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FB > SEC Filings for FB > Form 10-Q on 25-Jul-2013All Recent SEC Filings

Show all filings for FACEBOOK INC

Form 10-Q for FACEBOOK INC


25-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. "Risk Factors." For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.
Overview
Our mission is to give people the power to share and make the world more open and connected.
We build products that support our mission by creating utility for users, developers, and marketers:
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.
Marketers. We enable marketers to engage with more than one billion monthly active users 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 marketers 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. In the second quarter of 2013, we recorded revenue of $1,813 million, income from operations of $562 million and net income of $333 million. In the first six months of 2013, we recorded revenue of $3,271 million, income from operations of $935 million and net income of $552 million.


Trends in Our User Metrics
The numbers for our key metrics, our daily active users (DAUs), monthly active users (MAUs), mobile MAUs and average revenue per user (ARPU), and certain other metrics such as mobile DAUs and mobile-only MAUS, do not include Instagram users unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics do not include Instagram unless otherwise specifically stated.
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.

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


Worldwide DAUs increased 27% to 699 million on average during June 2013 from 552 million during June 2012. We experienced growth in DAUs across major markets including Brazil, India, and the United States. Overall growth in DAUs was driven by increased mobile usage of Facebook. During the second quarter of 2013, the number of DAUs using personal computers increased modestly compared to the same period in 2012, but in certain key markets such as the United States the number of DAUs using personal computers decreased, while mobile DAUs continued to increase. Worldwide mobile DAUs were 469 million on average during June 2013.
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.

[[Image Removed]] As of June 30, 2013, we had 1.15 billion MAUs, an increase of 21% from June 30, 2012. Users in India and Brazil represented key sources of growth in the second quarter of 2013 relative to the prior year.


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.

Worldwide mobile MAUs increased 51% to 819 million as of June 30, 2013 from 543 million as of June 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in India, Brazil, and Indonesia representing key sources of mobile growth over the second quarter of 2013 as compared to the first quarter of 2013. There were 219 million mobile MAUs who accessed Facebook solely through mobile apps or our mobile website during the month ended June 30, 2013, increasing 16% from 189 million during the month ended March 31, 2013. The remaining 600 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may be flat or continue to decline in certain markets, including key developed markets such as the United States, in part due to our focus on developing mobile products to encourage mobile usage of Facebook.

[[Image Removed]]


Trends in Our Monetization by User Geography We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered or virtual goods are purchased. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. Our revenue and ARPU in regions such as United States & Canada and Europe are relatively higher due to the size and maturity of those advertising markets as well as our greater sales presence and the number of payment methods that we make available to marketers and users.

[[Image Removed]]
[[Image Removed]]
Note: Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue by geography disclosure in our condensed consolidated financial statements where revenue is geographically apportioned based on the location of the marketer or developer.


During the second quarter of 2013, worldwide ARPU was $1.60, an increase of 25% from the second quarter of 2012. Over this period, ARPU increased by approximately 43% in Rest of World and by over 30% in United States & Canada, Asia and Europe. User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. We expect that user growth in the future will continue to be higher in those regions where ARPU is relatively lower, such as Asia and Rest of World, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region. Components of Results of Operations
Revenue
We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers.
Advertising. Our advertising revenue is generated by displaying ad products on the Facebook website or mobile app and third-party affiliated websites or mobile apps. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by our users, the number of actions taken by our users or the number of impressions delivered. We recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content, and action-based ads in the period in which a user takes the action the marketer contracted for. We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users. The number of ads we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. Whether we count the initial display only or every display of an ad as an impression is dependent on where the ad is displayed. For example, an individual ad in News Feed that is purchased on an impression basis may be displayed to users more than once during a day; however, only the initial display of the ad is considered an impression, regardless of how many times the ad is actually displayed within the News Feed to a particular user.
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 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. Our other fees revenue consists primarily of user Promoted Posts, our ad serving and measurement products and, to a lesser extent, Facebook Gifts revenue. Such revenue has been immaterial in recent periods.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers such as facility and server equipment depreciation, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions.
Research and development. Research and development expenses consist primarily of salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense all of our research and development costs as they are incurred.
Marketing and sales. Our marketing and sales expenses consist primarily of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include user-, developer-, and marketer-facing marketing and promotional expenditures.
General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include outside consulting fees, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal settlements and amortization of patents we acquired.


Results of Operations
The following table set forth our condensed consolidated statements of
operations data:
                                        Three Months Ended June 30,          Six Months Ended June 30,
                                          2013               2012             2013               2012
                                                                 (in millions)
Revenue                              $      1,813       $      1,184     $      3,271       $      2,242
Costs and expenses:
Cost of revenue                               465                367              878                644
Research and development                      344                705              637                858
Marketing and sales                           269                392              472                535
General and administrative                    173                463              349                567
Total costs and expenses                    1,251              1,927            2,336              2,604
Income (loss) from operations                 562               (743 )            935               (362 )
Interest and other expense, net               (17 )              (22 )            (37 )              (21 )
Income (loss) before (provision for)
benefit from income taxes                     545               (765 )            898               (383 )
(Provision for) benefit from income
taxes                                        (212 )              608             (346 )              431
Net income (loss)                    $        333       $       (157 )   $        552       $         48

Share-based compensation expense included in costs and expenses:

                                         Three Months Ended June 30,         Six Months Ended June 30,
                                             2013               2012            2013            2012
                                                                (in millions)
Share-based compensation expense
included in costs and expenses:
Cost of revenue                      $         11           $       66     $         19     $       71
Research and development                      151                  545              268            605
Marketing and sales                            33                  232               57            251
General and administrative                     29                  263               50            282
Total share-based compensation
expense                              $        224           $    1,106     $        394     $    1,209


The following table set forth our condensed consolidated statements of operations data (as a percentage of revenue):

                                       Three Months Ended June 30,             Six Months Ended June 30,
                                        2013                 2012               2013                2012
Revenue                                  100  %               100  %             100  %              100  %
Costs and expenses:
Cost of revenue                           26  %                31  %              27  %               29  %
Research and development                  19  %                60  %              19  %               38  %
Marketing and sales                       15  %                33  %              14  %               24  %
General and administrative                10  %                39  %              11  %               25  %
Total costs and expenses                  69  %               163  %              71  %              116  %
Income (loss) from operations             31  %               (63 )%              29  %              (16 )%
Interest and other expense, net           (1 )%                (2 )%              (1 )%               (1 )%
Income (loss) before (provision
for) benefit from income taxes            30  %               (65 )%              27  %              (17 )%
(Provision for) benefit from
income taxes                             (12 )%                51  %             (11 )%               19  %
Net income (loss)                         18  %               (13 )%              17  %                2  %

Share-based compensation expense included in costs and expenses (as a percentage of revenue):

                                          Three Months Ended June 30,          Six Months Ended June 30,
                                            2013                2012             2013              2012
Cost of revenue                                1 %                 6 %              1 %                 3 %
Research and development                       8                  46                8                  27
Marketing and sales                            2                  20                2                  11
General and administrative                     2                  22                2                  13
Total share-based compensation expense        12 %                93 %             12 %                54 %

Three and Six Months Ended June 30, 2013 and 2012

Revenue
                            Three Months Ended June 30,                       Six Months Ended June 30,
                                                                   %                                             %
                                2013               2012         change           2013            2012         change
                                                     (in millions, except for percentages)
Revenue:
Advertising             $         1,599         $     992           61 %    $       2,844     $   1,864           53 %
Payments and other fees             214               192           11 %              427           378           13 %
Total revenue           $         1,813         $   1,184           53 %    $       3,271     $   2,242           46 %

Revenue in the second quarter and the first six months of 2013 increased $629 million, or 53%, and $1,029 million, or 46%, respectively, compared to the same periods in 2012. The increases were due primarily to increases in advertising revenue.
Advertising revenue increased $607 million, or 61%, and $980 million, or 53%, in the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012. Advertising revenue grew due to a 43% and 41% increase in the number of ads delivered during the second quarter and the first six months of 2013, respectively, and a 13% and 8% increase in the average price per ad as compared to those same periods in 2012. The most important factor driving advertising revenue growth in these periods was an increase in revenue from ads in News Feed on both mobile devices and personal computers. News Feed ads are displayed more prominently, have significantly higher levels of engagement and a higher price per ad relative to our other ad placements. For the second quarter and the first six months of 2013, we estimate that advertising revenue from News Feed ads on mobile devices represented approximately 41% and 36%, respectively, of total advertising revenue, as compared with approximately 3% and 1% in the same periods in 2012. Other factors that influenced our advertising revenue growth and advertising


price and volume trends in these periods included: (i) an increase in the number of marketers actively advertising on Facebook which we believe increased demand for our ads; (ii) 27% growth in average DAUs and 21% growth in MAUs from June 30, 2012 to June 30, 2013, which increased the number of ads we delivered; and (iii) other product changes, including our decision in the fourth quarter of 2012 to lower our market reserve price, i.e. the minimum price threshold accepted in our ads auction. We believe the reserve price change significantly increased the number of ads delivered and reduced the average price per ad, and overall had a modest positive effect on revenue in the 2013 periods. Payments and other fees revenue in the second quarter and the first six months of 2013 increased $22 million, or 11%, and $49 million, or 13%, respectively, compared to the same periods in 2012. The increase in Payments and other fees revenue is a result of increased Payments revenue from games played on Facebook on personal computers, and to a lesser extent, the inclusion of other fees revenue in 2013 from user Promoted Posts, our ad serving and measurement products, and Facebook Gifts.

Cost of revenue
                           Three Months Ended June 30,                         Six Months Ended June 30,
                                                                  %                                                 %
                             2013                2012          change           2013               2012          change
                                                      (in millions, except for percentages)
Cost of revenue        $        465         $        367           27 %    $       878         $       644           36 %
Percentage of revenue            26 %                 31 %                          27 %                29 %

Cost of revenue in the second quarter and the first six months of 2013 increased $98 million, or 27%, and $234 million, or 36%, respectively, compared to the same periods in 2012. The increases in both periods were primarily due to $57 million and $65 million of lease abandonment expense recognized in the second quarter and the first six months of 2013 resulting from exiting certain leased data centers due to the migration of operations to our own data centers. In addition, operational expenses related to expanding our own data centers also contributed to the increases in cost of revenue, including $58 million and $145 million increases in depreciation for the second quarter and the first six months of 2013, respectively. These increases were partially offset by $55 million and $52 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) as a result of our IPO in May 2012.

Research and development
                             Three Months Ended June 30,                         Six Months Ended June 30,
                                                                  %                                                 %
                               2013                2012         change            2013               2012         change
                                                        (in millions, except for percentages)
Research and development $        344         $        705          (51 )%   $       637         $       858          (26 )%
Percentage of revenue              19 %                 60 %                          19 %                38 %

Research and development expenses in the second quarter and the first six months of 2013 decreased $361 million, or 51%, and $221 million, or 26%, respectively, compared to the same periods in 2012. The decreases were primarily due to $394 million and $337 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs as a result of our IPO in May 2012. These decreases were partially offset by increases in payroll and benefits expense resulting from a 58% growth in employee headcount from June 30, 2012 to June 30, 2013 in engineering and other technical functions. This investment supported our efforts to improve existing products and build new products for users, developers, and marketers.


Marketing and sales
                            Three Months Ended June 30,                      Six Months Ended June 30,
                                                                 %                                              %
                              2013                2012         change         2013               2012         change
                                                    (in millions, except for percentages)
Marketing and sales     $        269         $        392      (31)%     $       472         $       535      (12)%
Percentage of revenue             15 %                 33 %                       14 %                24 %

Marketing and sales expenses in the second quarter and the first six months of 2013 decreased $123 million, or 31%, and $63 million, or 12%, compared to the same periods in 2012. The decreases were primarily due to $199 million and $194 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs as a result of our IPO in May 2012. These decreases were partially offset by $54 million and $73 million increases in our user-, developer-, and marketer-facing marketing expenses for the second quarter and the first six months of 2013, respectively, and by increases in payroll and benefits expenses resulting from a 18% increase in employee headcount from June 30, 2012 to June 30, 2013 to support global sales, business development and customer service.

General and administrative
                               Three Months Ended June 30,                         Six Months Ended June 30,
                                                                      %                                                 %
                                 2013                2012          change           2013               2012          change
                                                          (in millions, except for percentages)
General and administrative $        173         $        463          (63 )%   $       349         $       567          (38 )%
Percentage of revenue                10 %                 39 %                          11 %                25 %

General and administrative expenses in the second quarter and the first six . . .

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