Facebook, Inc. Q2 2013 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2013. Facebook, Inc. operates a social networking platform generating revenue primarily through advertising and fees from its Payments infrastructure. The company reported a significant turnaround in profitability compared to the prior year, driven by revenue growth and a substantial reduction in share-based compensation expenses following its 2012 IPO.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | YTD 6 Months 2013 | YTD 6 Months 2012 |
|---|---|---|---|---|
| Revenue | $1,813 million | $1,184 million | $3,271 million | $2,242 million |
| Net Income | $333 million | ($157 million) Loss | $552 million | $48 million |
| Operating Income | $562 million | ($743 million) Loss | $935 million | ($362 million) Loss |
| Diluted EPS | $0.13 | ($0.08) | $0.22 | $0.02 |
| Cash & Equivalents | $3,001 million | $2,384 million (Dec 2012) | Cash Flow from Operations (6mo): $2,041 million | |
| Marketable Securities | $7,251 million | $7,242 million (Dec 2012) | ||
| Long-Term Debt | $1,500 million | $1,500 million | Capital Expenditures (6mo): $595 million | |
| Total Assets | $15,724 million | $15,103 million (Dec 2012) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 53% year-over-year in Q2 2013. Advertising revenue grew 61%, driven by a 43% increase in the number of ads delivered and a 13% increase in average price per ad. Mobile News Feed ads accounted for approximately 41% of total advertising revenue in Q2 2013, up from 3% in Q2 2012.
- Profitability Turnaround: The company shifted from a net loss of $157 million in Q2 2012 to a net income of $333 million in Q2 2013. This was primarily due to a 51% decrease in Research and Development expenses and a 63% decrease in General and Administrative expenses.
- Share-Based Compensation: Total share-based compensation expense dropped significantly from $1,106 million in Q2 2012 to $224 million in Q2 2013. This reduction is attributed to the recognition of expenses related to pre-2011 RSUs in the prior year following the IPO.
- Cost of Revenue: Increased 27% year-over-year, largely due to $57 million in lease abandonment expenses from migrating operations to owned data centers and increased depreciation.
Guidance, Outlook, and Risks
- User Growth: Monthly Active Users (MAUs) reached 1.15 billion (up 21% YoY). Mobile MAUs grew 51% to 819 million. Management anticipates mobile usage growth will exceed PC usage growth, though PC usage may decline in developed markets.
- Monetization: Worldwide Average Revenue Per User (ARPU) increased 25% to $1.60. Management expects user growth to remain higher in regions with lower ARPU (Asia, Rest of World), which may slow the growth rate of worldwide ARPU.
- Capital Expenditures: The company anticipates capital expenditures of approximately $1.6 billion for the full year 2013.
- Risks: Key risks include the transition to mobile monetization, competition from other social networks and mobile apps, potential government restrictions on access (e.g., China), and the impact of non-deductible share-based compensation on effective tax rates.
- Legal Proceedings: The company is defending multiple class actions and derivative suits related to its IPO and the Paul Ceglia lawsuit. Management believes these claims are without merit.
Investor Verification Checklist
- Mobile Monetization: Verify the trajectory of mobile advertising revenue relative to the rapid growth in mobile user base to ensure monetization keeps pace with usage shifts.
- Expense Normalization: Confirm that the significant drop in share-based compensation is a one-time normalization effect and assess future expense trends as new equity grants vest.
- Data Center Migration: Review the impact of lease abandonment costs and the long-term efficiency gains from migrating to owned data centers.
- Geographic Mix: Monitor the shift in revenue mix toward lower-ARPU regions (Asia, Rest of World) and its effect on overall margin expansion.
- Debt Obligations: Note the $1.5 billion term loan due in October 2015 and the associated interest rate swap hedging strategy.