
Facebook's S-1 Filing - hornokplease
http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/0001193125-12-034517-index.htm
======
jonnathanson
Facebook is heavily (heavily!) reliant on display advertising, all of which is
a) challenged by the switch of its userbase to mobile, and b) going to hit
critical mass eventually. No matter how smart you make display advertising,
there's still a cap on how much you can foist onto users before you piss them
off.

IMO, Facebook's future depends on two things:

1) Figuring out how to serve up contextually relevant ads on mobile platforms
in a nonintrusive and, ideally, useful way.

2) Figuring out how to serve up contextually relevant ads _outside of
Facebook_ , to Facebook Connect-backended partner sites and apps. (Sort of
like an AdSense/AdWords hybrid, but based on very intelligent user-interest
and browsing data).

I'm betting on #2's being the runaway breadwinner for Facebook in the long
run. The longterm strategy seems to be to reduce reliance/dependence on
Facebook.com in favor of Facebook Connect.

~~~
teej
I've been saying this for a while now
(<http://news.ycombinator.com/item?id=3041689>). Facebook's engagement is
shifting to mobile. Their entire business model relies on web. Their app
ecosystem has been crashing as a result, and display advertising is likely to
follow.

Facebook is filled with smart people. They understand the trends better than
we do. As you'll note, 4 of their top 5 Risk Factors relate to the web-to-
mobile shift and the problems inherent with that.

From the filing:

#2 - "We generate a substantial majority of our revenue from advertising. The
loss of advertisers, or reduction in spending by advertisers with Facebook,
could seriously harm our business;"

#3 - "Growth in use of Facebook through our mobile products, where we do not
currently display ads, as a substitute for use on personal computers may
negatively affect our revenue and financial results;"

#4 - "Facebook user growth and engagement on mobile devices depend upon
effective operation with mobile operating systems, networks, and standards
that we do not control;"

#5 - "We may not be successful in our efforts to grow and further monetize the
Facebook Platform;"

~~~
jpdoctor
> _and display advertising is likely to follow._

I think this is correct, and it explains why the IPO exit is happening now.
Most of the insane growth (in profit as well as valuation) has already been
squeezed out.

~~~
dcaranda
I think the only reason they went public was because they had to. Mainly the
500 investor limit.

~~~
jpdoctor
> I think the only reason they went public was because they had to.

No, hitting the investor limit means only that you have filing obligations
with the SEC. There is no obligation to trade your stock publicly.

------
bradleyjg
They are doing a dual class offering. The class B shares (i.e. those held by
Zuckerberg and other insiders) are going to have ten times the voting rights
as the class A shares.

I wouldn't by into such an ownership structure, though to be fair, google has
such a structure and those that bought that at IPO have done very well so far.

From the risks section:

 _As a result of voting agreements with certain stockholders, together with
the shares he holds, Mark Zuckerberg, our founder, Chairman, and CEO, will be
able to exercise voting rights with respect to an aggregate of XX shares of
common stock, representing a majority of the voting power of our outstanding
capital stock following our initial public offering. As a result, 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. Additionally, in the event that Mr. Zuckerberg
controls our company at the time of his death, control may be transferred to a
person or entity that he designates as his successor. As a board member and
officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act
in good faith in a manner he reasonably believes to be in the best interests
of our stockholders. As a stockholder, even a controlling stockholder, Mr.
Zuckerberg is entitled to vote his shares, and shares over which he has voting
control as a result of voting agreements, in his own interests, which may not
always be in the interests of our stockholders generally._

~~~
jpdoctor
> _and must act in good faith in a manner he reasonably believes to be in the
> best interests of our stockholders. As a stockholder, even a controlling
> stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over
> which he has voting control as a result of voting agreements, in his own
> interests, which may not always be in the interests of our stockholders
> generally._

So he must act in good faith except when he doesn't. Got it.

~~~
tlrobinson
Presumably he must act in good faith until he resigns from the board.

~~~
nknight
No, he must act in good faith when acting in his capacity as a board member
and corporate officer. When acting in his capacity as a shareholder, he has no
such obligation. The line between the two roles is usually pretty clear.

Think of a member of a military. They have a clear duty to act according to
the policy and orders of their superiors. But in most nations, they can also
vote, in their personal capacity as citizens, to change the top level of
leadership, and they have no obligation to exercise their vote in furtherance
of anyone's agenda but their own.

Zuckerberg's position is similar. What's out of whack is that he controls a
majority vote of the "citizenry" (shareholders) himself.

------
newhouseb
One of the interesting gems in this filing is at the very end, it details
stock grants for acquisitions so you can infer the running rate of talent
acquisitions. So for example, "On February 28, 2011, we issued 681,357 shares
of our Class A common stock as consideration to a company in connection with
our purchase of certain assets from the company." You can cross reference
these with news and correlate approximate acquisition cost based on the
estimate value of price per share assuming, say, a valuation of $100 billion.
So I'm guessing that the company I mentioned is Octazen and assuming a $100
billion valuation (~$50 per share), this comes out to about $35 million
(assuming an entirely stock acquisition - note that Facebook spent, for
example, $20 million aggregate in cash on acquisitions in 2010).

------
lyime
A small tidbit. FB paid Zuck $783,529 (3) in "other" compensation from his
base 500k salary.

(3) The fine print.... The amount reported represent approximately $692,679
for costs related to personal use of aircraft chartered in connection with his
comprehensive security program and on which family and friends flew during
2011.

Like a boss.

~~~
sriramk
For someone worth close to $30b, compromising on things like flying and
security seems silly. Amazed they aren't spending more.

~~~
hga
Indeed.

One should also remember that in the infinite wisdom of the Congress and
whoever was President at the time, any cash salary over $1 million gets an
extra tax on top of normal income taxes. Better to pay for his security in
before tax dollars.

------
apike
It turns out that Zynga only accounts for 12% of their revenue.

"In 2011, Zynga accounted for approximately 12% of our revenue, which amount
was comprised of revenue derived from payments processing fees related to
Zynga’s sales of virtual goods and from direct advertising purchased by Zynga.
Additionally, Zynga’s apps generate a significant number of pages on which we
display ads from other advertisers."

It appears they would still be profitable without Zynga.

~~~
veyron
"Zynga’s apps generate a significant number of pages on which we display ads
from other advertisers"

Are those ads counted toward the 12% statistic?

~~~
brd
85% of revenue is from advertising. So either Zynga controls 80% of all non
advertising revenue (aka the remaining 15%) or that 12% figure includes
advertisements served on Zynga pages.

Is it reasonable to conclude that Zynga constitutes 80% of FB's credit
ecosystem?

~~~
jim-greer
No, the 12% includes advertisements Zynga _buys_ from Facebook, but not ads
that appear on their pages.

"In 2011, Zynga accounted for approximately 12% of our revenue, which amount
was comprised of revenue derived from payments processing fees related to
Zynga’s sales of virtual goods and from direct advertising purchased by Zynga.
Additionally, Zynga’s apps generate a significant number of pages on which we
display ads from other advertisers."

------
chintan
<Interesting/> "Mobile" appears as risk factor in 2 instances.

 _\- Growth in use of Facebook through our mobile products, where we do not
currently display ads, as a substitute for use on personal computers may
negatively affect our revenue and financial results;_

 _\- Facebook user growth and engagement on mobile devices depend upon
effective operation with mobile operating systems, networks, and standards
that we do not control;_

~~~
ypcx
They will be able to exert any control they want on the Windows Phone through
Microsoft. Also, what prevents them from showing ads in mobile apps? They did
a great work locking everyone out of functionality that would enable direct FB
access, app developers can only access FB as an FB app, so no ad-less
competition there.

------
omarish
I'm curious as to what facebook did to generate $382k of revenue in 2004.
Seems like a great start for a company of their size at the time. IIRC, they
didn't turn on ads for a while afterwards.

Link:
[http://www.sec.gov/Archives/edgar/data/1326801/0001193125120...](http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/g287954g71g62.jpg)

~~~
scottkrager
Not sure about 2004 but I bought an ad on facebook in 2005. It was for a
specific university and that was about the extent of the targeting if I
remember correctly...

------
dxbydt
It looks like the accountant put in the perfect round figure of 1000 million
for 2011 Net Income& then backed out all the other entries :) I used to do
exactly that in my Accountancy 101 exams - Q.write the income statement for
Acme Corp. What do you want Net Income to be ? XXX $. That means, TCO must be
XXX - yyy, R&D must be XXX - zzz, and similarly back out everything else. Not
saying they actually did that, just that seeing such perfectly round numbers
reminded me of those exam problems.

------
mwytock
Key information on revenue is on page 50. 85% of revenue comes from ads, which
grew 69% Y/Y mostly driven by user growth (39% Y/Y) and showing a bunch more
ads starting Q4 2010:

2011 Compared to 2010. 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 thenumber 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 byan increase in usage of our mobile products, where we do not show
ads, and by various product changes implemented in 2011that 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.

~~~
jcampbell1
The key information is on page 54-55: Why the massive jump in Q4 2011 revenue
over Q3? It looks like there is a seasonality factor, but their explanation
only covers Q4 2010, to Q4 2011.

This is going to be a super volatile stock. If the Q1 2012 revenue is flat
QoQ, this is probably a $50B company, if it is up 15%, then this is probably a
$100B company.

~~~
mwytock
I was actually most curious to see if they had developed a source of revenue
other than ads. It seems like the answer to that is mostly no, although they
are working on payments.

I agree that ads revenue growth will be key for them in the short term. The Q4
2011 vs 2010 growth was 44% and it seems like perhaps the growth rate is
slowing down.

Of course they're not yet showing ads on mobile..

~~~
jcampbell1
Given that Google has made a ton of huge bets but doesn't make a dime outside
of advertising, it is hard to think Facebook will move the needle with an
alternative revenue stream. Even if they hit a Groupon sized home run with an
alternative revenue stream, it only moves the valuation by 10-20%.

I think on balance mobile is not really an opportunity. They are losing the
game revenue to the mobile/tablet platforms and in-app mobile monetization is
a minimal opportunity for a task based application.

I don't use facebook, but can you explain what it means to be working on
payments? I thought that was just their taking a 30% cut on game payments on
their platform. That kind of margin doesn't exist for more general "payments".

Even with all my negativity, I am still cautiously bullish on Facebook. They
are only making 50 cents/month per active user. I see no reason they can't
double that.

------
revorad
Zuckerberg's letter is really fantastic
-<http://techcrunch.com/2012/02/01/facebook-ipo-letter/>.

I'm really proud of him for clearly and loudly representing the hacker way
when the whole world is watching.

~~~
ColdAsIce
What makes Zuckerberg a hacker?

~~~
mpeg
he made a website used by 800 million people?

You might not necessarily agree with the extent the word "hacker" is applied
to nowadays, but considering you are in a site called "hacker news" you
probably should

------
olivercameron
Curiously, Sean Parker appears to not be on the top shareholders list[1],
despite previously having a large %. Did he sell all of it on SecondMarket?

1\. [http://techcrunch.com/2012/02/01/facebooks-s-1-and-the-
large...](http://techcrunch.com/2012/02/01/facebooks-s-1-and-the-largest-
shareholders-who-owns-what/)

~~~
paul
That's not a list of top shareholders (despite the headline). I think they
only need to report the holdings of officers, directors, and anyone with more
than 5%. Sean Parker does not fall into any of those categories, so they don't
report his ownership.

~~~
olivercameron
Ah, that explains it.

------
ajays
Facebook's revenue will eventually shift from display advertising to data
selling. There will come a time when no display campaign will run without
input from Facebook.

Before any impression on any online media, advertisers will make a query to
Facebook to find out which of the ads should be shown to this user. And
Facebook will charge a small fee for each such query.

------
dm8
Wow.. $3.7 billion in revenues in 2011; $1 billion in profits. Out of
curiosity, what were GOOG's revenue/profit numbers when they filed for IPO?

~~~
mun2mun
Looks like jacquesm lost a bet <http://news.ycombinator.com/item?id=689789>
:).

~~~
swalsh
To be fair, he said multiple billion in profit not revenue. Still has some
ways to go.

~~~
paul
The story was about revenue: <http://news.ycombinator.com/item?id=689712>

It's hard to believe that a fb board member could make more accurate revenue
predictions than random people with strong opinions commenting on HN ;)

------
alain94040
Interesting salary history: 100% raise over 2 years.

 _Molly Graham, the daughter of Donald E. Graham, a member of our board of
directors, is employed by us. During 2009, 2010, and 2011, Ms. Graham had
total cash compensation, including base salary, bonus and other compensation,
of $98,058, $133,620, and $189,168._

~~~
meric
I would think that is a fair compensation considering Facebook doubled its
profits over that time also.

~~~
gwern
I doubt she was responsible for the doubling of profits. (And what of all the
other employees...)

~~~
corin_
If you take a simplistic view of it, without assigning value to each person,
doubling a person's salary is, while doubling profits, giving a raise that
fits the success of the company, not a raise that says she played more or less
than an average role within the company.

------
patd
If you are logged on Facebook, never go on the website but still see the like-
button that are scattered all around the web, do you count as an "monthly
active user" ?

~~~
alastair
"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."

------
moxiemk1
$1 Billion in profit => $1/(user year) in profit for 2011, correct?

That's pretty darn good money, but not a huge amount more room for user-
growth. They'll grow by having new businesses/making current ones more
profitable. New business would have to be monetizable (eventually, at least),
current businesses would either have to convert better or become less costly
to run.

Facebook is full of some smart cookies - it'll be interesting to see how they
accomplish those paths.

~~~
brd
I was thinking the same thing. Considering they have ~42% of all users
(assuming the billion internet user estimate) there is only so much growth
available from relying on their current model of acquiring users and serving
ads to them.

I would imagine a next logical step would be to expand its ad network beyond
facebook (i.e. serve facebook ads outside of facebook itself), it would allow
for a significant jump in growth potential while staying close to their core
competency.

------
CWIZO
As someone that lives in EU (as in, not in USA) and has no clue about stock
market: what would be the easiest way for me to get a couple of hundred €
worth of stocks in FB? Is that even possible?

~~~
patd
You need to buy them on the day they IPO. You will not be able to buy it at
the IPO price but at the price of the first minute of trading.

On top of that, "a couple of hundred €" is probably not enough money. The fees
to buy stocks on the Nasdaq is usually in the tens of euro. You'll probably
have between 10 and 50 euros of fees at the cheaper online trading platforms.

You can also call your traditional bank to buy the stocks but the fees would
probably be higher.

------
blantonl
Per the S-1 filing, Facebook did $1 billion dollars in net revenue in 2011.

A valuation of $80-$100 billion dollars after the IPO would mean Facebook
would be trading at 80 to 100x earnings.

Facebook is going to need to see some serious growth to continue to command a
PE ratio like that long term. _Serious Growth_

~~~
jacques_chester
Alpha Centauri is an untapped market.

~~~
LearnYouALisp
Think of all the arcane technology to recover from the ruins!

------
gggrgraham
The Letter from mark has to be the coolest part.

<http://theairspace.net/commentary/letter-mark/>

The Hacker Way has grown up and lambasted Wall St.

------
zach
Direct link to the text of the S-1:

[http://www.sec.gov/Archives/edgar/data/1326801/0001193125120...](http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm)

------
newguy0
Looks like members of the exec team (COO, CTO, etc.) will _each_ be worth
100MM post IPO

Wonder what amt of RSUs the rank-and-file are getting?

Also, it'll be interesting to see how the culture changes when a good % of the
populace are millionaires

------
dcaranda
I put together a really quick valuation multiples analysis based on financial
info from the S-1:
[https://twitter.com/#!/daranda/status/164854828957310978/pho...](https://twitter.com/#!/daranda/status/164854828957310978/photo/1/large)

Disclaimer: This analysis is flawed

\- Using multiples is not a perfect method to understand the valuation of a
business. It's one of many. It's a proxy. It's quick.

\- This chart uses 2011 financial data. Facebook is growing fast - their
multiples would come down significantly if we used 2012 projections - which we
don't have. If I had more than 10 minutes on this - I would use 2nd half of
2011 or Q4 2011 as a run rate.

Quick Thoughts (Not Conclusions):

\- In Ben Horowitz's argument against the bubble - he says the valuations they
were seeing at AH for large private tech companies (like facebook) is in line
with large public tech companies (google). So just looking at the data
quickly, I was disappointed that FB appeared to have higher multiples (his
blog post: [http://bhorowitz.com/2011/03/24/bubble-trouble-i-
don%E2%80%9...](http://bhorowitz.com/2011/03/24/bubble-trouble-i-
don%E2%80%99t-think-so/))

\- DAYAM FB has a crazy operating margin

\- And they're getting better at monetizing each user. User growth was 40%
from end of 2010 to end of 2011, while revenue grew 80%
([http://allthingsd.com/20120201/facebook-has-845-million-
user...](http://allthingsd.com/20120201/facebook-has-845-million-users/))

------
sp332
So what % of the company are they selling off for $5 Billion? I'm wondering
what they're claiming the whole company to be worth.

~~~
trotsky
All of those numbers will be preliminary, they won't actually decide on number
of shares offered and offering price (which determines their claimed
valuation) until just before the offering. It depends on market conditions and
what the large institutions say they're willing to pay.

------
Sthorpe
"In the first quarter of 2012, our compensation committee discussed and
approved a request by our CEO to reduce his base salary to $1 per year,
effective January 1, 2013."

Awesome.

~~~
craigbellot
I never understood why management sometimes take $1 salary. Doesn't the IRS
see that as non reasonable compensation?

~~~
wmf
CEOs are still paying taxes on their non-salary compensation.

~~~
craigbellot
So what exactly is the purpose or benefit?

~~~
dekz
Probably to receive stock options in compensation. Sergey Brin, Larry Page and
Eric Schmidt have also done the same. They seem to be exempt from payroll
taxes in the United Sates.

[1]:
[http://www.sec.gov/Archives/edgar/data/1288776/0001193125060...](http://www.sec.gov/Archives/edgar/data/1288776/000119312506010016/d8k.htm)

~~~
asr
Sometimes the explanation is more optimistic than that--sometimes the CEO is
rich enough it makes little difference. E.g. John Mackey (Whole Foods CEO)
switched to a $1 salary because he felt he no longer needed to work for money
[1].

I mean, think about it: Mark owns over $10 billion in Facebook stock--he makes
over a billion dollars by pushing the stock price up 10% (or loses over a
billion if the stock drops 10%). Either way, a $15 million salary would be
fairly insignificant...

[1]
[http://www.businessweek.com/bwdaily/dnflash/content/may2007/...](http://www.businessweek.com/bwdaily/dnflash/content/may2007/db20070509_992600_page_2.htm)

------
shaggy
I really wish everyone would stop talking about mobile access like it's this
entirely new thing that's never been done before. Using facebook from a mobile
device is absolutely, 100%, without room for debate using "the web". Sure it's
a mobile device, but it's still HTTP and it's still a mobile browser based
app. Just because it's not a "desktop" version of a browser does not mean the
access isn't "web".

~~~
politician
The issue with mobile is the limited screen real estate and the impact that
has on being able to place ads. The mobile environment is different from the
desktop environment, so it makes sense to distinguish the two. But you're
right, calling the later "web" is a misnomer.

------
portman
EDGAR keeps timing out for me, anyone know of a mirror?

~~~
bcn
<http://www.scribd.com/doc/80163402/Facebook-S-1>

------
swlkr
I agree with what people say about a Facebook phone. They might offer a
smartphone for a heavily subsidized price and/or a feature phone for free.
They might even offer free unlimited data, the catch for either model (and the
data) is the that you log in with Facebook first thing, and maybe they'll
restrict you to using only Facebook services, like messenger.

------
Toddward
"We had 845 million monthly active users (MAUs) as of December 31, 2011."

That blows some estimates out of the water.

------
rplnt
The site is really slow for me, maybe it's getting overloaded or ... something
else. Either way, could someone post a summary of the filing? If I remember
correctly there should be some pretty interesting figures; revenue, profit and
so on.

~~~
hornokplease
Here's a screencap of the summary financial data chart:

<http://i.imgur.com/c5pHt.png>

~~~
samstave
Wow, thats pretty interesting; the earnings per share.

I would love to see that compared to users. Especially if new users flattened
out somewhat compared to increasing revenues.

I am not sure, but I dont think that FB userbase went up by 4.5x in the same
period as did revenues.

That means they are getting far better at monetizing the users/advertisers are
willing to spend far more to advert to the users, than before.

------
visegrip
Filing a S1 when business is slowing down. Genius!

Subscriber rates have fallen and the future is filled with uncertainty. Let's
go Public!

Google SYWP changing the game of advertising. Panic!

Exit strategy for investors to monetize their investments. Priceless!

------
ChrisNorstrom
I wonder how many employees are going to ditch the company after it goes
public. They might have stuck around just for the IPO so they can hit big,
take the money, leave, and start their own companies.

~~~
tdenkinger
They won't be able to exercise their vested options for several months
(usually six, as I recall). And many won't have vested 100% yet. That keeps
people around.

------
taylorwc
3.711B in revenue and 3,200 employees at the end of 2011. That puts their
revenue/employee numbers only slightly lower than Apple & Google, but beats
Amazon. Impressive.

------
hessenwolf
An adsense product from facebook would be really interesting, but I am not
interested in adverstising on facebook.com. Do they already have this?

------
Johngibb
If they filed for an IPO today, how long will it be until their shares are
actually available to an average investor?

~~~
mikejestes
Sounds like 2nd quarter, maybe May.

~~~
dcaranda
Technically, just cause you file doesn't necessarily mean you IPO. Depends how
their roadshow goes. But yeah - prolly May

------
sek
Wow look at site 54, they pushed their revenue this year to a billion in
December. How are they doing this?

~~~
dcaranda
4th quarter, and December in particular, are usually huge in advertising cause
of the holiday shopping season.

------
ig1
Reading this document makes me think Facebook don't know what's happening
inside their own company. Facebook from all behavioural indications have been
focused on maximizing short-term spend per advertiser rather than the long
term revenue per user. Yet that doesn't seem to be reflected at all in their
filing.

~~~
ig1
If you disagree with this statement I'd suggest you comment explaining why
rather than just down-voting. Speaking as someone who bought over 35 million
ads on Facebook last year, it's pretty evident that there's a mismatch between
what Facebook are doing in practice and their view of what they're doing as
portrayed by their SEC filing.

~~~
whatusername
Rather than complaining about down-votes -- it would be awesome for you (who
having bought a ton of FB ads knows that market really really well) to explain
and justify your statement. Can you give us some examples of their short-term
thinking?

~~~
ig1
It's pretty well known in the industry, for example they've long ignored
requests for basic features (day-parting, A/B testing) that would improve
conversion rates for advertisers because they would result in a short-term
drop in advertiser spending even though making Facebook an effective
advertising platform would be a better long-term solution (revenue wise).

~~~
whatusername
Thanks.

------
hc8217
I just read through the entire S-1 before reading anything in the media about
it. I liveblogged the tidbits I found interesting:

<http://hc8217.tumblr.com/>

------
collypops
"Effective January 1, 2013, Mr. Zuckerberg’s annual base salary will be
reduced to $1."

In the business world, we can now call this "Doing a Jobs".

~~~
apaprocki
Or a Elon Musk, Sergey Brin, Larry Page, Mike Bloomberg..

<http://en.wikipedia.org/wiki/One-dollar_salary>

