267 -50.7389 68.575
  27. 27. Appendix 3 1. Facebook’s form 10-K filed with the SEC. http://www.sec.gov/Archives/edgar/data/1326801/000132680113000003/fb12312012x10k.htm 2. Facebook’s corporate website. http://investor.fb.com/ 3. Hoovers Online 27
  28. 28. http://www.hoovers.com/ 4. Wikipedia page on Facebook’s IPO http://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook 5. News article in USA Today on Facebook’s Q2 earnings http://www.usatoday.com/story/money/markets/2013/07/24/facebook-earningsquarters/2584135/ 28
  29. 29. 6. Facebook’s S1 filing with the SEC http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm 7. Yahoo finance page on Facebook http://finance.yahoo.com/echarts?s=FB+Interactive#symbol=fb;range=2y;compare=;indicator=v olume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; 29
  30. 30. 8. Yahoo finance analyst estimates for Facebook http://finance.yahoo.com/q/ae?s=FB+Analyst+Estimates 9. Twitter’s S2 filing with the SEC. http://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/d564001ds1.htm#fin 564001_6 30
  31. 31. 10. Pandora’s financial statements on Yahoo Finance. http://finance.yahoo.com/q/bs?s=P+Balance+Sheet&annual 11. LexisNexis page on Facebook http://www.lexisnexis.com/hottopics/lnacademic/? 31
  32. 32. 12. Financial statements of Facebook on Yahoo. http://finance.yahoo.com/q/bs?s=FB+Balance+Sheet&annual http://finance.yahoo.com/q/is?s=FB+Income+Statement&annual http://finance.yahoo.com/q/cf?s=FB+Cash+Flow&annual 32

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