FB_ JPM Research Report_Oct 2012

7/27/2019 FB_ JPM Research Report_Oct 2012

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North America Equity Research19 October 2012

Doug Anmuth(1-212) [email protected]

10 Questions into Facebook EarningsCan Ad Revenue Re-Accelerate? We believe it can as the first full quarter of Sponsored Stories (SS) on both Mobile and the Weband early benefits from theFacebook AdExchange (FBX)should help offset decelerating Marketplace growthdue to the shift toward mobile. Were modeling 3Q ad revenue of $1.059B, +33%Y/Y and +7% Q/Q compared to 28% Y/Y growth in 2Q. We expect Q/Qcurrency impact to be neutral to modestly positive in 3Q. Please see our detailed

bottom-up Facebook ad revenue model on page 8 for a break-out across Mobile SS,Web SS, and Web Marketplace.

What Will the Sponsored Stories and Mobile Run-Rate Be ? We estimate total SSrevenue of $123M ($1.35M/day) for all of 3Q, split as $84M for Mobile SS (nearly$1M/day) and $39M for Web SS (nearly $500k/day). We believe these estimates areconservative, particularly in Mobile based on greater engagement per user andincreased frequency of ads displayed by Facebook. We believe Facebook couldprovide a 3Q exit run-rate for Mobile and Web SS combined between $2M and$3M per day. This would represent a 2-3x increase from the 2Q exit run-rate. Weremain bullish on Facebooks mobile advertising opportunity and continue tobelieve the companys mobile ad revenue could be more than $200M this yearand more than $900M next year. Our 2013 estimate suggests a 5x increase in theannualized run-rate exiting 2Q12 driven by significant increases in mobile users,higher engagement (visits/user and time spent), more ad impressions per mobile visit,and higher CPMsand we believe it could still be conservative.

How Will Web Marketplace Ad Revenue Fare in the Mobile Transition? Thisremains a key question for investors as the desktop has historically generated all of Facebooks ad revenue and impressions likely decline in the transition to mobile. Weproject 17% Y/Y growth in Marketplace revenue in 3Q, down from 23% in 2Qand 36% in 1Q, as impressions decline 3% Q/Q. We expect ROW and Asia user growth and overall monetization improvements to serve as tailwinds, thoughsomewhat offset by significant user/usage shifts towards mobile in developedmarkets such as the US, Europe, and Japan.

Is Sponsored Stories Revenue Incremental? One frequent area of investor pushback is that while Sponsored Stories revenue growth could be strong, it maycome at the expense of Web Marketplace revenue as marketers simply move dollarsacross formats. Gauging the impact of the mix-shift between SS and Marketplace adson Facebooks ad revenue is challenging. We think SS are likely cannibalizingMarketplace revenue to some degree, but overall we think SS revenue isincremental given the different objectives of each ad format. We view SS as more

of a branding (demand generation) effort and most Marketplace ads more for directresponse or bottom of the funnel objectives (demand fulfillment).

Are Sponsored Stories Weighing on the User Experience? Our checks suggestFacebook significantly increased the frequency and number of SS in the Mobile

News Feed during 3Q. Anecdotally, we often see 3-4 SS ads in a mobile visit. Giventhat the ads are social in nature and often blend in with content, we do notbelieve they are materially weighing on the user experience. Though, werecognize that marketers need to continue developing engaging content in SS ads.We look for more clarity from Facebook on whether the company has determined theright formula for delivering mobile ads in terms of frequency, volume, and formats.


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How Big Is the Facebook AdExchangeHow Big Can it Be? Facebook recentlylaunched its FBX retargeting system out of beta with 16 technology partners on the

exchange, including Triggit, AdRoll, AppNexus, and others. Early partnerfeedback on FBX has been extremely positive with many partners witnessingconversions equivalent to and sometimes higher than other leading exchanges,including Googles AdEx and Right Media. Given Facebooks Web CPMs aresignificantly lower than on many online sites, advertisers are witnessing significantlyhigher ROI on FBX. According to Triggit, FBX had 4x higher click-through rates(CTR) than traditional ad exchanges with over 2x the conversion rate, yielding CPAs(cost per acquisition) that were 6.5x lower than other online ad exchanges. Ourchecks suggest that its still early in terms of penetration of FBX amongadvertisers, and near-term contribution may be limited, but we believe FBXcould be a multi-billion opportunity over time. It is likely the best directresponse vehicle online since Search.

What Are Web and Mobile DAU Numbers? Earlier this month, Facebook announced it had reached over 1B users worldwide with mobile surpassing 600Musers. We think the Street is focused on the impact of the mobile mix shift ondesktop users and engagement as comScore data shows a deceleration in worldwidedesktop users (+10% Y/Y in 3Q vs. +15% in 2Q) and minutes (+14% Y/Y in 3Q vs.+28% Y/Y in 2Q). To get deeper insight here, DAUs across Web and Mobile maybe a better reflection of the shifting dynamics in the story than MAUs. And

based on CEO Mark Zuckerbergs comments at TechCrunch Disrupt in September,we believe mobile DAUs are likely higher than web DAUs. Mobile users arespending more time per person on Facebook than desktop users and are 2x as likelyto use Facebook in 6 of the past 7 days (L6/7).

Are Facebook Users Increasingly Going Toward Twitter and Instagram? Thisquestion is tied to user engagement and satisfaction levels as discussed earlier, butwe do believe that some Facebook users are increasingly using Twitter andInstagram. According to comScore, Were curious to hear managements take onwhether theyre seeing any material migration. Separately, Instagrams usagenumbers could also be included in Facebooks metrics from the time of the earlySeptember close. And were curious if Facebook has any monetization plans forInstagram or whether it is simply too early.

Can Payments Grow Again? The short answer is were not counting on it any timesoon. We recently lowered our Payments revenue significantly given Zyngas 2H12outlook. We are modeling 2013 Payments revenue to decline 28% to $582M and

2014 to decline 13% to $507M. We expect Payments to remain challenging as: 1)web social gaming monetization slows; 2) users continue to shift toward mobilewhere Apple and Google control app distribution; and 3) newer Payments verticalsare not materializing. We expect the Payments segment to decline for theforeseeable future. eCommerce and OpenGraph monetization remain opportunitiesgoing forward, in our view, though they are not currently contemplated in our model.

What Are the Near-Term Lock-up Expiration Details? Heading into earnings we believe investors also remain heavily focused on the large near-term lock-upexpirations in October and November. Overall, ~37% of Facebook shares unlock by mid-November, including ~234M employee shares on October 29 and ~777M


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shares on November 14 (see Fig 1 below). We note that Facebooks maximum floatcould currently be around 700M shares based on the IPO and the August lock-up

expiration. Accordingly, Facebooks float could increase by up to ~2.5x.

Figure 1: Facebook Shares Lock-Up Expiration TimetableIn millions

Note: Lock-up expirations above exclude 504M shares/options owned by Mark Zuckerberg which will not be sold for at least 12 months.Source: Company reports, J.P. Morgan.

Date EventShares

OutstandingAdditionsto Float

Max EndingPublic Float Description

05/17/2012 IPO 2,744 421 421

08/16/2012 Lock-up Exp. 2,744 271 692 271M shares held by selling stockholders in IPO excluding Mark Zuckerberg

~10/25/12 RSU Tax Settlement (101)

2,643

10/29/2012 Lock-up Exp. 2,643 234 926 124M net-settled pre-2011 RSUs, 55M shares and 55M shares underlyingoptions excluding Mark Zuckerberg

11/14/2012 Lock-up Exp. 2,643 777 1,703 749M shares & 28M net-settled pre-2011 RSUs

12/14/2012 Lock-up Exp. 2,643 156 1,859 156M shares held by selling stockholders in IPO excluding Mark Zuckerberg

05/18/2013 Lock-up Exp. 2,643 47 1,906 47M shares held by Mail.ru and DST


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Figure 2: J.P. Morgan Estimates vs. Consensus

Source: J.P. Morgan estimates, Bloomberg.

J.P. Morgan Estimates 3Q12E 4Q12E 2012E 2013E 2014E

($ in millions except per share data)

Advertising 1,059 1,217 4,140 5,512 6,978Y/Y Growth 32.7% 29.1% 31.3% 33.1% 26.6%Q/Q Growth 6.8% 14.9%

Payments 189 236 803 582 507Y/Y Growth 21.2% 25.6% 44.2% -27.6% -12.9%Q/Q Growth -1.5% 24.9%

Revenue 1,248 1,453 4,943 6,094 7,484Y/Y Growth 30.8% 28.5% 33.2% 23.3% 22.8%Q/Q Growth 5.4% 16.4%

EBITDA 670 777 2,695 3,187 3,868Y/Y Growth 16.7% 5.9% 17.1% 18.3% 21.4%% Margin 53.7% 53.5% 54.5% 52.3% 51.7%

GAAP EPS $0.08 $0.10 $0.20 $0.35 $0.49Y/Y Growth -22.7% -23.9% NM NM 42.8%

PF EPS $0.12 $0.14 $0.51 $0.56 $0.70Y/Y Growth -0.4% -11.6% -0.4% 11.3% 24.2%

Bloomberg

Revenue 1,366 1,529 4,907 6,295 7,980EBITDA 743 824 2,595 3,482 4,422

% Margin 54.4% 53.9% 52.9% 55.3% 55.4%

GAAP EPS $0.10 $0.12 $0.26 $0.53 $0.73PF EPS $0.14 $0.15 $0.48 $0.62 $0.80


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Investment ThesisWe believe Facebooks virtual ownership of the social graph, strong competitivemoat, and focus on the user experience position the company to significantlyimprove monetization over time and to become an enduring, blue-chip company builtfor the long term. Facebooks massive reach and engagement continue to drivenetwork effects and its targeting abilities provide significant value to advertisers,though it is still early. We believe Facebooks ad platform is just beginning to shifttoward more social ads with higher quality formats, and it will become increasinglyvaluable to advertisers.

ValuationOur $28 price target is based on ~15x our 2014 EBITDA estimate of $3.9B and is atthe low end of the range of high growth Internet comps such as Amazon (14x 2014EEBITDA) and LinkedIn (25x 2014E EBITDA).

Risks to Rating and Price TargetDownside risks include: 1) significant lock-up expirations though year-end 2012could bring considerable supply of shares; 2) user-first mentality could create short-term revenue risk and volatility; 3) rapid shift toward mobile usage ahead of mobilemonetization efforts; 4) advertiser ROI on Facebook may remain difficult tomeasure; 5) privacy, security, and regulatory risks; and 6) dual-class share structureand Mark Zuckerbergs control.


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Table 2: Facebook Income Statement

Source: J.P. Morgan estimates, Company data.

1Q11 2Q11 3Q11 4Q11 2011A 1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014ERevenue 731 895 954 1,131 3,711 1,058 1,184 1,248 1,453 4,943 6,094 7,484

Cost of Revenue 167 207 233 244 851 273 295 324 381 1,273 1,615 1,976Gross Profit 564 688 721 887 2,860 785 889 924 1,073 3,670 4,479 5,508Operating Expenses

Marketing and Sales 68 91 108 116 383 136 135 182 206 660 908 1,138Research and Development 53 63 75 82 273 93 112 126 153 484 675 846General and Administrative 48 57 54 65 225 72 127 130 145 474 619 733Stock-based Compensation 7 64 70 76 217 103 1,106 180 180 1,570 780 674Payroll Tax Related to SBC 6 6 152 152

Total Operating Expenses 176 281 307 339 1,104 404 1,632 618 684 3,339 2,983 3,390Operating Income 388 407 414 548 1,756 381 (743) 305 388 331 1,496 2,118

PF Operating Income 395 477 484 624 1,979 484 515 485 568 2,053 2,276 2,792Other income (expense), net (4) (8) (29) (20) (61) 1 (22) 26 24 29 84 104

Pre-tax Income 384 399 385 528 1,695 382 (765) 331 412 361 1,580 2,222Income Taxes 151 159 158 233 695 177 (608) 139 165 (127) 695 933Effective Tax Rate 39% 40% 41% 44% 41% 46% N/A 42% 40% -35% 44% 42%

GAAP Net Income 233 240 227 302 1,000 205 (157) 192 247 488 885 1,289GAAP EPS $0.10 $0.11 $0.10 $0.13 $0.43 $0.09 ($0.08) $0.08 $0.10 $0.20 $0.35 $0.49Diluted Shares Out 2,332 2,337 2,332 2,332 2,332 2,361 2,451 2,554 2,512 2,470 2,553 2,604

Non-GAAP Pre-tax Income 391 469 455 604 1,918 485 493 512 593 2,082 2,360 2,896Income Taxes 149 184 174 231 732 192 198 205 237 832 920 1,071Effective Tax Rate 38% 39% 38% 38% 38% 40% 40% 40% 40% 40% 39% 37%

Non-GAAP Net Income 242 285 281 373 1,186 293 295 307 356 1,251 1,440 1,824Non-GAAP EPS $0.10 $0.12 $0.12 $0.16 $0.51 $0.12 $0.12 $0.12 $0.14 $0.51 $0.56 $0.70

EBITDA CalculationOperating Income 388 407 414 548 1,756 381 (743) 305 388 331 1,496 2,118

Stock-based compensation 7 64 70 76 217 103 1,106 180 180 1,570 780 674Payroll Tax Related to SBC 6 6 152 152Depreciation and Amortization 51 72 90 110 323 110 139 184 209 642 915 1,075

EBITDA 446 549 574 734 2,302 594 654 670 777 2,695 3,191 3,867

1Q11 2Q11 3Q11 4Q11 2011A 1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014E Y/Y GrowthRevenue 112% 108% 104% 55% 88% 45% 32% 31% 28% 33% 23% 23%

Cost of Revenue 67% 86% 78% 63% 73% 63% 43% 39% 56% 50% 27% 22%Gross Profit 130% 115% 115% 53% 93% 39% 29% 28% 21% 28% 22% 23%

Marketing and Sales 89% 112% 140% 100% 110% 100% 48% 69% 78% 72% 38% 25%Research and Development 130% 110% 92% 95% 102% 75% 78% 68% 86% 77% 40% 25%General and Administrative 153% 138% 69% 71% 101% 50% 123% 140% 124% 111% 31% 19%Stock-based Compensation 40% 1180% 1650% 1167% 985% 1371% 1628% 158% 137% 623% -50% -14%

Total Operating Expenses 112% 175% 156% 135% 146% 130% 481% 101% 102% 202% -11% 14%Total Operating Expenses (Ex-SBC) 89% 101% 90% 76% 88% 71% 60% 62% 75% 67% 32% 442%Operating Income 140% 87% 92% 25% 70% -2% -283% -26% -29% -81% 352% 42%PF Operating Income 137% 114% 120% 41% 88% 23% 8% 0% -9% 4% 11% 23%GAAP Net Income 145% 86% 73% 20% 65% -12% -165% -15% -18% -51% NM 46%GAAP EPS -13% -179% -23% -24% -54% NM 43%Non-GAAP EPS 20% -1% 0% -12% 0% 11% 24%EBITDA 121% 113% 125% 54% 93% 33% 19% 17% 6% 17% 18% 21%Q/Q GrowthRevenue 0% 22% 7% 19% -6% 12% 5% 16%Operating Income -11% 5% 2% 32% -30% -295% -141% 27%PF Operating Income -11% 21% 1% 29% -22% 6% -6% 17%EBITDA -7% 23% 5% 28% -19% 10% 2% 16%% of RevenueCost of Revenue 22.8% 23.1% 24.4% 21.6% 22.9% 25.8% 24.9% 26.0% 26.2% 25.8% 26.5% 26.4%Gross Profit 77.2% 76.9% 75.6% 78.4% 77.1% 74.2% 75.1% 74.0% 73.8% 74.2% 73.5% 73.6%

Marketing and Sales 9.3% 10.2% 11.3% 10.3% 10.3% 12.9% 11.4% 14.6% 14.2% 13.3% 14.9% 15.2%Research and Development 7.3% 7.0% 7.9% 7.3% 7.4% 8.8% 9.5% 10.1% 10.5% 9.8% 11.1% 11.3%General and Administrative 6.6% 6.4% 5.7% 5.7% 6.1% 6.8% 10.7% 10.4% 10.0% 9.6% 10.2% 9.8%Stock-based Compensation 1.0% 7.2% 7.3% 6.7% 5.8% 9.7% 93.4% 14.5% 12.4% 31.8% 12.8% 9.0%

Operating Income 53.1% 45.5% 4 3.4% 4 8.5% 47.3% 36.0% -62.8% 24.5% 26.7% 6.7% 24.6% 28.3%PF Operating Income 54.0% 53.3% 50.7% 55.2% 53.3% 45.7% 43.5% 38.9% 39.1% 41.5% 37.4% 37.3%EBITDA 61.0% 61.3% 60.2% 64.9% 62.0% 56.1% 55.2% 53.7% 53.5% 54.5% 52.4% 51.7%


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Table 2: Facebook Bottom-Up Ad Model


(in Millions except per user figures) 1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014E

Mobile Average MAUs 460 516 578 642 551 794 1,034Visits/User/Day 0.7 0.8 1.0 1.1 0.91 1.15 1.30Impressions/Visit/User 0.00 0.17 0.26 0.37 0.3 0.55 0.80Total Impressions/Day 0 72 153 265 109 505 1078Total Impressions in Period - 1,722 13,959 24,091 39,772 184,273 393,396 eCPM $0.00 $6.88 $6.00 $5.50 $5.74 $5.00 $4.50

Revenue/MAU $0.00 $0.02 $0.14 $0.21 $0.41 $1.16 $1.71Revenue/Day (in $ millions) -- $0.49 $0.92 $1.46 $0.62 $2.52 $4.85

Mobile Revenue $0.0 $11.8 $83.8 $132.5 $228.1 $921.4 $1,770.3Y/Y Growth 304% 92%Q/Q Growth 607% 58%

eb Sponsored Stories Average MAUs 803 836 861 875 834 910 970Visits/User/Day 1.07 1.03 0.98 0.99 1.02 0.88 0.80Impressions/Visit/User 0.05 0.17 0.25 0.35 0.2 0.56 0.80Total Impressions/Day 44 145 213 305 176 446 621Total Impressions in Period 3,981 13,168 19,387 27,791 64,327 162,935 226,606 eCPM $1.50 $1.75 $2.00 $2.00 $1.92 $2.00 $2.18Revenue/MAU $0.01 $0.03 $0.05 $0.06 $0.15 $0.36 $0.51Revenue/Day (in $ millions) -- $0.25 $0.43 $0.61 $0.34 $0.89 $1.35

eb SS Revenue $6.0 $23.0 $38.8 $55.6 $123.4 $325.9 $492.9Y/Y Growth 164% 51%Q/Q Growth 286% 68% 43%

Total SS Revenue $6.0 $34.9 $122.5 $188.1 $351.5 $1,247.2 $2,263.2Y/Y Growth 255% 81%Q/Q Growth 484% 251% 54%

eb Marketplace and Other Average MAUs 803 836 861 875 834 910 970Visits/User/Day 1.07 1.03 0.98 0.99 1.02 0.88 0.80Impressions/Visit/User 58.9 59.2 58.0 58.0 65.2 58.0 58.0 Total Impressions/Day 50,506 50,864 49,343 52,385 50,497 52,939 54,206 Total Impressions in Period 4,596,019 4,628,594 4,490,239 4,767,075 18,481,927 19,322,684 19,785,370eCPM $0.19 $0.21 $0.21 $0.22 $0.20 $0.22 $0.24Revenue/MAU $1.08 $1.15 $1.09 $1.18 $4.54 $4.68 $4.86Revenue/Day (in $ millions) $9.52 $10.52 $10.29 $11.31 $10.35 $11.68 $12.92

eb Marketplace/Other Revenu $866.0 $957.1 $936.5 $1,029.0 $3,788.6 $4,264.7 $4,714.5Y/Y Growth 36% 23% 17% 9% 20% 13% 11%Q/Q Growth -8% 11% -2% 10%

Total Ads Average MAUs 873 928 989 1,047 958 1,177 1,388Visits/User/Day 1.35 1.37 1.45 1.52 1.42 1.46 1.53 Impressions/Visit/User 43 40 35 33 37 31 26 Total Impressions/Day 50,549 51,027 49,710 52,956 50,781 53,890 55,905 Total Impressions in Period 4,600,000 4,643,484 4,523,585 4,818,957 18,586,026 19,669,892 20,405,372eCPM $0.19 $0.21 $0.23 $0.25 $0.22 $0.28 $0.34

Total Ad Revenue $872.0 $992.0 $1,059.0 $1,217.1 $4,140.1 $5,511.9 $6,977.6Y/Y Growth 37% 28% 33% 29% 31% 33% 27%Q/Q Growth -8% 14% 7% 15%

SS as a % of total Impressions 0.09% 0.32% 0.74% 1.08% 1% 1.77% 3.04%SS as a % of Revenue 0.7% 3.5% 11.6% 15.5% 8% 22.6% 32.4%


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Table 3: Facebook Revenue Drivers Summary


1Q11 2Q11 3Q11 4Q11A 2011A 1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014ESummary

Advertising 637 776 798 943 3,154 872 992 1,059 1,217 4,140 5,512 6,978Y/Y Growth 87% 83% 77% 44% 69% 37% 28% 33% 29% 31% 33% 27%Q/Q Growth -3% 22% 3% 18% -8% 14% 7% 15%% of Total Revenues 87% 87% 84% 83% 85% 82% 84% 85% 84% 84% 90% 93%

Payments and Other Fees 94 119 156 188 557 186 192 189 236 803 582 507Y/Y Growth 1780% 1388% 818% 147% 425% 98% 61% 21% 26% 44% -28% -13%Q/Q Growth 24% 27% 31% 21% -1% 3% -2% 25%% of Total Revenues 13% 13% 16% 17% 15% 18% 16% 15% 16% 16% 10% 7%

Total Revenue 731 895 954 1,131 3,711 1,058 1,184 1,248 1,453 4,943 6,094 7,484Y/Y Growth 112% 108% 104% 55% 88% 45% 32% 31% 28% 33% 23% 23%Y/Y Growth (Ex-FX) 111% 103% 101% 56% 86% 46% 36% 35% 31% 36%Q/Q Growth 0% 22% 7% 19% -6% 12% 5% 16%Seasonality 20% 24% 26% 30% 21% 24% 25% 29%

Revenue per MAU (ARPU) SummaryUS & Canada $2.49 $2.84 $2.80 $3.19 $11.50 $2.90 $3.20 $3.23 $3.62 $12.89 $13.41 $14.44Europe $1.19 $1.33 $1.34 $1.60 $5.61 $1.40 $1.43 $1.40 $1.66 $5.89 $6.41 $7.04

Asia $0.42 $0.50 $0.56 $0.56 $2.08 $0.53 $0.55 $0.57 $0.56 $2.24 $2.29 $2.39Rest of World $0.31 $0.39 $0.40 $0.41 $1.56 $0.37 $0.44 $0.45 $0.46 $1.74 $1.90 $2.09Total $1.14 $1.26 $1.24 $1.38 $5.11 $1.21 $1.28 $1.26 $1.39 $5.16 $5.18 $5.39

Y/Y GrowthUS & Canada 41% 52% 45% 16% 33% 17% 13% 16% 13% 12% 4% 8%Europe 58% 49% 59% 29% 46% 18% 7% 5% 3% 5% 9% 10%

Asia 37% 37% 59% 23% 40% 25% 11% 2% 0% 8% 2% 5%Rest of World 82% 72% 77% 21% 468% 18% 13% 14% 14% 12% 9% 10%Total 30% 34% 37% 9% 25% 7% 1% 2% 1% 1% 0% 4%

Q/Q GrowthUS & Canada -10% 14% -1% 14% -9% 10% 1% 12%Europe -4% 12% 1% 20% -13% 2% -2% 19%

Asia -8% 18% 13% 0% -6% 4% 4% -2%Rest of World -7% 24% 2% 3% -9% 19% 3% 2%

Total-10% 11% -2% 11% -12% 5% -1% 10%

Geographic Revenue BreakdownBased on User LocationUS & Canada 394 471 482 567 1,914 525 590 619 724 2,458 2,874 3,436Europe 229 275 290 361 1,155 328 346 349 428 1,451 1,789 2,166

Asia 62 82 104 115 363 118 135 154 163 571 766 986Rest of World 46 67 77 88 278 87 113 126 138 465 663 896Total 731 895 954 1,131 3,711 1,058 1,184 1,248 1,453 4,943 6,094 7,484

% of TotalUS & Canada 54% 53% 51% 50% 52% 50% 50% 50% 50% 50% 47% 46%Europe 31% 31% 30% 32% 31% 31% 29% 28% 29% 29% 29% 29%


Y/Y GrowthUS & Canada 84% 89% 78% 38% 67% 33% 25% 28% 28% 28% 17% 20%Europe 139% 113% 117% 66% 100% 43% 26% 20% 19% 26% 23% 21%



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Table 4: Facebook Revenue DriversAdvertising


1Q11 2Q11 3Q11 4Q11A 2011A 1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014EGlobal Summary

Global Advertising Advertising Impressions (in billions) 3,441 3,947 3,965 4,385 15,500 4,600 4,643 4,524 4,819 18,586 19,670 20,405Y/Y Growth 16% 41% 35% 18% 14% 10% 20% 6% 4%Q/Q Growth 15% 0% 11% 5% 1% -3% 7%

Average Cost Per Thousand (CPM) $0.19 $0.20 $0.20 $0.22 $0.20 $0.19 $0.21 $0.23 $0.25 $0.22 $0.28 $0.34Y/Y Growth 24% 20% 1% 9% 16% 17% 12% 26% 22%Q/Q Growth 6% 2% 7% -12% 13% 10% 8%

Global Advertising Revenue 637 776 798 943 3,154 872 992 1,059 1,217 4,140 5,512 6,978Y/Y Growth 87% 83% 77% 44% 69% 37% 28% 33% 29% 31% 33% 27%Q/Q Growth -3% 22% 3% 18% -8% 14% 7% 15%

Regional BreakdownUS & Canada

Advertising Impressions (in billions) 1,107 1,126 1,068 1,155 4,455 1,200 1,103 1,046 1,120 4,470 4,434 4,434Y/Y Growth 8% -2% -2% -3% 0% -1% 0%Q/Q Growth 2% -5% 8% 4% -8% -5% 7%

Average Cost Per Thousand (CPM) $0.30 $0.35 $0.37 $0.40 $0.36 $0.35 $0.43 $0.49 $0.53 $0.45 $0.58 $0.72Y/Y Growth 16% 24% 32% 32% 26% 29% 24%Q/Q Growth 17% 6% 8% -13% 24% 12% 8%

US & Canada Advertising Revenue 332 394 395 462 1,583 419 479 511 592 2,001 2,562 3,177Y/Y Growth 59% 62% 52% 29% 48% 26% 22% 29% 28% 26% 28% 24%% of Total Advertising Revenue 52% 51% 49% 49% 50% 48% 48% 48% 49% 48% 46% 46%

Europe Advertising Impressions (in billions) 1,288 1,361 1,289 1,611 5,549 1,800 1,715 1,547 1,836 6,898 7,331 7,477

Y/Y Growth 40% 26% 20% 14% 24% 6% 2%Q/Q Growth 6% -5% 25% 12% -5% -10% 19%

Average Cost Per Thousand (CPM) $0.16 $0.18 $0.19 $0.19 $0.18 $0.15 $0.17 $0.19 $0.20 $0.18 $0.22 $0.27Y/Y Growth -5% -5% 0% 3% -2% 25% 22%Q/Q Growth -20% 13% 11% 3%

Europe Advertising Revenue 206 245 245 306 1,002 274 294 294 359 1,221 1,621 2,017Y/Y Growth 115% 91% 88% 52% 81% 33% 20% 20% 17% 22% 33% 24%% of Total Advertising Revenue 32% 32% 31% 32% 32% 31% 30% 28% 30% 29% 29% 29%

Asia Advertising Impressions (in billions) 509 673 733 731 2,646 650 841 880 840 3,211 3,550 3,834

Y/Y Growth 28% 25% 20% 15% 21% 11% 8%Q/Q Growth 32% 9% 0% -11% 29% 5% -5%

Average Cost Per Thousand (CPM) $0.11 $0.11 $0.12 $0.13 $0.12 $0.15 $0.14 $0.16 $0.17 $0.15 $0.20 $0.24Y/Y Growth 38% 24% 30% 30% 31% 29% 22%Q/Q Growth 0% 9% 8% 17% -10% 14% 8%

Asia Advertising Revenue 56 74 88 95 313 99 115 137 142 493 702 925Y/Y Growth 155% 131% 144% 79% 119% 77% 55% 56% 50% 58% 42% 32%% of Total Advertising Revenue 9% 10% 11% 10% 10% 11% 12% 13% 12% 12% 13% 13%

Rest of World Advertising Impressions (in billions) 538 788 875 889 3,089 950 984 1,050 1,022 4,007 4,355 4,660Y/Y Growth 77% 25% 20% 15% 30% 9% 7%Q/Q Growth 47% 11% 2% 7% 4% 7% -3%

Average Cost Per Thousand (CPM) $0.08 $0.08 $0.08 $0.09 $0.08 $0.08 $0.11 $0.11 $0.12 $0.11 $0.14 $0.18Y/Y Growth 5% 32% 39% 35% 29% 36% 28%Q/Q Growth 0% 0% 13% -6% 25% 5% 9%

ROW Advertising Revenue 43 63 70 80 256 80 104 117 124 425 626 858Y/Y Growth 231% 215% 192% 90% 934% 86% 65% 67% 55% 66% 47% 37%% of Total Advertising Revenue 7% 8% 9% 8% 8% 9% 10% 11% 10% 10% 11% 12%


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Table 5: Facebook Revenue DriversPayment and Other Fees


1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014EPayment and Other Fees

Global Payments and Other FeesTotal Payments and Other Fees 186 192 189 236 803 582 507

Y/Y Growth 98% 61% 21% 26% 44% -28% -13%Q/Q Growth -1% 3% -2% 25%

Revenue per Avg. DAU $0.37 $0.36 $0.33 $0.39 $1.44 $0.80 $0.61Y/Y Growth 37% 18% -8% -4% 5% -44% -24%Q/Q Growth -8% -3% -7% 17%

Revenue Per Avg. MAU (ARPU) $0.21 $0.21 $0.19 $0.23 $0.84 $0.49 $0.36Y/Y Growth 46% 23% -6% -1% 9% -41% -26%Q/Q Growth -7% -3% -8% 18%

1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014E

Facebook Payments Revenue From Zynga (30% take) 120 103 83 88 394 234 194Y/Y Growth 35% -6% -29% -28% -10% -41% -17%Q/Q Growth -2% -14% -20% 6%% of FB Payments Revenue 64% 54% 44% 37% 49% 40% 38%% of FB Total Revenue 11% 9% 7% 6% 8% 4% 3%

Other Payments Revenue (excl. Zynga) 66 89 106 148 409 348 313Y/Y Growth NA NA 165% 125% 239% -15% -10%Q/Q Growth 0% 34% 20% 39% -- --% of FB Payments Revenue 36% 46% 56% 63% 51% 60% 62%

Total Facebook Payments Revenue (Bottom-up) 186 192 189 236 803 582 507Y/Y Growth 98% 61% 21% 26% 44% -28% -13%Q/Q Growth -1% 3% -2% 25%


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Table 6: Facebook User Metrics by Region


2010A 1Q11 2Q11 3Q11 4Q11A 2011A 1Q12A 2Q12A 3Q12E 4Q12E 2012E 2013E 2014EUser Metrics

Monthly Active Users (MAU)US & Canada 154 163 169 176 179 179 183 186 197 202 202 227 249Europe 183 201 212 221 229 229 239 246 252 263 263 295 324

Asia 138 156 174 196 212 212 234 255 284 297 297 374 451Rest of World 133 160 184 207 225 225 245 268 290 308 308 388 468Total 608 680 739 800 845 845 901 955 1,023 1,071 1,071 1,284 1,493

Y/Y GrowthUS & Canada 38% 25% 23% 22% 16% 16% 12% 10% 12% 13% 13% 11% 10%Europe 56% 46% 40% 32% 25% 25% 19% 16% 14% 15% 15% 12% 10%

Asia 123% 93% 81% 73% 54% 54% 50% 47% 45% 40% 40% 26% 21%Rest of World 93% 95% 88% 64% 69% 69% 53% 46% 40% 37% 37% 26% 21%

Total 69% 58% 53% 45% 39% 39% 33% 29% 28% 27% 27% 20% 16%

Country MixUS & Canada 25% 24% 23% 22% 21% 21% 20% 19% 19% 19% 19% 18% 17%Europe 30% 30% 29% 28% 27% 27% 27% 26% 25% 25% 25% 23% 22%

Asia 23% 23% 24% 25% 25% 25% 26% 27% 28% 28% 28% 29% 30%Rest of World 22% 24% 25% 26% 27% 27% 27% 28% 28% 29% 29% 30% 31%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Mobile MAU 245 288 325 376 432 432 488 543 614 669 669 918 1,150Y/Y Growth 143% 123% 110% 92% 76% 76% 69% 67% 63% 55% 55% 37% 25%Q/Q Growth 18% 13% 16% 15% 13% 11% 13% 9%% of total MAUs 40.3% 42.4% 44.0% 47.0% 51.1% 51.1% 54.2% 56.9% 60.0% 62.5% 62.5% 71.5% 77.0%

Mobile-Only MAU 15 22 30 40 58 58 83 102 153 190 190 344 493Y/Y Growth -- -- 500% 300% 287% 287% 277% 240% 284% 227% 227% 82% 43%Q/Q Growth 47% 36% 33% 45% 43% 23% 50% 23%% of total MAUs 2.5% 3.2% 4.1% 5.0% 6.9% 6.9% 9.2% 10.7% 15.0% 17.7% 17.7% 26.8% 33.0%

Web and Mobile MAU 230 266 295 336 374 374 405 441 460 480 480 574 657Y/Y Growth 128% 109% 97% 81% 63% 63% 52% 49% 37% 28% 28% 20% 14%Q/Q Growth 16% 11% 14% 11% 8% 9% 4% 4%% of total MAUs 37.8% 39.1% 39.9% 42.0% 44.3% 44.3% 45.0% 46.2% 45.0% 44.8% 44.8% 44.7% 44.0%

Web MAU 593 658 709 760 787 787 818 853 870 881 881 940 1,000Y/Y Growth 65% 53% 49% 41% 33% 33% 24% 20% 14% 12% 12% 7% 6%Q/Q Growth 11% 8% 7% 4% 4% 4% 2% 1%% of total MAUs 97.5% 96.8% 95.9% 95.0% 93.1% 93.1% 90.8% 89.3% 85.0% 82.3% 82.3% 73.2% 67.0%

Web Only MAU 363 392 414 424 413 413 413 412 409 402 402 366 343

Y/Y Growth 40% 30% 27% 20% 14% 14% 5% 0% -3% -3% -3% -9% -6%Q/Q Growth 8% 6% 2% -3% 0% 0% -1% -2%% of total MAUs 59.7% 57.6% 56.0% 53.0% 48.9% 48.9% 45.8% 43.1% 40.0% 37.5% 37.5% 28.5% 23.0%

Daily Active Users (DAU)US & Canada 99 105 117 124 126 126 129 130 138 144 144 164 182Europe 107 120 127 135 143 143 152 154 159 171 171 211 234

Asia 64 72 85 98 105 105 119 129 145 154 154 213 271Rest of World 57 75 88 100 109 109 126 139 152 163 163 234 299Total 327 372 417 457 483 483 526 552 594 632 632 822 986

DAU as % of MAUUS & Canada 64.3% 64.4% 69.2% 70.5% 70.4% 70.4% 70.5% 69.9% 70.0% 71.0% 71.0% 72.5% 73.0%Europe 58.5% 59.7% 59.9% 61.1% 62.4% 62.4% 63.6% 62.6% 63.0% 65.0% 65.0% 71.5% 72.0%

Asia 46.4% 46.2% 48.9% 50.0% 49.5% 49.5% 50.9% 50.6% 51.0% 52.0% 52.0% 57.0% 60.0%Rest of World 42.9% 46.9% 47.8% 48.3% 48.4% 48.4% 51.4% 51.9% 52.5% 53.0% 53.0% 60.2% 64.0%Total 53.8% 54.7% 56.4% 57.1% 57.2% 57.2% 58.4% 57.8% 58.0% 59.1% 59.1% 64.0% 66.0%

Y/Y Growth

US & Canada 55% 28% 38% 35% 27% 27% 23% 11% 11% 14% 14% 14% 11%Europe 70% 52% 49% 44% 34% 34% 27% 21% 18% 20% 20% 23% 11% Asia 121% 85% 89% 81% 64% 64% 65% 52% 48% 47% 47% 38% 27%Rest of World 97% 121% 110% 89% 91% 91% 68% 58% 52% 50% 50% 43% 28%Total 77% 59% 62% 56% 48% 48% 41% 32% 30% 31% 31% 30% 20%

Country MixUS & Canada 30% 28% 28% 27% 26% 26% 25% 24% 23% 23% 23% 20% 18%Europe 33% 32% 30% 30% 30% 30% 29% 28% 27% 27% 27% 26% 24%

Asia 20% 19% 20% 21% 22% 22% 23% 23% 24% 24% 24% 26% 27%Rest of World 17% 20% 21% 22% 23% 23% 24% 25% 26% 26% 26% 28% 30%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


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Facebook: Summary of FinancialsIncome Statement - Annual FY11A FY12E FY13E FY14E Income Statement - Quarterly 1Q12A 2Q12A 3Q12E 4Q12ERevenues 3,711 4,943 6,094 7,484 Revenues 1,058A 1,184A 1,248 1,453Operating Income 1,979 2,053 2,276 2,792 Operating Income 484A 515A 485 568D&A 323 642 915 1,075 D&A 110A 139A 184 209EBITDA 2,302 2,695 3,191 3,867 EBITDA 594A 654A 670 777Net interest income / (expense) (42) - - - Net interest income / (expense) - (10)A - -Other income / (expense) (19) - - - Other income / (expense) - (12)A - -Pretax income 1,695 361 1,580 2,222 Pretax income 382A (765)A 331 412Income taxes 695 (127) 695 933 Income taxes 177A (608)A 139 165Net income 1,000 488 885 1,289 Net income 205A (157)A 192 247Weighted average diluted shares 2,332 2,470 2,553 2,604 Weighted average diluted shares 2,361A 2,451A 2,554 2,51Diluted EPS 0.51 0.51 0.56 0.70 Diluted EPS 0.12A 0.12A 0.12 0.14Balance Sheet and Cash Flow Data FY11A FY12E FY13E FY14E Ratio Analysis FY11A FY12E FY13E FY14ECash and cash equivalents 1,512 763 3,656 6,155 Sales growth 88.0% 33.2% 23.3% 22.8% Accounts receivable 547 603 609 793 EBITDA growth 93.3% 17.1% 18.4% 21.2%Other current assets 2,874 8,526 8,434 8,464 EPS growth - (0.4%) 11.4% 24.2%

Current assets 4,933 10,183 12,920 15,637PP&E 1,475 2,650 3,412 4,005 EBITDA margin 62.0% 54.5% 52.4% 51.7%Total assets 6,660 13,689 17,187 20,498 Net margin - - - -Total debt 0 0 0 0 Debt / EBITDA - - - -Total liabilities 1,432 1,716 1,747 1,999Shareholders' equity 5,228 11,972 15,441 18,499 Return on assets (ROA) - - - -

Return on equity (ROE) - - - -Net Income (including charges) 1,000 488 885 1,289D&A 323 642 915 1,075 Enterprise value / EBITDA - - - -Change in working capital 5 70 187 33 Enterprise value / Free cash flow - - - -Other P/E 37.3 37.5 33.6 27.1Cash low from operations 1,549 3,047 3,323 3,771Capex (606) (1,475) (1,280) (1,272)Free cash flow 470 1,228 1,648 2,102Cash flow from investing activities (3,023) (8,079) (1,280) (1,272)Cash flow from financing activities 1,198 4,650 500 0

Dividends - - - -Dividend yield - - - -

Source: Company reports and J.P. Morgan estimates.Note: $ in millions (except per-share data).Fiscal year ends Dec


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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document

individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report.

Important Disclosures

Market Maker: JPMS makes a market in the stock of Facebook. Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Facebook

within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Facebook. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment

banking clients: Facebook.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the followingcompany(ies) as clients, and the services provided were non-investment-banking, securities-related: Facebook.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,and the services provided were non-securities-related: Facebook.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Facebook. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking

services in the next three months from Facebook.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or servicesother than investment banking from Facebook.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company , calling 1-800-477-0406, or [email protected] with your request.

Date Rating Share Price($)

Price Target($)

27-Jun-12 OW 32.23 45.0004-Sep-12 OW 17.73 30.0005-Oct-12 OW 20.91 28.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period.J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the

0

11

22

33

44

55

66

Price($)

May12

May12

Jun12

Jul12

Aug12

Sep12

Oct12

Facebook (FB, FB US) Price Chart

OW $28

OW $30

OW $45

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Jun 27, 2012.
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average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policyreasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not arecommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return iscompared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans researchwebsite, www.morganmarkets.com.

Coverage Universe: Anmuth, Doug : Amazon.com (AMZN), Bankrate Inc (RATE), CafePress, Inc. (PRSS), Expedia, Inc. (EXPE),Facebook (FB), Google (GOOG), Groupon (GRPN), HomeAway Inc (AWAY), LinkedIn Corp (LNKD), Netflix Inc (NFLX), PandoraMedia Inc (P), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), TripAdvisor, Inc. (TRIP), Trulia Inc. (TRLA),Yahoo Inc (YHOO), Zynga Inc (ZNGA), eBay, Inc (EBAY)

J.P. Morgan Equity Research Ratings Distribution, as of September 28, 2012Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 12%IB clients* 52% 46% 34%

JPMS Equity Research Coverage 42% 48% 10%IB clients* 69% 61% 53%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a holdrating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the tableabove.

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FB_ JPM Research Report_Oct 2012