Facebook

www.morganmarkets.
com
North America Equity Research
27 June 2012
Facebook
Initiation
Overweight
FB, FB US
The Social Infrastructure of the Web; Initiating at
Overweight with $45 Price Target
Price: $33.10
Price Target: $45.00
Internet
Doug Anmuth
AC
(1-212) 622-6571
douglas.anmuth@jpmorgan.com
Kaizad Gotla, CFA
(1-212) 622-6436
kaizad.gotla@jpmorgan.com
Bo Nam
(1-212) 622-5032
bo.nam@jpmorgan.com
Shelby Taffer
(212) 622-6518
shelby.x.taffer@jpmorgan.com
J.P. Morgan Securities LLC
YTD 1m 3m 12m
Abs -13.0% 6.6% -13.0% -13.0%
Rel -16.8% 5.9% -7.5% -16.0%
Facebook Inc. (FB;FB US)
FYE Dec 2011A 2012E 2013E 2014E
EPS Reported ($)
Q1 (Mar) 0.10 0.12A 0.14 -
Q2 (Jun) 0.12 0.11 0.15 -
Q3 (Sep) 0.12 0.12 0.16 -
Q4 (Dec) 0.16 0.14 0.20 -
FY 0.51 0.50 0.66 0.92
Bloomberg EPS FY ($) - 0.52 0.66 0.87
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data
Price ($) 33.10
Date Of Price 26 Jun 12
52-week Range ($) 45.00 - 25.52
Mkt Cap ($ mn) 86,821.30
Fiscal Year End Dec
Shares O/S (mn) 2,623
Price Target ($) 45.00
Price Target End Date 31 Dec 13
See page 58 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
25
30
35
40
45
$
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

Price Performance
FB share price ($)
S&P500 (rebased)
We are initiating coverage of Facebook with an Overweight rating and year-end 2013
price target of $45. As the underlying social fabric of the Web, Facebook is a unique
platform asset with strong network effects, a deep competitive moat, and unparalleled
social context. We believe the next phase of the Internet will be driven by data and
powered by ubiquitous online access, and Facebook is well positioned here through its
large and engaged user base, virtual ownership of the social graph, and unwavering
focus on the user experience.
Facebook ad platform growing stronger. While Street focus is likely on the shift
toward mobile usage, we point out that Facebooks advertising platform is also in
the midst of an important transitionads are becoming more social, they are more
prevalent in the News Feed, and the Facebook Ad Exchange should increase
advertiser demand and inventory yield.
Early feedback on Sponsored Stories is positive. Based on our checks we are
increasingly bullish on Sponsored Stories in the News Feed on both desktop and
mobile. Early data suggests click-through rates and eCPMs for both are several
times those of Facebooks traditional desktop ads.
Mobile monetization may be better than people expect. Facebook likely will
continue to roll out mobile ads in a measured manner going forward, but we believe
Sponsored Stories in the mobile News Feed have been turned on more in just the
past few weeks and initial results appear positive. Our analysis suggests mobile
could become a $300M-$500M quarterly revenue opportunity for Facebook in the
next 2-4 quarters as higher pricing and visit frequency offset fewer overall
impressions.
We expect growth to trough in 2Q and reaccelerate in 2H12 and into 2013. We
project 2Q12 revenue of $1.1B (+24% Y/Y) and EBITDA of $587M (+6%, 53.1%
margin), but we expect revenue to reaccelerate and margins to expand modestly Q/Q
in the back half driven largely by continued solid user growth and newer ad formats.
We project 2012-2015 three-year CAGRs of 33% for revenue and 35% for EBITDA.
Overweight rating and $45 PT. Our year-end 2013 price target of $45 is based on
an average of two methodologies: 1) 17x 2014E EBITDA of $5.0B which yields
$39; and 2) our DCF analysis utilizing a 3% terminal growth rate and an 11%
WACC which yields $51.
This document is being provided for the exclusive use of VINEET PRASAD at CONCORDIA UNIVERSITY
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Table of Contents
Investment Thesis....................................................................3
Risks to Rating and Price Target ............................................4
Company Description ..............................................................5
Key Questions ..........................................................................6
Can Advertising Monetization Increase Meaningfully? ............................................6
How Is Mobile Impacting FB Users and Revenue? ................................................12
How Much Ad Revenue Could Mobile Generate?..................................................14
Can Facebook Deliver Meaningful ROI for Advertisers? .......................................16
Can Payments Evolve Beyond Gaming?................................................................18
Will Facebook Get Into Search? ............................................................................20
Will Facebook Build an Ad Network? ...................................................................22
Social Infrastructure Creates Options..................................23
Large Global Market Opportunity..........................................27
Global User Growth ..............................................................................................27
Advertising Market ...............................................................................................28
Payments ..............................................................................................................30
Culture and Management.......................................................31
Key Facebook Products and Features .................................32
Key User Products ................................................................................................33
Key Advertiser Products........................................................................................33
Key Developer Products........................................................................................35
Current Business....................................................................37
User Growth and Engagement ...............................................................................37
Advertising...........................................................................................................37
Payments ..............................................................................................................41
Financial Outlook ...................................................................43
Early Lock-Up Expirations Could Create Volatility in the Near Term....................46
Valuation .................................................................................47
Financial Models.....................................................................50
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Investment Thesis
Facebook is the premier social layer of the Internet
We believe Facebooks virtual ownership of the social graph puts the company in a
unique position to influence the way people interact, communicate, and live their
lives. Facebooks mission is to make the world more open and connected, and we
believe the company achieves this goal through its massive base of more than 900M
users, its innovative products and tools, and substantial network effects. Facebook
brings people closer together and can add a social layer to nearly everything people
do, both online and offline. We believe Facebooks virtual ownership of the social
graph, strong competitive moat, and unwavering focus on the user experience
position the company to significantly improve monetization over time and to
become an enduring, blue-chip company built for the long term.
Massive reach and engagement drive network effects
Facebooks strong reach and engagement drive powerful network effects which we
believe will make it incredibly difficult for direct social competitors to gain any
meaningful share. With more than 900M monthly active users (MAUs), Facebook
reaches ~13% of the worlds population and nearly 40% of global Internet users
and we still expect 35%+ user growth this year in Asia and Rest of World (ROW). In
terms of engagement, 526M daily active users (DAUs) or nearly 60% of users visit
Facebook any given day. And Facebook users account for one of every seven
minutes spent online, or 14% of total Internet time. Monthly mobile users total
488M, or 54% of Facebooks overall user base, and despite the associated near-
term revenue headwinds, we believe ubiquity of devices and increased
engagement through mobile will be strong positives for the company over the
long term.
Targeting abilities provide significant value to advertisers, and still early
Beyond Facebooks broad reach and scale highlighted above, the companys
mapping of the social graph yields valuable information for brands and advertisers
that is highly differentiated and difficult to replicate. Facebooks visibility into user
likes and preferences, social connections, and a variety of other social signals and
data creates a degree of targeting that is unique both online and offline. Facebook ads
are generally targeted, but they are not yet highly social, and marketers are still in the
early stages of understanding and implementing successful campaigns. We believe
Facebooks ad platform is just beginning to shift toward more social ads with
higher-quality formats, and it will become increasingly valuable to advertisers.
Strong financial profile with growth expected to accelerate in 2H12 and 2013
Over the next few years we expect Facebook to post 30%+ revenue growth and mid-
to high-50s (%) EBITDA margins. We estimate 2012 revenue growth will decelerate
to 30% and EBITDA margins will compress ~740 bps Y/Y to 54.5%, largely due to
the shift toward mobile usage and heavy product and advertising investments.
However, we are confident that new ad formats will drive greater monetization
and lead to accelerating revenue growth and sequential margin improvement in
2H12 and into 2013. Given high margins and projected capex leverage going
forward, we also expect Facebook to be a strong generator of free cash flow.
Facebook (FB)
Overweight
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New ad products change the complexion of Facebook advertising
We believe Facebooks advertising platform is in the midst of an important transition
as formats shift to having greater social context and ads are increasingly placed in the
News Feed. Facebook ads have generally been targeted based on a variety of
demographic and user preferences data, and Sponsored Stories on the right-hand side
of the page have been available since January 2011. But we believe only a minority
of ad impressions currently have social context, despite data that suggests ads with
social context have 50% better ad recall. Based on our checks with agencies and
advertisers we are increasingly bullish on Sponsored Stories both on the desktop
and mobile, and we are confident they can deliver meaningfully higher CTRs
(click-through rates) and yield higher eCPMs (effective cost per thousand
impressions). We are also optimistic on Facebooks new RTB ad exchange which
will: 1) enable third parties to re-target users on Facebook, thereby incorporating
purchase intent data; and 2) create greater demand and higher inventory yield
through a larger base of advertisers.
Mobile monetization may be better than people realize
The shift toward mobile is widely viewed as a negative for Facebook given limited
screen real estate and the lack of mobile ad products. Facebook will also likely
continue to roll out mobile ads in a measured manner so as not to compromise the
user experience. However, we believe Sponsored Stories within the mobile News
Feed have become much more prevalent over just the last few weeks and the
initial results appear positive. Early data suggests mobile Sponsored Stories have
CTRs and eCPMs that are several times those of traditional Facebook desktop ads.
Our analysis suggests mobile could become a $300M-$500M quarterly revenue
opportunity for Facebook in the next 2-4 quarters as higher pricing and visit
frequency offset a lower overall number of impressions. Location-based
advertising could also soon be another high value driver of mobile monetization.
Risks to Rating and Price Target
Facebooks user-first mentality could create short-term risk, volatility
We believe Facebooks loyal user base is its most valuable asset and the company
intends to remain focused on the user experience above all else. This approach
should increase the value of Facebook over time, but also has the potential to
result in greater risk and volatility on a short-term basis.
Shift in mobile usage well ahead of mobile monetization efforts
The rapid shift of Facebook usage toward mobile has created a significant
monetization headwind over the last few quarters. This is likely to continue near term
as Facebook is in the very early stages of rolling out mobile ads. The mobile display
ad market also remains smalla $1B market in the U.S. this year according to
IDCand marketers are still figuring out how to run effective mobile campaigns.
Mobiles smaller screen real estate and format limitations suggest that desktop
ads cannot simply be ported over to mobilemobile requires a different
approach.
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Advertiser ROI on Facebook may remain difficult to measure
Facebook targets the demand generation segment of the purchase funnel and is
therefore going after branded advertising spending. However, marketers may still
be utilizing Facebook from a direct response approach (demand fulfillment) and
they are likely still determining the best way to utilize the Facebook platform
across owned, paid, and earned media. GMs recent comments about Facebook
highlight this challenge, and we believe GM is not alone. Our industry discussions
suggest strong interest in advertising on Facebook, but ad formats and measurement
need to improve and Facebook needs to further educate the ad industry.
Privacy, security, and regulation
As noted above, we believe Facebooks user base is its most valuable asset.
Anything that could compromise that user base from a privacy or security
perspective represents a significant risk to Facebook. To some degree all Internet
companies have similar risks, but trust is an even more integral piece of the
Facebook platform given the depth of user-profile data, social connections, and
social signals. In November 2011, Facebook reached a 20-year settlement agreement
with the FTC on the practices and treatment of user data and privacy settings,
including an independent privacy audit every two years. We also believe Facebook
needs to further educate users about privacy settings and make them easier to change.
Dual-class share structure and Mark Zuckerberg control
Facebook has a dual-class share structureClass A shares have one vote each while
Class B shares have 10 votes each. Owners of Class B shares hold ~96% of the
voting power post IPO, including Mark Zuckerberg with ~57%. Concentrated
voting power is likely to make the company more nimble in a dynamic Internet
landscape, but it also leaves institutional shareholders with little say in how the
company is run.
Lock-up expirations are both early and staggered, bringing considerable supply
As highlighted in Figure 41 of this report, Facebooks lock-up expirations run from
three months to one year post IPO, with the largest expiration coming at six months.
Facebook also plans to sell ~$4B worth of existing stock into the market roughly six
months after the IPO (November 2012) to pay a large tax bill related to RSU vesting.
Facebook sold ~16% of the company into the public market through the IPO,
but increased supply over the next year could lead to greater volatility in the
share price.
Company Description
Founded in 2004 and based in Menlo Park, California, Facebook is the largest online
global social network and enables its 900M-plus users to connect with friends,
family, brands, public figures, and organizations. Users and businesses can share
information and photos, form interest groups, and express their lives and identities in
many ways. Facebook is a free service for its users, supported by revenues from
advertising and payments. Advertisers can engage Facebooks user base through
highly targeted ads and the ability to add social context from user profiles and
interactions. Developers can also leverage Facebooks platform through APIs
(application programming interfaces) to personalize and engage in social interactions
for new products and partnerships with other businesses.
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Key Questions
Can Advertising Monetization Increase Meaningfully?
One of the primary controversies surrounding Facebook is whether the company can
meaningfully increase advertising monetization. While we expect Facebooks
worldwide user growth to remain solid in the coming yearsdespite currently
having over 900M users or 40% of the global online populationwe think an
increasing proportion of Facebooks future growth is likely to come from improved
monetization or ad revenue per user. We believe user growth and revenue growth
are converging in 2012, but we expect ad revenue to reaccelerate in the back
half of this year and into 2013, again driving a greater gap between these
measures.
We model Facebooks ad revenue based on: 1) the number of impressions; and
2) pricing on an eCPM basis. Based on the still-early stage of Facebook advertising
and near-term macro pressures in Europe we do not model any pricing improvement
in 2012. However, going forward we anticipate pricing increases to become a larger
relative driver of ad revenue growth. We believe Facebook can significantly
improve advertising monetization as evidenced by the reacceleration we model
in 2H12 and into 2013, and the relatively stable ~30% ad revenue growth we
anticipate over the next few years.
Key ad monetization drivers include: 1) transition of the ad platform toward
more social ads and higher-quality formats, especially on the desktop; 2) mobile
monetization which is just beginning; 3) continued education of marketers;
4) development of better ROI tools; 5) Facebooks RTB ad exchange; and
6) location-based advertising.
Social advertising in very early stages. We think social marketing remains in its
early stages and there has yet to be the breadth and depth of advertisers required to
drive deeper monetization of Facebooks usersthat is part of the opportunity going
forward. And even though ads are usually targeted, we believe there are major
opportunities to add greater social context to ads, particularly as ads with social
context have 50% better ad recall than ads without it according to a Facebook
study.
Potential for Facebook to grow revenue per user. In order to better gauge
Facebooks potential revenue opportunity, we compared Facebooks revenue per user
to those of a range of other large online advertising and social networking
companies. As shown below in Figure 1, Facebooks worldwide revenue per user
trails those of large U.S. web companies including Google and Yahoo!. Facebooks
revenue per user was roughly 32% below Yahoo!s last year, but we expect this gap
to shrink over time as Facebook improves its advertiser depth and targeting/
measurement capabilities.
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Figure 1: Facebook Revenue per User Compared to Other Internet Companies
Source: Company data and J.P. Morgan estimates. Note: Worldwide data.
We model revenue per user to grow from $5.11 in 2011 to $6.27 by 2014,
rebounding to double-digit growth after a flattish 2012. We would not expect
Facebook to reach Googles $28/user anytime soon given that search typically targets
users close to the bottom of the purchase funnel and advertisers are willing to pay a
premium for ads that directly lead to a near-term purchase. We believe it also
remains easier to calculate ROI metrics for search compared to social.
We also note that Facebooks revenue per user trails those of other web companies in
spite of having higher engagement or time spent per user. As shown in Figure 2
below, Facebook accounted for nearly 14% of online time spent in the U.S. in
2011more than any other sitethough it accounted for just 5% of U.S. online
advertising spend. We expect near-term share gains to continue at the expense of
portals such as Yahoo!, AOL, and MSN as dollars follow engagement. But we
expect Google to continue to take disproportionate share as advertisers are extremely
familiar with the measurability and ROI of search.
Figure 2: Facebooks Share of U.S. Online Advertising Significantly Lags its Share of Usage
U.S. Data for 2011
Source: Company data, IAB, comScore, and J.P. Morgan estimates. Google U.S. share includes O&O and Network revenue.
$28.26
$8.63
$7.49
$6.44
$5.11
$4.47
$3.91
$0.92
$0.0
$10.0
$20.0
$30.0
GOOG ZNGA YHOO Tencent FB LNKD Twitter Renren
Revenue / User 2011
14.4%
10.2%
9.0%
3.1%
5.0%
42.5%
10.4%
6.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Facebook Google Yahoo! AOL
% Share of time spent % Ad Share
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27 June 2012
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Significant monetization potential across geographies. Figure 3 below also
highlights the significant monetization gap that exists across Facebooks reported
geographies. As early as social advertising is in the U.S., it is at an even earlier stage
in international markets. We believe Facebook is generally showing fewer
impressions in these markets and CPMs are significantly lower. For example, we
project Facebook will have an average eCPM of $0.36 in the U.S and Canada in
2012, but average pricing of only $0.17 in Europe, $0.16 in Asia, and $0.10 in Rest
of World. Overall, on an eCPM basis Facebook inventory is currently priced like
low-end remnant online inventory, and is therefore well below guaranteed
online inventory and virtually all offline media. We believe pricing across all
geographies can increase over time as Facebooks ad platform transitions to
more social ads and higher-quality formats.
Figure 3: Facebook Revenue/User by Geography
Source: Company reports and J.P. Morgan estimates.
Measurement of ROI underdeveloped. According to a 2011 Social Marketing
Survey, only 13% of marketers said they are very effective at measuring results of
their social media campaigns. We think this data point suggests the early and
experimental nature of Facebook advertising for many advertisers and believe the
company needs to continue to roll out new ad formats and metrics to help advertisers
and agencies substantiate the efficacy of Facebook ads. We think Facebook is
positioned to become a leading brand awareness or demand generation vehicle
for advertisers, though our checks suggest that many advertisers on the
platform continue to use Facebook mostly as a direct response toolan
approach through which Facebook likely underperforms other ad formats such
as search. As a result, we think traditional ROI measurement techniques likely need
to be adjusted to include the impact on Fans and Friends of Fans to account for the
full viral nature of Facebooks ad formats and audience.
2010A 2011A 2012E 2013E 2014E
Revenue per MAU (ARPU) Summary
US & Canada $8.62 $11.50 $11.86 $13.04 $14.29
Europe $3.85 $5.61 $5.68 $6.61 $8.08
Asia $1.49 $2.08 $2.57 $2.93 $3.42
Rest of World $0.27 $1.56 $1.88 $2.45 $3.19
Total $4.08 $5.11 $5.05 $5.55 $6.27
Y/Y Growth
US & Canada 33% 3% 10% 10%
Europe 46% 1% 16% 22%
Asia 40% 24% 14% 17%
Rest of World 468% 21% 30% 30%
Total 32% 25% -1% 10% 13%
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Doug Anmuth
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Figure 4: Effectiveness at Measuring Social Media Campaigns According to U.S. B2C and B2B
Marketers
% of Total
Source: Chief Marketer, 2011 Social Marketing Survey.
Three near-term monetization drivers. We model an acceleration in revenue
growth in 2H12 and into 2013 as we are positive on monetization improvements
driven by: 1) greater inclusion of Sponsored Stories in the Desktop News Feed;
2) Sponsored Stories on Mobile; and 3) the Facebook Ad Exchange.
Sponsored Stories in Desktop News Feed. Facebook launched its sponsored
stories ad format on the desktop in January 2011, though these ads were
originally relegated to the right rail of a Facebook page. The Sponsored Stories ad
format allows marketers to amplify the distribution of stories or posts that users
have already shared. For example, when a user on Facebook likes Starbucks,
Starbucks can then use Sponsored Stories to highlight that to a users friends.
Sponsored Stories can be created around a number of actions including Likes,
RSVPs, check-ins, app usage, and others.
In January 2012, Facebook began including Sponsored Stories in a users News
Feed on the desktop. We think the inclusion of Sponsored Stories in the News
Feed makes the ads much more prominent to the user and should increase their
effectiveness. Therefore, we believe advertisers should be willing to pay a
premium for this exposure. According to a recent study of 17 clients by TBG
Digitala company that places ads through Facebooks ads API
Facebooks Desktop Sponsored Stories in the News Feed have a 6x higher
click-through rate than overall desktop ads (News Feed + Sidebar), as shown
in Figure 5. In addition, eCPMs on desktop News Feed ads at $3.72 are much
higher than those of overall desktop (News Feed + Sidebar) ads at $0.74. We note
that Sponsored Stories in the desktop News Feed are almost entirely incremental
given that these ads have only been recently rolled out by Facebook in a
meaningful way.
Very
effective,
13%
Somewhat
effective,
47%
Not very
effective ,
28%
Not at all
effective ,
12%
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27 June 2012
Doug Anmuth
(1-212) 622-6571
Figure 5: Facebook Sponsored Story Ad Performance
Source: TBG Digital and TechCrunch.
Sponsored Stories on Mobile. As we highlighted earlier, users have been
adopting Facebook on mobile at a rapid rate, and even if it has created
incremental usage, it has been a net negative to revenue given the lack of
monetization on mobile devices. In addition, the lack of screen real estate leaves
potentially fewer opportunities to place ads in a mobile Facebook users session
or visit. Facebook officially began rolling out Sponsored Stories in the Mobile
News Feed in March 2012, but our checks with both advertisers and users
suggest frequency has increased more materially over just the last few
weeks. The challenges of monetizing mobile are well known in terms of lack of
screen real estate and perhaps shorter engagement sessions. But we believe
Sponsored Stories on Mobile will benefit from being directly in a users News
Feed, without any of the other potential visual distractions that may exist on the
desktop. According to the TBG Digital study mentioned above, Sponsored
Stories in the Mobile News Feed click-through rates and eCPMs are both
13x higher than those of overall desktop ads on Facebook and about 2x as
high as those of desktop News Feed Sponsored Stories.
Figure 6: Facebook Sponsored Story Ads in Mobile (Left) and Desktop (Right)
Source: Facebook iPhone App and Company website. Note: Used with permission.
$0.74
$3.72
$9.86
0.083%
0.588%
1.140%
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
0.000%
0.200%
0.400%
0.600%
0.800%
1.000%
1.200%
Desktop (News Feed +
Sidebar)
Desktop News Feed Mobile News Feed
eCPM CTR
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27 June 2012
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According to comScore, the News Feed/Homepage accounts for ~40% of
Facebook user activity in terms of time spent, making it the largest driver of
monetization on both desktop and mobile as it is the primary area where brands can
communicate with their Fans and Friends of Fans. However, despite the high usage
of News Feed, a minority of Fans see content from a brand in a given week.
According to Facebook, only 16% of Fans are reached by branded content from
a brand that posts content five out of seven days on its Facebook page, as some
fans may miss content based on their usage patterns and the volume of content
flowing through the News Feed. In addition, Facebooks algorithm ranks content or
stories based on relevance so only a fraction of content/stories are delivered to a user
at a specific time. We believe Sponsored Stories can become an extremely effective
ad format over time as they blend in with the rest of a users stories and the user
likely perceives them with similar importance to unpaid stories.
Figure 7: Share of Time Spent on Facebook.com by Activity (%)
Source: comScore Mediabuilder, U.S., March 2012.
Facebook Exchange should improve targeting. Facebook recently announced it
would allow advertisers to bid on specific impressions in real time through its
Facebook Exchange. Real-time bidding allows advertisers to bid on specific
impressions or users rather than inferring user intention through broad
demographics (age, gender, etc.) or interests. One of the keys to the Facebook
Exchange is the ability for advertisers to use third-party data to target ads on
Facebook. For example, if a user visits an online travel agent but leaves before
the check-out process, the online travel agent can re-targetsite targeting in this
casethat user on Facebook with additional messages or offers. Facebook will
allow real-time bidding for ads on the right-hand side of a page and therefore the
users News Feed will not currently include re-targeted ads. In addition, pricing
will be based on a CPM basis and initial technology partners will include
TellApart Inc., Turn Inc., Triggit, DataXu Inc., MediaMath Inc., AppNexus Inc.,
The Trade Desk Inc., and AdRoll.com. Exchange partners will now have
access to a new, large pool of inventory through Facebook, which should
help increase advertiser demand and yield on the Facebook platform.
We believe site re-targeting could significantly improve ad pricing on Facebook.
According to AdRoll.comone of the technology partners mentioned above
CPMs for site targeting can range from $1.00 to $2.50, well above Facebooks
current CPM of ~$0.30 in the U.S. According to DataXu, pricing for re-targeting
campaigns is 3x higher (see Figure 8) than a run of exchange (broad buy across
an exchanges inventory) as multiple DSPs (demand-side platforms) and ad
Homepage/
Newsfeed, 40%
Photos, 18%
Apps/Tools, 14%
Profile Pages, 12%
Other, 16%
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networks bid on a limited number of high-value impressions. We think
Facebooks ~70% reach in the U.S. and high engagement14% of all minutes
onlinemake it well suited for advertisers to re-target users on Facebook. In
addition to the expected pricing benefits from the Facebook Exchange, we
think more relevant ads should also improve the user experience.
Figure 8: Prices for Re-Targeted Ads on Ad Exchanges Up to 3x Those of Non-Targeted Ads
%
Source: DataXu, MarketPulse, September 2010.
How Is Mobile Impacting FB Users and Revenue?
Facebook has witnessed significant growth in mobile usage as a result of rapid
smartphone and tablet adoption. We think mobile is driving higher usage of
Facebook overall as DAUs as a percentage of MAUsa measurement of overall
engagementhas increased to 58.4% in 1Q12 from 54.7% a year ago.
Mobile transition has been a net negative to Facebooks revenue over the last few
quarters and Facebook will likely continue to take a very reserved approach to
displaying ads in Mobile to test the impact to the user experience. As Mobile will
likely have fewer ads per session than desktop, even though Mobile is driving
incremental usage of Facebook overall, it may be cannibalistic to revenue in the near
term depending on how quickly mobile usage replaces desktop usage on Facebook.
However, as noted above, we think Mobile adsspecifically Sponsored Stories in
the Mobile News Feedcan have significantly higher click-through rates and
eCPMs, which should help offset the smaller number of overall ad impressions.
Furthermore, we think Facebook has begun rolling out Mobile Sponsored Stories
more in June and we forecast an inflection in Mobile and overall revenue in 2H12.
As shown in Figure 9 below, Facebooks overall audience increased by 56M monthly
users in 1Q12 (+7% Q/Q), though web-only users were flat Q/Q. Mobile-only users
increased 25M and Web and Mobile users increased 31M.
0%
100%
200%
300%
400%
Run of Exchange (ROE) Optimized ROE Audience Targeting Retargeting
Campaign Types
3x
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Figure 9: Facebook Users by Medium
Users in millions
Source: Company reports.
While Facebooks 83M mobile-only users generated close to no revenue in 1Q12,
its unclear how usage of Web and Mobile (405M) users is split between the two
platforms. According to comScore, mobile users on average spend 441 minutes/user/
month on Facebooks mobile apps/mobile site compared to 391 minutes/user/month
on the PC. This suggests mobile could account for ~30-40% of all time spent on
Facebookactivity thats almost completely unmonetized today, but
increasingly will be going forward.
Figure 10: Facebooks Mobile Users Are More Engaged Than its Web Users
Minutes per User
Source: comScore, US data.
58
83
374
405
413
413
0
200
400
600
800
1000
4Q11A 1Q12
Mobile Only Web and Mobile Web Only
845
901
391.1
18.8
441.3
12.9
0
50
100
150
200
250
300
350
400
450
500
Facebook Linkedin
Web Mobile
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27 June 2012
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We think evidence suggests that mobile is slowing web usage growth and perhaps
even cannibalizing web usage or engagement. As we mentioned earlier, increasing
DAUs as a percentage of MAUs suggests overall engagement on Facebook (Web and
Mobile) is increasing. However, as Figure 11 below suggests, growth in web/PC
engagementmeasured in visits per unique visitorhas slowed significantly in the
last 2-3 quarters. We think mobile is the primary driver of this shift in user behavior.
We believe mobile is likely to remain a net negative in the very near term as
users migrate from desktop to mobile faster than ads materialize, but mobile
monetization will begin to kick in over the next few quarters and mobile creates
a compelling long-term opportunity for Facebook.
Figure 11: Facebooks Web Activity Growth Across Unique Visitors and Average Visits per Visitor
Y/Y Growth
Source: comScore, US data. Web/PC use only.
How Much Ad Revenue Could Mobile Generate?
Estimating Facebooks mobile ad revenue potential is difficult, but it is also a critical
question for many investors. As noted above, despite the potential negative
revenue impact of Facebooks usage shift toward mobile, we are optimistic
about Facebooks ability to monetize its mobile platform based on strong
engagement, a captive audience focused on the News Feed, and mobile ads that
may potentially have higher click-through rates and eCPMs than desktop ads.
As shown in Figure 12 below, we model several scenarios for Facebooks mobile
monetization as the company slowly rolls out Sponsored Stories in the Mobile News
Feed and experiments with additional mobile ad formats. The range of potential
mobile revenue outcomes is wide based on estimates for impressions per mobile
visit, visits per user, and pricing. Based on our analysis, we believe mobile could
become a $300M-$500M quarterly revenue opportunity for Facebook within the
next 2-4 quarters.
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Unique Visitor Growth Average Visits per Visitor Growth
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27 June 2012
Doug Anmuth
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Figure 12: Facebook Quarterly Mobile Ad Revenue Potential Based on 1Q12 User Metrics
For our analysis, we looked at web monetization and found that Facebooks 818M
web users in 1Q12 generated $872M in ad revenue$0.36 per user per month. Our
estimates suggest web users were exposed to 58 impressions per visit at an eCPM of
$0.19.
By contrast, Facebook has 488M (and growing) mobile users and we think mobile
users are likely to use or visit Facebooks mobile apps more frequently. We estimate
a range of 0.5-4.5 times per day, or 15-135 visits per month.
We think the number of ad impressions that can be delivered in a mobile visit (0.5-2)
is a fraction of web impressions per visit (58). However, we think mobile eCPMs
are likely to be significantly higher as mobile Sponsored Stories have social
context, are only in the News Feed, and face less competition from other
Facebook content on the screen. Our analysis uses a mobile eCPM range of $1-$9.
Pricing is critical, but impressions per visit and visits per user are the other key
variables. Based on Facebooks focus on the user experience, we would not expect
ad impressions per mobile visit to go above 2, and that is likely high early on. In
Figure 13 below we look at several scenarios to determine whether a mobile user
could generate more ad revenue per user than a web user.
Our breakeven point for web revenue per user is $0.36/user/month based on
32 visits/month, 58 impressions/visit, and an eCPM of $0.19. Hence, the shaded
segments in the left-hand tables indicate the scenarios under which Facebook can be
revenue neutral on a per-user basis assuming all of their activity shifted to mobile.
Our views on mobile pricing and frequency of visits give us confidence in
Facebooks ability to reaccelerate advertising growth. Facebooks desktop ads
should also see improving monetization through Sponsored Stories in the News
Feed and Reach Generator.
Web
in millions Scenario 1 Scenario 2 Scenario 3 Scenario 4
Users 818 488 488 488 488
Qtrly Ad Impressions (in billions) 4,600 32.9 - 76.9 65.9 - 153.7 98.8 - 230.6 131.8 - 307.4
Visits/User/Month 32.1 45 - 105 45 - 105 45 - 105 45 - 105
Impressions/Visit 58 0.5 1.0 1.5 2.0
eCPM $0.19 $3 - $7 $3 - $7 $3 - $7 $3 - $7
Qtrly Ad Revenue $872 $99 - $538 $198 - $1,076 $296 - $1,614 $395 - $2,152
Revenue/User/Month $0.36 $0.07 - $0.37 $0.14 - $0.74 $0.20 - $1.10 $0.27 - $1.47
Mobile
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27 June 2012
Doug Anmuth
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Figure 13: Facebooks Web to Mobile User Migration Revenue Breakeven Scenarios
$s
Source: J.P. Morgan estimates.
Can Facebook Deliver Meaningful ROI for Advertisers?
We think there has been some degree of controversy around the efficacy of
advertising on Facebook, particularly since General Motors announced last month
that it would no longer spend on paid ads on Facebookpreferring to invest in
unpaid content on GMs Facebook page. With Facebook users totaling over 900M,
we think its difficult for an advertiser to ignore Facebook and we note that all of the
Ad Age 100 advertisers spend on Facebook advertising. Our discussions with
advertisers suggest strong interest in advertising on Facebook, though ad
formats and measurement still likely need to evolve for advertisers to spend on
Facebook in a meaningful way. According to a recent study by Ipsos, 20% of
Facebook users purchased products because of ads or comments they saw on
Facebook (Figure 14), suggesting significant potential for advertisers to implement
effective marketing strategies. We think the onus remains on Facebook to continue to
create new methods for advertisers to measure ROI in order to meaningfully increase
advertising on the site.
Mobile Revenue/User/Month Quarterly Mobile Ad Revenue (in $Ms)
Impressions Per Mobile Visit --> 0.5 Impressions Per Mobile Visit --> 0.5
15 45 75 105 135 15 45 75 105 135
(0.5/day) (1.5/day) (2.5/day) (3.5/day) (4.5/day) (0.5/day) (1.5/day) (2.5/day) (3.5/day) (4.5/day)
$1.00 $0.01 $0.02 $0.04 $0.05 $0.07 $1.00 $11 $33 $55 $77 $99
$3.00 $0.02 $0.07 $0.11 $0.16 $0.20 $3.00 $33 $99 $165 $231 $296
$5.00 $0.04 $0.11 $0.19 $0.26 $0.34 $5.00 $55 $165 $275 $384 $494
$7.00 $0.05 $0.16 $0.26 $0.37 $0.47 $7.00 $77 $231 $384 $538 $692
$9.00 $0.07 $0.20 $0.34 $0.47 $0.61 $9.00 $99 $296 $494 $692 $889
Impressions Per Mobile Visit --> 1 Impressions Per Mobile Visit --> 1
15 45 75 105 135 15 45 75 105 135
$1.00 $0.02 $0.05 $0.08 $0.11 $0.14 $1.00 $22 $66 $110 $154 $198
$3.00 $0.05 $0.14 $0.23 $0.32 $0.41 $3.00 $66 $198 $329 $461 $593
$5.00 $0.08 $0.23 $0.38 $0.53 $0.68 $5.00 $110 $329 $549 $769 $988
$7.00 $0.11 $0.32 $0.53 $0.74 $0.95 $7.00 $154 $461 $769 $1,076 $1,383
$9.00 $0.14 $0.41 $0.68 $0.95 $1.22 $9.00 $198 $593 $988 $1,383 $1,779
Impressions Per Mobile Visit --> 1.5 Impressions Per Mobile Visit --> 1.5
15 45 75 105 135 15 45 75 105 135
$1.00 $0.02 $0.07 $0.11 $0.16 $0.20 $1.00 $33 $99 $165 $231 $296
$3.00 $0.07 $0.20 $0.34 $0.47 $0.61 $3.00 $99 $296 $494 $692 $889
$5.00 $0.11 $0.34 $0.56 $0.79 $1.01 $5.00 $165 $494 $824 $1,153 $1,482
$7.00 $0.16 $0.47 $0.79 $1.10 $1.42 $7.00 $231 $692 $1,153 $1,614 $2,075
$9.00 $0.20 $0.61 $1.01 $1.42 $1.82 $9.00 $296 $889 $1,482 $2,075 $2,668
Impressions Per Mobile Visit --> 2 Impressions Per Mobile Visit --> 2
15 45 75 105 135 15 45 75 105 135
$1.00 $0.03 $0.09 $0.15 $0.21 $0.27 $1.00 $44 $132 $220 $307 $395
$3.00 $0.09 $0.27 $0.45 $0.63 $0.81 $3.00 $132 $395 $659 $922 $1,186
$5.00 $0.15 $0.45 $0.75 $1.05 $1.35 $5.00 $220 $659 $1,098 $1,537 $1,976
$7.00 $0.21 $0.63 $1.05 $1.47 $1.89 $7.00 $307 $922 $1,537 $2,152 $2,767
$9.00 $0.27 $0.81 $1.35 $1.89 $2.43 $9.00 $395 $1,186 $1,976 $2,767 $3,558
Visits/User/Month
eCPM
Visits/User/Month
Visits/User/Month
Visits/User/Month
Visits/User/Month
eCPM
eCPM
eCPM eCPM
Visits/User/Month
eCPM
Visits/User/Month
eCPM
Visits/User/Month
eCPM
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27 June 2012
Doug Anmuth
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Figure 14: Facebook Drives a Significant Amount of Purchasing Decisions
U.S. Facebook Users Who Have Bought Products Because of Ads or Comments They Saw on Facebook, by
Age, June 2012
Source: Reuters survey conducted by Ipsos, June 2012.
Many brands use Facebook paid ads to drive Likes to the brands Facebook page and
these campaigns are often measured on a cost-per-like basis. Once a Facebook user
likes a brand (i.e., becomes a Fan), the brand creates a direct line of communication
with the useralmost akin to an email marketing list. However, we think the
marketing value of these Fans to a brand goes well beyond direct Fans to Friends of
Fans as well, since each Fan (of a top 100 brand) has nearly 34 friends (per
comScore) to which he/she can advocate the brand. As shown in Figure 15,
Kenshoo Social reported that over 77% of people clicking on Sponsored Story
ads promoting brand page Likes convert to fans, exhibiting the value of social
context in ads.
Figure 15: Conversion Rates for Clicks in Sponsored Stories
Source: Kenshoo Social and J.P. Morgan estimates.
20%
12%
17%
28%
80%
88%
83%
72%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Total
55+
35-54
18-34
Yes No
0.2%
60.4%
77.3%
15.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
App Share App Used Like Post Like
Conversion Rates
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27 June 2012
Doug Anmuth
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A recent study by comScore commissioned by Facebook sheds some light on the
effectiveness of Facebooks paid ads. The study analyzed the lift to online and in-
store purchasing behavior for users exposed to Facebook ads of a major retailer. The
results showed a 16% lift in in-store purchases (1.47% of users exposed to Facebook
ads, up from 1.27%) for users exposed to Facebook ads. In addition, Facebook ads
yielded a 56% increase in online purchases for the retailer from exposed customers
vs. customers that had not been exposed to Facebook ads.
Figure 16: Facebook Ads Drove a Significant Lift in Purchases for a Major Multichannel Retailer
% of Exposed Group Purchasing Online and In-Store in the Weeks Following Facebook Ad Exposure
Source: comScore and Facebook.
We also think that Facebook is in the early stages of ad monetization. We believe
marketers realize meaningful value in maintaining a brand presence via an unpaid
Facebook page. Over time, in our view Facebook could add additional paid tools
for brands to improve their Facebook pages or presence which could drive
significant monetization improvements. We think Sponsored Storieswhich
allows brands to amplify their communications to Facebook Fansis likely the first
step in many toward driving higher revenue from Facebook marketers.
Can Payments Evolve Beyond Gaming?
Social gaming represents the largest portion of Facebooks Payments business and
we think Zynga still drives the majority of Facebooks Payments revenue64% of
Facebook Payments/Fees revenue in 1Q12. While the network and distribution
effects of Facebook integration are clear in our view, we think Facebook is taking a
cautious approach toward monetization and as a result Payments today are almost
exclusively generated through in-app purchases in social games.
As it did with games, Facebook in our opinion can continue to leverage network
effects to drive in-app purchases in social media discovery beyond the games
vertical to music, news, and online video. However, we believe the underlying
economics in digital music, online news, and video are not likely to be as rich as
those for games, and we see Facebook taking a smaller percentage of these
transactions though we think volumes could be significantly higher than those with
games.
0.19%
0.38%
0.49%
0.61%
0.11% 0.20%
0.32%
0.39%
0.46%
0.84%
1.18%
1.47%
0.37%
0.69%
1.00%
1.27%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
Week 1 Week 1-2 Week 1-3 Week 1-4
Online-Test Online-Control In-Store-Test In-Store-Control
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27 June 2012
Doug Anmuth
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Music. We think deep Facebook integration has been instrumental in Spotifys
growth from 3MMAUs in September 2011 (pre-integration) to 22M MAUs in
June, according to AppData. The Spotify integration allows users to sign into
Spotifys service using their Facebook account so that a users Facebook Friends
can view and share playlists.
News. While Facebook currently features Trending Stories in the News Feed of
popular stories read by users, we think there could be a way for Facebook to
monetize news for paid online articles or within paid reading apps.
Online Video. We think the distribution and marketing effects of this kind of
integration are powerful and we see similar opportunities for deep integration
with online video services such as Netflix in the intermediate term.
We believe there is also potential for Facebook to expand its Payments beyond in-
app purchases. Not only is Facebook expanding its own products with the App
Center and paid apps, but many partner sites and developers currently leverage the
Facebook social graph through Open Graph at no cost. In the intermediate to long
term, we think Facebook may be able to monetize such Payment platform products.
App Center. We note the companys recent App Center launch which enables
social discovery of new apps, some of which may be paid and therefore
potentially monetizable for Facebook.
Open Graph. We think the volume of traffic that Facebook brings to app
developers is significant and we remain positive that the company can find new
monetization methods and effectively become the toll-taker of user purchasing
activity on Facebook and third-party sites leveraging Facebooks Social Graph.
Other, such as Connected TV. We believe there may be other areas in which
Facebooks social layer can add value which could be monetized as well. We
think one such idea could be the potential for Facebook to be the social layer for
Connected TVs so that users can share and recommend TV content directly to
their social network without having to use a separate device. Facebook data and
targeting capability could also serve as the basis for ad delivery in an IP-enabled
ad environment.
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Doug Anmuth
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Figure 17: Snapshot of Facebook App Center
Source: Facebook. Note: Used with permission.
Will Facebook Get Into Search?
We believe competition between Google and Facebook is likely to increase over the
next several years as each company vies to become both the starting point and
primary toll-taker on the web. Google has social products such as Google+, Google
+1, and Google Search Plus Your World in order to improve its search tools using
social signals. While it is still early, we think Facebook has a significant lead in
social through strong user metrics and engagement that do not appear to be
decreasing.
According to comScore, Facebook generates a large amount of searchesroughly
2B or 1% worldwide sharethough we think the vast majority of these searches
are likely to be non-commercial or people searches. As witnessed during the
Google/MySpace deal from 2007, monetization of search inventory on social
networks is challenging, in our view, and as a result we dont think Facebook is
likely to launch its own search engine anytime soon. However, we believe Facebook
will increasingly leverage its users social signals (Likes, Shares, etc.) to bolster a
competitive search servicemost likely being Microsofts Bing. Just as Google
applies its Page Rank algorithm to rank a websites relevance based on the
number of other websites linking into it, we think Bing is integrating Facebooks
social signals to rank its search results and provide a differentiated search
experience.
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27 June 2012
Doug Anmuth
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Figure 18: Snapshot of Facebook Bing Integration
Source: Bing.com. Note: Used with permission.
In May, Bing announced it began including Likes and recommendations from
Facebook friends and strangers into its search results. In addition, Bing also
announced the roll-out of a social sidebar which allows Bing search users to solicit
help from their Facebook friends while performing a search. For example, a search
for hotels in Chicago would feature a users Facebook friends living in Chicago as
well as the ability to request help finding a hotel from a users Facebook friends.
We do not believe Facebook has closed the door on one day becoming a
principal in search. However, we do not view it as a near-term priority and we
believe it would have to provide a differentiated experience in a social setting
without negatively impacting the user. In the meantime we believe Facebook is
rightly focused on user growth and monetization of its core social network. Building
a robust search engine would require significant engineering and capex resources that
could prove a distraction for management.
We also think that Facebook currently offers a discovery mechanism, though it is a
push model rather than Googles pull model, in which the user requests or pulls
the information of interest. Hence, creating a search service could potentially
cannibalize existing usage of Facebook by frequently redirecting users outside the
Facebook network. Of course Facebook is already a material driver of traffic for sites
all across the Web. We see the relationship with Bing continuing to grow stronger as
the two companies face Google as a large competitor. As mentioned previously, we
think Facebooks query volume is primarily related to people searches and therefore
typically difficult to monetize.
We think Facebook is unlikely to implement a similar search integration with
Google, and given the differentiation it provides, Microsoft (MSFT, $30.02, rated
Neutral by J.P. Morgan Software analyst John DiFucci) may be willing to ultimately
compensate Facebook for exclusivity, in our view.
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Will Facebook Build an Ad Network?
As comparisons to Google are common, we think many have concluded that a
Facebook ad network is the next logical step in the companys progression,
particularly given that Facebook is the social layer underlying many different
websites across the web and therefore following the same user from Facebook across
other sites could drive greater reach and ad performance. In recent weeks Facebook
has seemingly taken two key steps toward the direction of an ad network
through the launch of its RTB Ad Exchange and serving ads on Zynga.com.
However, we still think a Facebook ad network is unlikely in the near term for a
few reasons:
Facebook is better served driving O&O sales. As weve frequently discussed
in this report, it is early in social advertising. We believe Facebook needs to
prove out efficacy and returns more on its core platform before it can more
broadly deliver ads on third-party sites. We note that Google was able to quickly
deploy its existing search and ad technology to build out a contextual ad network,
but we believe Googles text-based ads were perhaps more extensible early on to
third-party sites than Facebooks social ads may be. We think Facebook is likely
to focus in the near term on improving its O&O (Owned & Operated) ad platform
on which it does not share revenue with publisher partners. We believe the recent
Facebook Exchange announcement is a significant positive for improving
monetization by leveraging third-party data and advertiser demand, but we note
that it remains limited to Facebooks O&O inventory.
Facebook is still in the process of refining its own ad technology. We think the
Facebook ad platform remains nascent and advertisers have yet to fully embrace
Facebooks ad formats in a meaningful way, as concerns about measurability and
ROI remain. We believe Facebook would be better served getting this right on its
own platform before extending it to other sites.
Facebook already has significant reach. One of the primary reasons advertisers
employ ad networks is to increase their reach by advertising across multiple
websites across the web. We think Facebook already offers advertisers significant
reach in most geographiesover 70% of U.S. Internet usersand significant
engagement offers several opportunities for advertisers to target users exclusively
on Facebook.com rather than targeting Facebook users on third-party sites.
Privacy issues. We also think Facebook is likely to tread carefully when it comes
to targeting its users on third-party websites. The recent RTB/re-targeting
announcement enables exchange partners to use third-party site data to target
users on Facebook.com, but it does not include ad targeting of Facebook.com
users on a third-party website.
Ad ROI. We think social ads work well in a social environmentlike
Facebook.combut its unclear whether users will find social ads valuable in a
third-party setting and it could raise user concerns around privacy.
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Doug Anmuth
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Social Infrastructure Creates Options
We believe Facebook has become the underlying social fabric of the Internet and we
think this utility gives the company and investors significant option value in terms of
launching new businesses in the future. We think the Internet ecosystem is settling
around a few select companies that will provide the base or foundation of application
development over the next several years. We believe Amazon, Apple, Google,
Facebook, and eBay are emerging as primary platforms on top of which large
amounts of online/mobile communications, advertising, and commerce are
likely to be conducted over the next decade. We use five key attributes to define
and evaluate the competitiveness of a platform and we believe Facebook ranks highly
in each of these key attributes:
Global reach. A platforms underlying technology and network is easily scalable
across geographies. Facebook and Google are likely the best examples of this
given their strong brands and widespread adoption among users and developers
across the world.
Large ecosystem. Platforms have strong relationships with developers/partners
that build their businesses or applications on top of the underlying platform
architecture. Apple (AAPL, $572.03, rated OW by J.P. Morgan IT Hardware
analyst Mark Moskowitz) has created a robust applications ecosystem through
iOS and its iTunes store, and as a result has become the primary distribution
focus for developers.
Device agnosticism. Android is probably the best example as it is an open-source
operating system that runs on many mobile devicesin sharp contrast to Apples
iOS. Facebook is also accessible across most devices and operating systems
though the company has deeper integration with Microsoft and Apple, partially
due to competition from Google.
Network effects. Leading platforms have robust network effects such that each
additional user of the platform enhances the value of the platform to existing
users. The best example of this in our view is Facebook, though we believe
Apples AppStore also has strong network effects.
Toll booths. Platforms typically generate revenue from transactions or activity
that occurs through applications that reside on them. Examples are Facebook
Credits, Google AdWords/AdSense, and the Apple App Store.
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Doug Anmuth
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Figure 19: Large Web Platforms and Their Ecosystems
Source: J.P. Morgan.
While we expect advertising to remain the primary driver of Facebooks revenue for
the next several years, we think Facebooks strong social platform lends itself to
many future monetization opportunities:
New ad formats. Weve talked about how Facebook ads are in transition toward
becoming more social in context and higher quality. Accordingly, we think
formats will continue to evolve across the desktop right rail, the desktop News
Feed, and mobile. We believe location-based targeting is likely in the near term,
especially on mobile devices. We believe this could be a significant opportunity
to drive Facebook advertising among local merchants. Over 4M small businesses
now have a Facebook page.
Adding premium tools to brand pages. We think many brands are increasingly
relying on their Facebook Fan or brand pages to communicate with users and
drive word-of-mouth marketing. We think this is apparent in the fact that in TV
ads many large CPG brands now direct consumers to visit their Facebook page
rather than their own website. Facebook is well positioned to monetize this trend,
in our view, by offering brands premium tools to manage and distribute content
from their Fan pages, and we think the recent roll-out of Sponsored Stories in the
News Feed is an example of brands paying Facebook to amplify their stories.
Monetizing the social graph. We think several companies including Spotify,
TripAdvisor, and Zynga have witnessed sizable user growth through deep
Facebook integrations and in our opinion Facebook may increasingly monetize its
social utility by requiring companies with deep Facebook integrations to pay a
fixed licensing or per-user/subscriber fee. As detailed later in this report, we think
digital music, online video, and news are likely to be the first of many new
categories monetized by Facebook.
Facebook
Google
Apple
Amazon
Utility apps such
as Birthday Cards
& Horoscopes
Business/Nonprofit
apps such as Causes
Communication tools
such as Windows
Live Messenger
eCommerce sites Android
iTunes
iOS Operating System
Apple App Store
Amazon Web
Services
Kindle
Content sites
such as NY Times
AdWords/AdSense
Social Games
Third Party
Marketplace
Fulfillment by
Amazon
eBay
eCommerce
Marketplace
Channel Advisor,
Mercent
Paypal
Consumers/ Merchants
Third party
Paypal apps
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27 June 2012
Doug Anmuth
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Online identity. While several large technology companies including Microsoft,
Google, and Yahoo! have attempted to create single-sign-on access across
multiple sites on the web, we think Facebook is the first company to truly crack
the problem of a single online identity. We think Facebook could extend this
concept with deeper verification and by convincing users to add credit card or
other payment information which in turn would enable users to easily and safely
transact and/or add/consume content across the web. Over time we expect
Facebook to add additional micro transaction features, enabling bloggers,
developers, and large news media outlets to easily charge users for online
transactionswith Facebook collecting an incentive-based fee for logins or
purchases on a site. In addition, we think the social signals and engagement of
Facebook users on third-party sites create a richer experience for users on
Facebook.com.
Social commerce. We refer to social commerce as eCommerce conducted
through a social networking site such as Facebook. As consumers become more
comfortable trusting Facebook with their personal informationincluding credit
card and payment datawe think they could be more likely to conduct a
transaction on an online retailers Facebook app. In many instances, shopping in
the physical world can be a social experience and we think Facebook can
facilitate similar experiences online. For example, a user can have his/her
Facebook friends select a shirt that matches a pair of pants selected on a
Facebook merchants website.
According to a Booz & Company study, social commerce is expected to drive
$9B in sales of physical goods in 2012, reaching $30B by 2015, with the U.S.
growing faster than the rest of the world. Several companies, both large and
small, have begun to leverage social networks to drive eCommerce transactions.
For example, 1-800-Flowers has built its eCommerce platform directly into its
Facebook Fan page, allowing users to complete transactions directly on
Facebook.com. The company also leverages Facebook birthday and calendar
features to drive higher engagement when consumers are in the market for its
products. We think Facebook also has the opportunity to create its own
marketplace for secondary goods or partner with companies such as eBay and
Craigslist to allow users to sell used items to their Facebook Friends or other
users in their neighborhood.
Figure 20: Social Commerce Revenues Worldwide, U.S. vs. Rest of World, 2011-15
$ in billions
Source: Booz & Company, Turning Like to Buy: Social Media Emerges as a Commerce Channel, January 19, 2011.
$1 $3
$5
$9
$14
$4
$6
$8
$12
$16
$5
$9
$14
$20
$30
$0
$5
$10
$15
$20
$25
$30
$35
2011 2012 2013 2014 2015
US Rest of world
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Doug Anmuth
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In addition, a 4Q11 survey of North American Internet users commissioned by
Oracle suggests 19% of respondents indicated they had already purchased a
product through a retailers Facebook page or that they were willing to do so
suggesting both eCommerce players and Facebook need to improve the social
shopping experience in order to make social commerce a compelling proposition
for users.
Figure 21: Internet Users in North America Who Have Purchased Products via a Retailers
Facebook Page, Q4 2011
% of Total
Source: Oracle, Cross-Channel Commerce 2011: The Consumer View, November 2011.
Payments: Moving beyond gaming. We believe social gaming represents the
largest portion of Facebooks Payments business and we think Zynga still drives the
majority of Facebooks Payments revenue63% of Facebook Payments/Fees
revenue in 1Q12. As it did with games, Facebook in our view can continue to
leverage network effects to drive social media discovery beyond games to music,
news, online video, connected TV, apps, and eBooks. For example, we think deep
Facebook integration has been instrumental in Spotifys growth from 3MMAUs
globally in September 2011 (pre-integration) to 22M MAUs in June 2012, according
to AppData. The Spotify integration allows users to sign into Spotifys music service
using their Facebook account so that a users Facebook Friends can view and join in
to listening to a song with a user. We think the distribution and marketing effects of
this kind of integration are powerful and see similar opportunities for deep
integration with online video services such as Netflix in the intermediate term.
Have purchased
products, 9%
Would purchase
products, 10%
Didn't know that I
could do this on
Facebook, 15%
Would never
purchase
products, 34%
Do not use
Facebook , 32%
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27 June 2012
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Large Global Market Opportunity
Global User Growth
Of the current global population of ~7 billion people, IDC forecasts the number of
Internet users globally to grow from ~2 billion in 2010 to ~2.7 billion in 2015. We
expect Internet penetration to continue to grow, driven by the rapid adoption of
connected mobile devices, particularly in emerging markets. Facebook currently has
over 901M global users and aims to connect all Internet users through its desktop and
mobile offerings.
Figure 22: Facebook Penetration Rates by Region
In millions
Source: ITU, InternetWorldStats.com, BI, Company reports, and J.P. Morgan estimates.
With nearly 80% of its users accessing Facebook internationally, there is still a lot of
headroom for user growth, particularly in large, underpenetrated markets. Penetration
rates in the U.S. and U.K. are estimated to be over 60%, in Chile, Turkey, and
Venezuela over 85%, in Brazil and Germany around 30%-40%, and in Japan, Russia,
and South Korea 20% or lower. Though some of these countries have local social
networks with dominant share, Facebooks global scale offers a unique offering that
social networks focused on single markets can not provide. The one exception is
China, a market that Facebook is currently not present in and may not be able to
enter for the foreseeable future due to regulatory issues outside of the companys
control. Other U.S. Internet companies including Google face similar issues in China.
US & Canada 2009 2010 2011
Population 341 344 348
Internet Users 249 262 273
Facebook Users 112 154 179
FB Pentration (%) 45% 59% 66%
Europe 2009 2010 2011
Population 614 615 623
Asia Pacific 2009 2010 2011
Population 3,839 3,889 3,919
Internet Users 741 875 1,066
Rest of World 2009 2010 2011
Population 1,980 1,996 2,043
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Figure 23: Facebook Monthly Average Users (MAUs) and Daily Average Users (DAUs)
In millions
Advertising Market
According to IDC, the total worldwide advertising market is estimated to have been
$588 billion in 2010, of which online advertising excluding mobile accounted for
$68 billion or 12% of total advertising. IDC projects online advertising to grow to
$120 billion or 16% penetration by 2015. We think Facebooks market opportunity
in the advertising market extends beyond the online display ad market, as it has the
potential to attract branded ad budgets from offline channels and mobile advertising.
Facebook offers advertising solutions that can be targeted to a higher degree than
those other traditional offline and online advertising companies. We believe
Facebooks social context, coupled with a highly engaged audience, should
enable it to take significant share of online and offline advertising dollars.
Figure 24: Global Advertising Revenues, 2010
Source: IDC, Company reports, and J.P. Morgan estimates.
Figure 25: Global Advertising Revenues, 2015E
Source: IDC, Company reports, and J.P. Morgan estimates.
MAU DAU
2010A 2011A 2012E 2013E 2014E 2010A 2011A 2012E 2013E 2014E
US & Canada 154 179 206 231 255 US & Canada 99 126 149 171 191
Europe 183 229 266 298 327 Europe 107 143 180 216 251
Asia 138 212 290 366 442 Asia 64 105 153 209 263
Rest of World 133 225 306 386 465 Rest of World 57 109 164 232 297
Total 608 845 1,068 1,280 1,488 Total 327 483 646 828 1,002
Y/Y Growth Y/Y Growth
US & Canada 38% 16% 15% 12% 11% US & Canada 64% 70% 72% 74% 75%
Europe 56% 25% 16% 12% 10% Europe 58% 62% 68% 73% 77%
Asia 123% 54% 37% 26% 21% Asia 46% 50% 53% 57% 59%
Rest of World 93% 69% 36% 26% 21% Rest of World 43% 48% 53% 60% 64%
Total 69% 39% 26% 20% 16% Total 54% 57% 60% 65% 67%
Offline
Advertising
88.5%
Google
3.7%
Facebook
0.3%
Other Online
Advertising
7.5%
2010
$588B
Offline
Advertising
84.4%
Google
7.1%
Facebook
1.5%
Other Online
Advertising
7.0%
2015E
$770B
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In the online marketing funnel, we view Facebook as an effective demand generator.
Facebook helps advertisers market their brands or products to a wide audience to
help users discover and create demand for new products and brands, as compared to
demand fulfillment services such as Google search in which the user actively seeks a
brand or item. Facebooks reach and scale with its database of social interactions
make it an attractive platform for brand advertisers that previously relied on offline
marketing channels for widespread brand exposure. IDC estimates that TV, print, and
radio accounted for $363 million, or 62% of the total ad market, in 2010. We believe
Facebook can help to attract a growing portion of the offline demand generation ad
market as it provides a highly effective platform for brand and product discovery
through online word-of-mouth marketing. According to Facebook, an advertiser
could reach an audience of 65 million-plus U.S. users in December 2011. As a result,
all of the top 100 largest global ad spenders ranked by Advertising Age in 2011 have
been reported to advertise on Facebook.
IDC estimates the worldwide mobile advertising market to grow from $2.9 billion in
2010 to $17.4 billion in 2015, equivalent to a 44% CAGR. Facebooks mobile users
have been growing at a rapid pace, reaching 488M MAUs as of 1Q12, and outpacing
Facebooks advertising revenue growth. According to Nielsen, the Facebook mobile
app had more UVs (unique visitors) on Android and iPhone in the U.S. in 2011 than
any other mobile app, highlighting the network effect through the mobile platform.
Though 10.1% of U.S. adult time spent was on mobile devices, eMarketer estimates
mobile ad spending share was only 0.9% in 2011. We believe a growing interest in
mobile advertising from brand advertisers coupled with improving mobile ad formats
suited for smaller screen sizes should help to bridge this disconnect between mobile
time spent and mobile marketing spend.
Figure 26: Worldwide Mobile Ad Spend, 2010
Source: IDC and J.P. Morgan estimates.
Figure 27: Worldwide Mobile Ad Spend, 2015E
Source: IDC and J.P. Morgan estimates.
U.S. Search Ads
17%
U.S. Display Ads
14%
International
69%
2010
$2.9B
U.S. Search Ads
45%
U.S. Display Ads
16%
International
39%
2015E
$17.4B
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Payments
According to NPD, global virtual and digital goods sales online were estimated to be
$9 billion in 2011 and are forecast to reach $14 billion by 2016. Facebook generates
Payments revenues through fees charged to platform developers, with a majority of
its fees generated from virtual and digital goods sold through social games on its
platform, with Zynga as its largest partner. We believe Facebook has the opportunity
to expand its payments integration in the future beyond the games category into other
verticals or types of paid apps, such as music, news, or movies. Beyond in-app
purchases, Facebook could also expand its Payments platform to monetize its Open
Graph partnerships or paid apps through the App Center. We recognize there may
also be potential to enter the global eCommerce market of ~$821 billion by enabling
social commerce, but we currently do not expect that to be a near-term focus for the
company.
Figure 28: Virtual and Digital Goods Market, 2011
Source: NPD, Company reports, and J.P. Morgan estimates.
Figure 29: Virtual and Digital Goods Market, 2016E
Source: NPD, Company reports, and J.P. Morgan estimates.
Virtual and
Digital Goods
94%
Facebook
6%
2011
$9B
Virtual and
Digital Goods
77%
Facebook
23%
2016E
$14B
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Culture and Management
Emphasis on users
Facebooks primary focus is to pursue its social mission of connecting users and
strengthening relationships through its platform. We believe Facebooks emphasis on
the user experience is central to how the business will be managed, as its success is
highly correlated with user and engagement growth. This is evidenced by the
companys reluctance to over-monetize its interface with larger and richer ads,
despite the capability to do so. As such, we do not believe the company will engage
in any strategy or launch any product that will hinder the user experience in any way,
regardless of potential near-term financial benefits. While this may limit Facebooks
near-term financial opportunities, we believe the companys value is highly
correlated with user engagement and loyalty, and view the culture of valuing the user
experience to be critical to the long-term growth of the platform.
The Hacker Way
Facebook has adopted the term hacker and embraced it as one of its core values.
The Hacker Way refers to the approach of constantly building and innovating on its
products and services. Mantras such as Move fast and break things reinforce the
companys focus and pressure to keep innovating its product, technology, and
services. We believe this type of innovative and fast-moving culture is an asset to the
companys structure, given the fickle and trend-driven nature of the Internet and
social networking sector. New sites such as Pinterest and Instagram have gained
mass adoption at a rapid pace, resulting in Facebooks acquisition of Instagram ahead
of its IPO. We believe Facebooks culture of constant innovation and shipping
products quickly is essential to maintaining its leadership position in the highly
competitive social networking and Internet space.
Technology driven
Facebook is a technology-driven company, as it relies on engineers to support and
continue to build its platform. To support the website, Facebook invests in data
centers, some of which are still capital leased and being converted to owned and
operated through capital investments. Data centers are a critical asset to keeping the
desktop and mobile sites operational, enabling better control by converting them to
all O&O. We expect Facebook to continue to invest in data centers and other
technology-related expenditures through continued capital investment over the next
several years.
Building a long-term, sustainable business
We believe Facebook is a company that is being managed for the long term, as Mark
Zuckerberg clearly states in his shareholder letter that Facebook doesnt build
services to make money, but rather makes money to build better services. As such,
management at times may make key investment decisions that could have negative
implications in the near term but are designed for long-term, sustainable growth. We
think a long-term focus coupled with rapid innovation and product launches may
help prevent product decisions that could put user loyalty and experience at risk.
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Key Facebook Products and Features
The key components of the Facebook platform as it exists today include several
product components that launched over the past few years. While some notable
products, such as the Wall or Photos, have helped to drive user growth and
engagement, other products have aided advertisers in leveraging Facebooks reach
and social context to serve and create better ads.
Figure 30: Key Product Launches
Monthly
Active
Users (M) Key Products Launch Description
1
Wall Sept 2004 Forum for users to post messages to friends
6
Photos Oct 2005 Enabled users to upload photos
Facebook Mobile Apr 2006 Facebook available for mobile devices
12
API Aug 2006 Developers to connect
News Feed Sept 2006 Scrolling updates
Facebook Platform May 2007 Launched with 65 developers and 85 applications
58
Self-service Ad Platform Nov 2007 Enables advertisers to manage ad campaigns
Pages Nov 2007 Profile pages for companies and brands
Chat Apr 2008 Instant messaging capabilities
Facebook Connect Dec 2008 Enables partner sites to allow users to login with Facebook accounts
Like button Feb 2009 Button to indicate user preferences and recommendations
Facebook Payments May 2009 Allows for in-app purchases using Facebook Credits
Graph API Apr 2010 Developer access to Facebook's social graph
608
Social Plugins Apr 2010 Lets users see what friends have liked, commented, shared across the web
Groups Oct 2010 Allows users to organize groups around common interests and topics
Sponsored Stories Jan 2011 Advertisements built around user social interactions on right side of page
Timeline Sept 2011 New user profile interface on chronological basis
Apps for Timeline Jan 2012 Applications and widgets in Timeline profiles
Sponsored Stories in News Feed Jan 2012 Ads with social context in News Feed
Offers Feb 2012 New placements of Offers and update to Pages
Sponsored Stories - Mobile Mar 2012 Ads with social context in mobile news feed
Interest Lists Mar 2012 Allows users to connect with people with similar interests
Photo Viewer Enhancements Mar 2012 Includes high resolution photos and full screen viewing
Android App Shortcuts Apr 2012 Includes shortcuts to share photos and messages from home screen
958 (E)
Facebook Camera Mobile App May 2012 A mobile app to make photos faster to upload and access
App Center Jun 2012 A new interface to discover social apps (desktop and mobile)
Facebook Exchange Summer Real-time-bidding Ad Exchange
iOS 6 Integration Fall Deep integration with Apple mobile operating system
145
360
845
901
1,015 (E)
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Doug Anmuth
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Key User Products
Photos
Launched in 2005, Facebook is one of the most popular photo uploading and sharing
services on the Internet, with an average of 300M photos uploaded a day in 1Q12.
Facebook users can upload an unlimited number of photos and set privacy settings to
specify to whom they are visible. Users can add captions and tag people in the
photos, a unique identifying feature that leverages users friend connections to
enhance the usability and sharing capabilities of photos. We believe the Photos
feature in Facebook has been one of the social networks greatest traffic drivers and
expect it to be an important part of Facebooks future growth.
News Feed
The News Feed is the main interface of a users homepage which features scrolling
headlines of all stories from a users friends, pages Liked, and interests. The News
Feed is personalized based on the users friend connections and includes posts,
photos, event updates, and Sponsored Stories. Updates are prioritized based on social
signals of importance such as time, popularity of content among friends, and the type
of content posted. The News Feed interface is also the main starting screen in mobile
apps. According to comScore, users spend the highest percentage of their time (40%)
on the News Feed, making it one of the most valuable ad spaces available to
advertisers on Facebook.
Timeline
At the f8 conference in September 2011, Facebook announced Timeline, an updated
version of the Facebook profile for both users and brand pages. Timeline enables
users to organize and share content in a searchable personal narrative that is
displayed chronologically. Timeline was rolled out broadly in 1Q12 with the ability
to add apps and widgets to profiles.
Key Advertiser Products
Pages
Facebook enables brands, advertisers, and companies to create Pages to engage and
communicate with their users and customers. This free service provides brands and
companies with a Facebook profile page that can be subscribed to and Liked.
Advertisers and brands frequently promote links to their Facebook Pages in their
major brand advertisements. Creating a Pages site is usually one of the first
interactions between advertisers and Facebook, as it provides the ability for
companies to experiment with social networking advertising without any direct
investment. According to comScore, the Skittles brand attracted 320,000 unique
visitors to its brand page on Facebook in March 2012, 14x more than it had on its
www.skittles.com site in the same period.
Ads and Sponsored Stories
Facebook serves several types of online ads, among which there are several formats
including traditional display ads, ads with social context, and Sponsored Stories.
Advertisers can pay for these ads on a CPC or CPM basis, depending on what the ad
campaign is designed to achieve. Facebook provides value to advertisers through its
reach and scale of its 901M-plus users and unique targeting capabilities which
include profile information, status updates, and relationships.
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First launched in January 2011, Sponsored Stories enable advertisers to re-broadcast
posts from users friends or Pages in the form of an ad on the right side of the page.
In January 2012 Sponsored Stories have been included into the News Feed, and in
March into the mobile News Feed. We believe Sponsored Stories in News Feeds are
likely to have a higher impact than display ads with social context, as they resemble
regular News Feed updates so closely that many users may not even realize they are
ads at all. Sponsored Stories leverage social connections to reinforce brands and ads,
effectively allowing advertisers to purchase word-of-mouth marketing. According to
Kenshoo Social, Sponsored Stories have the highest exposure rate among
Facebooks ad formats, indicating that amplification works to get a brands
message out, in addition to having nearly 2x the CTR as other Facebook ads.
We believe this is an even greater factor on mobile devices with the audiences
captive focus on the News Feed given the screen format of the mobile app, though
mobile monetization levels may not be at par with desktop at this point.
Figure 31: Sponsored Stories Have Highest Exposure Rate of Facebook Ads
Source: Kenshoo Social and J.P. Morgan estimates.
Facebook Premium and Reach Generator
At the fMC event in February, Facebook announced a new premium advertising
solution called Reach Generator, designed to help large clients looking to reach a
higher percentage of their Fans through sponsored activity. Advertisers pay
Facebook on an ongoing basis to sponsor a daily one-page post with the guarantee of
reaching 75% of the pages fan base over the period of a month, extending the
average reach of 16%, as seen in the figure below. An example of this was Ben &
Jerrys which reported reaching 98% of its fan base and that every $1 spent on
Facebook returned $3 in incremental sales as measured by Nielsen Marketing Mix
Analysis.
0.5%
1.2%
36.0%
1.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Post Ad Social Ad Sponsored Story Web Ad
Exposure Rate
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Doug Anmuth
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Key Developer Products
Platform, API, and Open Graph
Platform, API, and Open Graph enable developers to leverage the Facebook user
base to drive engagement on their own sites, mobile apps, or Facebook Apps. One
example of this is users logging into partner sites or apps using their Facebook
account, enabling the partner site or app to access the users friend lists and other
information shared on Facebook. This enables a users Facebook profile to be used as
their online identity without the need to create additional logins for sites that opt to
develop and partner with Facebook. Though there is no direct economic inflow
associated with these partnerships at this time, Facebook benefits through increased
user engagement. We believe it is not inconceivable that Facebook may be able
monetize these partnerships in some manner at some point.
App Center
In June, Facebook launched the App Center, an interface on both desktop and mobile
that helps users discover new apps. A top-level App Center link is located at the top-
left sidebar of the desktop page and within the left menu screen on mobile devices. It
highlights and promotes apps that connect to Facebook, even those that only use FB
Connect for authentication purposes. The App Center currently features 600-plus
apps and is being rolled out on a limited basis.
Developers can create an App Detail Page to describe their apps and incorporate
social context (which friends use it), including direct links to install it into a
Facebook.com account or to Apple App Store/Google Play on mobile devices.
Facebook has added a tool in the Open Graph API that allows developers to see what
devices users are using so that developers can create device-specific ads for those
users. Facebook has also launched a beta program for paid apps that lets people pay a
flat fee to use an app on Facebook.com.
iOS 6 Integration
At the Worldwide Developers Conference 2012, Apple announced a deep integration
with iOS 6 and Facebook. We expect this integration to be a significant driver of user
engagement as it lowers the barrier for iPhone and iPad users to post, update, and
check information on Facebook. Signing into Facebook accounts directly in Apple
iOS 6 allows for seamless content sharing from any interface on the iPhone and iPad.
While this may not directly generate any significant revenue, we view any driver of
increased engagement and content to be beneficial to Facebooks user engagement,
which in turn should drive incremental advertising dollars.
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Figure 32: Facebook iOS 6 Integration
Source: Company site. Note: Used with permission.
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Doug Anmuth
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Current Business
User Growth and Engagement
Facebooks engagement continues to rise globally as comScore data shows an
increasing percentage of minutes spent online are on Facebook. Accounting for ~3%
of total minutes in 1Q09, worldwide users now spend ~14% of their time online on
Facebook as of 1Q12. Engagement measured by Daily Average Users and Monthly
Average Users supports this, showing an increase from ~47% to ~58% over a
comparable time period.
Figure 33: Facebook Engagement Continues to Rise
Source: Company reports, comScore, and J.P. Morgan estimates.
Advertising
Facebook currently generates nearly 80% of its revenues from online advertising,
primarily consisting of targeted display ads. Facebook provides advertisers with a
reach of over 901M users, high engagement metrics, and audience targeting
capabilities that exceed those of any other platform both online and offline.
Advertisers pay for ads displayed on Facebook on a clicks or impression basis with
the ability to specify audience targeting by leveraging Facebooks database of user
information and social actions.
Facebook manages its advertising customer base either through direct sales or its
self-service marketplace. Direct sales teams are assigned to brands and large
advertisers to assist in managing ad campaigns across the Facebook platform.
Smaller and individual advertisers can access all of the same advertising products
through Facebooks self-service marketplace.
3.3%
14.2%
46.7%
58.4%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
2
Q
1
0
3
Q
1
0
4
Q
1
0
1
Q
1
1
2
Q
1
1
3
Q
1
1
4
Q
1
1
1
Q
1
2
% of Minutes Spent on FB DAU / MAU
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27 June 2012
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Ad Formats
Facebook provides advertisers with two primary types of ad formats: standard
display and display ads with social context such as sponsored stories. These ads are
generally displayed on the right rail of the page. While both types of display ads can
be highly targeted towards a specific demographic audience, ads with social context
highlight a friends social interactions or connections to companies and brands
through a users social network. According to comScore, 15.2% of all U.S. display
ads were socially enabled in March 2012, up from 8.2% in November 2011. An
example of an ad with social context can include a Like or comments, as seen in
the example below.
Figure 34: Standard Display Ad Format
Source: Company website.
Note: Used with permission.
Figure 35: Display Ad With Social Context
Source: Company website.
Note: Used with permission.
In January 2012, Sponsored Stories were integrated into the News Feed. According
to comScore, users spend the highest percentage of their time (40%) on the News
Feed, making it a more valuable ad space available to advertisers than any other parts
of Facebook, even including brand pages. Sponsored Stories allow advertisers to re-
broadcast social interactions between a users friends and brands, such as a Like
action. We believe Sponsored Stories are designed to blend in with a users other
News Feed headlines, making them a primary method of brand exposure. As of
March 2012, Facebook integrated Sponsored Stories into the mobile app and News
Feed. As Facebook reported an increase of 50%-plus in ad recall for Facebook ads
with social context, we believe these types of ads will be a primary driver of
advertising growth going forward.
Data and Targeting
Facebooks ad offering is differentiated for advertisers due to its massive scale and
reach of users, large database of user information and social interactions, and the
ability to amplify ads through social networks. Advertisers can target display ads to a
subset of Facebooks users based on publicly shared information submitted by users.
Such info can include general demographic characteristics such as age, gender,
location, relationship status, or even specific interests indicated by the use of
Facebooks Like button on various sites and partners. We believe this level of
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targeting exceeds the ability of other competing platforms, both offline and online,
and is a feature that makes Facebook an integral part of brand ad campaigns.
In addition to targeting, Facebooks ads with social context provide advertisers with
the ability to differentiate by complementing their products and brands with
recommendations from friends within a users direct social network. In an analysis of
79 ad campaigns, Facebook reported an increase of 50%-plus in ad recall for
Facebook ads with social context compared to standard Facebook display ads. As
advertisers increasingly see the value in ads on social networks, ads with social
context should continue to proliferate.
For a Facebook ad campaign to be effective on an advertiser ROI basis, there must be
a comprehensive ad strategy around the campaign, in our view. While certain
metrics, such as the number of fans for a brand page, are very easy to measure, we
believe there is still some difficulty in calculating and measuring the performance
and ROI of Facebook ad campaigns. A recent comScore study The Power of
Like 2 highlights the importance of Fan Reach, Engagement, and Amplification.
Fan Reach and Engagement are achieved through brand pages and interactions with
fans, but amplification is a difficult metric to achieve and measure. Amplification
refers to the brands ability to leverage its Fans to serve as a conduit for brand
exposure to each of their own social networks. We believe advertisers are still in
early stages of understanding, strategizing, and evaluating their Facebook ad
campaigns and see potential for upside as ROI measurement continues to develop.
Pricing and Revenue by Geography
In 2011, half of Facebooks advertising revenues were generated in the U.S. and
Canada, 32% in Europe, 10% in Asia, and 8% in the rest of the world.
Figure 36: Facebook Advertising Revenue by Geography
$ in millions
2010A 2011A 2012E 2013E 2014E
Global Summary
Global Advertising Revenue 1,868 3,154 3,904 5,104 6,670
Y/Y Growth 69% 24% 31% 31%
US & Canada Advertising Revenue 1,071 1,583 1,755 2,042 2,363
Y/Y Growth 48% 11% 16% 16%
% of Total Advertising Revenue 57% 50% 45% 40% 35%
Europe Advertising Revenue 555 1,002 1,136 1,452 1,883
Y/Y Growth 81% 13% 28% 30%
Asia Advertising Revenue 143 313 552 820 1,160
Y/Y Growth 119% 76% 49% 41%
ROW Advertising Revenue 25 256 460 790 1,264
Y/Y Growth 934% 80% 72% 60%
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27 June 2012
Doug Anmuth
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Facebook reported 2011 revenue per average MAU of $5.11 (advertising-only ARPU
of $4.34), considerably lower than those of its online advertising peers such as
Google or Yahoo!, as seen in the figure below. We estimate that, even on a CPM
basis, Facebooks average CPM is in the range of $0.30-$0.40 in the U.S. and
Canada, with other regional CPMs close to half of that or less. We believe the pricing
discount is primarily attributed to the limited variety of ad formats for Facebooks
display ads and the learning curve of how to leverage social media ads for
advertisers. We expect pricing to continue to improve, potentially accelerated by
Facebooks unique targeting capabilities and improving ad formats.
Figure 37: Facebook Revenue per User Compared to Other Internet Companies
Near-term growth drivers
We believe the inclusion of Sponsored Stories in the desktop News Feed as of
January will be a key driver of online ad growth in the near term. Not only does the
News Feed represent the highest touch-point to the user, Sponsored Stories are re-
broadcasts of real social interactions from friends and are nearly indistinguishable
from regular updates. In our view, this adds a higher degree of credibility and
trustworthiness to the ads that other display ads may be unable to achieve. While ads
on the right rail may be automatically relegated as ads in the minds of users, News
Feed Sponsored Stories blend in with all the other updates and leverage social
connections to reinforce the ad exposure. We believe ads with social context such as
Sponsored Stories will become a key addition to many brand advertisers on
Facebook and help to drive advertising revenue growth.
In March, Facebook launched Sponsored Stories for mobile apps and has
subsequently begun to sell mobile-only News Feed ads. We believe Facebook may
be able to charge a higher CPM for mobile-only Sponsored Stories than desktop
CPMs, given the limited screen size on mobile devices and highly captive viewing
experience. Mobile apps are also likely to have more frequent ad impressions than
desktop ads as users can access the app anywhere, anytime. Though mobile user
growth is currently outpacing the growth in advertising revenue contribution, we
believe improving mobile ad formats such as location-based ads could become a
source of advertising revenue growth going forward.
$28.26
$8.63
$7.49
$6.44
$5.11
$4.47
$3.91
$0.92
$0.0
$10.0
$20.0
$30.0
GOOG ZNGA YHOO Tencent FB LNKD Twitter Renren
Revenue / User 2011
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Payments
In 2011, 59% of Facebooks payment revenues were generated in the U.S. and
Canada, 28% in Europe, 9% in Asia, and 4% in the rest of the world.
Figure 38: Facebook Payments Revenue by Geography
$ in millions
Facebook generates its Payments revenue by charging fees to Platform developers
for the sale of virtual and digital goods to users. At this time, the majority of
Facebooks Payments revenue is generated from virtual good sales in social games.
Zynga is the largest platform developer using Facebooks Payments platform, and
contributed 12% of revenue in 2011 from Payments processing fees, with an
additional 7% related to ads displayed on Zynga apps. Facebook has indicated it may
seek to extend its Payments platform to other types of apps in the future with
potentially varying fee structures.
Currently, users purchase Facebook Credits as currency for digital or virtual goods
bought on the platform. These credits are held as deposits until the user completes a
purchase, at which time Facebook takes a 30% transaction fee and remits the
remaining 70% to the developer. On June 19, Facebook announced two changes to
its payment products:
Subscriptions. Starting in July, Facebook plans to enable developers to offer
subscription plans for in-app purchases of virtual items in social games.
Developers will be able to manage recurring revenues and offer premium content
to its paying subscribers. The first developers to test this are KIXEYE and Zynga.
Currency pricing. Facebook is updating its Payments platform to support
pricing in local currencies instead of Facebook Credits. This transition is to
support developers that currently convert Facebook Credits to their own form of
credits to circumvent local currency issues. Developers will be able to set prices
on a market-by-market basis and this feature will be integrated into subscriptions.
2010A 2011A 2012E 2013E 2014E
Payment and Other Fees
Global Payments and Other Fees 106 557 928 1,409 2,007
Y/Y Growth 425% 67% 52% 42%
US & Canada 75 331 526 803 1,104
Y/Y Growth 340% 59% 53% 37%
% of Total Payment Revenue 71% 59% 57% 57% 55%
Europe 22 153 269 409 592
Y/Y Growth 587% 76% 52% 45%
Asia 6 50 93 141 221
Y/Y Growth 813% 86% 51% 57%
Rest of World 3 22 40 56 90
Y/Y Growth 672% 76% 43% 60%
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In June, Facebook launched the App Center, an app marketplace interface on both
desktop and mobile designed to help users discover new apps. While most of the
apps are expected to remain free and supported by in-app purchases, Facebook is
offering developers a chance to sell paid apps by charging users flat fees to access
their apps on Facebook. As the paid apps program is still in beta testing, the exact
economics are not clear yet. We do not expect the App Center to drive incremental
revenue at this time, as we view the App Center to be focused more on app
discovery. We note that one interesting feature is the ability to push apps to mobile
devices from the desktop interface.
We believe in-app purchases of virtual and digital goods through social games will
remain the primary revenue driver in the near term, as other social gaming companies
beyond Zynga begin to expand their presence on the Facebook platform. Facebooks
users are an attractive social gaming audience, as developers are able to leverage
social connections between friends to promote games and increase engagement. In
the long term, we look for other potential sources of Payments revenue to come from
other verticals such as music, news, and possibly even movies, though we recognize
that the fee structure may differ from the 70/30 split seen with social game
developers.
43
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Doug Anmuth
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Financial Outlook
Addressing recent revenue deceleration in 4Q11 and 1Q12
Facebooks revenue growth decelerated to 55% Y/Y in 4Q11 and 45% Y/Y in 1Q12
from triple-digit growth in the first three quarters of 2011. We believe several factors
in Facebooks advertising business contributed to this change, along with the
underlying usage shift from desktop to mobile usage. 4Q11 had a difficult Y/Y comp
as Facebook had significantly increased the number of ads displayed to users in
4Q10, resulting in higher advertising revenue in the year-ago period. Also during the
quarter Facebook removed ads from photo pages for a period of time and increased
pricing to improve ad quality on the site.
Figure 39: Facebook Revenue and Growth Rates by Quarter
$ in millions
1Q12 saw continued rapid shift in usage toward mobile, thereby negatively
impacting revenue. In addition, we believe Facebook experienced softness in Europe
and saw its mix shift of ads move more toward geographies with lower pricing such
as Asia and ROW.
We believe these factors may have extended into 2Q12 as well, and Facebook has
specifically highlighted the trend of DAUs increasing more rapidly than the growth
in ads delivered, with mobile cited as a primary factor. In addition, we believe
Timeline pages initially showed fewer ads per page than previous profile pages.
EBITDA margins declined in 1Q12 to 56.1% from the low 60s in 2011 partly due to
slower revenue growth, but also due to: 1) increase in cost of revenues from higher
data-center expenses and payment processing fees from rising Payments volume;
2) increase in sales and marketing due to an increase in user, developer, and
advertiser-facing marketing as well as higher headcount in global sales, business
development, and customer service; 3) higher R&D costs from an increase of 55% in
employee headcount in engineering, design, product management, and other
$731
$895
$954
$1,131
$1,058
$1,105
$1,200
$1,468
112%
108%
104%
55%
45%
24%
26%
30%
0%
20%
40%
60%
80%
100%
120%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1Q11 2Q11 3Q11 4Q11A 1Q12A 2Q12E 3Q12E 4Q12E
Revenue Y/Y Growth
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technical roles, and;4) higher G&A costs from increasing headcount-related
expenses.
In 2Q12, we expect continued heavy investments in products, mobile, new ad
formats, and technology infrastructure. We model gross margins and EBITDA
margins to trough in 2Q12 at 73.6% and 53.1%, respectively. In addition, we look for
2Q12 stock-based compensation of $1B.
Expect reacceleration in revenue growth in 2H12
For the remainder of 2012, we forecast reacceleration in growth as we model 2Q12
to be the trough in both revenue growth and margins. We forecast 3Q12 and 4Q12
revenue growth of 26% Y/Y and 30% Y/Y, respectively, driving total 2012 revenue
growth of 30%. We look for Facebooks newer ad formats to begin to show up in
numbers in 2H12, particularly Sponsored Stories. 4Q12 will also benefit from a
significantly easier Y/Y comp. We look for EBITDA margins to improve in 3Q12
and 4Q12 to 54.3% and 54.6% (vs. 53.1% in 2Q12), as we believe Facebook is
efficiently increasing revenue through improved ad formats and Payments segment
contribution.
We expect Facebook to continue to make significant investments in technology,
including building its own data centers, the first of which was completed in April
2011 in Oregon. We forecast capex spending of $1.7 billion in 2012 including capital
leases, resulting in FCF of $845 million.
Three-year outlook
In the advertising segment, Facebook in our view will continue to improve its ad
formats with greater social context and targeting capabilities. As advertisers continue
to shift brand budgets online and increasingly focus on social networking, we believe
Facebook can be a primary beneficiary. In Payments, Facebooks social games
developer base is likely to continue expanding beyond Zynga to become a
meaningful contributor to Facebooks revenues. In addition, we believe Facebook
may find new ways to monetize its Payments platform to contribute to higher
growth.
We model acceleration in revenue growth to continue in 2013 to 35% Y/Y, with
EBITDA margins expanding to 56.4%. In 2014, we forecast revenue growth of 33%
and EBITDA margins of 57.3%. We look for Facebook to gain leverage in each of its
cost lines as it improves its efficiency and scale in its advertising business, with
increasing contributions from the Payments segment over the next three years. We
expect Sales and Marketing to continue to be Facebooks largest operating cost item,
followed by R&D, though we expect Y/Y revenue growth to outpace growth in
operating expenses. We are modeling Facebook to continue investing in O&O data
centers, with capex increasing to $1.8B (including capital leases) in 2014.
45
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Figure 40: Facebook Revenues and EBITDA Margins
$ in millions
Corporate income taxes and SBC. We expect Facebook to build a significant net
operating loss in 2012 as a result of vesting of a significant number of RSUs and
options. The companys 277 pre-2011 RSUs awarded to employees vest upon the
satisfaction of both a service and liquidity conditionthe latter being satisfied six
months after the companys IPO. As the liquidity condition had not been met prior to
the IPO (up to 1Q12 financials), Facebook has not recognized any stock-based
compensation related to these pre-2011 RSUs. However, given the IPO in 2Q12, the
company will begin recording stock compensation expense related to the pre-2011
RSUs using the accelerated attribution method and, hence, we expect the company
to record ~$1 billion in SBC in 2Q12, likely making the company unprofitable
on a GAAP Net Income basis this quarter. In addition, SBC in 2013 will remain
elevated due to recognition of pre-2011 RSUswe project 2013 SBC of $780M.
The company expects ~277Mshares underlying the pre-2011 RSUs to settle 151-181
days after the IPO and RSU holders will recognize taxable income based on the value
of the shares on the date they are settled. RSUs will be net settled so Facebook will
withhold ~122M shares of Class B common stock and Facebook will remit an
equivalent dollar amount to the relevant tax authorities in cash. In order to fund this
remittance, Facebook expects to sell shares roughly six months after the IPO in
an amount equivalent to the tax withholding requirement mentioned above
~$4B or 122M shares based on a stock price of $33/share. Note that this share sale
will not be dilutive but it will increase the public float in addition to the six-month
lock-up expiration.
In addition to the RSUs mentioned above, the company expects options equivalent to
185M shares of Class B stock to vest and settle in 2012. The exercise of the RSUs
and options will result in a corporate income tax deduction of ~$14.4B based on
FB stock trading at current levels ($33/share) upon settlement. The amount of
this deduction exceeding the companys U.S. taxable income will result in a net
operating loss (NOL) that can be used to receive a refund on taxes paid in 2010-11
$1,974
$3,711
$4,832
$6,513
$8,677
60.3%
61.9%
54.5%
56.4%
57.3%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
2010 2011 2012E 2013E 2014E
Revenue EBITDA Margin
46
27 June 2012
Doug Anmuth
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a $500M refund payable in 2013and any portion of the NOL remaining after the
carry-back can be used to offset U.S. taxable income in future years. We value
Facebooks NOL at ~$4.3B by offsetting estimated U.S. pre-tax income through
2017 (discounted to present value) and recognizing a $500M refund in 2013.
Early Lock-Up Expirations Could Create Volatility in the
Near Term
On May 18, Facebook offered 421.2M Class A shares in its IPO for $38 per share, at
the top of the $34-$38 pricing range. Facebook sold 180M Class A shares with the
remaining 241.2M Class A shares from prior investors. Facebook adopted a dual-
class share structure between Class A and B shares, with Class A shares representing
one vote each and Class B shares with ten votes each. Mark Zuckerberg exercised an
option to purchase 120M Class B shares that can be converted immediately to
Class A shares, of which he sold 30.2M Class A shares in the IPO. After the IPO,
Mark Zuckerberg holds over 57% of the voting power in Facebook.
As shown in the table below, Facebooks first tranche of 268M post-IPO Class A
shares are unlocked on 8/16/12just three months after the companys IPO rather
than the typical six-month lock-upand we believe this could increase volatility in
the near term. In addition, as described in the companys S-1 filing, the companys
IPO triggers the vesting of a large number of RSUs and Options with a very low cost
basis, valued at ~$14B at current trading levels. For tax withholding purposes,
Facebook will attempt to sell secondary shares worth roughly 45% of the vested
RSUs/Options (~$4B) six months post its IPO. While no new shares will be sold in
this transaction, the planned sale will increase overall supply.
Figure 41: Facebook Post-IPO Share Lock-Up Expiration Schedule
Source: Company reports and J.P. Morgan.
Date Event
Shares
Outstanding
Additional
Shares
Ending Public
Float Description
05/17/2012 IPO 2623 421 421
08/16/2012 Lock-up Exp. 2623 268 689 268M shrs held by selling stockholders excl Mark Zuckerberg
11/14/2012 Lock-up Exp. 2623 247 936 ~137M RSUs, 55mm shrs and 55mm underlying options for Mark Zuckerberg
11/14/2012 Lock-up Exp. 2623 1241 2177 1,223M sh & 18M RSUs
12/14/2012 Lock-up Exp. 2623 124 2301 124M sh held by selling stockholders other than Mark Zuckerberg
05/18/2013 Lock-up Exp. 2623 47 2348 47M sh held by Mail.ru and DST
47
27 June 2012
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Valuation
Our year-end 2013 price target of $45 on Facebook is derived using an average
of a target EV/EBITDA multiple ($39 price/share) and our DCF analysis ($51
price/ share). We believe Facebook is a unique Internet asset with high revenue
growth, strong competitive barriers, and significant upside potential as a key Internet
platform, and therefore deserves to trade at a premium to most Internet names. We
utilize a combination of a 2014E EV/EBITDA multiple and a DCF analysis to take
into account Facebooks strong near-term financial profile and also the future
potential of the Facebook platform. As noted throughout our report, we believe there
are many material growth drivers for Facebook in the coming years.
We believe Facebook will be most often comped against LinkedIn given both
companies social characteristics, strong financial profiles, and early-stage natures.
However, in addition to LinkedIn, we also look at Facebook relative to a group of
high-growth Internet leaders including Google, Amazon, Tencent, Baidu, Priceline,
Zynga, and Mail.ru Group.
Figure 42: High-Growth Internet Comparables
$ in millions
Source: Bloomberg and J.P. Morgan estimates.
Relative Valuation
EV/EBITDA. We apply a target EV/EBITDA multiple of 17x on our 2014E
EBITDA of $5B which implies a $39 stock price. Facebook currently trades at
19x on a 2013E EV/EBITDA basis, and we assume a slight step down for
looking an incremental year out. We believe the company deserves a premium to
most Internet peers based on its high growth potential and strong network effects.
However, we would expect LinkedIn to receive a higher multiple based on its
significantly higher growth rate, subscription-based revenue characteristics,
transparent model, and early public track record of beating numbers.
P/E. Facebook trades at 51x our 2013 PF EPS estimate of $0.66 versus high-
growth comps such as Amazon and LinkedIn trading at 52x and 79x 2013E EPS,
respectively. At our $45 price target Facebook would trade essentially in line
with LNKD on a PF EPS basis.
Prices as of Market 11-14
Company 6/26/2012 Cap EV 2012 2013 2014 2012 2013 2014 2012 2013 2014 Rev CAGR 2012 2013 2014 Ratings Covering Analyst
Primary Comps
Google Inc GOOG $564.68 188,115 133,685 3.8x 2.9x 2.2x 7.0x 5.4x 4.0x 13.3x 11.4x 9.8x 18% 9.9x 7.7x 5.6x OW Doug Anmuth
Amazon.com Inc AMZN $225.61 104,288 90,356 1.4x 1.1x 0.8x 23.5x 16.5x 11.9x 78.2x 52.2x 40.8x 27% 31.9x 19.1x 13.7x OW Doug Anmuth
Tencent Holdings Ltd TCTZF $28.30 51,689 48,744 7.5x 5.6x 4.2x 17.2x 13.0x 10.0x 25.2x 19.9x 16.1x 33% 20.8x 15.0x 11.4x OW Dick Wei
Baidu Inc BIDU $110.59 39,267 35,995 10.1x 6.8x 4.9x 18.0x 12.2x 9.0x 23.8x 17.0x 13.4x 42% 22.6x 15.6x 11.0x OW Dick Wei
priceline.com Inc PCLN $656.36 33,898 30,795 5.8x 4.5x 3.5x 15.4x 11.3x 8.4x 20.8x 16.1x 13.2x 21% 20.2x 14.4x 10.6x OW Doug Anmuth
LinkedIn Corp LNKD $106.42 12,085 11,344 12.5x 8.7x 6.5x 62.6x 36.6x 24.0x 166.9x 79.2x 49.3x 50% 102.2x 69.6x 56.6x OW Doug Anmuth
Zynga Inc ZNGA $5.77 4,984 3,721 2.4x 1.8x 1.3x 8.0x 4.9x 3.3x 18.8x 12.5x 10.2x 24% 82.2x 6.9x 4.6x OW Doug Anmuth
Mail.ru Group Ltd MAIL LI $31.34 6,552 6,026 8.9x 6.7x 5.3x 17.7x 13.1x 10.2x 26.9x 20.7x 16.9x 26% 25.3x 16.3x 12.5x OW Alexei Gogolev
Mean 6.6x 4.8x 3.6x 21.2x 14.1x 10.1x 46.7x 28.6x 21.2x 39.4x 20.6x 15.7x
Median 6.6x 5.0x 3.8x 17.4x 12.6x 9.5x 24.5x 18.4x 14.8x 23.9x 15.3x 11.2x
Facebook - Current FB $33.10 82,750 67,374 13.9x 10.7x 8.0x 25.6x 19.0x 13.9x 66.5x 50.5x 36.0x 33% 84.8x 40.2x 25.3x
Facebook - EV/EBITDA PT FB $39.00 97,500 82,124 17.0x 13.2x 9.8x 31.2x 23.3x 17.1x 78.4x 59.5x 42.5x 33% 102.3x 48.8x 30.9x
Facebook - Final PT FB $45.00 112,500 97,124 20.1x 13.2x 9.8x 36.9x 23.3x 17.1x 90.4x 68.7x 49.0x 33% 120.0x 48.8x 30.9x
OW Doug Anmuth
EV/Revenue EV/FCF P/E EV/EBITDA
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EV/FCF. On an EV/FCF basis, Facebook trades at 40x our 2013 FCF estimate of
$1.9B. Amazon and LinkedIn trade at 2013E FCF multiples of 19x and 70x,
respectively.
EV/Revenue. On an EV/Revenue basis, Facebook currently trades at 11x our
2013 revenue estimate of $6.5B, above other higher-growth Internet peers trading
in a range of 6-8x.
DCF analysis
Our DCF analysis supports a valuation of $51 per share. Our DCF assumes a
discount rate of 11% based on a more normalized 10-year Treasury of 3%, estimated
beta of 1.30, an equity risk premium of 5.50%, and a bit more conservatism. We
assume a 3% terminal growth rate which is in line with to a bit below that utilized
when looking at other high-growth Internet names. Our DCF incorporates an
estimated 2012-2020 revenue CAGR of 26% and an EBITDA CAGR of 27%. In
addition, we include a sensitivity analysis around our DCF assumptions in the figure
below.
Figure 43: Facebook DCF Analysis
$ in millions except per-share data
Source: Company data and J.P. Morgan estimates.
2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 4,832.0 6,512.8 8,676.8 11,323.3 14,592.1 18,094.2 21,894.0 25,835.0 29,968.6
% Change 30.2% 34.8% 33.2% 30.5% 28.9% 24.0% 21.0% 18.0% 16.0%
Adjusted EBITDA 2,635.1 3,672.1 4,973.9 6,533.7 8,464.8 10,496.3 12,700.5 14,986.6 17,384.5
% Change 14.8% 39.4% 35.4% 31.4% 29.6% 24.0% 21.0% 18.0% 16.0%
% margin 54.5% 56.4% 57.3% 57.7% 58.0% 58.0% 58.0% 58.0% 58.0%
Cash Taxes (207.9) (184.3) (346.5) (585.3) (2,207.7) (3,358.8) (4,064.2) (4,795.7) (5,563.0)
Capex (1,331.1) (1,367.7) (1,475.1) (1,585.3) (1,721.9) (2,171.3) (2,627.3) (3,100.2) (3,596.2)
PP&E acquired under capital leases (398.0) (423.3) (459.9) (509.5) (576.4) (542.8) (656.8) (775.0) (899.1)
Change in Working Capital 76.6 58.9 67.9 63.7 67.1 100.0 100.0 100.0 100.0
Unlevered Free Cash Flow 774.6 1,755.8 2,760.3 3,917.3 4,025.9 4,523.3 5,452.2 6,415.6 7,426.2
% Change 47.0% 126.7% 57.2% 41.9% 2.8% 12.4% 20.5% 17.7% 15.8%
Terminal EBITDA Multiple 12.9x 12.9x
Discount Rate 11.0% 11.0%
Terminal Value 223,825.0 223,825.0
Implied Terminal FCF Multiple 30.1x 30.1x
Present Value of FCF 19,842 21,250
Present Value of Terminal Value 87,498.7 97,123.6
Implied Firm Value 107,341.0 118,373.9
Gross Cash Balance 11,079.7 13,858.7 Adjusted EBITDA Terminal Multiple
PV of Future Tax Benefits 4,296.2 4,762.1 10.9x 11.9x 12.9x 13.9x 14.9x
Plus: Total Cash 15,375.9 18,620.8 8.0% $54 $58 $61 $65 $68
Less: Debt - - 9.0% $51 $54 $58 $61 $64
Implied Equity Value 122,716.9 136,994.7 10.0% $48 $51 $54 $57 $60
11.0% $46 $48 $51 $54 $57
Fully Diluted Shares Outstanding 2,500.0 2,675.0 12.0% $43 $46 $48 $51 $54
13.0% $41 $43 $46 $48 $51
Equity Value Per Share $49.09 $51.21 14.0% $39 $41 $43 $46 $48
D
i
s
c
o
u
n
t

R
a
t
e
DCF Sensitivity Analysis
49
27 June 2012
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Figure 44: J.P. Morgan Internet Comps
(US$, millions except per share)
Company Google Facebook Yahoo! eBay Amazon Netflix Priceline.com Expedia TripAdvisor LinkedIn Groupon Zynga Pandora HomeAway Bankrate CafePress ReachLocal Quinstreet
Symbol GOOG FB YHOO EBAY AMZN NFLX PCLN EXPE TRIP LNKD GRPN ZNGA P AWAY RATE PRSS RLOC QNST
JP Morgan Rating OW OW N N OW N OW N N OW N OW OW OW N OW OW N
Price as of 6/26/2012 $564.68 $33.10 $15.35 $42.50 $225.61 $66.80 $656.36 $46.40 $44.01 $106.42 $10.25 $5.77 $10.36 $20.48 $17.79 $14.22 $10.70 $9.27
Shares Outstanding 2012 333 2,500 1,229 1,316 462 55 51.645 139 138 114 674 865 169 86 102 17 29 47
2,010
Market Capitalization $188,115 $82,750 $18,866 $55,909 $104,288 $3,645 $33,898 $6,429 $6,054 $12,085 $6,905 $4,984 $1,751 $1,770 $1,809 $245 $311 $434
2,010
Total Enterprise Value 2012 $135,011 $67,374 $4,749 $46,115 $92,917 $3,295 $31,038 $6,340 $6,053 $11,726 $5,462 $3,461 $1,679 $1,517 $1,874 $158 $210 $400
EARNINGS PER SHARE (EPS)
(1)
EPS 2012 $42.55 $0.50 $1.13 $2.30 $2.82 $0.97 $31.63 $2.76 $1.55 $0.64 $0.14 $0.31 -$0.10 $0.50 $0.84 $0.81 $0.34 $0.83
EPS 2013 $49.54 $0.66 $1.20 $2.69 $4.24 $3.39 $40.65 $3.33 $1.85 $1.34 $0.87 $0.46 -$0.07 $0.67 $1.06 $1.13 $0.41 $0.88
EPS 2014 $57.88 $0.92 $1.30 $3.12 $5.45 $5.93 $49.65 $3.89 $2.18 $2.16 $1.14 $0.57 $0.18 $0.90 $1.34 $1.43 $0.69 $0.91
2011 - 2014 EPS CAGR 17% 22% 11% 15% 23% 7% 28% 12% 14% 82% NM 33% NM 20% 29% 35% 30% -4%
P/E 2012 13.3x 66.5x 13.6x 18.5x 79.9x 68.6x 20.8x 16.8x 28.4x 166.9x 72.4x 18.8x NM 41.3x 21.1x 17.6x 31.1x 11.2x
P/E-to-Growth 0.8x 3.0x 1.2x 1.2x 3.5x 10.1x 0.7x 1.4x 2.0x 2.0x NA 0.6x NM 2.1x 0.7x 0.5x 1.0x NM
P/E 2013 11.4x 50.5x 12.8x 15.8x 53.2x 19.7x 16.1x 14.0x 23.8x 79.2x 11.8x 12.5x NM 30.7x 16.8x 12.6x 26.1x 10.5x
P/E 2014 9.8x 36.0x 11.8x 13.6x 41.4x 11.3x 13.2x 11.9x 20.2x 49.3x 9.0x 10.2x 59.1x 22.7x 13.3x 10.0x 15.6x 10.2x
2,010
FREE CASH FLOW (FCF)
FCF 2012 $13,544 $845 $1,324 $3,404 $2,833 $76 $1,528 $691 $203 $111 $345 $45 -$20 $74 $73 $15 $19 $53
FCF 2013 $15,730 $1,856 $1,216 $3,953 $4,529 $39 $2,029 $752 $241 $164 $603 $488 -$8 $93 $120 $20 $26 $53
FCF 2014 $18,706 $2,885 $1,220 $4,534 $5,919 $30 $2,545 $815 $285 $202 $996 $629 $19 $108 $146 $25 $35 $55
2011-2014 FCF CAGR 19% 83% 15% 25% 45% -47% 25% 10% 13% 66% 51% 61% NM 19% 51% 29% 61% -8%
FCF/Share 2012 $40.66 $0.34 $1.08 $2.59 $6.13 $1.39 $29.59 $4.98 $1.47 $0.98 $0.51 $0.05 -$0.12 $0.86 $0.72 $0.89 $0.67 $1.14
FCF/Share 2013 $46.52 $0.69 $0.98 $2.98 $9.74 $0.71 $38.77 $5.46 $1.72 $1.42 $0.86 $0.55 -$0.05 $1.06 $1.16 $1.08 $0.89 $1.16
FCF/Share 2014 $54.51 $1.06 $0.98 $3.40 $12.64 $0.54 $48.07 $5.97 $2.00 $1.71 $1.37 $0.69 $0.11 $1.21 $1.40 $1.34 $1.17 $1.19
Price/FCF 2012 13.9x 97.9x 14.3x 16.4x 36.8x 47.9x 22.2x 9.3x 29.8x 108.9x 20.0x 110.1x NM 23.8x 24.8x 16.0x 16.1x 8.2x
P/FCF-to-Growth 0.7x 1.2x 1.0x 0.7x 0.8x -1.0x 0.9x 1.0x 2.3x 1.7x 0.4x 1.8x NA 1.2x 0.5x 0.6x 0.3x -1.0x
Price/FCF 2013 12.1x 47.7x 15.6x 14.3x 23.2x 93.6x 16.9x 8.5x 25.6x 75.2x 12.0x 10.5x NM 19.4x 15.3x 13.1x 12.0x 8.0x
Price/FCF 2014 10.4x 31.3x 15.6x 12.5x 17.8x 124.3x 13.7x 7.8x 22.0x 62.1x 7.5x 8.3x 98.1x 17.0x 12.7x 10.6x 9.1x 7.8x
FCF Yield 2012 7.2% 1.0% 7.0% 6.1% 2.7% 2.1% 4.5% 10.7% 3.4% 0.9% 5.0% 0.9% -1.2% 4.2% 4.0% 6.3% 6.2% 12.3%
FCF Yield 2013 8.2% 2.1% 6.4% 7.0% 4.3% 1.1% 5.9% 11.8% 3.9% 1.3% 8.4% 9.5% -0.4% 5.2% 6.5% 7.6% 8.3% 12.5%
FCF Yield 2014 9.7% 3.2% 6.4% 8.0% 5.6% 0.8% 7.3% 12.9% 4.6% 1.6% 13.4% 12.0% 1.0% 5.9% 7.9% 9.4% 11.0% 12.9%
EBITDA 2,010
EBITDA 2012 $19,180 $2,635 $1,649 $4,429 $3,810 $137 $1,994 $762 $347 $181 $380 $464 -$10 $79 $169 $27 $20 $72
EBITDA 2013 $22,529 $3,672 $1,773 $5,040 $5,186 $338 $2,596 $867 $421 $312 $916 $687 -$5 $102 $206 $40 $31 $70
EBITDA 2014 $26,326 $4,974 $1,857 $5,706 $6,758 $558 $3,210 $958 $499 $477 $1,166 $857 $44 $131 $245 $50 $45 $74
2011-2014 EBITDA CAGR 18% 29% 3% 14% 37% 5% 29% 10% 16% 69% NM 41% 155% 25% 22% 38% 41% -7%
EV/EBITDA 2012 7.0x 25.6x 2.9x 10.4x 24.4x 24.0x 15.6x 8.3x 17.4x 64.8x 14.4x 7.5x NM 19.2x 11.1x 5.9x 10.4x 5.5x
EV/EBITDA-to-Growth 0.4x 0.9x 0.8x 0.7x 0.7x 4.7x 0.5x 0.8x 1.1x 0.9x NA 0.2x NA 0.8x 0.5x 0.2x 0.3x NM
REVENUE 2,010
Revenue 2012 $34,841 $4,832 $4,521 $13,733 $61,837 $3,575 $5,349 $3,854 $781 $904 $2,372 $1,522 $425 $279 $542 $232 $446 $363
Revenue 2013 $41,145 $6,513 $4,664 $15,749 $78,033 $4,065 $6,544 $4,248 $938 $1,305 $3,114 $1,904 $606 $344 $641 $293 $528 $350
Revenue 2014 $47,903 $8,677 $4,781 $17,611 $96,088 $4,728 $7,800 $4,633 $1,099 $1,766 $3,661 $2,216 $823 $418 $730 $346 $618 $363
2011-2014 Revenue CAGR 18% 33% 3% 15% 26% 14% 21% 10% 20% 50% 31% 24% 44% 22% 20% 25% 18% -3%
5.4x 17.1x 4.2x 4.1x 1.7x 1.0x 6.3x 1.7x 7.7x 13.4x 2.9x 3.3x 4.1x 6.4x 3.3x 1.1x 0.7x 1.2x
Market Cap/Revenue 2013 4.6x 13.6x 4.1x 3.6x 1.3x 0.9x 5.3x 1.5x 6.6x 9.4x 2.3x 2.7x 2.9x 5.3x 2.9x 0.9x 0.6x 1.2x
Market Cap/Revenue 2014 4.0x 10.4x 4.0x 3.2x 1.1x 0.8x 4.5x 1.4x 5.7x 7.1x 2.0x 2.4x 2.2x 4.4x 2.5x 0.8x 0.5x 1.2x
Notes:
1) All EPS shown are Pro Forma, to exclude the impact of stock based compensation.
2) P/E and P/FCF for Yahoo! does not adjust for Yahoo! Japan
3) Pandora's calendar year estimates are used (e.g., FY2012 equates to ~CY2011. QuinStreet's FY estimates (with a June year-end) are used.
Source: Company reports and JP Morgan estimates
Market Cap/Revenue 2012
50
27 June 2012
Doug Anmuth
(1-212) 622-6571
Financial Models
Figure 45: Facebook Income Statement
$ in millions
2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Revenue 1,974 3,711 1,058 1,105 1,200 1,468 4,832 6,513 8,677
Cost of Revenue 493 851 273 292 308 377 1,251 1,661 2,152
Gross Profit 1,481 2,860 785 814 892 1,091 3,581 4,852 6,525
Operating Expenses
Marketing and Sales 182 384 136 175 196 225 731 977 1,284
Research and Development 135 274 93 109 119 141 462 606 772
General and Administrative 112 229 72 92 102 125 391 495 616
Stock-based Compensation 20 217 103 1,000 210 257 1,570 780 677
Total Operating Expenses 449 1,104 404 1,376 627 747 3,154 2,858 3,349
Operating Income 1,032 1,756 381 (562) 265 344 428 1,994 3,176
PF Operating Income 1,052 1,973 484 438 475 601 1,998 2,774 3,852
Other income (expense), net (24) (61) 1 18 26 27 72 100 124
Pre-tax Income 1,008 1,695 382 (544) 292 371 500 2,094 3,300
Income Taxes 402 695 177 68 122 148 516 921 1,386
Effective Tax Rate 40% 41% 46% NA 42% 40% 103% 44% 42%
GAAP Net Income 606 1,000 205 (613) 169 222 (16) 1,173 1,914
GAAP EPS $0.43 $0.09 ($0.25) $0.07 $0.08 ($0.01) $0.44 $0.70
Diluted Shares Out 2,332 2,361 2,451 2,554 2,634 2,500 2,675 2,729
Non-GAAP Pre-tax Income 1,912 485 456 502 628 2,070 2,874 3,977
Income Taxes 732 192 182 201 251 826 1,121 1,471
Effective Tax Rate 38% 40% 40% 40% 40% 40% 39% 37%
Non-GAAP Net Income 1,180 293 273 301 377 1,244 1,753 2,505
Non-GAAP EPS $0.51 $0.12 $0.11 $0.12 $0.14 $0.50 $0.66 $0.92
EBITDA Calculation
Operating Income 1,032 1,756 381 (562) 265 344 428 1,994 3,176
Stock-based compensation 20 217 103 1,000 210 257 1,570 780 677
Depreciation and Amortization 139 323 110 149 177 201 637 898 1,121
EBITDA 1,191 2,296 594 587 652 802 2,635 3,672 4,974
2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Y/Y Growth
Revenue 154% 88% 45% 24% 26% 30% 30% 35% 33%
Cost of Revenue 121% 73% 63% 41% 32% 55% 47% 33% 30%
Gross Profit 167% 93% 39% 18% 24% 23% 25% 35% 34%
Marketing and Sales 61% 111% 100% 90% 81% 94% 90% 34% 31%
Research and Development 67% 103% 75% 71% 58% 72% 69% 31% 27%
General and Administrative 58% 104% 50% 50% 89% 92% 71% 27% 24%
Stock-based Compensation -26% 985% 1371% 1463% 200% 238% 624% -50% -13%
Total Operating Expenses 54% 146% 130% 390% 104% 120% 186% -9% 17%
Operating Income 294% 70% -2% -238% -36% -37% -76% 366% 59%
PF Operating Income 264% 88% 23% -7% -2% -4% 1% 39% 39%
GAAP Net Income 165% 65% -12% -355% -26% -26% -102% NM 63%
GAAP EPS -13% -343% -32% -35% -102% NM 60%
Non-GAAP EPS 20% -8% -2% -11% -2% 32% 40%
EBITDA 225% 93% 33% 6% 14% 10% 15% 39% 35%
Q/Q Growth
Revenue -6% 4% 9% 22%
Operating Income -30% -248% -147% 30%
PF Operating Income -22% -10% 9% 26%
EBITDA -18% -1% 11% 23%
% of Revenue
Cost of Revenue 25.0% 22.9% 25.8% 26.4% 25.7% 25.7% 25.9% 25.5% 24.8%
Gross Profit 75.0% 77.1% 74.2% 73.6% 74.3% 74.3% 74.1% 74.5% 75.2%
Marketing and Sales 9.2% 10.3% 12.9% 15.8% 16.3% 15.3% 15.1% 15.0% 14.8%
Research and Development 6.8% 7.4% 8.8% 9.9% 9.9% 9.6% 9.6% 9.3% 8.9%
General and Administrative 5.7% 6.2% 6.8% 8.3% 8.5% 8.5% 8.1% 7.6% 7.1%
Stock-based Compensation 1.0% 5.8% 9.7% 90.5% 17.5% 17.5% 32.5% 12.0% 7.8%
Operating Income 52.3% 47.3% 36.0% -50.9% 22.1% 23.4% 8.8% 30.6% 36.6%
PF Operating Income 53.3% 53.2% 45.7% 39.6% 39.6% 40.9% 41.3% 42.6% 44.4%
EBITDA 60.3% 61.9% 56.1% 53.1% 54.3% 54.6% 54.5% 56.4% 57.3%
51
27 June 2012
Doug Anmuth
(1-212) 622-6571
Figure 46: Facebook Segment Summary
$ in millions
2010A 1Q11 2Q11 3Q11 4Q11A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Summary
Advertising 1,868 637 776 798 943 3,154 872 890 957 1,185 3,904 5,104 6,670
Y/Y Growth 145% 87% 83% 77% 44% 69% 37% 15% 20% 26% 24% 31% 31%
Q/Q Growth -3% 22% 3% 18% -8% 2% 7% 24%
% of Total Revenues 95% 87% 87% 84% 83% 85% 82% 81% 80% 81% 81% 78% 77%
Payments and Other Fees 106 94 119 156 188 557 186 215 244 284 928 1,409 2,007
Y/Y Growth 715% 1780% 1388% 818% 147% 425% 98% 81% 56% 51% 67% 52% 42%
Q/Q Growth 24% 27% 31% 21% -1% 16% 13% 16%
% of Total Revenues 5% 13% 13% 16% 17% 15% 18% 19% 20% 19% 19% 22% 23%
Total Revenue 1,974 731 895 954 1,131 3,711 1,058 1,105 1,200 1,468 4,832 6,513 8,677
Y/Y Growth 154% 112% 108% 104% 55% 88% 45% 24% 26% 30% 30% 35% 33%
Q/Q Growth 0% 22% 7% 19% -6% 4% 9% 22%
Seasonality 20% 24% 26% 30% 22% 23% 25% 30%
Revenue per MAU (ARPU) Summary
US & Canada $8.62 $2.49 $2.84 $2.80 $3.19 $11.50 $2.86 $2.87 $2.82 $3.21 $11.86 $13.04 $14.29
Europe $3.85 $1.19 $1.33 $1.34 $1.60 $5.61 $1.40 $1.25 $1.28 $1.71 $5.68 $6.61 $8.08
Asia $1.49 $0.42 $0.50 $0.56 $0.56 $2.08 $0.53 $0.60 $0.69 $0.73 $2.57 $2.93 $3.42
Rest of World $0.27 $0.31 $0.39 $0.40 $0.41 $1.56 $0.37 $0.41 $0.51 $0.56 $1.88 $2.45 $3.19
Total $4.08 $1.14 $1.26 $1.24 $1.38 $5.11 $1.21 $1.19 $1.22 $1.41 $5.05 $5.55 $6.27
Y/Y Growth
US & Canada 41% 52% 45% 16% 33% 15% 1% 1% 0% 3% 10% 10%
Europe 58% 49% 59% 29% 46% 17% -6% -4% 6% 1% 16% 22%
Asia 37% 37% 59% 23% 40% 27% 21% 22% 29% 24% 14% 17%
Rest of World 82% 72% 77% 21% 468% 19% 6% 29% 39% 21% 30% 30%
Total 32% 30% 34% 37% 9% 25% 7% -6% -2% 3% -1% 10% 13%
Q/Q Growth
US & Canada -10% 14% -1% 14% -10% 0% -2% 14%
Europe -4% 12% 1% 20% -13% -10% 2% 33%
Asia -8% 18% 13% 0% -5% 13% 14% 6%
Rest of World -7% 24% 2% 3% -9% 11% 24% 11%
Total -10% 11% -2% 11% -12% -2% 2% 16%
Geographic Revenue Breakdown
Based on User Location
US & Canada 1,146 394 471 482 567 1,914 525 549 557 651 2,282 2,845 3,467
Europe 577 229 275 290 361 1,155 328 308 324 445 1,406 1,860 2,475
Asia 149 62 82 104 115 363 118 145 179 204 645 961 1,380
Rest of World 28 46 67 77 88 278 87 104 141 168 500 847 1,355
Total 1,900 731 895 954 1,131 3,711 1,058 1,105 1,200 1,468 4,832 6,513 8,677
% of Total
US & Canada 60% 54% 53% 51% 50% 52% 50% 50% 46% 44% 47% 44% 40%
Europe 30% 31% 31% 30% 32% 31% 31% 28% 27% 30% 29% 29% 29%
Asia 8% 8% 9% 11% 10% 10% 11% 13% 15% 14% 13% 15% 16%
Rest of World 1% 6% 7% 8% 8% 8% 8% 9% 12% 11% 10% 13% 16%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Y/Y Growth
US & Canada 84% 89% 78% 38% 67% 33% 16% 15% 15% 19% 25% 22%
Europe 139% 113% 117% 66% 100% 43% 12% 12% 23% 22% 32% 33%
Asia 182% 156% 182% 100% 145% 90% 76% 72% 77% 78% 49% 44%
Rest of World 254% 228% 210% 102% 907% 89% 56% 82% 90% 79% 69% 60%
Total 112% 108% 104% 55% 95% 45% 24% 26% 30% 30% 35% 33%
52
27 June 2012
Doug Anmuth
(1-212) 622-6571
Figure 47: Facebook Revenue DriversUsers
$ in millions
2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
User Metrics
Monthly Active Users (MAU)
US & Canada 154 179 188 194 201 206 206 231 255
Europe 183 229 241 250 256 266 266 298 327
Asia 138 212 230 249 270 290 290 366 442
Rest of World 133 225 242 265 288 306 306 386 465
Total 608 845 901 958 1,015 1,068 1,068 1,280 1,488
Y/Y Growth
US & Canada 38% 16% 15% 15% 14% 15% 15% 12% 11%
Europe 56% 25% 20% 18% 16% 16% 16% 12% 10%
Asia 123% 54% 47% 43% 38% 37% 37% 26% 21%
Rest of World 93% 69% 51% 44% 39% 36% 36% 26% 21%
Total 69% 39% 33% 30% 27% 26% 26% 20% 16%
Country Mix
US & Canada 25% 21% 21% 20% 20% 19% 19% 18% 17%
Europe 30% 27% 27% 26% 25% 25% 25% 23% 22%
Asia 23% 25% 26% 26% 27% 27% 27% 29% 30%
Rest of World 22% 27% 27% 28% 28% 29% 29% 30% 31%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
Mobile MAU 245 432 488 548 609 667 667 915 1,146
Y/Y Growth 143% 76% 69% 69% 62% 55% 55% 37% 25%
Q/Q Growth 13% 12% 11% 10%
% of total MAUs 40.3% 51.1% 54.2% 57.2% 60.0% 62.5% 62.5% 71.5% 77.0%
Mobile-Only MAU 15 58 83 117 152 189 189 343 491
Y/Y Growth -- 287% 277% 290% 281% 226% 226% 81% 43%
Q/Q Growth 43% 41% 30% 24%
% of total MAUs 2.5% 6.9% 9.2% 12.2% 15.0% 17.7% 17.7% 26.8% 33.0%
Web and Mobile MAU 230 374 405 431 457 478 478 572 655
Y/Y Growth 128% 63% 52% 46% 36% 28% 28% 20% 14%
Q/Q Growth 8% 6% 6% 5%
% of total MAUs 37.8% 44.3% 45.0% 45.0% 45.0% 44.8% 44.8% 44.7% 44.0%
Web Only MAU 363 413 413 410 406 400 400 365 342
Y/Y Growth 40% 14% 5% -1% -4% -3% -3% -9% -6%
Q/Q Growth 0% -1% -1% -1%
% of total MAUs 59.7% 48.9% 45.8% 42.8% 40.0% 37.5% 37.5% 28.5% 23.0%
Daily Active Users (DAU)
US & Canada 99 126 129 136 143 149 149 171 191
Europe 107 143 152 159 169 180 180 216 251
Asia 64 105 119 132 141 153 153 209 263
Rest of World 57 109 126 139 152 164 164 232 297
Total 327 483 526 565 604 646 646 828 1,002
DAU as % of MAU
US & Canada 64.3% 70.4% 68.6% 69.8% 71.1% 72.2% 72.2% 74.2% 75.2%
Europe 58.5% 62.4% 63.1% 63.5% 65.8% 67.8% 67.8% 72.7% 76.6%
Asia 46.4% 49.5% 51.7% 52.9% 52.2% 52.8% 52.8% 57.0% 59.5%
Rest of World 42.9% 48.4% 52.1% 52.5% 52.8% 53.4% 53.4% 60.2% 64.0%
Total 53.8% 57.2% 58.4% 59.0% 59.5% 60.5% 60.5% 64.7% 67.3%
Y/Y Growth
US & Canada 55% 27% 23% 16% 15% 18% 18% 15% 12%
Europe 70% 34% 27% 25% 25% 26% 26% 20% 16%
Asia 121% 64% 65% 55% 44% 46% 46% 36% 26%
Rest of World 97% 91% 68% 58% 52% 50% 50% 42% 28%
Total 77% 48% 41% 36% 32% 34% 34% 28% 21%
Country Mix
US & Canada 30% 26% 25% 24% 24% 23% 23% 21% 19%
Europe 33% 30% 29% 28% 28% 28% 28% 26% 25%
Asia 20% 22% 23% 23% 23% 24% 24% 25% 26%
Rest of World 17% 23% 24% 25% 25% 25% 25% 28% 30%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
53
27 June 2012
Doug Anmuth
(1-212) 622-6571
Figure 48: Facebook Revenue DriversAdvertising
$ in millions
2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Global Summary
Global Advertising
Advertising Impressions 11,000 15,500 4,600 4,610 4,844 5,461 19,615 23,755 28,446
Y/Y Growth 41% 35% 17% 22% 25% 27% 21% 20%
Q/Q Growth 5% 0% 5% 13%
Average Cost Per Thousand (CPM) $0.17 $0.20 $0.19 $0.19 $0.20 $0.22 $0.20 $0.21 $0.23
Y/Y Growth 20% 1% -2% -2% 1% 0% 8% 9%
Q/Q Growth -12% 2% 2% 10%
Global Advertising Revenue 1,868 3,154 872 890 957 1,185 3,904 5,104 6,670
Y/Y Growth 69% 37% 15% 20% 26% 24% 31% 31%
Q/Q Growth -8% 2% 7% 24%
Regional Breakdown
US & Canada
Advertising Impressions 4,455 1,200 1,182 1,164 1,275 4,821 5,295 5,836
Y/Y Growth 8% 5% 9% 10% 8% 10% 10%
Q/Q Growth 4% -1% -2% 10%
Average Cost Per Thousand (CPM) $0.36 $0.35 $0.36 $0.36 $0.39 $0.36 $0.39 $0.40
Y/Y Growth 16% 3% -3% -3% 3% 6% 5%
Q/Q Growth -13% 3% 0% 8%
US & Canada Advertising Revenue 1,071 1,583 419 426 418 493 1,755 2,042 2,363
Y/Y Growth 48% 26% 8% 6% 7% 11% 16% 16%
% of Total Advertising Revenue 57% 50% 48% 48% 44% 42% 45% 40% 35%
Europe
Y/Y Growth 40% 12% 15% 18% 21% 19% 18%
Q/Q Growth 12% -15% -3% 28%
Y/Y Growth -5% -11% -10% 1% -6% 8% 10%
Q/Q Growth -20% 6% 6% 12%
Europe Advertising Revenue 555 1,002 274 246 254 363 1,136 1,452 1,883
Y/Y Growth 81% 33% 0% 3% 19% 13% 28% 30%
Asia
Advertising Impressions 2,646 700 841 990 1,023 3,554 4,549 5,640
Y/Y Growth 38% 25% 35% 40% 34% 28% 24%
Q/Q Growth -4% 20% 18% 3%
Y/Y Growth 29% 33% 30% 32% 32% 16% 14%
Q/Q Growth 9% 3% 7% 10%
Asia Advertising Revenue 143 313 99 123 154 176 552 820 1,160
Y/Y Growth 119% 77% 66% 76% 85% 76% 49% 41%
Rest of World
Y/Y Growth 86% 35% 38% 42% 47% 31% 28%
Q/Q Growth 13% 6% 14% 5%
Y/Y Growth 0% 13% 36% 35% 23% 31% 25%
Q/Q Growth -11% 13% 20% 12%
ROW Advertising Revenue 25 256 80 96 131 153 460 790 1,264
Y/Y Growth 934% 86% 52% 87% 92% 80% 72% 60%
54
27 June 2012
Doug Anmuth
(1-212) 622-6571
Figure 49: Facebook Revenue DriversPayments
$ in millions
2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Payment and Other Fees
Global Payments and Other Fees
Total Payments and Other Fees 106 557 186 215 244 284 928 1,409 2,007
Y/Y Growth 425% 98% 81% 56% 51% 67% 52% 42%
Q/Q Growth -1% 16% 13% 16%
0.96
Revenue per Avg. DAU $0.41 $1.38 $0.37 $0.39 $0.42 $0.45 $1.64 $1.91 $2.19
Y/Y Growth 232% 37% 31% 17% 13% 20% 16% 15%
Q/Q Growth -8% 7% 6% 9%
Revenue Per Avg. MAU (ARPU) $0.22 $0.77 $0.21 $0.23 $0.25 $0.27 $0.97 $1.20 $1.45
Y/Y Growth 250% 46% 38% 22% 19% 27% 24% 21%
Q/Q Growth -7% 9% 7% 10%
Regional Breakdown
US & Canada
Payment and Other Fees Revenue 75 331 106 123 139 159 526 803 1,104
Y/Y Growth 340% 71% 59% 59% 51% 59% 53% 37%
% of Total Payment Revenue 71% 59% 57% 57% 57% 56% 57% 57% 55%
Y/Y Growth 219% 37% 33% 38% 30% 30% 31% 21%
Q/Q Growth -1% -69% 20% 18%
Revenue per Avg. MAU (ARPU) $0.57 $1.99 $0.58 $0.64 $0.70 $0.78 $2.73 $3.68 $4.55
Y/Y Growth 251% 48% 38% 39% 32% 37% 35% 24%
Q/Q Growth -2% -68% 22% 22%
Europe
Payment and Other Fees Revenue 22 153 54 62 71 82 269 409 592
Y/Y Growth 587% 135% 108% 56% 49% 76% 52% 45%
Y/Y Growth 367% 81% 65% 25% 19% 36% 24% 23%
Q/Q Growth -7% -67% 18% 17%
Y/Y Growth 400% 92% 75% 34% 29% 46% 33% 41%
Q/Q Growth -6% -66% 21% 24%
Asia
Y/Y Growth 813% 217% 169% 50% 42% 86% 51% 57%
Y/Y Growth 402% 92% 68% 1% -2% 21% 8% 20%
Q/Q Growth -14% -71% 5% 12%
Y/Y Growth 422% 111% 85% 7% 3% 29% 16% 27%
Q/Q Growth -12% -69% 9% 13%
Rest of World
Y/Y Growth 672% 133% 115% 32% 77% 76% 43% 60%
Y/Y Growth 300% 31% 32% -15% 17% 7% -2% 20%
Q/Q Growth -22% -76% 12% 39%
Y/Y Growth 336% 46% 46% -7% 29% 19% 9% 30%
Q/Q Growth -19% -73% 18% 41%
55
27 June 2012
Doug Anmuth
(1-212) 622-6571
Figure 50: Facebook Balance Sheet
$ in millions
2010A PF 2011A PF 1Q12A 2Q12E 3Q12E 4Q12E 4Q13E 2014E
Assets
Cash and cash equivalents 1,785 1,512 1,282 7,838 7,962 8,452 11,231 14,575
Marketable securities - 2,396 2,628 2,628 2,628 2,628 2,628 2,628
Accounts receivable 373 547 482 486 498 609 767 920
Prepaid expenses and other current assets 88 478 627 553 600 441 434 434
Total Current Assets 2,246 4,933 5,019 11,506 11,688 12,130 15,059 18,557
Property and equipment 574 1,475 1,855 2,093 2,312 2,566 3,460 4,274
Goodwill and intangible assets, net 96 162 189 739 739 739 739 739
Other assets 74 90 121 121 121 121 121 121
Total Assets 2,990 6,660 7,184 14,458 14,860 15,555 19,379 23,690
Liabilities and Stockholder's Equity
Accounts payable 29 63 129 111 156 73 153 217
Platform partners payable 75 171 178 177 204 235 334 434
Accrued expenses and other current liabilities 137 296 337 337 337 337 337 337
Deferred revenue and deposits 42 90 93 99 108 117 133 174
Current portion of capital lease obligations 106 279 302 265 264 272 287 304
Total Current Liabilities 389 899 1,039 989 1,069 1,034 1,244 1,465
Capital lease obligations, less current portion 117 398 404 404 404 404 404 404
LT Debt 250 - - - - - - -
Other liabilities 72 135 144 144 144 144 144 144
Total Liabilities 828 1,432 1,587 1,537 1,617 1,582 1,792 2,013
Stockholders Equity
Convertible preferred stock 615 - -
Common stock - - - 6,871 6,685 6,792 6,631 7,803
Additional paid-in capital 947 4,267 4,433 5,499 5,837 6,238 8,841 9,845
Accumulated other comprehensive loss (6) (6) (7) (7) (7) (7) (7) (7)
Retained earnings 606 967 1,171 558 727 950 2,123 4,037
Total Stockholder's Equity 2,162 5,228 5,597 12,921 13,243 13,973 17,587 21,677
Total Liabilities and Stockholder's Equity 2,990 6,660 7,184 14,458 14,860 15,555 19,379 23,690
Balance Check OK OK OK OK OK OK OK OK
Total Gross Cash 1,785 3,908 3,910 10,466 10,590 11,080 13,859 17,203
Total revenue 1,974 3,711 1,058 1,105 1,200 1,468 1,970 8,677
Cost of Revenue 493 851 273 292 308 377 502 2,152
Accounts receivable, net of allowance 373 547 482 486 498 609 767 920
A/R DSOs 17 13 42 40 38 38 36 10
% of Revenue 19% 15% 46% 44% 42% 42% 39% 11%
Prepaid expenses and other current assets 88 478 627 553 600 441 434 434
% of Revenue 4% 13% 59% 50% 50% 30% 22% 5%
Accounts payable 29 63 129 111 156 73 153 217
A/P DSPs 1 2 11 9 12 5 7 2
% of Revenue 1% 2% 12% 10% 13% 5% 8% 3%
Platform partners payable 75 171 178 177 204 235 334 434
% of Revenue 4% 5% 17% 16% 17% 16% 17% 5%
Deferred revenue and deposits 42 90 93 99 108 117 133 174
% of Revenue 2% 2% 9% 9% 9% 8% 7% 2%
Current portion of capital lease obligations 106 279 302 265 264 272 287 304
% of Revenue 5% 8% 29% 24% 22% 19% 15% 4%
56
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Doug Anmuth
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Figure 51: Facebook Cash Flow Statement
$ in millions
2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Net Income 606 1,000 205 (613) 169 222 (16) 1,173 1,914
Depreciation and Amortization 139 323 110 149 177 201 637 898 1,121
Loss on write-off of equipment 3 4 1 1 -
Share-based compensation 20 217 103 1,000 210 257 1,570 780 677
Tax benefit from share-based award activity 115 433 54 - - - 54 - -
Excesss tax benefit from share-based award activity (115) (433) (54) 62 110 133 251 737 1,039
Accounts Receivable (209) (174) 65 (4) (12) (111) (62) (158) (153)
Prepaid expenses and other current assets (38) (31) (28) 74 (47) 160 158 7 (0)
Other assets 17 (32) (32) (32) -
Accounts Payable 12 6 (3) (18) 45 (83) (59) 80 64
Platform partners payable 75 96 7 (1) 27 31 64 99 100
Accrued expenses and other current liabilities 20 38 2 - - - 2 - -
Deferred Revenue and deposits 37 49 3 6 9 9 27 16 40
Other liabilities 16 53 8 (37) (1) 8 (22) 15 17
Change in Working Capital (70) 5 22 20 21 14 77 59 68
Net Cash from Operating Activities 698 1,549 441 618 687 828 2,574 3,647 4,820
Purchases of property and equipment (293) (606) (453) (276) (264) (338) (1,331) (1,368) (1,475)
Purchases of marketable securities - (3,025) (876) (876) -
Maturities of marketable securities - 516 567 567 -
Sales of marketable securities - 113 69 69 -
Investments in non-marketable equity securities - (3) (1) (1) -
Acquisitions of business, net of cash acquired (22) (24) (25) (550) (300) (875) -
Change in restricted cash and deposits (9) 6 (1) (1) -
Net Cash used in Investing Activities (324) (3,023) (720) (826) (564) (338) (2,448) (1,368) (1,475)
Net proceeds from inssuance of convertible preferred stock - - - -
Net proceeds from issuance of common stock 500 998 - 6,765 6,765
Proceeds from exercise of stock options 6 28 5 5
Proceeds from (repayments of) LT Debt 250 (250) - -
Proceeds from sale and lease-back transactions - 170 62 62
Principle payments on capital lease obligations (90) (181) (71) (71)
Excess tax benefit from share-based award activity 115 433 54 54 500
Net Cash provided by Financing Activities 781 1,198 50 6,765 - - 6,815 500 -
Effect of FX (3) 3 (1) (1)
Net Increase/Decrease in Cash and Cash Equivalents 1,152 (273) (230) 6,556 123 490 6,940 2,779 3,344
Cash at BOP 633 1,785 1,512 1,282 7,838 7,962 1,512 8,452 11,231
Cash at EOP 1,785 1,512 1,282 7,838 7,962 8,452 8,452 11,231 14,575
Fair Value of shares issued related to acquisitions of biz and other 60 58 6
Capex (293) (606) (453) (276) (264) (338) (1,331) (1,368) (1,475)
Y/Y Growth 788% 107% 120% 3% 8%
% of Revenue 15% 16% 43% 25% 22% 23% 28% 21% 17%
Property and equipment acquired under capital leases (217) (473) (38) (111) (132) (117) (398) (423) (460)
Y/Y Growth 288% 118% -16% 6% 9%
% of Revenue 11% 13% 4% 10% 11% 8% 8% 7% 5%
Capex + Capital Lease PPE (510) (1,079) (491) (387) (396) (455) (1,729) (1,791) (1,935)
Y/Y Growth 473% 112% 60% 4% 8%
% of Revenue 26% 29% 46% 35% 33% 31% 36% 28% 22%
Depreciation and Amortization
D&A 139 323 110 149 177 201 637 898 1,121
Depreciation as % of Revenue 7% 9% 10% 13% 15% 14% 13% 14% 13%
Depreciation as % of Avg Period PPE 42% 34% 7% 8% 8% 8% 32% 30% 29%
Property Plant and Equipment
PPE, BOP 148 574 1,475 1,855 2,093 2,312 1,475 2,567 3,460
+ Capital Expenditures (Incl. PPE Under Cap Lease) 510 1,079 491 387 396 455 1,729 1,791 1,935
- Depreciation (139) (323) (110) (149) (177) (201) (637) (898) (1,121)
Net PPE, EOP 519 1,330 1,856 2,093 2,312 2,566 2,567 3,460 4,274
Reported Net PPE, EOP 574 1,475 1,855
FCF Calculation
Net Cash from Operating Activities 698 1,549 441 618 687 828 2,574 3,647 4,820
Less: Capex (293) (606) (453) (276) (264) (338) (1,331) (1,368) (1,475)
Less: Property and equipment acquired under capital leases (217) (473) (38) (111) (132) (117) (398) (423) (460)
Free Cash Flow 188 470 (50) 231 291 373 845 1,856 2,885
Y/Y Growth 185% 150% 80% 120% 55%
Free Cash Flow Excluding Tax Benefit 188 470 (50) 170 181 239 540 1,118 1,845
Y/Y Growth 185% 150% 15% 107% 65%
57
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Doug Anmuth
(1-212) 622-6571
Facebook: Summary of Financials
Income Statement - Annual FY11A FY12E FY13E FY14E Income Statement - Quarterly 1Q12A 2Q12E 3Q12E 4Q12E
Revenues 3,711 4,832 6,513 8,677 Revenues 1,058A 1,105 1,200 1,468
Operating Income 1,973 1,998 2,774 3,852 Operating Income 484A 438 475 601
D&A 323 637 898 1,121 D&A 110A 149 177 201
EBITDA 2,296 2,635 3,672 4,974 EBITDA 594A 587 652 802
Net interest income / (expense) (42) - - - Net interest income / (expense) - - - -
Other income / (expense) (19) - - - Other income / (expense) - - - -
Pretax income 1,695 500 2,094 3,300 Pretax income 382A (544) 292 371
Income taxes 695 516 921 1,386 Income taxes 177A 68 122 148
Net income 1,000 (16) 1,173 1,914 Net income 205A (613) 169 222
Weighted average diluted shares 2,332 2,500 2,675 2,729 Weighted average diluted shares 2,361A 2,451 2,554 2,634
Diluted EPS 0.51 0.50 0.66 0.92 Diluted EPS 0.12A 0.11 0.12 0.14
Balance Sheet and Cash Flow Data FY11A FY12E FY13E FY14E Ratio Analysis FY11A FY12E FY13E FY14E
Cash and cash equivalents 1,512 8,452 11,231 14,575 Sales growth 88.0% 30.2% 34.8% 33.2%
Accounts receivable 547 609 767 920 EBITDA growth 92.8% 14.8% 39.4% 35.4%
Other current assets 2,874 3,069 3,062 3,062 EPS growth - (1.7%) 31.7% 40.1%
Current assets 4,933 12,130 15,059 18,557
PP&E 1,475 2,566 3,460 4,274 EBITDA margin 61.9% 54.5% 56.4% 57.3%
Total assets 6,660 15,555 19,379 23,690 Net margin - - - -
Total debt 0 0 0 0 Debt / EBITDA - - - -
Total liabilities 1,432 1,582 1,792 2,013
Shareholders' equity 5,228 13,973 17,587 21,677 Return on assets (ROA) - - - -
Return on equity (ROE) - - - -
Net Income (including charges) 1,000 (16) 1,173 1,914
D&A 323 637 898 1,121 Enterprise value / EBITDA - - - -
Change in working capital 5 77 59 68 Enterprise value / Free cash flow - - - -
Other P/E 65.4 66.5 50.5 36.0
Cash flow from operations 1,549 2,574 3,647 4,820
Capex (606) (1,331) (1,368) (1,475)
Free cash flow 470 845 1,856 2,885
Cash flow from investing activities (3,023) (2,448) (1,368) (1,475)
Cash flow from financing activities 1,198 6,815 500 0
Dividends - - - -
Dividend yield - - - -
Note: $ in millions (except per-share data).Fiscal year ends Dec
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Doug Anmuth
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Facebook (FB, FB US) Price Chart
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
59
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Doug Anmuth
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average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months,
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(1-212) 622-6571
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