Facebook

Facebook
Elana Benedikt
BUS 210 – 00A
https://materials.proxyvote.com/Approved/30303
M/20130409/AR_166822/
Introduction
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Mark Zuckerberg, CEO
Palo Alto, CA
End of fiscal year: December 31, 2012
Facebook is the largest social networking site in
the world, providing users with availability to
connect with family, friends, and current events.
– It is a service company.
• Facebook is an international internet company
reaching users across the globe.
– 16% domestic users, 84% international users
Audit Report
• Facebook’s independent auditor is Ernst &
Young LLP.
• The auditors stated that Facebook’s annual
report is in accordance with the U.S.
accounting principles and all financial
statements listed in the report are in
conformity with the Public Company
Accounting Oversight Board.
Stock Market Information
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Facebook’s (FB) most recent stock price: $24.53
52 Week High/Low : $33.45/$17.55
Dividend per share: $0
Information as of June 21, 2013
Facebook went public in May 2012 as part of their
growth and liquidity strategy. Although they are not
issuing dividends, Facebook is using their retained
earnings to expand in order to increase their gross
opportunities and profit. Based on my evaluation of
FB, I would buy shares in the company as the future
stock price is likely to increase.
– $16,000 MM revenue from IPO
Income Statement
• Facebook’s income statement represents a
single-step format.
• Over the past two years, Facebook’s net income
has decreased from $1,000MM (2011) to
$53MM (2012).
– A major factor in the increase of total costs and
expenses was caused by share-based compensation
amounting to $1,572MM.
– Facebook’s net profit dramatically decreased due to
the non-cash charge of its IPO.
• There was an increase of $2,596MM in total
costs and expenses from 2011 to 2012.
Share-based Compensation
(from Annual Report)
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.
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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.
Balance Sheet
• Facebook’s total assets have increased by $8,772
MM from 2011 to 2012.
• Facebook’s total liabilities and total
shareholder’s equity have more than doubled
during the past two years.
– In 2012, total assets, which equals total liabilities
plus shareholders’ equity was $15,103MM.
• Facebook’s marketable securities have increased
by over 60% due to revenue received from its
IPO.
• Facebook is well positioned for growth post-IPO.
Statement of Cash Flows
• Net cash flow from operations, $1,612MM, is much
greater than net income, $53MM, in 2012.
• Facebook has almost doubled their investing activities
over the past two years. From 2011 to 2012, their
investing activities have increased from $3,023MM to
$7,024MM.
• Facebook’s primary sources of financing are equity
issuances (May 2012 IPO), lease financing, and debt
financing.
• Facebook’s net cash has increased dramatically over the
past two years. The company has not issued dividends
since it is in its growth phase, thus using the cash for
acquisition opportunities instead.
Accounting Policies
• Revenue recognition occurs when:
– There is evidence of an arrangement, Facebook delivers its obligations to its
customer, the price is determined, and the collectability of the receivable is
certain.
• Cash and cash equivalents:
– Are made up of cash in deposits in banks and investments in money market
funds
• Accounts Receivable:
– Are noted at their original cost less the allowance for uncollectable amounts
• Investments:
– Are held in marketable securities (U.S. government securities)
– Classified as available-for-sale securities
• Property and Equipment:
– Are stated at cost
– Depreciation is recorded using the straight-line method
Accounting Policies
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Note 1: Summary of Significant Accounting Policies
Note 2: Acquisitions
Note 3: Earnings per share
Note 4: Cash and cash equivalents, and marketable securities
Note 5: Fair Market Measurement
Note 6: Property and Equipment
Note 7: Goodwill and Intangible assets
Note 8: Accrued expenses and other current liabilities
Note 9: Long-term debt
Note 10: Commitments and Contingencies
Note 11: Stockholders’ equity
Note 12: Other income (expense), net
Note 13: Income taxes
Note 14: Geographical information
Financial Analysis
Liquidity Ratios
(millions of dollars)
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Working capital
– 2012: $11,267 – $1,052 = $10,215
– 2011: $4,604 – $899 = $3,705
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Current Ratio
– 2012: $11,267/$1,052 = 10.71
– 2011: $4,604/$899 = 5.12
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Receivable turnover
– 2012: $5,089/(($719+$547)/2) = 8.04
– 2011: $3,711/(($547+$373)/2) = 8.07
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Average days’ sales uncollected
– 2012: 365/$8.04 = 45.40 days
– 2011: 365/$8.07 = 45.23 days
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Inventory turnover—N/A
Average days’ inventory on hand—N/A
Operating Cycle
– 2012: 45.40 days
– 2011: 45.23 days
Financial Analysis
Liquidity Ratios
• Current ratio and working capital have both
dramatically increased because Facebook has
more than doubled their current assets.
– Current assets have increased dramatically due to
the IPO (i.e. cash and marketable securities).
• Facebook’s receivable turnover and average
days’ sales uncollected have remained relatively
constant over the past two years.
• Facebook’s operating cycle solely consists of
average days’ sales uncollected due to the
absence of inventory on its financial statements.
Financial Analysis
Profitability Ratios
• Profit margin
(millions of dollars)
– 2012: $53/$5,089 = 0.0104, 1.04%
– 2011: $1,000/$3,711 = 0.2695, 2.70%
• Asset turnover
– 2012: $5,089/$1,5103 = 0.337
– 2011: $3,711/$6,331 = 0.586
• Return on assets
– 2012: $53/$1,5103 = 0.0035, 0.35%
– 2011: $1,000/$6,331 = 0.158, 15.8%
• Return on equity
– 2012: $53/$1,1755 = 0.0045, 0.45%
– 2011: $1,000/$4,899 = 0.2041, 20.4%
Financial Analysis
Profitability Ratios
• From 2011 to 2012, Facebook’s profit margin,
asset turnover, return on assets, and return on
equity all decreased.
– In 2012, Facebook’s profitability decreased due to
one-time expenses from IPO (non-cash charge).
• Facebook is generating less revenue from their
assets and equity accounts, leading to a
decrease in return on assets and return on
equity.
– Primarily caused by share-based compensation.
Earnings per share (EPS)
Financial Analysis
Market Strength Ratios
• Price/Earnings per share (P/E)
– 2012: (price = average of 52 week high/low)
• $25.50/$0.02 = 1,275
– 2011: (private company)—price undisclosed
• Dividend yield—N/A
• In 2012 the P/E ratio was extremely high. This
is deceptive because net income dramatically
decreased from 2011 to 2012.
– This was caused by Facebook’s IPO.
Financial Analysis
Solvency Ratios
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(millions of dollars)
Debt-to-equity
– 2012: $3,348/$11,755 = 0.285
– 2011: $1,432/$4,899 = 0.292
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Days Payable
– 2012: (4,400/65) = 67.69
• (365/67.69) = 5.39 days
– 2011: (2,842.5/63) = 45.12
• (365/45.12) = 8.09 days
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Financial gap (days payable –operating cycle)
– 2012: 5.39 – 45.40 = -40.01 days
– 2011: 8.09 – 45.23 = -37.14 days
– Operating cycle only consists of days sales
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Facebook’s debt-to-equity ratio has remained relatively constant over the past
two years.
From 2011 to 2012, Facebook’s financial gap has also remained relatively
constant. Their financing gap has increased by approximately 3 days.
– Facebook’s accounts payable is due in a shorter amount of time than when they receive cash
from their operating cycle.
– In 2012, the difference being approximately 40 days.
– In 2011, approximately 37 days.
Industry Situation & Company Plans
• Facebook has not yet reached the analyst’s projections of
their common stock.
– It continues to be volatile.
• The stock has a negative earnings growth of 96.8% for 2012
and a positive 7.37% growth in 2013 (as of June 2013).
– 2012 negative growth was due to share-based compensation
• The FB stock price is fluctuating due to: changes in revenue
and operating performance, concerns about growth, and
failure to meet analyst’s projections.
• Facebook does not plan to issue dividends in the near future
because they plan on using their retained earnings for
financing growth and acquisition opportunities.
http://www.schaeffersresearch.com/commentary/content/blogs/gauging+expectations+ahead+of+facebook+inc+fb+earnings/tradi
ng_floor_blog.aspx?single=true&blogid=115866
http://money.cnn.com/quote/quote.html?symb=FB
http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=20765463
Executive Summary
• Overall, Facebook’s IPO helped expand the
company by supplying $16 billion in capital.
• Share-based compensation amounted to a large
portion of Facebook’s expenses causing their net
income to decrease from 2012 to 2011.
• Facebook is continuing to expand by using their
retained earnings to acquire other companies in
order to increase their profits in the future.
– Since IPO, Facebook has acquire 12 companies.
– Its largest acquisition being Instagram.
• Facebook is not issuing dividends to common
share holders.
Work Cited
• https://materials.proxyvote.com/Approved/30
303M/20130409/AR_166822/
• http://www.nasdaq.com/symbol/fb
• http://www.marketwatch.com/investing/stock
/fb/financials/balance-sheet
• http://www.nasdaq.com/markets/ipos/compa
ny/facebook-inc-673740-69138