The day many have eagerly awaited has arrived. Facebook has filed to go public. Its
S-1 document is available for anyone to review. We’ll be taking a deeper look, ourselves. For now, consider this a live blog of what I find interesting in it.
What I’m highlighting generally comes as you read down through the S-1, though I’ve consolidated some topics, where it makes sense. Also see our other stories from today:
The Mission Statement
Disappointingly, the document doesn’t say, “I’m the Facebook S-1, Bitch,” as I hoped. Don’t get it? See “The Social Network” But we have a mission statement:
Our mission is to make the world more open and connected.
Assets Include Users & Friendships
Is this the first IPO that counts 100 billion friendships among its assets?
Facebook now at 845 million active users.
Mobile Growth Is A Risk?
Facebook cites mobile use growing more as a risk, since it doesn’t serve mobile ads. In contrast, Google sees mobile as new opportunity.
Facebook worries about mobile because it happens on platforms it doesn’t control, Android and iOS get named.
Further in the document, there’s an entire section that talks about mobile active users, or Mobile MAUs:
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. We had more than 425 million mobile MAUs in December 2011. In 2011, mobile usage of Facebook increased in markets around the world, including major developed markets such as the United States where smartphone penetration grew rapidly. Our mobile MAU growth was also driven by product enhancements across several mobile platforms. For example, we improved our product offering on feature phones following our acquisition of Snaptu in April 2011 and we launched the Facebook app for the iPad in October 2011. Improving our mobile products and increasing mobile usage of Facebook are key company priorities that we believe are critical to help us maintain and grow our user base and engagement over the long term. We expect consumers around the world will continue to increase the amount of time they spend and the information they share and consume through mobile devices. We do not currently display ads to users who access Facebook via mobile apps or our mobile website. To the extent that increasing usage of Facebook through mobile apps or our mobile website substitutes for the use of Facebook through personal computers where we do show ads, the number of ads that we deliver to users and our revenue may be negatively affected unless and until we include ads or sponsored stories on our mobile apps and mobile website. We believe that people around the world will continue to increase their use of Facebook from mobile devices, and that some of this mobile usage has been and will continue to be a substitute for use of Facebook through personal computers.
Zynga Generates 12% Of Revenue
“We face significant competition in almost every aspect of our business, including from companies such as Google, Microsoft, and Twitter.”
Facebook calls out that 12% of its revenue comes from Zynga, a risk. Then from further down, talking about revenue it gets from fees and payments:
To date, games from Zynga have generated the majority of our payments and other fees revenue. In addition, we generate other fees revenue in connection with arrangements related to business development transactions and fees from various mobile providers; in recent periods, other fees revenue has been immaterial.
And from even further in the filing:
Twelve percent of our total revenue in 2011, and less than 10% in 2010 and 2009, came from a single customer, Zynga. This revenue consisted of payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015.
Growth Decline Is Already Expected
Our rates of user & revenue growth will decline over time. For example, our annual revenue grew 154% from 2009 to 2010 and 88% from 2010 to 2011.”
We Had This FTC Settlement & People Like To Sue
“From time to time, we receive inquiries from regulators….” is a fairly casual lead-in to the 20 year Facebook-FTC settlement on privacy.
“Because we have hundreds of millions of users, the plaintiffs in class action cases filed against us typically claim enormous monetary damages even if the alleged per-user harm is small or non-existent.”
The Buck Stops With Zuck
Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors.
Facebook: Now With Over 3,200 Employees
Our employee headcount and the scope and complexity of our business have increased significantly, with the number of full-time employees increasing from 2,127 as of December 31, 2010, to 3,200 as of December 31, 2011
$3.7 Billion In Revenue, $1 Billion In Net Income
Facebook had $3.7 billion in revenue in 2011, $1 billion net income after taxes, if I’m reading things correctly.
How about some revenues by year? OK:
Let’s bulletpoint those revenues by year:
2007: $153 million
2008: $272 million (about double)
2009: $777 million (about triple)
2010: $1.974 billion (about triple)
2011: $3.711 billion (about double)
Net income?
2007: -$138 million
2008: -$56 million
2009: $229 million
2010: $606 million
2011: $1 billion
How much cash on hand? Facebook has a long discussion of “Free Cash Flow,” which says in part:
We believe that FCF is one of the key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient to fund the ongoing property and equipment investments required to maintain and grow our business.
At the end of 2011, FCF was $470 million.
An Illustrated History
We have an illustrated history, complete with monthly active user benchmarks:
Counting Users
Interesting long section on how monthly active users and daily active users are measured:
The numbers of monthly active users (MAUs) and daily active users (DAUs) presented in this prospectus are based on internal company data and we use these numbers in managing our business. We believe that our MAU and DAU numbers are reasonable estimates, and we take measures to improve their accuracy, such as eliminating known fictitious or duplicate accounts. There are inherent challenges in measuring usage across large online and mobile populations around the world. For example, there may be individuals who have multiple Facebook accounts in violation of our terms of service, despite our efforts to detect and suppress such behavior. As another example, applications on certain mobile devices may automatically contact our servers for regular updates with no user action involved, and this activity may cause our system to count the user associated with such a device as an active user of Facebook. We estimate that less than 5% of our estimate of worldwide DAUs as of December 31, 2011 could have resulted from this type of automatic mobile activity and that this type of activity had an even smaller effect on our estimate of worldwide MAUs. The impact of this automatic activity on our metrics may vary by geography, as mobile usage varies in different regions of the world. In addition, our data regarding the geographic location of our users is based on a number of factors, such as IP address, which may not always accurately reflect user location. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. In addition, our MAU and DAU estimates will differ from estimates published by third parties due to differences in methodology. For example, some third parties do not count mobile users.
Monthly Active Users Over Time & By Region
We have charts of monthly active user growth (small, I know — but that’s what was in the S-1):
The charts come with this explanation. I’ve bulletpointed some things to make them easier to compare:
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. As of December 31, 2011, we had 845 million MAUs, an increase of 39% from December 31, 2010. We experienced growth across different geographies, with users in Brazil and India representing a key source of growth.
We had 161 million MAUs in the United States as of December 31, 2011, an increase of 16% from the prior year.
We had 37 million MAUs in Brazil as of December 31, 2011, an increase of 268% from the prior year.
Additionally, we had 46 million MAUs in India as of December 31, 2011, an increase of 132% from the prior year. There are more than two billion global Internet users, according to an industry source, and we aim to connect all of them. We have achieved varying levels of penetration within the population of Internet users in different countries.
For example, in countries such as Chile, Turkey, and Venezuela we estimate that we have penetration rates of greater than 80% of Internet users;
in countries such as the United Kingdom and the United States we estimate that we have penetration rates of approximately 60%;
in countries such as Brazil, Germany, and India we estimate that we have penetration rates of approximately 20-30%;
in countries such as Japan, Russia, and South Korea we estimate that we have penetration rates of less than 15%;
and in China, where Facebook access is restricted, we have near 0% penetration.
Daily Active Users Over Time & By Region
Here’s a look at daily active users:
And some explanation:
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 Worldwide DAUs increased 48% to 483 million on average during December 2011 from 327 million during December 2010. We experienced growth in DAUs across major markets including Brazil, Canada, Germany, Mexico, the United Kingdom, and the United States. Increased mobile usage was a key contributor to this growth. DAUs as a percentage of MAUs increased from 54% in December 2010 to 57% in December 2011. We believe that we have the opportunity to continue to grow our DAUs around the world. Growth in DAUs depends on our ability to attract new users and increase the frequency of engagement for existing users. We aim to increase DAUs by developing products that are more compelling for our users, increasing the relevance of the information we display for each user, increasing the number of compelling Platform apps and website integrations, and improving the quality of our products across mobile platforms. We also believe that younger users have higher levels of engagement with the web and mobile devices in general and with Facebook specifically. We anticipate that demographic trends over the long term may contribute to growth in engagement as a greater number of users will come from demographic groups that have grown up with the web and mobile devices and who spend more time online every day
Ad Inventory Impacts
This section was interesting:
For example, in the fourth quarter of 2010, we significantly increased the number of ads on many Facebook pages. As another example, in the fourth quarter of 2011, we increased the reserve price (i.e., the minimum price threshold) in our advertising auction system in order to reduce the frequency with which low quality ads are displayed to users. This change caused a reduction in the overall number of ads shown and increased the average price per ad as a result of factors including the removal of ads with bids that were below the reserve price and some advertisers raising their bids in response to this change. For this particular
Revenue Up Because More Users Meant More Ads Impressions
Revenues up in 2011 on Facebook mainly because there were more users to see more ads but pages also had more ads
Revenue in 2011 increased $1,737 million, or 88% compared to 2010. The increase was due primarily to a 69% increase in advertising revenue to $3,154 million. 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. 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 do 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.
85% Of Revenues From Ads, 56% Revenues Are US-Based
The chart above shows that 85% of Facebook came from ads; 15% from fees and payments. But for US-based revenues, that’s 56/44. Some further details:
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 advertisers 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. Revenue in 2010 increased $1,197 million, or 154%, compared to 2009. The increase was primarily due to a 145% increase in advertising revenue to $1,868 million in 2010. Advertising revenue grew primarily due to an increase in the number of ads delivered driven by growth in users and engagement as well as the number of ads per page. Payments and other fees revenue increased to $106 million in 2010 due to the initial adoption of Facebook Payments during the year. In 2010, we generated approximately 62% of our revenue from advertisers and Platform developers based in the United States, compared to 67% in 2009.
Fee Revenue Growing
I found this quarterly breakdown of ad revenue versus fee revenue interesting:
At Google, I believe ad revenue still makes up around 95% of its total revenue. But Facebook has been diversifying its revenue base so that ads were down to 83% overall, in the last quarter.
A Letter From Mark
Similar to how the Google IPO filing documents started with a letter from its founders warning, “Google is not a conventional company. We do not intend to become one,” so there’s a similar sounding letter from Facebook founder and CEO Mark Zuckerberg. It starts out:
Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected. We think it’s important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do. I will try to outline our approach in this letter.
It goes on to explain the concept of building a social network, such as:
Personal relationships are the fundamental unit of our society. Relationships are how we discover new ideas, understand our world and ultimately derive long-term happiness. At Facebook, we build tools to help people connect with the people they want and share what they want, and by doing this we are extending people’s capacity to build and maintain relationships.
It reminds me so much of how the Google founders seemed to be trying to explain the concept of a search engine, when Google went public, to investors who still might not really understand what one was and why it couldn’t just take payment for better rankings:
Google users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating. We also display advertising, which we work hard to make relevant, and we label it clearly. This is similar to a well-run newspaper, where the advertisements are clear and the articles are not influenced by the advertisers’ payments. We believe it is important for everyone to have access to the best information and research, not only to the information people pay for you to see.
The parallels continue. From Zuckerberg:
As I said above, Facebook was not originally founded to be a company. We’ve always cared primarily about our social mission, the services we’re building and the people who use them. This is a different approach for a public company to take, so I want to explain why I think it works. I started off by writing the first version of Facebook myself because it was something I wanted to exist. Since then, most of the ideas and code that have gone into Facebook have come from the great people we’ve attracted to our team. Most great people care primarily about building and being a part of great things, but they also want to make money. Through the process of building a team — and also building a developer community, advertising market and investor base — I’ve developed a deep appreciation for how building a strong company with a strong economic engine and strong growth can be the best way to align many people to solve important problems. Simply put: we don’t build services to make money; we make money to build better services. And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.
From the Google founders:
Throughout Google’s evolution as a privately held company, we have managed Google differently. We have also emphasized an atmosphere of creativity and challenge, which has helped us provide unbiased, accurate and free access to information for those who rely on us around the world…. Sergey and I founded Google because we believed we could provide an important service to the world—instantly delivering relevant information on virtually any topic. Serving our end users is at the heart of what we do and remains our number one priority. Our goal is to develop services that significantly improve the lives of as many people as possible. In pursuing this goal, we may do things that we believe have a positive impact on the world, even if the near term financial returns are not obvious. For example, we make our services as widely available as we can by supporting over 90 languages and by providing most services for free…. As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter.” In Warren Buffett’s words, “We won’t ‘smooth’ quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.”…. We will make business decisions with the long term welfare of our company and shareholders in mind and not based on accounting considerations.
Both stress a long-term view. Both talk about serving users at the top priority. Zuckerberg is far more blatant in almost saying “Hey, we’re not looking to make money — so don’t depend on that.” With the Google founders, it was more a declaration that they’d make money as they thought made sense, not based on what some investors might think.
Zuckerberg ends talking about “The Hacker Way,” the idea of always improving and so shipping fast and letting competition rule: “Code wins arguments,” as he quotes. He also concludes with how The Hacker Way translates into five core values for Facebook:
Focus on Impact: If we want to have the biggest impact, the best way to do this is to make sure we always focus on solving the most important problems. It sounds simple, but we think most companies do this poorly and waste a lot of time. We expect everyone at Facebook to be good at finding the biggest problems to work on. Move Fast: Moving fast enables us to build more things and learn faster. However, as most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly. We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough. Be Bold: Building great things means taking risks. This can be scary and prevents most companies from doing the bold things they should. However, in a world that’s changing so quickly, you’re guaranteed to fail if you don’t take any risks. We have another saying: “The riskiest thing is to take no risks.” We encourage everyone to make bold decisions, even if that means being wrong some of the time. Be Open: We believe that a more open world is a better world because people with more information can make better decisions and have a greater impact. That goes for running our company as well. We work hard to make sure everyone at Facebook has access to as much information as possible about every part of the company so they can make the best decisions and have the greatest impact. Build Social Value: Once again, Facebook exists to make the world more open and connected, and not just to build a company. We expect everyone at Facebook to focus every day on how to build real value for the world in everything they do.
Google had nothing like declaring it had a management approach called “The Hacker Way.” It did talk about its famed 20% time:
We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google. This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner. For example, AdSense for content and Google News were both prototyped in “20% time.” Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses.
Google was also already well-known for having an engineers-rule culture and notorious for shipping products that clearly weren’t finished, in “beta,” so it’s interesting to see in some ways to see Zuckerberg perhaps feeling like he might have to explain why he might ship “unfinished” products.
Hey, when Apple ships the iPhone 4S with one of its major features, Siri, in beta — being beta and The Hacker Culture is perhaps the new normal.
Executive Pay
After the letter comes a more narrative approach to explaining Facebook and its various features, plus how advertisers and users are making use of them.
Next, a list of the board of directors, plus their compensation, followed by that of the executive officers:
Mark Zuckerberg, $500,000
Sheryl Sandberg, $300,000
David Ebersman, $300,000
Mike Schroepfer, $275,000
Theodore Ullyot, $275,000
Of course, cash compensation is nothing next to the millions — or sometimes billions — of stock compensation is granted. Sandberg, for example received $31 million in overall compensation at the end of 2011.
That’s one reason why Zuckerberg is down for reducing his salary to $1 per year beginning in 2013. Both Google’s cofounders do the same, as does Google chief executive Eric Schmidt, if I recall correctly. And why not — with the stock compensation, the salary is literally pocket-change that can be tossed back for a nice PR spin.
And that’s pretty much it. Also see coverage on this topic across the web via Techmeme, as well as our two other stories, below:
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