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Below is a sample of an IPO that received our highest rating.


Facebook, Inc.   FB   $28.00-$35.00  337.4 million shares Underwriters: Morgan Stanley; J.P. Morgan; Goldman, Sachs & Co. Co-Managers: BofA Merrill Lynch; Barclays Capital; Allen & Company Citigroup; Credit Suisse; Deutsche Bank Securities; RBC Capital Markets; Wells Fargo Securities  Proposed trade date of  5/18 Their mission is to make the world more open and connected.  People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

 

Facebook, Inc.    FB

  •  337,415,352 shares to be offered between $28.00 and $35.00 per share
  • Underwriters: Morgan Stanley; J.P. Morgan; Goldman, Sachs & Co   Co-Managers: BofA Merrill Lynch; Barclays Capital; Allen & Company Citigroup; Credit Suisse; Deutsche Bank Securities; RBC Capital Markets; Wells Fargo Securities
  • Proposed trade date of 5/18
  • Rating = 5

 

Click here to view the prospectus.

http://www.sec.gov/Archives/edgar/data/1326801/000119312512208192/d287954ds1a.htm

 

Company Overview

Their mission is to make the world more open and connected.  People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. They believe that Facebook has become an integral part of many of their users' daily lives. Users add value to the overall Facebook ecosystem each time they engage with friends, developers, or advertisers. Increases in user engagement enable them to attract more users, developers, and advertisers. Growth in the number of users, developers, and advertisers and the interactions among them enhances the value they deliver to all of their constituencies.

They believe that they are at the forefront of enabling faster, easier, and richer communication between people and that Facebook has become an integral part of many of their users' daily lives. They have experienced rapid growth in the number of users and their engagement.

They build products that support their mission by creating utility for users, developers, and advertisers:

Users. They 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. They enable developers to use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach their global network of users and to build products that are more personalized, social, and engaging.

Advertisers. They enable advertisers to engage with more than 900 million monthly active users (MAUs) on Facebook or subsets of their users based on information they have chosen to share with them such as their age, location, gender, or interests. They offer advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads.

They generate substantially all of their revenue from advertising and from fees associated with their Payments infrastructure that enables users to purchase virtual and digital goods from their Platform developers. For the year ended December 31, 2011, they recorded revenue of $3,711 million, operating income of $1,756 million, and net income of $1,000 million. They were incorporated in July 2004 and are headquartered in Menlo Park, California.

 

 

IPO Detail

 

This is the initial public offering of Facebook, Inc. and no public market currently exists for its common stock. Facebook is offering 337,415,352 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $28.00 and $35.00 per share. The company has applied to list its Class A common stock on the NASDAQ Global Market New York Stock Exchange under the symbol "FB."

 

Class A common stock offered by the company

       180,000,000        Class A shares

 

Class A common stock offered by the selling shareholders

       157,415,352        Class A shares

 

Class A common stock to be outstanding immediately after this offering

       337,415,352        Class A shares

 

Class B common stock to be outstanding immediately after this offering

   1,539,688,918      Class B shares

 

Total Class A and Class B common stock to be outstanding immediately after this offering

   2,138,085,037     Class A and Class B shares

 

They have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The holders of their outstanding shares of Class B common stock will hold approximately 96.3% of the voting power of their outstanding capital stock following this offering, and their founder, Chairman, and CEO, Mark Zuckerberg, will hold or have the ability to control approximately 57.3% of the voting power of their outstanding capital stock following this offering.

Use of Proceeds

They estimate that their net proceeds from the sale of the Class A common stock that they are offering will be approximately $5.6 billion. The principal purposes of their initial public offering are to create a public market for their Class A common stock and thereby enable future access to the public equity markets by us and their employees, obtain additional capital, and facilitate an orderly distribution of shares for the selling stockholders. They intend to use the net proceeds to us from their initial public offering for working capital and other general corporate purposes; however, they do not currently have any specific uses of the net proceeds planned. They may use a portion of the net proceeds to us to satisfy a portion of the anticipated tax withholding and remittance obligations related to the initial settlement of their outstanding RSUs. Additionally, they may use a portion of the proceeds to us for acquisitions of complementary businesses, technologies, or other assets. However, they have no commitments to use the proceeds from this offering for any such acquisitions or investments at this time.

They will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders. Mark Zuckerberg, their founder, Chairman, and CEO, will offer and sell 30,200,000 shares in their initial public offering. They expect that the substantial majority of the net proceeds Mr. Zuckerberg will receive upon such sale will be used to satisfy taxes that he will incur in connection with the partial exercise of an outstanding stock option.

Competition

 

Company

 

Stock Symbol

 

Exchange.

 

 

 

 

 

Google

 

 

GOOG

 

 

NASDAQ

Microsoft

 

 

MSFT

 

 

NASDAQ

Twitter

 

 

Private

 

 

=

Cyworld (subsidiary of SK Telecom)

 

 

SKM

 

 

NYSE

Mixi

 

 

2121

 

 

TYO

vKontakte

 

 

Private

 

 

 

Linkedin

 

 

LNKD

 

 

NYSE

 

They would also face competition from companies in China such as Renren, Sina, and Tencent in the event that they are able to access the market in China in the future. As they introduce new products, as their existing products evolve, or as other companies introduce new products and services, they may become subject to additional competition.

Market Opportunity

Their Advertising Market Opportunity

 Advertisers' objectives range from building long-term brand awareness to stimulating an immediate purchase. They offer advertising solutions that are designed to be more engaging and relevant for users in order to help advertisers better achieve their goals. Facebook's combination of reach, relevance, social context, and engagement gives advertisers enhanced opportunities to generate brand awareness and affiliation, while also creating new ways to generate near-term demand for their products from consumers likely to have purchase intent. According to an industry source, total worldwide advertising spending in 2010 was $588 billion. Their addressable market opportunity includes portions of many existing advertising markets, including the traditional offline branded advertising, online display advertising, online performance-based advertising, and mobile advertising markets.

Advertising on the social web is a significant market opportunity that is still emerging and evolving. They believe that most advertisers are still learning and experimenting with the best ways to leverage Facebook to create more social and valuable ads.

Traditional Offline Branded Advertising. Television, print, and radio accounted for $363 billion, or 62% of the total advertising market in 2010 according to an industry source. Historically, advertisers interested in generating awareness of and demand for their brands have heavily relied on these offline media to reach their audiences at scale. They believe that these brand advertisers will increasingly dedicate a portion of their advertising dollars to Facebook because the broad audiences they are trying to reach are active on Facebook on a daily basis, because they can reach their desired audiences with precision, and because they can spark word of mouth marketing through Facebook. In December 2011, an advertiser could reach an estimated audience of more than 65 million U.S. users in a typical day on Facebook. By comparison, the 2011 season finale of American Idol was viewed by an estimated U.S. audience of 29 million people. In 2011, their advertising customers included each of the 100 largest global advertising spenders, as ranked by an industry source. Examples of Facebook advertising campaigns by large brand advertisers include:

 

  • Nike launched its "Write the Future" campaign on Facebook as an integral part of its 2010 World Cup marketing effort. The launch placement was seen by 140 million users in 20 countries and users engaged with the message more than seven million times by taking actions such as watching the three-minute embedded video, or Liking, clicking, or Commenting on the ad.
  • American Express purchased ads on Facebook and put its Facebook Page at the center of its advertising campaign in November 2010 to introduce and promote "Small Business Saturday," a new local initiative designed to encourage shopping at small businesses on the Saturday after Thanksgiving. The ads reached 84 million Facebook users over the three week campaign. American Express continued the campaign in 2011. The campaign reached 91 million people, including 74 million who were shown an ad that featured a connection with their Facebook friends, successfully leveraging social context at scale. They believe that advertising on Facebook contributed to the successful results of the Small Business Saturday campaign; in 2011 public awareness of Small Business Saturday rose to 65% from 37% in 2010. Additionally, American Express saw a 23% increase in Cardmember transactions at small business merchants on Small Business Saturday.

Online Advertising. From 2010 to 2015, the worldwide online advertising market is projected to increase from $68 billion to $120 billion, representing 12% and 16%, respectively, of the worldwide advertising market according to an industry source. Currently, the online advertising market is generally divided between display advertising, where the advertiser is seeking impressions, and performance-based advertising, where the advertiser is seeking clicks or conversions.

 

  • Display Advertising. Online display advertising typically includes banner ads, interstitials, video ads, and rich media ads that aim to reach large numbers of consumers within a particular audience segment. Display advertisers run impression-based campaigns on Facebook in order to reach their large user base and because of the amount of time that users spend with them. Since January 2011, Facebook.com has been the number one website worldwide as measured by total minutes spent and total page views, according to an industry source. On average, users in the aggregate spent more than 9.7 billion minutes per day on Facebook on personal computers during December 2011. Display advertisers also use Facebook in order to more precisely reach their target audiences among their users and to leverage social context and their social distribution channels to increase engagement. Examples of display advertising campaigns on Facebook include:

 

    • Walmart U.S. purchased advertising on Facebook targeting users in the United States between the ages of 18 and 49 during the days surrounding "Black Friday" in November 2011. The campaign, which encouraged users to download a Black Friday shopping map of their local Walmart U.S. store to help them find great prices faster, reached 60 million Facebook users.

 

    • Diageo, the world's largest producer of spirits, purchased advertising on Facebook for a portfolio of its brands, including Captain Morgan rum and Smirnoff vodka, in order to increase market share for its products by targeting users in the United States over the age of 21. The campaign reached 50 million Facebook users, drove a 20% increase in offline sales, and achieved a significant return on investment as measured by an industry source.

 

  • Performance-based Advertising. Performance-based online advertising has typically involved advertisers seeking a specific user behavior such as a click on a search ad or a keyword-based content ad, a response to an email campaign, or an online purchase. They enable new forms of performance-based advertising, where advertisers can connect with users who are likely to have demand for their products based on the information that their users have chosen to share. They believe that performance-based campaigns on Facebook allow advertisers to offer their products to users with inferred intent and enhance users' experiences by showing them relevant ads tailored to their specific interests. Examples of performance-based advertising on Facebook include:

 

    • A local concert promoter advertised available tickets for an upcoming concert to users who lived in the metropolitan area where the concert was to be held and who had also Liked the artist.

 

    • 1-800-FLOWERS.COM purchased a Mother's Day advertising campaign on Facebook targeted at its fans and friends of its fans in order to drive traffic to its website and increase sales.

 

    • Social game developers including Disney, Electronic Arts, and Zynga purchased performance-based advertising on Facebook to drive player acquisition by promoting new game launches and existing games.

 

  • Mobile Advertising. The global mobile advertising market was $1.5 billion in 2010 and is expected to grow at a 64% compound annual rate to $17.6 billion in 2015 according to an industry source. According to a third-party report published in September 2010, the Facebook app is the most frequently downloaded app across all major smartphone platforms in the United States. They had more than 488 million MAUs who used Facebook mobile products in March 2012. They currently do not show ads or directly generate any meaningful revenue from users accessing Facebook through their mobile products, but they believe that they may have potential future monetization opportunities such as the inclusion of sponsored stories in users' mobile News Feeds.

 

Their Market Opportunity for Payments

When users purchase virtual and digital goods from their Platform developers using their Payments infrastructure, they receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between their users and Platform developers are for virtual goods used in social games. According to an industry source, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. They currently require Payments integration in games on Facebook, and they may seek to extend the use of Payments to other types of apps in the future.

How They Create Value for Users

Their top priority is to build useful and engaging products that enable you to:

  • Connect with Your Friends. With more than 900 million MAUs worldwide, their users are increasingly able to find and stay connected with their friends, family, and colleagues on Facebook.
  • Discover and Learn. They believe that users come to Facebook to discover and learn more about what is going on in the world around them, particularly in the lives of their friends and family and with public figures and organizations that interest them.
  • Express Yourself. They enable their users to share and publish their opinions, ideas, photos, and activities to audiences ranging from their closest friends to their 900 million users, giving every user a voice within the Facebook community.
  • Control What You Share. Through Facebook's privacy and sharing settings, their users can control what they share and with whom they share it.
  • Experience Facebook Across the Web. Through apps and websites built by developers using the Facebook Platform, their users can interact with their Facebook friends while playing games, listening to music, watching movies, reading news, and engaging in other activities.
  • Stay Connected with Your Friends on Mobile Devices. Through the combination of their mobile sites, smartphone apps, and feature phone products, users can bring Facebook with them on mobile devices wherever they go.

How They Create Value for Developers Through the Facebook Platform

The Facebook Platform is a set of development tools and application programming interfaces (APIs) that enables developers to easily integrate with Facebook to create social apps and websites and to reach their 900 million users. Platform developers build experiences that allow their users to connect and share with friends while engaging in a wide range of activities. Platform developers range from a student on his or her computer at home to teams of programmers at leading websites. They are focused on the growth and success of Platform developers by enabling:

  • Personalized and Social Experiences. They enable Platform developers to create better products that are personalized and social and that offer new ways for their users to engage with friends and share experiences across the web and on mobile devices. For example, a Facebook user can visit the Pandora website and immediately begin listening to a personalized radio station that is customized based on the bands the user Likes on Facebook.
  • Social Distribution. They enable Platform developers to reach their global user base and use their social distribution channels to increase traffic to their apps and websites.
  • Payments. They provide an online payments infrastructure that enables Platform developers to receive payments from their users in an easy-to-use, secure, and trusted environment.

How They Create Value for Advertisers and Marketers

They offer advertisers and marketers a unique combination of reach, relevance, social context, and engagement:

  • Reach.  Facebook offers the ability to reach a vast consumer audience of over 900 million MAUs with a single advertising purchase.
  • Relevance. Advertisers can specify that they show their ads to a subset of their users based on demographic factors and specific interests that they have chosen to share with them on Facebook or by using the Like button around the web. They allow advertisers to select relevant and appropriate audiences for their ads, ranging from millions of users in the case of global brands to hundreds of users in the case of smaller, local businesses.
  • Social Context. They believe that the recommendations of friends have a powerful influence on consumer interest and purchase decisions. They offer advertisers the ability to include "social context" with their marketing messages. Social context is information that highlights a user's friends' connections with a particular brand or business, for example, that a friend Liked a product or checked in at a restaurant. They believe that users find marketing messages more engaging when they include social context.
  • Engagement. They believe that the shift to a more social web creates new opportunities for businesses to engage with interested customers. Any brand or business can create a Facebook Page to stimulate an ongoing dialog with their users.

Description: LOGO

 

 

 

 

Year Ended December 31,

 

 

Three Months
Ended March 31,

 

  

2007

 

 

2008

 

 

2009

 

 

2010

 

 

2011

 

 

2011

 

  

2012

 

 

  

(in millions, except per share data)

 

Consolidated Statements of Operations Data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Revenue

  

$

153

  

 

$

272

  

 

$

777

  

 

$

1,974

  

 

$

3,711

  

 

$

731

  

  

$

1,058

  

 

 

 

 

 

 

 

 

Costs and expenses(1) :

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Cost of revenue

  

 

41

  

 

 

124

  

 

 

223

  

 

 

493

  

 

 

860

  

 

 

167

  

  

 

277

  

Marketing and sales

  

 

32

  

 

 

76

  

 

 

115

  

 

 

184

  

 

 

427

  

 

 

68

  

  

 

159

  

Research and development

  

 

81

  

 

 

47

  

 

 

87

  

 

 

144

  

 

 

388

  

 

 

57

  

  

 

153

  

General and administrative

  

 

123

  

 

 

80

  

 

 

90

  

 

 

121

  

 

 

280

  

 

 

51

  

  

 

88

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Total costs and expenses

  

 

277

  

 

 

327

  

 

 

515

  

 

 

942

  

 

 

1,955

  

 

 

343

  

  

 

677

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Income (loss) from operations

  

 

(124

 

 

(55

 

 

262

  

 

 

1,032

  

 

 

1,756

  

 

 

388

  

  

 

381

  

Interest and other income (expense), net

  

 

(11

 

 

(1

 

 

(8

 

 

(24

 

 

(61

 

 

10

  

  

 

1

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Income (loss) before provision for income taxes

  

 

(135

 

 

(56

 

 

254

  

 

 

1,008

  

 

 

1,695

  

 

 

398

  

  

 

382

  

Provision for income taxes

  

 

3

  

 

 

  

 

 

25

  

 

 

402

  

 

 

695

  

 

 

165

  

  

 

177

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Net income (loss)

  

$

(138

 

$

(56

 

$

229

  

 

$

606

  

 

$

1,000

  

 

$

233

  

  

$

205

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Net income (loss) attributable to Class A and Class B common stockholders

  

$

(138

 

$

(56

 

$

122

  

 

$

372

  

 

$

668

  

 

$

153

  

  

$

137

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Earnings (loss) per share attributable to Class A and Class B common stockholders(2):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Basic

  

$

(0.16

 

$

(0.06

 

$

0.12

  

 

$

0.34

  

 

$

0.52

  

 

$

0.12

  

  

$

0.10

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Diluted

  

$

(0.16

 

$

(0.06

 

$

0.10

  

 

$

0.28

  

 

$

0.46

  

 

$

0.11

  

  

$

0.09

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Pro forma earnings per share attributable to Class A and Class B common stockholders(2):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Basic

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.49

  

 

 

 

 

  

$

0.10

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Diluted

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.43

  

 

 

 

 

  

$

0.09

 

 

(1)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Year Ended December 31,

 

  

Three Months
Ended March 31,

 

 

  

  2007  

 

  

  2008  

 

  

  2009  

 

  

  2010  

 

  

  2011  

 

  

  2011  

 

  

  2012  

 

 

  

(in millions)

 

Cost of revenue

  

$

1

  

  

$

  

  

$

  

  

$

  

  

$

9

  

  

$

  

  

$

4

  

Marketing and sales

  

 

3

  

  

 

4

  

  

 

2

  

  

 

2

  

  

 

43

  

  

 

  

  

 

23

  

Research and development

  

 

56

  

  

 

7

  

  

 

6

  

  

 

9

  

  

 

114

  

  

 

4

  

  

 

60

  

General and administrative

  

 

13

  

  

 

19

  

  

 

19

  

  

 

9

  

  

 

51

  

  

 

3

  

  

 

16

  

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total share-based compensation expense

  

$

  73

  

  

$

  30

  

  

$

  27

  

  

$

  20

  

  

$

217

  

  

$

    7

  

  

$

103

  

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

As of December 31,

 

  

As of
March  31,

2012

 

 

  

   2007   

 

  

   2008   

 

  

   2009   

 

  

   2010   

 

  

   2011   

 

  

 

  

(in millions)

 

Consolidated Balance Sheets Data:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash, cash equivalents, and marketable securities

  

$

   305

  

  

$

   297

  

  

$

633

  

  

$

1,785

  

  

$

3,908

  

  

$

3,910

  

Working capital

  

 

250

  

  

 

279

  

  

 

703

  

  

 

1,857

  

  

 

3,705

  

  

 

3,655

  

Property and equipment, net

  

 

82

  

  

 

131

  

  

 

148

  

  

 

574

  

  

 

1,475

  

  

 

1,855

  

Total assets

  

 

448

  

  

 

505

  

  

 

1,109

  

  

 

2,990

  

  

 

6,331

  

  

 

6,859

  

Total liabilities

  

 

174

  

  

 

170

  

  

 

241

  

  

 

828

  

  

 

1,432

  

  

 

1,587

  

Total stockholders' equity

  

 

273

  

  

 

335

  

  

 

868

  

  

 

2,162

  

  

 

4,899

  

  

 

5,272

  

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Year Ended December 31,

 

 

Three Months
Ended March  31,

 

 

  

   2007   

 

 

   2008   

 

 

   2009   

 

 

   2010   

 

 

   2011   

 

 

   2011   

 

 

   2012   

 

 

  

(in millions)

 

Net cash provided by operating activities

  

$

     11

  

 

$

       8

  

 

$

155

  

 

$

698

  

 

$

1,549

  

 

$

  345

  

 

$

   441

  

Purchases of property and equipment

  

 

(55

 

 

(70

 

 

(33

 

 

(293

 

 

(606

 

 

(153

 

 

(453

Property and equipment acquired under capital leases

  

 

(11

 

 

(26

 

 

(56

 

 

(217

 

 

(473

 

 

(211

 

 

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Target Markets

Expand Their Global User Community. They continue to focus on growing their user base across all geographies, including relatively less-penetrated, large markets such as Brazil, Germany, India, Japan, Russia, and South Korea. They intend to grow their user base by continuing their marketing and user acquisition efforts and enhancing their products, including mobile apps, in order to make Facebook more accessible and useful.

Build Great Social Products to Increase Engagement. They prioritize product development investments that they believe will create engaging interactions between their users, developers, and advertisers on Facebook, across the web, and on mobile devices. They continue to invest significantly in improving their core products such as News Feed, Photos, and Groups, developing new products such as Timeline and Ticker, and enabling new Platform apps and website integrations.

Provide Users with the Most Compelling Experience. Facebook users are sharing and receiving more information across a broader range of devices. To provide the most compelling user experience, they continue to develop products and technologies focused on optimizing their social distribution channels to deliver the most useful content to each user by analyzing and organizing vast amounts of information in real time.

Build Engaging Mobile Experiences. They are devoting substantial resources to developing engaging mobile products and experiences for a wide range of platforms, including smartphones and feature phones. In addition, they are working across the mobile industry with operators, hardware manufacturers, operating system providers, and developers to improve the Facebook experience on mobile devices and make Facebook available to more people around the world. They had 488 million MAUs who used Facebook mobile products in March 2012. In April 2012, they entered into an agreement to acquire Instagram, Inc., which has built a mobile phone-based photo-sharing service. Following the closing of this acquisition, they plan to maintain Instagram's products as independent mobile applications to enhance their photos product offerings and to enable users to increase their levels of mobile engagement and photo sharing. They believe that mobile usage is critical to maintaining user growth and engagement over the long term.

Enable Developers to Build Great Social Products Using the Facebook Platform. The success of their Platform developers and the vibrancy of their Platform ecosystem are key to increasing user engagement. They continue to invest in tools and APIs that enhance the ability of Platform developers to deliver products that are more social and personalized and better engage users on Facebook, across the web, and on mobile devices. Additionally, they plan to invest in enhancing their Payments offerings and in making the Payments experience on Facebook as convenient as possible for users and Platform developers.

Improve Ad Products for Advertisers and Users. They plan to continue to improve their ad products in order to create more value for advertisers and enhance their ability to make their advertising more social and relevant for users. Their advertising strategy centers on the belief that ad products that are social, relevant, and well-integrated with other content on Facebook can enhance the user experience while providing an attractive return for advertisers. They intend to invest in additional products for their advertisers and marketers while continuing to balance their monetization objectives with their commitment to optimizing the user experience.

 

Company's Unique Strengths

Authentic Identity. They believe that using your real name, connecting to your real friends, and sharing your genuine interests online create more engaging and meaningful experiences. Representing yourself with your authentic identity online encourages you to behave with the same norms that foster trust and respect in your daily life offline. Authentic identity is core to the Facebook experience, and they believe that it is central to the future of the web. Their terms of service require you to use your real name and they encourage you to be your true self online, enabling them and Platform developers to provide you with more personalized experiences.

Social Graph. The Social Graph represents the connections between people and their friends and interests. Every person or entity is represented by a point within the graph, and the affiliations between people and their friends and interests form billions of connections between the points. Their mapping of the Social Graph enables Facebook and Platform developers to build more engaging user experiences that are based on these connections.

Social Distribution. Over time, people are consuming and creating more kinds of information at a faster pace across a broader range of devices. The growing volume of information makes it challenging to find meaningful and trusted content and to effectively make your voice heard. Facebook organizes and prioritizes content and serves as a powerful social distribution tool delivering to users what they believe they will find most compelling based on their friends and interests.

They had 901 million MAUs as of March 31, 2012, an increase of 33% as compared to 680 million MAUs as of March 31, 2011.

They had 526 million daily active users (DAUs) on average in March 2012, an increase of 41% as compared to 372 million DAUs in March 2011.

They had 845 million MAUs as of December 31, 2011, an increase of 39% as compared to 608 million MAUs as of December 31, 2010 and a 53.2% CAGR since December 31, 2009 .

They had 488 million MAUs who used Facebook mobile products in March 2012, and they surpassed 500 million mobile MAUs as of April 20, 2012.

They had more than 425 million MAUs who used Facebook mobile products in December 2011.

During the month of March 2012, they had on average 398 million users who were active with Facebook on at least six out of the last seven days, providing perspective on the number of people for whom Facebook is essentially an everyday activity.

There were more than 100 billion friend connections on Facebook as of December 31, 2011.

There were more than 125 billion friend connections on Facebook as of March 31, 2012.

On average more than 300 million photos per day were uploaded to Facebook in the three months ended March 31, 2012.

Their users generated an average of 3.2 billion Likes and Comments per day during the first quarter of 2012. Since users Like and Comment on content they find interesting, they believe that the number of Likes and Comments provides some insight into how engaging users find the content available to them on Facebook and through their Platform developers.

As of March 31, 2012, there were more than 42 million Pages with ten or more Likes. Anyone, including artists, public figures, businesses, brands, or charities can set up a Facebook Page to engage with their users. Examples of popular Pages on Facebook include Lady Gaga, Disney, and Manchester United, each of which has more than 20 million Likes.

Their users generated an average of 2.7 billion Likes and Comments per day during the three months ended December 31, 2011.

 

Company's Unique Risks

If they fail to retain existing users or add new users, or if their users decrease their level of engagement with Facebook, their revenue, financial results, and business may be significantly harmed. The size of their user base and their users' level of engagement are critical to their success. They had 901 million monthly active users (MAUs) as of March 31, 2012. Their financial performance has been and will continue to be significantly determined by their success in adding, retaining, and engaging active users. They anticipate that their active user growth rate will decline over time as the size of their active user base increases, and as they achieve higher market penetration rates. To the extent their active user growth rate slows, their business performance will become increasingly dependent on their ability to increase levels of user engagement in current and new markets.

They generate a substantial majority of their revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm their business. The substantial majority of their revenue is currently generated from third parties advertising on Facebook.  In 2009, 2010, and 2011 and the first quarter of 2011 and 2012, advertising accounted for 98%, 95%, 85%, 87%, and 82%, respectively, of their revenue. As is common in the industry, their advertisers typically do not have long-term advertising commitments with them. Many of their advertisers spend only a relatively small portion of their overall advertising budget with them. In addition, advertisers may view some of their products, such as sponsored stories and ads with social context, as experimental and unproven. Advertisers will not continue to do business with them, or they will reduce the prices they are willing to pay to advertise with them, if they do not deliver ads and other commercial content in an effective manner, or if they do not believe that their investment in advertising with them will generate a competitive return relative to other alternatives.

Growth in use of Facebook through their mobile products, where they do not currently display ads, as a substitute for use on personal computers may negatively affect their revenue and financial results. They had more than 488 million MAUs who used Facebook mobile products in March 2012 They anticipate that the rate of growth in mobile users will continue to exceed the growth rate of their overall MAUs for the foreseeable future, in part due to their focus on developing mobile products to encourage mobile usage of Facebook. Although the substantial majority of their mobile users also access and engage with Facebook on personal computers where they display advertising, their users could decide to increasingly access their products primarily through mobile devices. They do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and their ability to do so successfully is unproven. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if they are unable to successfully implement monetization strategies for their mobile users, their revenue and financial results may be negatively affected.

Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that they do not control. There is no guarantee that popular mobile devices will continue to feature Facebook, or that mobile device users will continue to use Facebook rather than competing products. They are dependent on the interoperability of Facebook with popular mobile operating systems that they do not control, such as Android and iOS, and any changes in such systems that degrade their products' functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that their products work well with a range of mobile technologies, systems, networks, and standards that they do not control.

They may not be successful in their efforts to grow and further monetize the Facebook Platform. They have made and are continuing to make major investments to enable developers to build applications (apps) and websites that integrate with the Facebook Platform. Existing and prospective Platform developers may not be successful in building apps or websites that create and maintain user engagement. Additionally, developers may choose to build on other platforms, including mobile platforms controlled by third parties, rather than building on the Facebook Platform. They are continuously seeking to balance the distribution objectives of their Platform developers with their desire to provide an optimal user experience, and they may not be successful in achieving a balance that continues to attract and retain Platform developers. From time to time, they have taken actions to reduce the volume of communications from apps to users on Facebook with the objective of enhancing the user experience, and such actions have reduced distribution from, user engagement with, and their monetization opportunities from, apps on Facebook. In some instances, these actions have adversely affected their relationships with Platform developers

Action by governments to restrict access to Facebook in their countries could substantially harm their business and financial results. It is possible that governments of one or more countries may seek to censor content available on Facebook in their country, restrict access to Facebook from their country entirely, or impose other restrictions that may affect the accessibility of Facebook in their country for an extended period of time or indefinitely. For example, access to Facebook has been or is currently restricted in whole or in part in China, Iran, North Korea, and Syria. In addition, governments in other countries may seek to restrict access to Facebook if they consider them to be in violation of their laws.

Their efforts to expand the Facebook Platform may result in users increasingly engaging with their Platform developers' Facebook-integrated websites instead of engaging on Facebook, which may negatively affect their advertising revenue and harm their business. They actively support Platform developers' efforts to develop products that integrate with Facebook on the developers' websites. Their Platform developers may choose to prioritize building or supporting Facebook-integrated websites as opposed to building or supporting apps that run on the Facebook website. When users visit a Platform partner's Facebook-integrated website, they do not deliver advertisements, whereas they would have displayed advertisements to these users if their activity had taken place on the Facebook website. If Facebook-integrated websites draw users away from their website, it may reduce or slow the growth of their user activity that generates advertising opportunities, which could negatively affect their advertising revenue. Although they believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated websites, these benefits may not offset the possible loss of advertising revenue, in which case their business could be harmed.

Improper access to or disclosure of their users' information could harm their reputation and adversely affect their business.

In 2011 and the first quarter of 2012, they estimate that up to 19% and 15% of their revenue, respectively, was derived from Payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pages generated by Zynga apps. If Zynga does not maintain its level of engagement with their users or if they are unable to successfully maintain their relationship with Zynga, their financial results could be harmed. In 2011 and the first quarter of 2012, Zynga directly accounted for approximately 12% and 11%, respectively, of their revenue, which was comprised of revenue derived from Payments processing fees related to Zynga's sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga's apps generate pages on which they display ads from other advertisers; for 2011 and the first quarter of 2012, they estimate that an additional approximately 7% and 4%, respectively, of their revenue was generated from the display of these ads. Zynga has recently launched games on its own website and on non-Facebook platforms, and Zynga may choose to try to migrate users from existing Facebook-integrated games to other websites or platforms. They may fail to maintain good relations with Zynga or Zynga may decide to reduce or cease its investments in games on the Facebook Platform. If the use of Zynga games on their Platform declines for these or other reasons, their financial results may be adversely affected.

They expect their rates of growth will decline in the future. They believe that their rates of user and revenue growth will decline over time. For example, their annual revenue grew 154% from 2009 to 2010 and 88% from 2010 to 2011, and 45% from the first quarter of 2011 to the same period in 2012. Historically, their user growth has been a primary driver of growth in their revenue. Their user growth and revenue growth rates will inevitably slow as they achieve higher market penetration rates, as their revenue increases to higher levels, and as they experience increased competition.

Their business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to their business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm their business.

They have been subject to regulatory investigations and settlements and they expect to continue to be subject to such proceedings in the future, which could cause them to incur substantial costs or require them to change their business practices in a manner materially adverse to their business.

They are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on their business, financial condition, or results of operations.

They are involved in numerous class action lawsuits and other litigation matters that are expensive and time consuming, and, if resolved adversely, could harm their business, financial condition, or results of operations. In addition to intellectual property claims, they are also involved in numerous other lawsuits, including putative class action lawsuits brought by users and advertisers, many of which claim statutory damages, and they anticipate that they will continue to be a target for numerous lawsuits in the future. Because they have hundreds of millions of users, the plaintiffs in class action cases filed against them typically claim enormous monetary damages even if the alleged per-user harm is small or non-existent. Any litigation to which they are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or they may decide to settle lawsuits on similarly unfavorable terms. Any such negative outcome could result in payments of substantial monetary damages or fines, or changes to their products or business practices, and accordingly their business, financial condition, or results of operations could be materially and adversely affected.

Their CEO has control over key decision making as a result of his control of a majority of their voting stock. As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, their founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of 933,969,202 shares of common stock, representing a majority of the voting power of their outstanding capital stock following their initial public offering. As a result, Mr. Zuckerberg has the ability to control the outcome of matters submitted to their stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of their assets. In addition, Mr. Zuckerberg has the ability to control the management and affairs of their company as a result of his position as their CEO and his ability to control the election of their directors. Additionally, in the event that Mr. Zuckerberg controls their company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to their stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of their stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of their stockholders generally.

They anticipate that they will expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of Restricted Stock Units (RSUs) following their initial public offering and the manner in which they fund that expenditure may have an adverse effect. They anticipate that they will expend substantial funds to satisfy tax withholding and remittance obligations on a date approximately six months following their initial public offering, when they will settle a portion of their RSUs granted prior to January 1, 2011 (Pre-2011 RSUs). On the settlement date, they plan to withhold and remit income taxes at applicable minimum statutory rates based on the then-current value of the underlying shares. They currently expect that the average of these withholding tax rates will be approximately 45%. If the price of their common stock at the time of settlement were equal to the midpoint of the price range on the cover page of the prospectus, they estimate that this tax obligation would be approximately $ 4 billion in the aggregate. The amount of this obligation could be higher or lower, depending on the price of their shares on the RSU settlement date. To settle these RSUs, assuming a 45% tax withholding rate, they anticipate that they will net settle the awards by delivering approximately 155 million shares of Class B common stock to RSU holders and simultaneously withholding approximately122 million shares of Class B common stock. In connection with this net settlement they will withhold and remit the tax liabilities on behalf of the RSU holders in cash to the applicable tax authorities.

Computer malware, viruses, hacking and phishing attacks, and spamming could harm their business and results of operations.

Payment transactions on the Facebook Platform may subject them to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm their business. Their users can use the Facebook Platform to purchase virtual and digital goods from their Platform developers using their Payments infrastructure. Depending on how their Payments product evolves, they may be subject to a variety of laws and regulations in the United States, Europe, and elsewhere, including those governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how their use of Payments may evolve and to mitigate regulatory uncertainty, they have applied for certain money transmitter licenses and expect to apply for additional money transmitter licenses in the United States, which will generally require them to demonstrate compliance with many domestic laws in these areas. 

They plan to continue expanding their operations abroad where they have limited operating experience and may be subject to increased business and economic risks that could affect their financial results. They plan to continue the international expansion of their business operations and the translation of their products. They currently make Facebook available in more than 70 different languages, and they have offices or data centers in more than 20 different countries. They may enter new international markets where they have limited or no experience in marketing, selling, and deploying their products. For example, they continue to evaluate entering China. However, this market has substantial legal and regulatory complexities that have prevented their entry into China to date.

The dual class structure of their common stock and the voting agreements among certain stockholders have the effect of concentrating voting control with their CEO, and also with employees and directors and their affiliates. Their Class B common stock has ten votes per share, and their Class A common stock, which is the stock they are offering in their initial public offering, has one vote per share. Stockholders who hold shares of Class B common stock, including their executive officers, employees, and directors and their affiliates, will together hold approximately 96.3% of the voting power of their outstanding capital stock following their initial public offering. Because of the ten-to-one voting ratio between their Class B and Class A common stock, the holders of their Class B common stock collectively will continue to control a majority of the combined voting power of their common stock and therefore be able to control all matters submitted to their stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of their Class A and Class B common stock. This concentrated control will limit investor's ability to influence corporate matters for the foreseeable future.

They have elected to take advantage of the "controlled company" exemption to the corporate governance rules for publicly-listed companies. Because they qualify as a "controlled company" under the corporate governance rules for publicly-listed companies, they are not required to have a majority of their board of directors be independent, nor are they required to have a compensation committee or an independent nominating function.

 

Bottom Line

From 2007 to 2011, Facebook's revenues have grown from $153 million to $3.7 billion, a 121.9% CAGR. During the same period, their net income (loss) was ($138 million), ($56 million), $229 million, $606 million and $1.0 billion in 2007, 2008, 2009 and 2010, respectively. Income growth from 2009 to 2011 was at a109% CAGR. For the first quarter of 2012, their revenues were $1.06 billion, an increase of 44.7%, and their net income was $205 million, a decrease of 12.0%, compared to the same period in 2011.  They had 901 million MAUs as of March 31, 2012, an increase of 32.5% as compared to 680 million MAUs as of March 31, 2011, and a 66.0% CAGR since March 31, 2009. They had 526 million daily active users (DAUs) on average in March 2012, an increase of 41.4% as compared to 372 million DAUs in March 2011 and a 78.8% CAGR since March 31, 2009.

Users add value to the overall Facebook ecosystem each time they engage with friends, developers, or advertisers. Developers can use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach their global network of users and to build products that are more personalized, social, and engaging. Advertisers can engage with more than 800 million monthly active users (MAUs) on Facebook. They offer advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads. They generate substantially all of their revenue from advertising and from fees associated with their Payments infrastructure that enables users to purchase virtual and digital goods from their Platform developers.

Advertising on the social web is a significant market opportunity that is still emerging and evolving. They offer advertising solutions that are designed to be more engaging and relevant for users in order to help advertisers better achieve their goals. Their addressable market opportunity includes portions of many existing advertising markets, including the traditional offline branded advertising, online display advertising, online performance-based advertising, and mobile advertising markets. They believe that these brand advertisers will increasingly dedicate a portion of their advertising dollars to Facebook because the broad audiences they are trying to reach are active on Facebook on a daily basis, because they can reach their desired audiences with precision, and because they can spark word of mouth marketing through Facebook. In December 2011, an advertiser could reach an estimated audience of more than 65 million U.S. users in a typical day on Facebook.

From 2010 to 2015, the worldwide online advertising market is projected to increase from $68 billion to $120 billion, representing 12% and 16%, respectively, of the worldwide advertising market. Since January 2011, Facebook.com has been the number one website worldwide as measured by total minutes spent and total page views, according to an industry source. They enable new forms of performance-based advertising, where advertisers can connect with users who are likely to have demand for their products based on the information that their users have chosen to share. The global mobile advertising market was $1.5 billion in 2010 and is expected to grow at a 64% compound annual rate to $17.6 billion in 2015. The Facebook app is the most frequently downloaded app across all major smartphone platforms in the United States. They currently do not show ads or directly generate any meaningful revenue from users accessing Facebook through their mobile products, but they believe that they may have potential future monetization opportunities such as the inclusion of sponsored stories in users' mobile News Feeds.

When users purchase virtual and digital goods from their Platform developers using their Payments infrastructure, Facebook receives fees that represent a portion of the transaction value. The worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. Facebook may seek to extend the use of Payments to other types of apps in the future.

Facebook creates value for their users by the sheer number of MAUs worldwide (845 million); the immense range of information available about current events and the lives of friends, family and public figures; the ability of users to share and publish their opinions, ideas, photos and activities to their chosen range of other users; the ability to control what users share and with whom; the ability to interact with their friends while playing games or utilizing apps or other websites; and the use of mobile devices to maintain contact with their friends through Facebook.

The Facebook Platform is a set of development tools and application programming interfaces (APIs) that enables developers to easily integrate with Facebook to create social apps and websites and to reach their 91 million users. They enable Platform developers to create better products that are personalized and social and that offer new ways for their users to engage with friends and share experiences across the web and on mobile devices, increase traffic to their apps and websites, and receive online payments from their users.

Advertisers can specify that they show their ads to a subset of their users based on demographic factors and specific interests that they have chosen to share with them on Facebook or by using the Like button around the web. Facebook offer advertisers the ability to include "social context" with their marketing messages. They believe that the shift to a more social web creates new opportunities for businesses to engage with interested customers. Any brand or business can create a Facebook Page to stimulate an ongoing dialog with their users.

The company plans to continue to focus on growing their user base across all geographies, including relatively less-penetrated, large markets such as Brazil, Germany, India, Japan, Russia, and South Korea. They continue to invest significantly in improving their core products such as News Feed, Photos, and Groups, developing new products such as Timeline and Ticker, and enabling new Platform apps and website integrations. They also continue to develop products and technologies focused on optimizing their social distribution channels to deliver the most useful content to each user by analyzing and organizing vast amounts of information in real time and are devoting substantial resources to developing engaging mobile products and experiences for a wide range of platforms, including smartphones and feature phones. They believe that mobile usage is critical to maintaining user growth and engagement over the long term.

They continue to invest in tools and APIs that enhance the ability of Platform developers to deliver products that are more social and personalized and better engage users on Facebook, across the web, and on mobile devices and plan to invest in enhancing their Payments offerings and in making them as convenient as possible for users and Platform developers. They intend to invest in additional products for their advertisers and marketers while continuing to balance their monetization objectives with their commitment to optimizing the user experience.

Authentic identity is core to the Facebook experience, and they believe that it is central to the future of the web, encouraging users to behave with the same norms that foster trust and respect in daily life. The Social Graph represents the connections between people and their friends and interests. Their mapping of the Social Graph enables Facebook and Platform developers to build more engaging user experiences that are based on these connections. Facebook organizes and prioritizes content and serves as a powerful social distribution tool delivering to users what they believe they will find most compelling based on their friends and interests.

To the extent their active user growth rate slows, their business performance will become increasingly dependent on their ability to increase levels of user engagement in current and new markets.They anticipate that their active user growth rate will decline over time as the size of their active user base increases, and as they achieve higher market penetration rates. For example, their annual revenue grew 154% from 2009 to 2010 and 88% from 2010 to 2011 and 45% from the first quarter of 2011 to the same period in 2012. To the extent their active user growth rate slows, their business performance will become increasingly dependent on their ability to increase levels of user engagement in current and new markets. Their advertisers typically do not have long-term advertising commitments with them and spend only a relatively small portion of their overall advertising budget with them.

They anticipate that the rate of growth in mobile users will continue to exceed the growth rate of their overall MAUs for the foreseeable future, in part due to their focus on developing mobile products to encourage mobile usage of Facebook. They do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and their ability to do so successfully is unproven. If users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if they are unable to successfully implement monetization strategies for their mobile users, their revenue and financial results may be negatively affected. They are dependent on the interoperability of Facebook with popular mobile operating systems that they do not control, such as Android and iOS. In order to deliver high quality mobile products, it is important that their products work well with a range of mobile technologies, systems, networks, and standards that they do not control.

They have made and are continuing to make major investments to enable developers to build applications (apps) and websites that integrate with the Facebook Platform. Existing and prospective Platform developers may not be successful in building apps or websites that create and maintain user engagement. From time to time, they have taken actions to reduce the volume of communications from apps to users on Facebook with the objective of enhancing the user experience. In some instances, these actions have adversely affected their relationships with Platform developers.

Their Platform developers may choose to prioritize building or supporting Facebook-integrated websites as opposed to building or supporting apps that run on the Facebook website. If Facebook-integrated websites draw users away from their website, it may reduce or slow the growth of their user activity that generates advertising opportunities. In 2011, Zynga accounted for approximately 12% of their revenue. If the use of Zynga games on their Platform declines, if Zynga launches games on or migrates games to competing platforms, or if they fail to maintain good relations with Zynga, they may lose Zynga as a significant Platform developer and their financial results may be adversely affected.

It is possible that governments of one or more countries may seek to censor content available on Facebook in their country, restrict access to Facebook from their country entirely, or impose other restrictions that may affect the accessibility of Facebook in their country. Access to Facebook has been or is currently restricted in whole or in part in China, Iran, North Korea, and Syria.

It is estimated that Google grew display advertising by 50% in first quarter 2012, vs. 37% for Facebook. In addition, YouTube is experiencing significant gains. Free cash flow was a negative $50 million for the first quarter of 2012, due to higher capital expenditures. Capital expenditures were projected to increase approximately 60% in 2012, compared to 2011.

In 2011 and the first quarter of 2012, Zynga directly accounted for approximately 12% and 11%, respectively, of their revenue, which was comprised of revenue derived from Payments processing fees related to Zynga's sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga's apps generate pages on which they display ads from other advertisers; for 2011 and the first quarter of 2012, they estimate that an additional approximately 7% and 4%, respectively, of their revenue was generated from the display of these ads. Zynga has recently launched games on its own website and on non-Facebook platforms, and Zynga may choose to try to migrate users from existing Facebook-integrated games to other websites or platforms.

The company is currently, and expects to be in the future, party to patent lawsuits, class action lawsuits and other litigation. Because they have hundreds of millions of users, the plaintiffs in class action cases filed against them typically claim enormous monetary damages even if the alleged per-user harm is small or non-existent. 

They anticipate that they will expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of Restricted Stock Units (RSUs) following their initial public offering. To settle these RSUs, assuming a 45% tax withholding rate, they anticipate that they will net settle the awards by delivering approximately 155 million shares of Class B common stock to RSU holders and simultaneously withholding approximately 122 million shares of Class B common stock.

Payment transactions on the Facebook Platform may subject them to additional regulatory requirements and other risks that could be costly and difficult to comply with. To increase flexibility in how their use of Payments may evolve and to mitigate regulatory uncertainty, they have applied for certain money transmitter licenses and expect to apply for additional money transmitter licenses in the United States, which will generally require them to demonstrate compliance with many domestic laws in these areas. Rating = 5

 



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