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FACEBOOK INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion of our financial condition and results
of operations in conjunction with our consolidated financial statements and the
related notes included in Part II, Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K. In addition to our
historical consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in Part I, Item 1A, "Risk Factors." For a discussion of
limitations in the measurement of certain of our user metrics, see the section
entitled "Limitations of Key Metrics."
Overview
Our mission is to make the world more open and connected. Facebook enables you
to express yourself and connect with the world around you instantly and freely.
We build products that support our mission by creating utility for users,
developers, and marketers:
Users. We enable people who use Facebook to stay connected with their friends
and family, to discover what is going on in the world around them, and to share
and express what matters to them to the people they care about.
Developers. We enable developers to use the Facebook Platform to build
applications (apps) and websites that integrate with Facebook to reach our
global network of users and to build products that are more personalized and
social.
Marketers. We enable marketers to engage with more than one billion monthly
active users (MAUs) on Facebook or subsets of our users based on information
they have chosen to share with us such as their age, location, gender, or
interests. We offer marketers a unique combination of reach, relevance, social
context, and engagement to enhance the value of their ads.
We generate substantially all of our revenue from advertising and from fees
associated with our Payments infrastructure that enables users to purchase
virtual and digital goods from our Platform developers. For the year ended
December 31, 2012, we recorded revenue of $5.09 billion, income from operations
of $538 million and net income of $53 million. Total costs and expenses
increased 133% compared to revenue growth of 37% due to significant increases in
share-based compensation and related payroll tax expenses for restricted stock
units (RSUs) and increases in headcount for the year ended December 31, 2012.
During fiscal 2012, we recognized $1.72 billion of share-based compensation and
related payroll tax expenses. Of these amounts, $1.13 billion was due to the
recognition of share-based compensation and related payroll tax expenses related
to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) triggered by the
completion of our initial public offering (IPO) in May 2012. Our effective tax
rate for the year ended December 31, 2012 has exceeded the U.S. statutory rate
primarily due to the impact of non-deductible share-based compensation and
losses arising outside the United States in jurisdictions where we do not
receive a tax benefit.
Trends in Our User Metrics
The numbers of MAUs, DAUs, and mobile MAUs discussed below, as well as average
revenue per user (ARPU), do not include Instagram users unless such users would
otherwise qualify as MAUs, DAUs and/or mobile MAUs based on activity that is
shared back to Facebook.
• Monthly Active Users (MAUs). We define a monthly active user as a
registered Facebook user who logged in and visited Facebook through our
website or a mobile device, or took an action to share content or
activity with his or her Facebook friends or connections via a
third-party website that is integrated with Facebook, in the last 30
days as of the date of measurement. MAUs are a measure of the size of
our global active user community, which has grown substantially in the
past several years.
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Note: For purposes of reporting MAUs, DAUs, and ARPU by geographic region,
Europe includes all users in Russia and Turkey, Asia includes all users in
Australia and New Zealand, and Rest of World includes Africa, Latin America, and
the Middle East. In June 2012, we discovered an error in the algorithm we used
to estimate the geographic location of our users that affected our attribution
of certain user locations for the first quarter of 2012. While this issue did
not affect our overall worldwide MAU number, it did affect our attribution of
users to different geographic regions. The first quarter of 2012 user metrics as
pictured in the charts above reflect the reclassification to more correctly
attribute users by geographic region.
As of December 31, 2012, we had 1.06 billion MAUs, an increase of 25% from
December 31, 2011. Users in Brazil, India and Indonesia represented key sources
of growth in fiscal 2012 relative to the prior year. We had 67 million MAUs in
Brazil as of December 31, 2012, an increase of 81% compared to the same period
in 2011; we had 71 million MAUs in India as of December 31, 2012, an increase of
54% compared to the same period in 2011; and we had 60 million MAUs in Indonesia
as of December 31, 2012, an increase of 25% compared to the same period in 2011.
Additionally, we had 174 million MAUs in the United States as of December 31,
2012, an increase of 8% compared to the same period in 2011.
• Daily Active Users (DAUs). We define a daily active user as a registered
Facebook user who logged in and visited Facebook through our website or
a mobile device, or took an action to share content or activity with his
or her Facebook friends or connections via a third-party website that is
integrated with Facebook, on a given day. We view DAUs, and DAUs as a
percentage of MAUs, as measures of user engagement.
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Note: For non-worldwide DAU user numbers presented for the periods marked
March 31, 2012 and June 30, 2012, the figures represent an average of the first
25 days of the former period and the last 27 days of the latter period in order
to avoid using data subject to the algorithm error described in the MAU section
above. These average numbers do not meaningfully differ from the average numbers
when calculated over a full month.
Worldwide DAUs increased 28% to 618 million on average during December 2012 from
483 million during December 2011. We experienced growth in DAUs across major
markets including Brazil, India and Japan. Overall growth in DAUs was driven
largely by increased mobile usage of Facebook. Relative to September 30, 2012,
DAUs increased from 584 million to 618 million, due to an increase in mobile
users. During the fourth quarter of 2012, the number of DAUs using personal
computers declined modestly compared to the third quarter of 2012, including
declines in key markets such as the United States, while mobile DAUs continued
to increase.
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--------------------------------------------------------------------------------• Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via
a mobile app or via mobile-optimized versions of our website such as
m.facebook.com, whether on a mobile phone or tablet such as the iPad,
during the period of measurement.
Worldwide mobile MAUs increased 57% to 680 million as of December 31, 2012 from
432 million as of December 31, 2011. In all regions, an increasing number of our
MAUs are accessing Facebook through mobile devices, with users in the United
States, India and Brazil representing key sources of mobile growth over the
fourth quarter of 2012 as compared to the third quarter of 2012. Approximately
157 million mobile MAUs accessed Facebook solely through mobile apps or our
mobile website during the month ended December 31, 2012, increasing 25% from 126
million during the month ended September 30, 2012. The remaining 523 million
mobile MAUs accessed Facebook from both personal computers and mobile devices
during that month. While most of our mobile users also access Facebook through
personal computers, we anticipate that the rate of growth in mobile usage will
exceed the growth in usage through personal computers for the foreseeable future
and that the usage through personal computers may be flat or continue to decline
in certain markets, including key developed markets such as the United States,
in part due to our focus on developing mobile products to encourage mobile usage
of Facebook.
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Trends in Our Monetization by User Geography
We calculate our revenue by user geography based on our estimate of the
geography in which ad impressions are delivered or virtual goods are purchased.
We define ARPU as our total revenue in a given geography during a given quarter,
divided by the average of the number of MAUs in the geography at the beginning
and end of the quarter. Annual ARPU is the sum of respective quarterly ARPU
amounts in that year. Our revenue and ARPU in markets such as United States &
Canada and Europe are relatively higher due to the size and maturity of those
advertising markets as well as our greater sales presence and the number of
payment methods that we make available to marketers and users.
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Note: Our revenue by user geography in the charts above is geographically
apportioned based on our estimation of the geographic location of our users when
they perform a revenue-generating activity. This allocation differs from our
revenue by geography disclosure in our consolidated financial statements where
revenue is geographically apportioned based on the location of the advertiser or
developer. In June 2012, we discovered an error in the algorithm we used to
estimate the geographic location of our users that affected our attribution of
certain user locations for the first quarter of 2012. The first quarter of 2012
ARPU amount for the United States & Canada region reflects an adjustment based
on the reclassification to more correctly attribute users by geographic region.
The amounts above for the fourth quarter of 2012 include a one-time increase in
Payments revenue as described in Results of Operations.
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For 2012, worldwide ARPU was $5.32, an increase of 6% from 2011. ARPU increased
in 2012 by approximately 20% in the United States & Canada and Rest of World, by
approximately 15% in Asia and 8% in Europe compared to 2011. During the fourth
quarter of 2012, worldwide ARPU was $1.54, an increase of 12% from the fourth
quarter of 2011. Over this period, ARPU increased by approximately 37% in Rest
of World, by over 20% in United States & Canada and Asia, and by approximately
7% in Europe. User growth was more rapid in geographies with relatively lower
ARPU, such as Asia and Rest of World. We expect that user growth in the future
will continue to be higher in those regions where ARPU is relatively lower, such
as Asia and Rest of World, such that worldwide ARPU may continue to increase at
a slower rate relative to ARPU in any geographic region, or potentially decrease
even if ARPU increases in each geographic region. We also expect worldwide ARPU
will decline in the first quarter of 2013 driven by seasonality, which is
consistent with historical trends.
Factors Affecting Our Performance
Number of MAUs and DAUs. Trends in our MAUs and DAUs affect our revenue and
financial results by influencing the number of ads we are able to show, the
volume of Payments transactions, as well as our expenses and capital
expenditures. In 2012, MAUs increased by 25% and DAUs increased by 28%. We
expect our growth rates for MAUs and DAUs to decline as the size of our active
user base increases and as we achieve higher market penetration rates.
Additionally, as we grow our business and expand internationally, we expect to
face challenges entering new markets such as China, where access to Facebook is
restricted in whole or in part. As user growth rates slow, we expect the rate of
growth in revenue will likely decline over time, which will affect our income
from operations and net income.
User Geography. The geography of our users affects our revenue and financial
results because we currently monetize users in different geographies at
different average rates. For example, ARPU for an average user in United States
& Canada is more than five times higher than for an average user in Asia. User
geography also has some impact on our costs, though in general new users in Asia
and Rest of World do not require material incremental infrastructure investments
because we are able to utilize existing infrastructure such as our data centers
in the United States to make our products available to these users. In addition,
user growth by geography does not necessarily affect our overall headcount
requirements or headcount-related expenses since we are generally able to
support users in all geographies from our existing facilities. In 2012, we grew
users relatively faster in Asia and Rest of World where on average users
generate less revenue as compared with users in the United States or Europe. In
the future, we expect to continue to grow more rapidly in Asia and Rest of World
markets where our current penetration rates are lower. We plan to continue to
invest in user growth across the world, including in geographies where current
per user monetization is relatively lower.
User Engagement. Changes in user engagement as measured by metrics such as
frequency of visitation will also affect our revenue and financial performance.
Growth in user engagement should generally increase the opportunities for us to
display advertising and to deliver relevant commercial content to users. Growth
in user engagement also generally results in increases in our expenses and
capital expenditures required to support user activity. User engagement as
measured by DAUs as a percentage of MAUs increased from 57% at the end of 2011
to 59% at the end of 2012. Our product development investments are focused on
increasing user engagement over time.
Facebook Usage on Mobile Devices. Increasing Facebook use on mobile devices may
affect our revenue and financial results as we currently show fewer ads on
average to mobile users compared to users on personal computers. The lower
volume of ads per mobile user is partially offset by the higher price per ad for
mobile, and we are investing to try to make our mobile ads more valuable over
time. In 2012, we began showing ads in mobile users' News Feeds, and for the
fourth quarter of 2012 and for the year ended December 31, 2012, we estimate
that approximately 23% and 11% of our ads revenue came from mobile products,
respectively. We expect mobile usage to increase at a faster rate than usage
through personal computers for the foreseeable future, particularly in developed
markets, and our success in ramping up mobile monetization will likely have a
material impact on our financial performance.
Value of Our Advertising Products. We believe that increasing the value of our
advertising products and the consequent return on investment to marketers from
working with Facebook will increase marketer demand and thereby increase the
amount marketers spend with us. We aim to increase the value of our advertising
products through such means as increasing the size and engagement of our user
base, improving our ability to select relevant advertising content for each
user, developing new ads formats and products, and improving the measurement
tools available to marketers to optimize their campaigns. For example, in 2012,
we launched advertising in News Feed and Custom Audiences in order to enable
marketers to more effectively reach their target customers.
Management of Ad Inventory. Our revenue trends are also affected by ad inventory
management changes affecting the number, size, or prominence of ads we display.
For example, in 2012 we began showing ads in News Feed. These News Feed ads are
displayed more prominently and we receive a higher price per ad compared to ads
displayed on the right hand column of our web page.
Product Innovation. We make ongoing product changes intended to enhance the user
experience and increase user engagement. For example, in 2012, we launched new
versions of our iPhone app that are faster and more reliable than the prior
versions of our app. The new versions of the apps significantly increased News
Feed loads and user feedback shared. Our new products often also increase costs
if they require additional compute power and infrastructure.
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Investment in Infrastructure. Our investments in the scope, reliability,
redundancy, and efficiency of our infrastructure affects our expenses and
capital expenditures. In 2012, we continued to make significant investments in
our technical infrastructure to ensure that our growing user base can access
Facebook rapidly and reliably, by expanding the capacity of our data centers in
Prineville, Oregon and Forest City, North Carolina and by initiating
construction of a new data center project in Lulea, Sweden. We also invested in
hardware and software efficiency projects to improve the performance of our
infrastructure.
Investment in Talent. As of December 31, 2012, we had 4,619 employees, an
increase of 44% from the end of 2011. Our employee headcount has increased
significantly and we expect headcount growth to continue in 2013 as we ramp up
our investment in technical staff, sales and marketing, and general and
administrative personnel. We have also made and intend to make acquisitions with
the primary objective of adding software engineers, product designers, and other
personnel with certain technology expertise.
Business Development and Acquisitions. As part of our business strategy, we
periodically make acquisitions to add specialized employees, complementary
companies, products, technologies, or other assets. For example, in 2012, we
acquired Instagram, Inc. and certain AOL patent assets from Microsoft
Corporation. Our acquisitions will affect our future financial results due to
factors such as the amortization of acquired intangible assets and may also
result in potential charges such as restructuring costs or impairment expense.
Geographic Earnings Mix. In 2012, our tax rate was 89%, up from 41% in 2011,
primarily due to significant amounts of share-based compensation expense being
allocated to our international subsidiaries in low tax jurisdictions, leading to
non-deductible losses in those subsidiaries. Our future tax rate and financial
results will be affected by the relative profitability of our corporate entities
in higher versus lower tax jurisdictions.
Seasonality. Advertising spending is traditionally seasonally strong in the
fourth quarter of each year. We believe that this seasonality in advertising
spending affects our quarterly results, which generally reflect significant
growth in advertising revenue between the third and fourth quarters and a
decline in advertising spending between the fourth and subsequent first
quarters. For instance, our advertising revenue increased 46%, 18%, and 22%
between the third and fourth quarters of 2010, 2011, and 2012, respectively,
while advertising revenue for the first quarter of 2011 and 2012 declined 3% and
8% compared to the fourth quarters of 2010 and 2011, respectively.
Share-based Compensation Expense. During the year ended December 31, 2012, we
recognized $1.57 billion of share-based compensation expense. Of these amounts,
$1.04 billion was due to the recognition of share-based compensation related to
Pre-2011 RSUs triggered by the completion of our IPO in May 2012. As of December
31, 2012, there was $2.21 billion of unrecognized share-based compensation
expense, of which $1.96 billion is related to RSUs and $244 million is related
to restricted shares and stock options. This unrecognized share-based
compensation expense is expected to be recognized over a weighted-average period
of approximately three years.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP). The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, costs and
expenses, and related disclosures. We evaluate our estimates and assumptions on
an ongoing basis. Our estimates are based on historical experience and various
other assumptions that we believe to be reasonable under the circumstances. Our
actual results could differ from these estimates.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, if different estimates reasonably could have
been used, or if changes in the estimate that are reasonably possible could
materially impact the financial statements. We believe that the assumptions and
estimates associated with revenue recognition for payments and other fees,
income taxes, share-based compensation, loss contingencies, and business
combinations and valuation of goodwill and other acquired intangible assets have
the greatest potential impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and
estimates. For further information on all of our significant accounting
policies, see Note 1 of our accompanying Notes to Consolidated Financial
Statements included in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K.
Revenue Recognition for Payments and Other Fees
We enable Payments from our users to our Platform developers. Our users can make
payments on the Facebook Platform by using credit cards or other payment methods
available on our website. The primary process for these transactions is through
the purchase of our virtual currency. Our users then use this virtual currency
to purchase virtual and digital goods in games and apps from developers on the
Facebook Platform. Upon the initial sale of the virtual currency, we record
consideration received from a user as a deposit.
When a user engages in a payment transaction utilizing the virtual currency for
the purchase of a virtual or digital good from a
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Platform developer, we reduce the virtual currency balance of the user by the
price of the purchase, which is a price that is solely determined by the
Platform developer. We remit to the Platform developer an amount that is based
on the total amount of virtual currency redeemed less the processing fee that we
charge the Platform developer for the service performed. Our revenue is the net
amount of the transaction representing our processing fee for the transaction.
We record revenue on a net basis as we do not consider ourselves to be the
principal in the sale of the virtual or digital good to the user. Under GAAP
guidance related to reporting revenue gross as a principal versus net as an
agent, the indicators used to determine whether an entity is a principal or an
agent to a transaction are subject to judgment. We consider ourselves the agent
to these transactions when we apply the indicators to our facts. Should material
subsequent changes in the substance or nature of the transactions with Platform
developers result in us being considered the principal in such sales, we would
reflect the virtual and digital goods sale as revenue and the amounts paid to
the Platform developers as an associated cost.
Income Taxes
We are subject to income taxes in the United States and numerous foreign
jurisdictions. Significant judgment is required in determining our provision for
income taxes and income tax assets and liabilities, including evaluating
uncertainties in the application of accounting principles and complex tax laws.
We record a provision for income taxes for the anticipated tax consequences of
the reported results of operations using the asset and liability method. Under
this method, we recognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities, as well as for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the
tax rates that are expected to apply to taxable income for the years in which
those tax assets and liabilities are expected to be realized or settled. We
record a valuation allowance to reduce our deferred tax assets to the net amount
that we believe is more likely than not to be realized.
We recognize tax benefits from uncertain tax positions only if we believe that
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the
position. Although we believe that we have adequately reserved for our uncertain
tax positions, we can provide no assurance that the final tax outcome of these
matters will not be materially different. We make adjustments to these reserves
when facts and circumstances change, such as the closing of a tax audit or the
refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will affect the
provision for income taxes in the period in which such determination is made and
could have a material impact on our financial condition and operating results.
The provision for income taxes includes the effects of any reserves that we
believe are appropriate, as well as the related net interest and penalties.
Share-based Compensation
Prior to January 1, 2011 we granted Pre-2011 RSUs to our employees and members
of our board of directors that vested upon the satisfaction of both a
service-based condition, generally over four years, and a liquidity condition.
The liquidity condition was satisfied in connection with our IPO in May 2012.
Because the liquidity condition was not satisfied until our IPO, in prior
periods we had not recorded any expense relating to the granting of the Pre-2011
RSUs. In the second quarter of 2012, we recognized $986 million of stock-based
compensation expense associated with Pre-2011 RSUs that vested in connection
with our IPO. For the Pre-2011 RSUs, we recognize share-based compensation
expense using the accelerated attribution method, net of estimated forfeitures,
in which compensation cost for each vesting tranche in an award is recognized
ratably from the service inception date to the vesting date for that tranche.
RSUs granted on or after January 1, 2011 (Post-2011 RSUs) are not subject to a
liquidity condition in order to vest, and compensation expense related to these
grants is based on the grant date fair value of the RSUs and is recognized on a
straight-line basis over the applicable service period. The majority of
Post-2011 RSUs are earned over a service period of four to five years. For
Post-2011 RSUs, which are only subject to a service condition, we recognize
share-based compensation expense on a ratable basis over the requisite service
period for the entire award.
We account for share-based employee compensation plans under the fair value
recognition and measurement provisions in accordance with applicable accounting
standards, which require all share-based payments to employees, including grants
of stock options and RSUs, to be measured based on the grant-date fair value of
the awards.
Share-based compensation expense is recorded net of estimated forfeitures in our
consolidated statements of income and as such is recorded for only those
share-based awards that we expect to vest. We estimate the forfeiture rate based
on historical forfeitures of equity awards and adjust the rate to reflect
changes in facts and circumstances, if any. We will revise our estimated
forfeiture rate if actual forfeitures differ from our initial estimates.
We have historically issued unvested restricted shares to employee stockholders
of certain acquired companies. As these awards are generally subject to
continued post-acquisition employment, we have accounted for them as
post-acquisition share-based compensation expense. We recognize compensation
expense equal to the grant date fair value of the common stock on a
straight-line basis over the employee's required service period.
We capitalize share-based employee compensation expense when appropriate. We did
not capitalize any share-based compensation
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expense in the three years ended December 31, 2012.
Loss Contingencies
We are involved in various lawsuits, claims, investigations and proceedings that
arise in the ordinary course of business. Certain of these matters include
speculative claims for substantial or indeterminate amounts of damages. We
record a liability when we believe that it is both probable that a loss has been
incurred and the amount can be reasonably estimated. Significant judgment is
required to determine both probability and the estimated amount. We review these
provisions at least quarterly and adjust these provisions accordingly to reflect
the impact of negotiations, settlements, rulings, advice of legal counsel, and
updated information.
In the opinion of management, there was not at least a reasonable possibility we
may have incurred a material loss, or a material loss in excess of a recorded
accrual, with respect to loss contingencies for legal and other contingencies as
of December 31, 2012. However, the outcome of litigation is inherently
uncertain. Therefore, although management considers the likelihood of such an
outcome to be remote, if one or more of these legal matters were resolved
against us in the same reporting period for amounts in excess of management's
expectations, our consolidated financial statements of a particular reporting
period could be materially adversely affected.
Business Combinations and Valuation of Goodwill and Other Acquired Intangible
Assets
We allocate the fair value of purchase consideration to the tangible assets
acquired, liabilities assumed and intangible assets acquired based on their
estimated fair values. The excess of the fair value of purchase consideration
over the fair values of these identifiable assets and liabilities is recorded as
goodwill. Such valuations require management to make significant estimates and
assumptions, especially with respect to intangible assets. During the
measurement period, which is one year from the acquisition date, we may record
adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period,
any subsequent adjustments are recorded to earnings.
We review goodwill for impairment at least annually or more frequently if events
or changes in circumstances indicate that the carrying value of goodwill may not
be recoverable. We have elected to first assess the qualitative factors to
determine whether it is more likely than not that the fair value of our single
reporting operating unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment
under the new authoritative guidance issued by the Financial Accounting
Standards Board (FASB). If we determine that it is more likely than not that its
fair value is less than its carrying amount, then the two-step goodwill
impairment test will be performed. The first step, identifying a potential
impairment, compares the fair value of the reporting unit with its carrying
amount. If the carrying amount exceeds its fair value, the second step will be
performed; otherwise, no further step is required. The second step, measuring
the impairment loss, compares the implied fair value of the goodwill with the
carrying amount of the goodwill. Any excess of the goodwill carrying amount over
the applied fair value is recognized as an impairment loss, and the carrying
value of goodwill is written down to fair value. As of December 31, 2012, no
impairment of goodwill has been identified.
Acquired intangible assets are amortized over their estimated useful lives. We
evaluate the recoverability of amortizable intangible assets for possible
impairment whenever events or circumstances indicate that the carrying amount of
such assets may not be recoverable. Recoverability of these assets is measured
by a comparison of the carrying amounts to the future undiscounted cash flows
the assets are expected to generate. If such review indicates that the carrying
amount of property and equipment and intangible assets is not recoverable, the
carrying amount of such assets is reduced to fair value. We have not recorded
any such impairment charge during the years presented.
In addition to the recoverability assessment, we routinely review the remaining
estimated useful lives of our amortizable intangible assets. If we reduce the
estimated useful life assumption for any asset, the remaining unamortized
balance would be amortized over the revised estimated useful life.
Components of Results of Operations
Revenue
We generate substantially all of our revenue from advertising and from fees
associated with our Payments infrastructure that enables users to purchase
virtual and digital goods from our Platform developers.
Advertising. Our advertising revenue is generated by displaying ad products on
the Facebook website or mobile app and third-party affiliated websites or mobile
apps. Marketers pay for ad products either directly or through their
relationships with advertising agencies, based on the number of impressions
delivered or the number of clicks made by our users. We recognize revenue from
the delivery of click-based ads in the period in which a user clicks on the
content. We recognize revenue from the display of impression-based ads in the
contracted period in which the impressions are delivered. Impressions are
considered delivered when an ad is displayed to users. The number of ads we show
is subject to methodological changes as we continue to evolve our ads business
and the structure of our ads products. Whether we count the initial display only
or every display of an ad as an impression is dependent on where the ad is
displayed. For example, an individual ad in News Feed that is purchased on an
impression basis may be displayed to users more than once during a day; however,
only the initial display of the ad is considered an impression, regardless of
how many times the ad is actually displayed within the News Feed.
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Payments and other fees. We enable Payments from our users to our Platform
developers. Our users can transact and make payments on the Facebook Platform by
using credit cards, PayPal or other payment methods available on our website. We
receive a fee from our Platform developers when users make purchases from our
Platform developers using our Payments infrastructure. We recognize revenue net
of amounts remitted to our Platform developers. We have mandated the use of our
Payments infrastructure for game apps on Facebook, and fees related to Payments
are generated almost exclusively from games. Cumulatively to date, games from
Zynga have generated the majority of our payments and other fees revenue.
However, Zynga's contribution to our payments and other fees revenue has
decreased over time and this trend may continue. Our other fees revenue consists
primarily of user Promoted Posts and, to a lesser extent, Facebook Gifts
revenue, and has been immaterial in recent periods.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated
with the delivery and distribution of our products. These include expenses
related to the operation of our data centers such as facility and server
equipment depreciation, facility and server equipment rent expense, energy and
bandwidth costs, support and maintenance costs, and salaries, benefits, and
share-based compensation for employees on our operations teams. Cost of revenue
also includes credit card and other transaction fees related to processing
customer transactions.
Research and development. Research and development expenses consist primarily of
salaries, benefits, and share-based compensation for employees on our
engineering and technical teams who are responsible for building new products as
well as improving existing products. We expense all of our research and
development costs as they are incurred.
Marketing and sales. Our marketing and sales expenses consist primarily of
salaries, benefits, and share-based compensation for our employees engaged in
sales, sales support, marketing, business development, and customer service
functions. Our marketing and sales expenses also include user-, developer-, and
advertiser-facing marketing and promotional expenditures.
General and administrative. Our general and administrative expenses consist
primarily of salaries, benefits, and share-based compensation for our executives
as well as our legal, finance, human resources, corporate communications and
policy, and other administrative employees. In addition, general and
administrative expenses include outside consulting fees, legal and accounting
services, and facilities and other supporting overhead costs. General and
administrative expenses also include legal settlements and amortization of
patents we acquired.
We have reclassified certain prior period expense amounts from marketing and
sales to general and administrative within our consolidated statements of income
to conform to our current year presentation. These reclassifications did not
affect previously reported revenue, total costs and expenses, income from
operations, or net income in our consolidated statements of income.
Results of Operations
The following table set forth our consolidated statements of income data:
Year Ended December 31,
2012 2011 2010
(in millions)
Consolidated Statements of Income Data:
Revenue $ 5,089 $ 3,711 $ 1,974
Costs and expenses:
Cost of revenue 1,364 860 493
Research and development 1,399 388 144
Marketing and sales 896 393 167
General and administrative 892 314 138
Total costs and expenses 4,551 1,955 942
Income from operations 538 1,756 1,032
Interest and other income (expense), net (44 ) (61 ) (24 )
Income before provision for income taxes 494 1,695 1,008
Provision for income taxes 441 695 402
Net income $ 53 $ 1,000 $ 606
45--------------------------------------------------------------------------------Share-based compensation expense included in costs and expenses:
Year Ended December 31,
2012 2011 2010
(in millions)
Cost of revenue $ 88 $ 9 $ -
Research and development 843 114 9
Marketing and sales 306 37 2
General and administrative 335 57 9
Total share-based compensation expense $ 1,572 $ 217 $ 20
The following table set forth our consolidated statements of income data (as a
percentage of revenue):
Year Ended December 31,
2012 2011 2010
Consolidated Statements of Income Data:
Revenue 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 27 23 25
Research and development 27 10 7
Marketing and sales 18 11 8
General and administrative 18 8 7
Total costs and expenses 89 53 48
Income from operations 11 47 52Interest and other income (expense), net (1 ) (2 ) (1 )
Income before provision for income taxes 10
46 51
Provision for income taxes 9 19 20
Net income 1 % 27 % 31 %
Share-based compensation expense included in costs and expenses (as a percentage
of revenue):
Year Ended December 31,
2012 2011 2010
Cost of revenue 2 % - % - %
Research and development 17 3 -
Marketing and sales 6 1 -
General and administrative 7 2 -Total share-based compensation expense 31 % 6 % 1 %
46
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Revenue
2011 to 2012 2010 to 2011
Year Ended December 31, % Change % Change
2012 2011 2010
(in millions)
Advertising $ 4,279 $ 3,154 $ 1,868 36 % 69 %
Payments and other fees 810 557 106 45 % 425 %
Total revenue $ 5,089 $ 3,711 $ 1,974 37 % 88 %
2012 Compared to 2011. Revenue in 2012 increased $1.38 billion, or 37% compared
to 2011. The increase was due primarily to a 36% increase in advertising revenue
during 2012 as compared to 2011.
Advertising revenue grew due to a 32% increase in the number of ads delivered
during 2012 and to a 3% increase in the average price per ad. The increase in
ads delivered was driven primarily by user growth. MAUs grew 25% from December
31, 2011 to December 31, 2012 and average DAUs grew 28% from December 2011 to
December 2012. Various product changes and changes in user engagement generally
offset in their impact on the average number of ads per user. For example, the
shift to greater mobile use generally reduced ads per user, while the
introduction of ads in News Feed increased the number of ads per user. The rate
of change in number of ads delivered also differs by geography, driven by
factors such as mobile penetration. For example, Europe and Rest of World
increased at a faster rate than the United States and Asia.
Growth in the average price per ad during 2012 compared to 2011 was driven
primarily by an increase in price per ad in the United States, which benefited
from growth in ads in News Feed across desktop and mobile devices. Ads in News
Feed have a significantly higher average price per ad due to factors which
include the prominent position of the ads. The increase in price per ad in the
United States was partially offset by an increased percentage of our worldwide
ads being delivered in the Asia and Rest of World geographies where the average
price per ad, while growing on a year-over-year basis, is relatively lower. The
average price per ad was also affected by a decline in the average price per ad
in Europe in 2012 compared to 2011 due to the impact of foreign exchange rate
changes, an increase in the percentage of ads being delivered in European
regions where the average price per ads is relatively lower, and in part, we
believe, to continuing weak economic conditions in that region affecting
advertiser demand.
For the year ended December 31, 2012, we estimate that mobile advertising
revenue as a percentage of advertising revenue was approximately 11%. As mobile
advertising was not offered prior to the first quarter of 2012, comparisons to
prior year are not meaningful.
Advertising revenue in the fourth quarter of 2012 increased 41% compared to the
same period in 2011, due to a 46% increase in the number of ads delivered,
partially offset by a 4% decrease in the average price per ad. The increase in
ads delivered was driven by user growth and certain product changes, including
the addition of News Feed ads on personal computers and mobile devices. MAUs
grew 25% from December 31, 2011 to December 31, 2012 and average DAUs grew 28%
from December 2011 to December 2012. Additionally, in the fourth quarter of
2012, we lowered our market reserve price (i.e. the minimum price threshold
accepted in our ads auction), and this product change had the effect of
increasing the number of ads delivered and decreasing the average price per ad.
This change primarily affected the Rest of World and Asia markets where the
average price per ad is relatively lower, and the change increased the
percentage of our ads that are shown in relatively lower priced markets, which
has the effect of decreasing the overall average price per ad. For the fourth
quarter of 2012, we estimate that mobile advertising revenue as a percentage of
advertising revenue was approximately 23%.
Payments and other fees revenue in 2012 increased $253 million, or 45%, compared
to 2011. Excluding the one-time increase in Payments revenue described below,
Payments and other fees revenue in 2012 increased 34% compared to 2011. Facebook
Payments became mandatory for all game developers accepting payments on the
Facebook Platform with limited exceptions on July 1, 2011. Accordingly,
comparisons of Payments and other fees revenue to periods before this date may
not be meaningful.
Payments and other fees revenue in the fourth quarter of 2012 was $256 million.
Comparisons to prior periods are not meaningful due to the one-time increase in
Payments revenue described below.
Our Payments terms and conditions provide for a 30-day claim period subsequent
to a Payments transaction during which the customer may dispute the virtual or
digital goods transaction. Through the third quarter of 2012, we had deferred
recognition of Payments revenue until the expiration of this period as we were
unable to make reasonable and reliable estimates of future refunds or
chargebacks arising during this claim period, due to lack of historical
transactional information. Beginning in the fourth quarter of 2012, we had 24
months of historical transactional information which enabled us to estimate
future refunds and chargebacks. Accordingly, in the fourth quarter of 2012, we
recorded all Payments revenues at the time of the purchase of the related
47
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virtual or digital goods, net of estimated refunds or chargebacks. This change
resulted in a one-time increase in Payments revenue in the fourth quarter of
2012 of approximately $66 million as we recognized revenue from four months of
transactions.
Seven and nine percent of our total revenue for the three and twelve months
ended December 31, 2012, respectively and 11% and 12% of our total revenue for
the three and twelve months ended December 31, 2011, respectively, came from a
single customer, Zynga. Revenue from Zynga consisted of payments processing fees
related to their sale of virtual goods and from direct advertising purchased by
Zynga.
In 2012, we generated approximately 51% of our revenue from marketers and
Platform developers based in the United States, compared to 56% in 2011. The
change is due primarily to a faster growth rate of international users and, to a
lesser extent, to the expansion of international sales offices and payment
methods. The majority of our revenue outside of the United States came from
customers located in western Europe, Canada, Australia and Brazil.
2011 Compared to 2010. Revenue in 2011 increased $1.74 billion, or 88% compared
to 2010. The increase was due primarily to a 69% increase in advertising revenue
to $3.15 billion. Advertising revenue grew due to a 42% increase in the number
of ads delivered and an 18% increase in the average price per ad delivered. The
increase in ads delivered was driven primarily by user growth; MAUs grew 39%
from December 31, 2010 to December 31, 2011 and average DAUs grew 48% from
December 2010 to December 2011. The number of ads delivered was also affected by
many other factors including product changes that significantly increased the
number of ads on many Facebook pages beginning in the fourth quarter of 2010,
partially offset by an increase in usage of our mobile products, where we did
not show ads, and by various product changes implemented in 2011 that in
aggregate modestly reduced the number of ads on certain pages. The increase in
average price per ad delivered was affected by factors including improvements in
our ability to deliver more relevant ads to users and product changes that
contributed to higher user interaction with the ads by increasing their relative
prominence.
Payments and other fees revenue increased to $557 million in 2011 due to the
adoption of Facebook Payments, which has been gradually adopted by our Platform
developers and began generating significant revenue in the fourth quarter of
2010. Facebook Payments became mandatory for all game developers accepting
payments on the Facebook Platform with limited exceptions on July 1, 2011.
Accordingly, comparisons of payments and other fees revenue to periods before
that date may not be meaningful. In 2011, other fees revenue was immaterial.
In 2011, we generated approximately 56% of our revenue from marketers and
Platform developers based in the United States, compared to 62% in 2010. This
change is due to factors including a faster growth rate of international users
and the expansion of international sales offices and payment methods. The
majority of our revenue outside of the United States came from customers located
in western Europe, Canada, and Australia.
Cost of revenue
Year Ended December 31,
2011 to 2012 2010 to 2011
2012 2011 2010 % Change % Change
(dollars in millions)
Cost of revenue $ 1,364 $ 860 $ 493 59 % 74 %
Percentage of revenue 27 % 23 % 25 %
2012 Compared to 2011. Cost of revenue in 2012 increased $504 million, or 59%,
compared to 2011. The increase was primarily due to expenses related to
expanding our data center operations, including a $257 million increase in
depreciation in 2012. Share-based compensation expense increased by $79 million
in 2012 compared to 2011 mainly due to the recognition of expenses related to
Pre-2011 RSUs triggered by the completion of our IPO in May 2012 and, to a
lesser extent, Post-2011 RSUs. Increases in payroll and benefits expenses
resulting from a 65% increase in employee headcount also contributed to the
increase in cost of revenue in 2012. These expenses supported our user growth,
the increased usage of products by users, developers, and marketers, and the
launch of new products.
2011 Compared to 2010. Cost of revenue in 2011 increased $367 million, or 74%,
compared to 2010. The increase was primarily due to expenses related to
expanding our data center operations, including a $164 million increase in
depreciation and a $35 million increase in data center facility rent. These
expenses supported our user growth, the increased usage of our products by
users, developers, and marketers, and the launch of new products. Additionally,
credit card and other related revenue processing fees increased by $60 million.
We anticipate that the cost of revenue will increase in dollar amount for the
foreseeable future as we expand our data center
48
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capacity to support user growth, increased user engagement, and the delivery of
new products and offerings. The expected increase in cost of revenue may be
partially mitigated to the extent we are able to realize improvements in server
performance and the efficiency of our technical operations. We expect cost of
revenue in absolute dollars and as a percentage of revenue to increase in 2013
compared to 2012 due to our investment in technical infrastructure.
Research and development
Year Ended December 31,
2011 to 2012 2010 to 2011
2012 2011 2010 % Change % Change
(dollars in millions)
Research and development $ 1,399 $ 388 $ 144 261 % 169 %
Percentage of revenue 27 % 10 % 7 %
2012 Compared to 2011. Research and development expenses in 2012 increased $1.01
billion, or 261%, compared to 2011. The increase was primarily due to an
increase in share-based compensation expense of $729 million in 2012 resulting
primarily from the recognition of expenses related to Pre-2011 RSUs triggered by
the completion of our IPO in May 2012 and, to a lesser extent, Post-2011 RSUs.
Payroll and benefits expense also increased due to a 73% growth in employee
headcount in engineering, design, product management, and other technical
functions. This investment supported our efforts to improve existing products
and build new products for users, developers, and marketers.
2011 Compared to 2010. Research and development expenses in 2011 increased $244
million, or 169%, compared to 2010. The increase was primarily due to an
increase from $9 million in 2010 to $114 million in 2011 for share-based
compensation expense related to Post-2011 RSUs. Payroll and benefits expense
also increased due to a 57% growth in employee headcount in engineering, design,
product management, and other technical functions. This investment supported our
efforts to improve existing products and build new products for users,
developers, and marketers.
In 2013, we plan to continue rapidly hiring engineering, design, product
management, and other technical employees. However, we expect research and
development expenses will rise in 2013 at a lower rate than it rose in 2012 due
to the large share-based compensation expense in the second quarter of 2012
associated with Pre-2011 RSUs triggered by the completion of our IPO.
Marketing and sales
Year Ended December 31,
2011 to 2012 2010 to 2011
2012 2011 2010 % Change % Change
(dollars in millions)
Marketing and sales 896 393 167 128 % 135 %
Percentage of revenue 18 % 11 % 8 %
2012 Compared to 2011. Marketing and sales expenses in 2012 increased $503
million, or 128%, compared to 2011. The increase was primarily due to an
increase in share-based compensation expense of $269 million in 2012 resulting
primarily from the recognition of expenses related to Pre-2011 RSUs triggered by
the completion of our IPO in May 2012 and, to a lesser extent, Post-2011 RSUs.
Payroll and benefits expenses also increased due to a 19% increase in employee
headcount to support global sales, business development and customer service. An
increase in our user-, developer-, and advertiser-facing marketing expense also
contributed to the increase in 2012.
2011 Compared to 2010. Marketing and sales expenses in 2011 increased $226
million, or 135%, compared to 2010. The increase was primarily due to an
increase in payroll and benefits expenses resulting from a 45% increase in
employee headcount to support global sales, business development, and customer
service, and, to a lesser extent, an increase in our user-, developer-, and
advertiser-facing marketing. Additionally, share-based compensation expense
increased from $2 million in 2010 to $37 million in 2011 due to recognition of
expense related to Post-2011 RSUs.
In 2013, we plan to add sales, business development and customer service
employees, and increase our investment in user-, developer-, and marketer-facing
marketing. However, we expect marketing and sales expenses will rise in 2013 at
a lower rate than it rose in 2012 due to the large share-based compensation
expense in the second quarter of 2012 associated with Pre-2011 RSUs triggered by
the completion of our IPO.
49
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General and administrative
Year Ended December 31,
2011 to 2012 2010 to 2011
2012 2011 2010 % Change % Change
(dollars in millions)
General and administrative $ 892 $ 314 $ 138 184 % 128 %
Percentage of revenue 18 % 8 % 7 %
2012 Compared to 2011. General and administrative expenses in 2012 increased
$578 million, or 184%, compared to 2011. The increase was primarily due to an
increase in share-based compensation expense of $278 million resulting from
recognition of expense related to Pre-2011 RSUs and, to a lesser extent,
Post-2011 RSUs. The increase was also due to growth in legal fees and settlement
costs, amortization of acquired patents and other professional service fees.
Payroll and benefits expenses also increased for 2012 due to a 38% increase in
employee headcount in corporate communications and policy, human resources,
legal, finance, and other functions.
2011 Compared to 2010. General and administrative expenses in 2011 increased
$176 million, or 128%, compared to 2010. The increase was primarily due to an
increase in payroll and benefits expenses resulting from a 60% increase in
employee headcount in finance, legal, human resources, and other functions.
Additionally, outside consulting and legal fees contributed to the increase.
Share-based compensation expense increased from $9 million in 2010 to $57
million in 2011 due to recognition of expense related to Post-2011 RSUs.
In 2013, we plan to continue to increase general and administrative employee
headcount to support our growth. However, we expect general and administrative
expenses will rise in 2013 at a lower rate than it rose in 2012 due to the large
share-based compensation expense in the second quarter of 2012 associated with
Pre-2011 RSUs triggered by the completion of our IPO.
Interest and other income (expense), net
Year Ended December 31,
2011 to 2012 2010 to 2011
2012 2011 2010 % Change % Change
(in millions)
Interest expense $ (51 ) $ (42 ) $ (22 ) 21 % 91 %
Other income (expense), net 7 (19 ) (2 ) (137 )% 850 %
Interest and other income
(expense), net $ (44 ) $ (61 ) $ (24 ) (28 )% 154 %
2012 Compared to 2011. Interest and other income (expense), net in 2012
decreased $17 million, or 28%, compared to 2011. Interest expense increased by
$9 million primarily due to an increased volume of property and equipment
financed by capital leases for 2012 and interest on the $1.5 billion term loan
that was drawn down in the fourth quarter of 2012. Changes in other income
(expense), net were primarily due to lower foreign exchange losses in 2012
resulting from the periodic re-measurement of our foreign currency balances and
an increase in interest income driven by higher invested cash balances.
2011 Compared to 2010. Interest and other income (expense), net in 2011
increased $37 million, or 154%, compared to 2010. Interest expense increased by
$20 million, driven by an increase in fees related to our credit facility as
described in "-Liquidity and Capital Resources," and the payments related to an
increased volume of property and equipment financed by capital leases. The
change in other income (expense), net was primarily due to $29 million in
foreign exchange related losses in 2011. Foreign exchange losses in 2011 stemmed
from the periodic re-measurement of our intercompany Euro balances. Foreign
currency balances were immaterial in 2010. These expenses were partially offset
by an increase in interest income driven by larger invested cash balances.
50
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Provision for income taxes
Year Ended December 31,
2011 to 2012 2010 to 2011
2012 2011 2010 % Change % Change
(dollars in millions)
Provision for income taxes $ 441 $ 695 $ 402 (37 )% 73 %
Effective tax rate 89 % 41 % 40 %
2012 Compared to 2011. Our provision for income taxes in 2012 decreased $254
million, or 37%, compared to 2011, primarily due to a decrease in pre-tax
income. Our effective tax rate increased primarily due to the impact of
non-deductible share-based compensation and the losses arising outside the
United States in jurisdictions where we do not receive a tax benefit. Our
effective tax rate in 2012 was also higher due to the expiration of the federal
tax credit for research and development activities.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted, which
includes a reinstatement of the federal research and development credit for the
tax year ended December 31, 2012. We estimate that our tax credit for 2012 would
have been approximately $80 million to $120 million, which we will record as a
discrete benefit in the first quarter of 2013.
2011 Compared to 2010. Our provision for income taxes in 2011 increased $293
million, or 73%, compared to 2010 primarily due to an increase in pre-tax
income. Our effective tax rate increased primarily due to losses arising outside
the United States in jurisdictions where we do not receive a tax benefit and the
impact of non-deductible share-based compensation expense during the year.
51
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Quarterly Results of Operations Data
The following tables set forth our unaudited quarterly consolidated statements
of operations data in dollars and as a percentage of total revenue for each of
the eight quarters in the period ended December 31, 2012. We have prepared the
quarterly consolidated statements of operations data on a basis consistent with
the audited consolidated financial statements included in Part II, Item 8,
"Financial Statements and Supplementary Data" in this Annual Report on Form
10-K. In the opinion of management, the financial information reflects all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of this data. This information should be read
in conjunction with the audited consolidated financial statements and related
notes included in Part II, Item 8, "Financial Statements and Supplementary Data"
in this Annual Report on Form 10-K. The results of historical periods are not
necessarily indicative of the results of operations for any future period.
Three Months Ended
Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2012 2012 2012 2012 2011 2011 2011 2011
(in millions)
Consolidated Statements of
Operations Data:
Revenue:
Advertising revenue $ 1,329 $ 1,086 $ 992 $ 872 $ 943 $ 798 $ 776 $ 637
Payments and other fees
revenue(1) 256 176 192 186 188 156 119 94
Total revenue 1,585 1,262 1,184 1,058 1,131 954 895 731
Costs and expenses:
Cost of revenue 398 322 367 277 247 236 210 167
Research and development 297 244 705 153 124 108 99 57
Marketing and sales 193 168 392 143 120 114 96 62
General and administrative 174 151 463 104 92 82 83 57
Total costs and expenses 1,062 885 1,927 677 583 540 488 343
Income (loss) from
operations 523 377 (743 ) 381 548 414 407 388
Income (loss) before
(provision for) benefit from
income taxes 505 372 (765 ) 382 520 379 399 398
Net income (loss) $ 64 $ (59 ) $ (157 ) $ 205 $ 302 $ 227 $ 240 $ 233
Net income (loss)
attributable to Class A and
Class B common stockholders $ 64 $ (59 ) $ (157 ) $ 137 $ 205 $ 150 $ 159 $ 153
Earnings (loss) per share
attributable to Class A and
Class B common stockholders:
Basic $ 0.03 $ (0.02 ) $ (0.08 ) $ 0.10 $ 0.15 $ 0.11 $ 0.12 $ 0.12
Diluted $ 0.03 $ (0.02 ) $ (0.08 ) $ 0.09 $ 0.14 $ 0.10 $ 0.11 $ 0.11
Share-based compensation expense included in costs and expenses:
Three Months Ended
Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2012 2012 2012 2012 2011 2011 2011 2011
(in millions)
Cost of revenue $ 9 $ 8 $ 66 $ 5 $ 3 $ 3 $ 3 $ -
Research and development 124 114 545 60 42 33 35 4
Marketing and sales 27 28 232 19 13 13 11 -
General and administrative 24 29 263 19 18 21 15 3
Total share-based
compensation expense(2) $ 184 $ 179 $ 1,106 $ 103 $ 76 $ 70 $ 64 $ 7
_____________________(1) In the fourth quarter of 2012, we recorded all Payments revenue at the time
of purchase of the related virtual or digital goods, net of estimated refunds
or chargebacks, instead of deferring Payment revenue until the expiration of
the 30-day claim period, as we are able to estimate future refunds and
chargebacks based on historical trends. This charge resulted in a one-time
increase in Payment revenue of $66 million in the fourth quarter of 2012.
(2) In the second quarter of 2012, we recognized $986 million of share-based
compensation expense related to Pre-2011 RSUs that vested in connection with
our IPO.
52--------------------------------------------------------------------------------
Three Months Ended
Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2012 2012 2012 2012 2011 2011 2011 2011
(as a percentage of total revenue)
Consolidated Statements
of Operations Data:
Revenue:
Advertising revenue 84 % 86 % 84 % 82 % 83 % 84 % 87 % 87 %
Payments and other fees
revenue 16 14 16 18 17 16 13 13
Total revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Costs and expenses:
Cost of revenue 25 26 31 26 22 25 23 23
Research and
development 19 19 60 14 11 11 11 8
Marketing and sales 12 13 33 14 11 12 11 8
General and
administrative 11 12 39 10 8 9 9 8
Total costs and
expenses 67 70 163 64 52 57 55 47
Income (loss) from
operations 33 30 (63 ) 36 48 43 45 53
Income (loss) before
(provision for) benefit
from income taxes 32 29 (65 ) 36 46 40 45 54
Net income (loss) 4 % (5 )% (13 )% 19 % 27 % 24 % 27 % 32 %
Net income (loss)
attributable to Class A
and Class B common
stockholders 4 % (5 )% (13 )% 13 % 18 % 16 % 18 % 21 %
Share-based compensation expense included in costs and expenses:
Three Months Ended
Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2012 2012 2012 2012 2011 2011 2011 2011
(as a percentage of total revenue)
Cost of revenue 1 % 1 % 6 % - % - % - % - % - %
Research and development 8 9 46 6 4 3 4 1
Marketing and sales 2 2 20 2 1 1 1 -
General and administrative 2 2 22 2 2 2 2 -
Total share-based
compensation expense 12 % 14 % 93 % 10 % 7 % 7 % 7 % 1 %
53--------------------------------------------------------------------------------Liquidity and Capital Resources
Year Ended December 31,
2012 2011 2010
(in millions)
Consolidated Statements of Cash Flows Data:
Net cash provided by operating activities $ 1,612 $ 1,549 $ 698
Net cash used in investing activities (7,024 ) (3,023 ) (324 )
Net cash provided by financing activities 6,283 1,198 781
Purchases of property and equipment (1,235 ) (606 ) (293 )
Depreciation and amortization 649 323 139
Share-based compensation 1,572 217 20
Our principal sources of liquidity are our cash and cash equivalents, marketable
securities, and cash generated from operations. Cash and cash equivalents and
marketable securities consist primarily of cash on deposit with banks and
investments in money market funds and U.S. government and U.S. government agency
securities. Cash and cash equivalents and marketable securities totaled $9.63
billion as of December 31, 2012, an increase of $5.72 billion from December 31,
2011. The most significant cash flow activities consisted of $6.8 billion of net
proceeds from our IPO, which was completed in May 2012, $1.61 billion of cash
generated from operations, $1.5 billion of loan draw down and $1.03 billion in
excess tax benefit from share-based award activity, offset by $2.86 billion of
taxes paid related to the net share settlement of RSUs when the Pre-2011 RSUs
vested and settled in the fourth quarter of 2012, $1.24 billion used for capital
expenditures and $911 million used for acquisitions of businesses and other
assets. If we continue to net settle RSUs, we will use additional cash to pay
employees' tax withholding obligations in connection with such settlements. We
currently anticipate that our available funds, credit facilities, and cash flow
from operations will be sufficient to meet our operational cash needs for the
foreseeable future.
In February 2012, we entered into an agreement for an unsecured five-year
revolving credit facility that allows us to borrow up to $5 billion for general
corporate purposes, with interest payable on the borrowed amounts set at London
Interbank Offered Rate (LIBOR) plus 1.0%. Under the terms of the agreement, we
are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn
balance. No amounts were drawn down under this credit facility as of December
31, 2012.
Concurrent with our entering into the revolving credit facility, we also entered
into a bridge credit facility agreement that allowed us to borrow up to $3
billion to fund tax withholding and remittance obligations related to the
settlement of RSUs in connection with our IPO.
In October 2012, we amended and restated our bridge credit facility, converting
it to an unsecured term loan facility (Amended and Restated Term Loan) that
allowed us to borrow up to $1.5 billion to fund tax withholding and remittance
obligations related to the settlement of RSUs in connection with our IPO, with
interest payable on the borrowed amounts set at LIBOR plus 1.0%. We paid
origination fees at closing of the Amended and Restated Term Loan, which fees
are being amortized over the term of the facility. We drew down the $1.5 billion
of the Amended and Restated Term Loan in October 2012 and paid an upfront fee of
0.15% on the loan amount, which fee is being amortized over the remaining term
of the facility. Any amounts outstanding will become due and payable on October
25, 2015.
In connection with the draw down of the Amended and Restated Term Loan, to hedge
our exposure to interest rate fluctuation, we entered into an interest rate swap
agreement. The net effect of this swap agreement is to convert the variable
interest rate to a fixed interest rate of 1.46%. The interest rate swap has a
maturity date of October 25, 2015.
As of December 31, 2012, our income tax refundable of $451 million reflects the
expected refund from income tax loss carrybacks to 2010 and 2011. We expect to
receive this refund in the first six months of 2013.
As of December 31, 2012, $565 million of the $9.63 billion in cash and cash
equivalents and marketable securities was held by our foreign subsidiaries. We
have provided for the additional taxes that would be due if we repatriated these
funds for use in our operations in the United States.
Cash Provided by Operating Activities
Cash flow from operating activities during 2012 primarily consisted of
adjustments to net income for certain non-cash items such as share-based
compensation expense of $1.57 billion and total depreciation and amortization of
$649 million, partially offset by income tax refundable of $451 million. The
cash flow from operating activities during 2012 compared to 2011 increased
modestly
54
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as the increases in adjustments for non-cash items as described above were
offset by a reduction in net income of $947 million and an increase in income
tax refundable.
Cash flow from operating activities during 2011 primarily resulted from net
income of $1 billion, adjusted for certain non-cash items, including
depreciation and amortization of $323 million, and share-based compensation
expense of $217 million.
Cash flow from operating activities during 2010 primarily resulted from net
income of $606 million, adjusted for certain non-cash items, including
depreciation and amortization of $139 million and share-based compensation
expense of $20 million, partially offset by cash consumed by working capital of
$70 million.
Cash Used in Investing Activities
Cash used in investing activities during 2012 primarily resulted from $4.87
billion for the net purchase of marketable securities, $1.24 billion for capital
expenditures related to the purchase of servers, networking equipment, storage
infrastructure, and the construction of data centers as well as $911 million for
acquisitions of businesses and other assets, such as patents. The increase in
cash used in investing activities during 2012 compared to 2011 was mainly due to
increases in the purchase of marketable securities, acquisitions of businesses
and other assets, and capital expenditures.
Cash used in investing activities during 2011 primarily related to the use of
approximately $2.4 billion for the net purchase of marketable securities. Our
cash used in investing activities in 2011 also consisted of capital expenditures
of $606 million related to the purchase of servers, networking equipment,
storage infrastructure, and the construction of data centers.
Cash used in investing activities during 2010 primarily consisted of capital
expenditures related to the purchases of property and equipment and the
construction of data centers. Changes in restricted cash and deposits consumed
$9 million of cash related to security deposits in support of real estate
expansion in 2010. Acquisitions, net of cash acquired, also consumed $22 million
of cash in 2010.
We anticipate making capital expenditures in 2013 of approximately $1.8 billion.
Cash Provided by Financing Activities
In May 2012, we received $6.8 billion in proceeds from our IPO, net of offering
costs. Our financing activities have primarily consisted of equity issuances,
lease financing, and debt financing. Net cash provided by financing activities
was $6.28 billion and $1.2 billion, in 2012 and 2011, respectively, and included
excess tax benefits from stock award activities of $1.03 billion and $433
million for the same periods, respectively. In 2012, our net cash provided by
financing activities included the draw down of $1.5 billion from the Amended and
Restated Term Loan. We did not have a loan draw down in 2011. In the fourth
quarter of 2012, we paid $2.86 billion of taxes related to the net settlement of
RSUs when the Pre-2011 RSUs were vested and settled.
In January 2011, we completed an offering of our Class A common stock to certain
non-U.S. investors that generated $998 million in net proceeds. In December
2010, we completed an offering of our Class A common stock that generated $500
million in proceeds.
In March 2010, we entered into a credit facility with certain lenders. This
facility allowed for the draw down of up to $250 million in unsecured senior
loans. In April 2010, we drew down the full amount available under the facility,
and in March 2011, we repaid the entire $250 million balance.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2012.
55
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Contractual Obligations
Our principal commitments consist of obligations under capital and operating
leases for equipment and office and data center facilities. The following table
summarizes our commitments to settle contractual obligations in cash as of
December 31, 2012.
Payment Due by Period
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
Operating lease obligations $ 851 $ 142 $ 245 $ 212 $ 252
Capital lease obligations 979 398 403 35 143
Other contractual commitments(1) 749 659 71 19 -
Long-term debt(2) 1,562 22 1,540 - -
Total contractual obligations $ 4,141 $ 1,221 $ 2,259 $ 266 $ 395
_____________________(1) Other contractual commitments primarily relate to equipment and supplies for
our data center operations, and, to a lesser extent, construction commitments
related to our data center sites.
(2) Long-term debt relates to the draw down of our Amended and Restated Term Loan
of $1.5 billion including the estimated future interest payments using a
fixed rate of 1.46%, which represented our effective interest rate after we
entered into an interest rate swap agreement.
In addition, our other liabilities include $100 million related to uncertain tax
positions as of December 31, 2012. Due to uncertainties in the timing of the
completion of tax audits, the timing of the resolution of these positions is
uncertain and we are unable to make a reasonably reliable estimate of the timing
of payments in individual years beyond 12 months. As a result, this amount is
not included in the above table.
Contingencies
We are involved in claims, lawsuits, government investigations, and proceedings.
We record a provision for a liability when we believe that it is both probable
that a liability has been incurred, and the amount can be reasonably estimated.
Significant judgment is required to determine both probability and the estimated
amount. Such legal proceedings are inherently unpredictable and subject to
significant uncertainties, some of which are beyond our control. Should any of
these estimates and assumptions change or prove to be incorrect, it could have a
material impact on our results of operations, financial position, and cash
flows.
See Note 10 in the accompanying notes to our consolidated financial statements
included in Part II, Item 8, "Financial Statements and Supplementary Data" and
Part I, Item 3, "Legal Proceedings" of this Annual Report on Form 10-K for
additional information regarding contingencies.
Recently Issued and Adopted Accounting Pronouncement
Comprehensive Income
In May 2011, the FASB issued guidance that changed the requirement for
presenting "Comprehensive Income" in the consolidated financial statements. The
update requires an entity to present the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. The update is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011 and
should be applied retrospectively. We adopted this new guidance on January 1,
2012.
Goodwill Impairment Testing
In September 2011, the FASB issued an amendment to an existing accounting
standard which provides entities an option to perform a qualitative assessment
to determine whether further impairment testing on goodwill is necessary. An
entity now has the option to first assess qualitative factors to determine
whether it is necessary to perform the current two-step impairment test. If an
entity believes, as a result of its qualitative assessment, that it is
more-likely-than-not that the fair value of a reporting unit is less than its
carrying amount, the quantitative impairment test is required. Otherwise, no
further testing is required. This standard is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December
15, 2011. We adopted this new standard on January 1, 2012 and the adoption did
not have a material impact on our financial statements.
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